Gone are the days when a “field of dreams” mentality will get dentists from inception to wealthy retirement: “If you build it, they will come.” The truth is, the game has changed, and it continues to change. The simple fact is that corporate dentistry has moved much faster than the solo practicing dentist. Enter dental service organizations and their financial practices that undercut the value of the solo practice owner.
Status quo exit strategies: The canary in the coal mine?
For dentists who want to enjoy a handsome retirement, the promise of a healthy valuation from a DSO is slim to none and selling to another dentist promises meager returns at best. Under the DSO valuation model, you’ll get an offer based on last year’s revenues. It usually a fraction of EBITDA plus the “privilege” of working for these corporate investors to earn your full buyout. Spoiler alert: that almost never goes as planned.Simply put, cash-rich corporate DSOs want to reap the rewards of your lifelong labor and desiccate your legacy while making the final years of your practicing life more of a nightmare than a dream. This is important, whether you’re a junior in your career or you’re looking to retire in the next five to 10 years. Eventually, this is the crossroads you’ll face. As private practitioners age out, fewer opportunities to sell directly to another dentist will be available. Young dentists are entering the field saddled with debt, unable to get a startup loan to fund or acquire a practice. They’re already working for big corporate dentistry.
Sooner rather than later, there will be scant few practitioners looking to buy your practice. If you’re a practice owner, regardless of whether you want to sell, you’re selling yourself short if you don’t read on.
Related reading
‘Invisible’ DSOs: Friend or foe?
DDSO blueprint series, Part 1: Action steps for dentist-owned private group models
7 hard truths about DSOs
If you’re thinking about selling to a corporate DSO, consider what’s at stake. Selling to a corporate DSO means:
- Death to your autonomy,
- Using their vendors for equipment, supplies, and services,
- Five years of indentured servitude working for a corporate overlord,
- Putting your dream of retirement (or your next venture) on hold,
- Taking on hidden risks and maybe not getting your full payout,
- Agreeing to a deal where you have zero control, and
- No longer putting your patients first.
It doesn’t have to be like this. There is a better way.
Dental entrepreneurship in times of change
There is no better time to be an entrepreneur in dentistry than right now. Make no mistake; I said there’s no better time to be an entrepreneur in dentistry. The timing for dentists entering the field? That’s a story for another day.
For years, dentists have had two options to sell their practice.
Option 1: Sell to a dentist for 70% annual collections.
Option 2: Sell to a DSO for a little bit more at the expense of your autonomy.
As time goes by, your options will narrow. Don’t expect to see dentist-owned DSOs forming 10 years from now. This is your chance to step in, stop corporate, and get paid what your life’s work is truly worth. Eventually, this is the crossroads you’ll face. As private practitioners age out, fewer opportunities to sell directly to another dentist will be available. Now there’s a third option.
Option 3: Don’t sell to a DSO. Become the DSO—a dentist-owned DSO (DDSO).
The DDSO concept is simple. Private solo practices and groups combine efforts to achieve much higher financial gains. Small solo practices (under $1.2 million) are valued based on a percentage of last year’s gross revenues.
Large solo practices and multiple location groups are valued based on a multiple of EBITDA. The greater the EBITDA, the greater the multiple used for the valuation. For instance, a practice or small group with EBITDA between $500,000 and $2 million might sell for six to seven times EBITDA, whereas a group structured as a master DDSO with $25 million of EBITDA trades will sell for between 12- and 15-times EBITDA. That’s double the profits by teaming up with other private practitioners!
Because the DDSO often doesn’t sell to a DSO but rather to a large capital group, it is able to structure much more favorable terms. Now you have greater clarification in relation to my earlier statement about the goal of a master DDSO—double digit multiples of EBITDA on your terms, rather than single digit multiples of EBITDA on their terms.
How it works
DSOs are not special. They’re just a step or two ahead, and they know how to sell assets to cash-rich private equity firms. Once a DSO acquires a practice, it slaps its business template onto the retiring dentist’s practice to make it just like all their other practices.
The DSO then sells a portion of the retiring dentist’s practice (along with another cluster of 50 practices who have gone through the same ordeal) to private equity for five times more than what they paid. The DSO then buys more practices, does the same thing, sells another portion of that for even more than the first time, and the cycle continues.
Here’s the thing. If these DSOs can do it, you can too. That’s why I founded the Become the DSO Summit and Freedom Dental Partners. We are a group of more than 100 dentists joining forces to beat the DSOs at their own game. We are creating our own DSO, a dentist-owned DSO. We believe dentistry should be controlled by dentists who believe patient care is top priority. We believe dentists should be able to see the same level of profit for their life’s work as the businesspeople running the DSOs.
Said another way, you can have your cake and eat it too. I founded Freedom Dental Partners to open this door to dentists who want a better way through, not a better way out. Large groups like this often go through several sales, or recapitalizations, creating even greater wealth accumulation for the affiliated private practitioners. What a wonderful strategy to capitalize on the current DSO upward trend.
