Jun 4, 2021
Should You Sell to a DSO?
Written By: Nate Williams
Should You Sell to a DSO? Heck No!
Over the past several years, dozens of our clients have been approached by DSOs requesting to buy their practice. In the past year, this DSO activity has increased significantly. The DSOs are becoming more aggressive and persuasive in their effort to centralize ownership and power in the dental industry. Dentistry is one of the best, most profitable small businesses in the country, but if dentists aren’t careful, they will give it away.
When asked by our clients if they should sell, we always keep an open mind, investigate the offer, and analyze the numbers. In every case, without exception, our conclusion has been this: unless you want to get out of dentistry permanently, or unless you cannot handle being an owner1, do not sell!
Lest you think I am biased, let me restate my own position. I am a CPA and I own a CPA firm. This position means two things: first, I get to look behind the curtains and see the financial x-rays—the truth of how much money people make and keep. Second, as a CPA, I’m in the business of organizing financial complexity; the more complex a situation, the more money CPA’s make. At one point a few years ago, we were solicited to be the accounting team for a budding DSO in Texas. We declined the offer because we didn’t want to work with the pompous owners; and good thing too as the DSO quickly failed. But it would have been a lucrative contract for us! Many service providers have joined the DSO revolution and are profiting handsomely from it. The same would be true for PFG. Most importantly, in writing this article, I am representing the best interest of dentists.
Then why not sell to a DSO? The reasons are many, where should I start? To answer this question, I am going to ask and answer three critical sub-questions:
- What are the motives of those who want to start DSOs, and what are the motives of dentists who want to sell their practices to them?
- Why shouldn’t I sell to them?
- What can I learn from this DSO revolution and what should I do?
I believe if you can understand the deeper answers to these questions, you’ll see why, time and time again, we have come to the same conclusion: practicing dentists should absolutely not sell to DSO’s!
Sub-Question 1: What are the motives of those who want to start DSOs and buy your practice? And what are the motives of those who want to sell?
To understand the DSO revolution, you first need to understand the bigger financial environment we’re in. In the last several decades, the federal reserve and our own government have promoted very loose fiscal policy. Printing money is the norm. Some estimate that more than $9 trillion dollars have been injected into the money supply since September 2019, and that 22% of the circulating US currency was printed in 20202. This mass printing of money has caused this phenomenon: there is a lot more money looking for good investments then there are good investments to be found. This high demand for investments (driven by the money supply) and low supply of good investments (relative to the demand), has caused prices to skyrocket. This is a big reason the stock market had soared in a year where much of the economy was literally shut down, and the reason why real estate prices in your town are also shooting to the moon!
Dentistry is a very good, profitable business. As a result, none of us should be surprised that there is a lot of money that wants to get a piece of the action. The thing to realize is this – cash is not what is valuable right now; owning a productive business is valuable. (Spoiler alert: if you own a dental business, DO NOT SELL your practice to a DSO!)
Greed is another motive. Many dentists sell to and join DSOs because of the allure of this promise: the ability to make money on the labors of other dentists. That promise – that you can sleep in and make money off the labor of others – has enticed the greed in humans for as long as history can remember. The relevant fact is that the people who want to buy your practice aren’t looking to help you, rather, they want to profit from you.
Finally, those DSO creators who want to buy your practice often try to capitalize on your fears. I have read so many times in their marketing materials comments like these:
- Dental practice valuations at an all-time high, and prices are sure to fall soon
- Many doctors are getting out of dentistry because of the pending recession that is sure to come
It is possible that dental practice valuations will fall in the near term (although not likely), or that a recession is around the corner. However, if it’s such a good time to sell, why are they trying so hard to buy?
In summary, these two components—the huge supply of cheap money currently available, and greed—are causing high demand for your practice. As such, you should expect that these “private equity gurus” will push HARD and will make the deal sound extremely enticing to you.
Sub-Question 2: Why Shouldn’t I Sell My Practice?
I have already given one big reason: what is most valuable today is not cash, but the ownership of productive assets (good businesses). But in case that singular reason doesn’t convince you, let me share these additional reasons not to sell:
Reason #1: Profits
A dental practice is one of the most profitable small businesses in America. As the owner of your practice, you have a right to 100% of the profits of the business. If you sell, even 1%, then you will forever ship your profits off to someone else. Why would you do this?
Reason #2: A dental practice needs a dentist
In dentistry, passive shareholders offer very little of value to a practice. As such, never share your profits with non-producing partners. This is an important principle that is unique to dentistry. To have a dental practice, where people come to pay for dental services, you first need a dentist. No dentist, no practice, no business, no profits. So in a dental practice, unlike other businesses, the paying patients are there for one reason—to see the dentist3. If you are the dentist, and the business profits are because of you, why would you share those profits with anyone who can’t produce?4
Reason #3: You’ll lose control
Like financial planning (my business), dentistry is a highly philosophical business. How you treat patients, how you plan treatment, how you market the practice, the equipment and supplies you use, and how you treat your team, are all examples of why the philosophy of the owner of the practice is so critical to the soul of the business. Why would you ever give this up? Why would you ever let anyone else dictate how you plan treatment, or what supplies you use, or how you market your business?
Reason #4: Killing the Golden Goose (Sell the business, then what?)
Once you sell the business and get the check (although emaciated from the original number they told you due to paying off debts and taxes), then what? What are you going to do? Unless you are ready to retire, you can’t retire. So now you get to go back to work for someone else with no control and at a significantly reduced wage.
The classic Aesop Fable of the Golden Goose, a man owns a goose who lays one golden egg per day. Impatient and desirous to get all the eggs now, the man kills the goose and cuts it open, only to find that there are no more golden eggs. If you’re selling your practice prematurely to “get all the eggs now,” this is exactly what you’re doing – killing your golden goose.
Reason #5: Taxes will evaporate your take-home pay
In the U.S. we have a progressive tax system. That means that tax rates go up as you make more money5. When I meet with high-income dentists (those making over $1M annually), they often comment about how they should stop working to pay less in taxes. Perhaps that is what they should do. But regardless of how you live your life, know these facts:
- The more money you make, the more the government will take it from you, and at higher tax rates; and,
- Because of the increasingly higher rates (as well as phase out of deductions, meaning you lose deductions as you make more money), it is much better to make $1M per year for 5 years then it is to make $5M in one year. In this example, you will keep far more of your money over 5 years, due exclusively to taxes. In short, taxes will punish you in the year you sell your business.
Reason #6: A practice allows you to ride the wave of inflation
Ownership of a business gives you the unique ability to ride the wave of inflation. As prices increase due to inflation, you can increase your fees, thereby riding this wave6. Last week I met with a client who is completely booked out until July of this year (3 months). “When was the last time you increased your fees?” I asked. “I raised a few of my fees 2% last year,” was his response. I then told him to increase all his fees by 10% across the board. If you don’t own the business, your ability to ride this wave will disappear7.
Reason #7: You’ll make less money (a recent case study)
Over the past 5 years or so, every time a client of ours has engaged in talks to sell their practice to a DSO, we have performed the financial analysis for them and reviewed the contract. We have found every one of these contracts to be persuasive, but misleading and some even sinister. Additionally, almost all cases require the dentist to stay on as an employee post sale, typically for 3-5 years. In every single case we have analyzed, looking only at the 3-5 year employment period, the dentist would have been financially better off to keep the practice than to sell.
In one recent example, our client was offered $3M to sell his practice. The $3M was to be paid out as follows:
Of the $1,917,000 he was to receive today (at closing), we calculated that he would have to pay $525,155 in taxes and pay off $1,338,907 in debt, leaving him with a whopping $47,938!
Reason #8. The false summit of being debt free
To many dentists, debt is emotionally oppressive and they want to pay it off as quickly as possible. We too, agree with the virtues of paying off debt and becoming free from its control. However, paying off debt needs to be done in wisdom and order, and a dentist shouldn’t seek to run faster than he/she has strength. Additionally, paying off your bank loans does not mean you’re debt free. You still have the debt of needing to live (your lifestyle expenses). The problems with selling your practice to pay off debt include all the reasons I’ve mentioned above, and also these:
- Getting debt free is on the path to financial independence, but not the end goal.
- Even if you are debt free, you still owe money to live – to eat, sleep, travel, etc.
- You still need to earn and save money for these lifestyle expenses, but now at a drastically reduced income because you sold the business.
Getting debt free should be a goal of yours, but it needs to be done prudently, and NOT by selling your business.
Reason #9: But if I join this group, I’ll save a bunch of money from their purchasing power!
We hear this all the time, that big groups get big discounts. I think a truer statement is this: good negotiators and prudent shoppers get big discounts. I have seen many small, one-doctor practices pay rock bottom supply fees. Much more importantly, however, is that any savings will be indiscernible and will be completely overshadowed by the fact that you’re now making much less money with no control. The ONLY significant purchasing power I can possibly see a large group having is with PPO reimbursement rates. But, if you’re a good dentist you should be progressing away from PPOs anyways.
Reason #10: Beware of “stock” in the DSO
In full disclaimer, we’ve never seen someone redeem their stock in the DSO; perhaps stock in a DSO is the greatest asset known to man and you should all give your practices up for it…but I highly doubt it.
In the example above, I highlighted one of the “benefits” the DSO was offering to our client in exchange for his practice. “Stock” in the acquiring DSO (titled “Rollover Equity Investment”). Almost every deal we have analyzed contains some version of this scam. So the pitch goes like this: “we’ll pay you a lot of money to sell your business to us; in addition, we’ll make you an owner of the larger DSO.” This offer sounds good and tricks many dentists into pulling the trigger (shooting themselves); however, when you buy this “stock,” you really have no idea what you’re getting. How many shares will you acquire? How many shares outstanding exist in this company? How are they valuing these shares? We have seen that these critical questions are never considered, asked, nor answered.
You will have no idea of the answers to these questions. Buying this stock is akin to putting a blindfold on and saying, “please take care of me!”
What about when you buy stock in a publicly traded company, isn’t that the same thing? Absolutely not! A publicly traded company has to publish audited financial statements. Additionally, when you buy shares, you know exactly how many shares you’re buying, exactly how many shares exist outstanding, and there is an extremely robust market to value these shares. But when you trade your company for “stock” in the new one, as far as you know you’re getting a high five, and a membership to the cool kids’ club!
Sub-Question 3: What can I learn about this DSO revolution and what should I do about it?
Stop Cannibalizing Your Industry
By selling to DSOs, dentists are literally “giving away the keys to their kingdom.” The end game of this activity is to centralize power in the hands of non-dentist businessman. Your industry will eventually—if you don’t stand up for yourselves and reject the greed—look like modern-day medicine, where doctors work for large hospital groups and have very little control over how, where, and when they practice.
You Need to Succeed in the Business of Dentistry (and with help, you can!)
You need to get smarter about how you run your business. A dental practice is a business, selling your services. Dental procedures are not the same as mandatory medical procedures (sometimes mandatory to sustain life, like cancer treatment). As such, you need to sell the dental procedures. You need to wisely market your practice. You need good systems and to create an exceptional patient experience. These DSOs usually attract the worst doctors (for example, brand new associates), but they do excel on the business side of the equation. You need to compete with them here. And you absolutely should not do it alone.
In the last 20 years, there has been an explosion of companies who provide business services to dental practice owners. You no longer need to wear all the hats, and you shouldn’t! But you do not need to sell your business to get the help you need. The best, most profitable dental practices will get help in many areas, including these:
- Finance and accounting
- Marketing, including website design and optimization
- Management consulting
- Human resources (HR)
When you outsource these services to other companies, you retain complete control of your business, utilize only the services you need, get the best expertise available (and can easily replace service providers who underperform); and because you’re running a good business in addition to providing exceptional clinical care, dentists who follow this path always outperform their DIY peers.
Dentistry is one of the greatest small businesses in America. But to perpetuate the success and the control in the hands of the dentists, you will collectively need to protect your industry. More importantly, for you individually, your best opportunity for wealth and meaning in your work, is to retain 100% ownership of your business (unless you share the ownership with another producing dentist).
Having said all of this, if any of you aren’t convinced and still want to sell and become employees in your own business, let me know. I will gladly buy your practice and allow you to work for me!
Epilogue: How will this DSO explosion end?
We’re experiencing history in the dental industry. The DSO explosion is a new phenomenon and the end story hasn’t been told. Here is my belief about how this will end…
Many DSOs are here to stay. Many dentists aren’t cut out, for whatever reason, to also be business owners. They don’t want to deal with staffing issues, marketing, operations, etc. They want to be an employee, one of the team and not the leader. For these people, perhaps the DSOs provide a valuable service and they are willing to work for a lot less pay to not have the extra responsibilities that come with business ownership.
Having said that, the end game of a dental practice is that there needs to be a dentist who provides dental services forever. Once the performance of those dental services stops, the business dies immediately. Many of the people involved with this DSO frenzy are not interested in managing dental practices long-term. They are looking for a big payout, akin to what Heartland Dental experienced (“What? There is gold in California?! Let’s go!!!”). Their goal is to consolidate as many practices as possible with the hope that, with more practices in the organization, they will be able to sell for a higher EBITDA multiple. Here is the newsflash – EBITDA multiples have a limit – they can’t grow indefinitely. As such, I absolutely believe that in coming years, we’ll see more and more of these DSOs collapse. The business people involved (private equity guys), will lose the investment of other peoples’ money and the doctors involved will be the biggest losers. So for a lot of these DSOs, it’s a game of musical chairs – just a matter of time before the music stops.
- For example, we helped one doctor come out of the military and buy a practice. It was a great practice in a perfect little Texas town (perfect to make a lot of money as a dentist). After 2 months and several anxiety attacks, he sold the practice and went back to the military, vowing never to own a practice again.
If you want more sources, simply search “how much money was printed in 2020?”
- Even if a patient has a hygiene appointment, they come to that location because of the dentist, not the hygienist.
- Note that sharing profits with non-producing owners is VERY different than hiring service providers. Equity owners provide one thing – capital (money). But these days, as explained previously, capital is VERY cheap and nothing in comparison to the value the actual dentist brings.
- As of 4/27/2021, the US tax rates are as follows:
- Many doctors scoff at this because they are “in network” with too many PPOs; they complain that it doesn’t matter what they do with their fees since the PPOs dictate the actual price. The goal in dentistry should be, over the course of your career, to increase in skill and in demand for your services. And with this increased demand, you should raise your fees. The best way to do this is by dropping PPOs. We absolutely recommend you work toward this; we also recommend that you hire a PPO consulting firm to help you navigate this task.
- Your home and stocks will also “hedge against” the risk of inflation (meaning the prices will rise with inflation). But your practice is your primary tool to protect against inflation.