4 DSO Sales Pitches You Shouldn’t Believe

By Jonathan Martin, CPA

For years, practice owners have heard some version of this message from corporate (DSO) groups: sell now, before the buying opportunity window closes. During the initial stages of the dental consolidation, that message was often based on fear (FOMO). Doctors were warned that rising interest rates and falling multiples would destroy that once in a lifetime opportunity to create generational wealth through selling out to a DSO.

Now the message has shifted, with DSOs touting four pitches that are misleading and often untrue as follows.

Many practice owners have recently been told that younger dentists no longer want to, or can afford to, buy their practice. While that claim is advantageous for DSOs, it’s usually not true.

Recent surveys by the American Dental Association (ADA) do show a steady decline in practice ownership over the last two decades. However, interpreting that decline to mean that younger doctors don’t want to buy a practice is inaccurate.

When practice ownership is analyzed by years since graduation, a more definitive picture emerges. Among dentists who graduated before 2010, more than 80% are now practice owners. For dentists who graduated between 2011-2015, over 30% were practice owners within the first 5-9 years of practice. However, after year 9, ownership jumped to nearly 60%. Accordingly, the majority of younger dentists still want to own practices, but are simply taking longer to get there.

Moreover, since 2010, the number of graduating dentists has increased by almost 40%. Combined with a delayed path to ownership, this has created a growing pool of experienced doctors now looking for practice purchase opportunities. In desirable markets, demand for practices remains very strong. In fact, we’re seeing record levels of inquiries that confirm strong demand for well-positioned practices.

Another common DSO claim is that the traditional single doctor, single location, private practice model is economically unsustainable. We disagree.

We continue to see many private practices thriving despite higher inflation, tighter patient budgets, and increased competition from corporate groups. In fact, it’s rare to see a strong private practice losing patients to a corporate-run (DSO) competitor. In many cases, the opposite is true. In some instances, private practices have set up beside a DSO practice using a single sign offering “free second opinions” as a successful marketing strategy. The reality is that patients trust doctors in private practice more highly, as they value the relationship, continuity, and excellent customer service experience that well-run practices provide.

In reality, the economic gap between DSO offers and traditional doctor-to-doctor offers continues to narrow. DSO terms have become less attractive due to lower multiples, increased negative EBITDA adjustments, and reduced cash available at closing. Meanwhile, traditional practice values have continued to rise. As more experienced younger doctors enter the buyer pool, traditional transitions are becoming highly competitive, and in some cases superior.

In the current marketplace, there’s a widening variation between the offers you may receive for your practice. Accordingly, if you speak to only one prospective DSO buyer, you may end up with a distorted view of the market and leave substantial value on the table.

This wider variance is simply because DSO buyers are using more stringent underwriting practices. Factors such as key-man risk, doctor age, years left to practice, and the number of providers (owners and associates) are materially affecting both the deal valuation and structure. If your practice depends heavily on one doctor, you have no associates, and limited staff, your practice may still receive DSO interest, but expect the terms to be significantly less attractive.

This makes the sales process extremely important. The goal is not to simply find a buyer, but rather one which is the right fit. Then determine how they’re valuing your practice, how much cash is paid at closing, and what portion of the offer depends on future events. Currently, DSO buyers are offering less cash at closing, with more value tied to contingent terms such as earn-outs, rollover equity, or other contingent consideration.

Recent interest rate increases have caused problems for a number of DSOs since the higher debt service payments have decimated their cash flow. Some groups such as Affordable Care and DCA have defaulted on their note payments, jeopardizing owners’ equity.

Many other groups are continuing to promote overly optimistic recapitalization timelines in an attempt to sell doctors on taking more equity and less cash. Unfortunately, the expected wave of recapitalizations hasn’t materialized. In fact, since mid-2022, well over 50 sales of DSOs appear to have been abandoned or withdrawn at various stages. Moreover, industry sources indicate that several larger DSOs have failed to recapitalize recently and only a handful of meaningful recaps have occurred during the last year. There’s also a sizable backlog of PE-backed DSOs that are now five-plus years into their recapitalization cycle, which normally takes only 3 to 5 years. So taking equity back and expecting a future bonanza isn’t realistic in most cases.

If you’re approaching retirement, understand that you have options for buyers. However, the right option depends on your practice, your timeline, your risk tolerance, and your goals.

The DSO market has definitely changed. Buyers are more selective. Deal structures are more complicated. Headline multiples are often misleading and deserve more scrutiny. Meanwhile, traditional buyers are still very much present and are looking to purchase practices.

A DSO sale may make sense for you, particularly if you own a large practice with low overhead and are willing to remain on for 3-5 years post-closing. However, don’t make a once in a lifetime practice sale decision based on fear, incomplete information, or a DSO’s narrative. Rather, use a practice transition expert that understands the dental sale marketplace and can evaluate your options before making a decision.

*Jonathan Martin is a partner at McGill and Lyon Practice Transitions, with over 20 years of experience helping dentists and dental specialists plan and execute their practice transition. We welcome the opportunity to speak with you about your situation. To schedule a complimentary call, or for more information on dental practice transition services, call 704.424.5626 or fill out a contact form.

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