The DSO and its appeal for the dental profession

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It is a rarity for attorneys to have had an experience with those in the dental profession. Dentists are not often sued by patients, so most of the legal work they are involved with comes from personal issues such as divorce, partnership disputes, and employee lawsuits.

The new wave in the dental profession today is the DSO, which is an abbreviation for the dental service organization. This is an area where attorneys are needed since the dentist will be making a decision that will probably last a lifetime, and he or she certainly needs the counsel that an experienced attorney and dental CPA can provide.

First, let’s provide some information about what a DSO is, what it does, and why it is such a popular vehicle for a dentist in today’s modern dental world.

For a little history about dentists in general, there is a popular understanding that dentists who truly enjoy their clinical work really dread the work that they have to be involved with regarding their administrative duties. These responsibilities include but are not limited to the hiring and firing of employees, personnel benefits and who gets them, as well as insurance, legal, and accounting coordination, and any other administrative tasks. The DSO format was created so that a business entity could hire a dentist who had the sole responsibility of performing clinical services for the patient and who would have few to no administrative duties. The administrative side of the business the DSO would be in charge of, and totally responsible for everything else. There would essentially be two business entities, one would be the clinical dental practice only and the other would be the administrative company.

This format has become very popular with dentists who are thinking about slowing down in their work schedule or possibly retiring, and also with the younger dentist who wants a reasonably good paycheck without the administrative headaches that accompany someone who buys or starts up his or her own dental practice. For those dentists who want the enjoyment of working with patients and not being an administrator such as an accountant, bookkeeper, or paralegal type while working at the dental office, the DSO may be the answer for this kind of dental school graduate. Graduating from dental school and being able to practice the dental profession with no staffing worries, no pressure to worry about meeting with accountants or attorneys, and limiting the work being done to clinical dentistry only is a coup for this dental school graduate. 

Types of DSOs, OSOs, and other dental service organizations

For starters, there is the undercapitalized DSO that may have been organized by a group of dentists who have excelled at operating their own practices from a clinical and administrative perspective. They have done well financially, the patients and staff like them, and they have an excellent reputation in the community. They now want to branch out and acquire additional dental practices and think that the new dental practices can be run in the same manner as their individual practice. They are in for a surprise as there is a geometric effect regarding the issues appearing in a multipractice organization compared to a single practice. There is the need for smart and experienced administrators, accountants, and office personnel to have the administrative side of the DSO run smoothly.

As more practices are added, the complexity grows. Financially, the undercapitalization of this type of DSO will lead it to be acquired cheaply as chaos ensues with it and paychecks are held because of the lack of an original attorney, someone who is retained in this scenario and who has a cheap budget that could damage the ability to find additional investors to prop up this DSO.

The other type of DSO is one that is well capitalized and has made provisions for the right administrative staff, who should be administrators and not dentists who have run their own practices clinically and administratively. The idea behind the DSO concept is to let the dentists deal with the patients and to let the administrators work with administering the administrative side of the dental practice. The administrators would be CPAs with experience with dental practices, human resource people with expertise in dealing with personnel, and others with wisdom in working with insurance companies, PPO plans, and other related administrative complexities. Unfortunately, the dentists who thought that a DSO would operate in a similar manner as their individual practice with them in charge of the clinical and administrative sides of the DSO will find out pretty quickly that is not the case.

The DSO and its “pot of gold at the end of the rainbow”

For a comparison of why a dentist would sell his or her dental practice to a DSO rather than to another dentist using a traditional approach to the transition, the following may provide a guideline.

When a dentist sells his or her dental practice to another dentist and not to a DSO, the traditional approach is that at the settlement table, the buyer has borrowed enough to pay the seller in a lump sum an amount that has been agreed upon between the buyer and seller or their representatives. Unless there is what is known as an “earn out” (a payment to be made later, based on the performance of the dental practice), that is the end of the transaction. A DSO offers a sum of cash much less than the asking price to be paid at the closing, plus a combination typically of stock in the DSO plus promissory notes due to the seller under certain terms, plus an agreed upon incentive plan-based payment to induce the seller to work as hard as possible to reach these incentivized goals.

These goals may be difficult to reach for the seller as the concept of the DSO is to remove the administrative worries from the seller by having the DSO being in charge of the hiring, firing, purchasing of dental supplies and equipment, and so forth. Effectively, the seller loses control of everything in the dental practice except the clinical side of the practice. This change may limit the ability of the selling dentist to achieve the incentives set forth in the agreement that made the sale to the DSO seem so attractive at first.

The goal of the DSO is to reach out to other dental practices and to acquire them. As their gross revenue rises, it becomes more enticing to a hedge fund or investment banker or larger DSO to acquire them. If that occurs, the original investors in the DSO as well as the earlier dental practices that have been acquired by the DSO will earn significant amounts. These sums will be much larger than the dentist who sold in a traditional manner where all of the money from the transition was paid at the closing table.

Study the terms of the DSO presentation and whether the incentives are able to be reached in a reasonable manner. There may be a “pot of gold at the end of the rainbow.” Can it be attained or will the total received by the DSO be less than what would have been earned by using the process enjoyed by thousands of dentists over the years with a traditional sale and all of the funds paid at the closing with no more work involved? 

Bruce Bryen is a certified public accountant with over 45 years of experience. He specializes in providing litigation support services to dentists, with valuation and expert witness testimony in matrimonial and partnership dispute cases. Bryen assists dentists with financial decisions about their practice, practice sales, evaluating whether to join a DSO, practice evaluation during divorce proceedings, and questions about the future or financial health of dental practices. He can be reached at [email protected].

The comments and observations expressed herein do not necessarily reflect the opinions of, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.

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