The allure of partnering with a dental service organization (DSO) often lies in promises of financial security, operational support, and a path to long-term success. However, not all DSO partnerships live up to their initial promises. Increasingly, dental practice owners find themselves in situations where projected equity returns and financial benefits fail to materialize. These outcomes can jeopardize their financial future and professional reputation, emphasizing the importance of selecting the right partner with the guidance of a trusted adviser.
When promises fall short: Cautionary tales
Ryan Mingus.
While DSOs may present attractive offers, practice owners must be wary of overly ambitious financial projections that fail to deliver. Here are some anonymized examples of what can go wrong:
- Equity that underperforms: A group of dentists partnered with a DSO that promised significant growth in equity shares. After several years, however, the expected returns fell far short due to mismanagement and lack of reinvestment into the practice. Despite working under the DSO umbrella, the dentists saw little to no financial benefit from their equity, which was a cornerstone of the deal.
- Unrealized buyout potential: Another practice was sold to a DSO with the assurance that the retained equity would dramatically increase in value during a subsequent recapitalization event. Unfortunately, when the recapitalization occurred, the practice's valuation did not meet the promised benchmarks, leaving the original owners with diluted shares and a fraction of their anticipated returns.
- Misaligned growth strategies: In one case, a DSO promised to implement aggressive marketing campaigns to drive patient acquisition and revenue growth, boosting the value of retained equity. However, the marketing efforts failed to produce results, leading to stagnant growth and equity values that never reached the projected milestones.
How misaligned partnerships hurt practice owners
These examples highlight a troubling trend: DSOs sometimes overpromise and underdeliver on financial outcomes, particularly regarding equity returns. For practice owners, the consequences can include the following negative outcomes:
- Loss of financial independence: Selling equity under the assumption of high future returns can lock practice owners into agreements that yield minimal financial benefits while stripping them of control over their business.
- Legal and operational entanglements: Disputes over unfulfilled financial promises can result in costly legal battles and strained operations, detracting from patient care and staff morale.
- Compromised retirement plans: Many dentists see the sale of their practice as a key part of their retirement strategy. When promised equity returns do not materialize, their long-term financial stability can be severely impacted.
The value of the right adviser
Navigating the complexities of a DSO partnership requires expertise and due diligence. An experienced adviser can play a pivotal role in helping practice owners avoid the pitfalls of overpromised and underdelivered returns. Here are the areas in which they can help:
- Offer realistic valuation assessments: Advisers scrutinize a DSO's financial projections to ensure that equity valuations are grounded in realistic market expectations, reducing the risk of inflated promises.
- Assist with structured negotiations: Skilled advisers negotiate terms that protect the seller, such as guaranteed minimum payouts or transparent equity growth benchmarks, ensuring that practice owners are not vulnerable.
- Provide strategic due diligence: By thoroughly evaluating a DSO's past performance, growth trajectory, and recapitalization history, advisers identify red flags and provide data-driven insights to guide decision-making.
- Design tailored exit strategies: Advisers help practice owners structure deals that include flexibility around roles and responsibilities post-close.
How to choose the right adviser
Selecting an adviser with a deep understanding of dental practice transitions and DSO partnerships is critical. Look for these qualities:
- Proven industry expertise: An adviser with a track record in dental M&A can provide unparalleled insights into the nuances of DSO deals.
- Transparency and integrity: Advisers who prioritize their clients' goals and offer honest evaluations of partnership opportunities are invaluable.
- Comprehensive service offerings: Choose an adviser who can handle every aspect of the process, from financial analysis to legal reviews and cultural fit assessments.
Securing your practice's future
Partnering with a DSO can be a transformative opportunity for dental practice owners, but it is not without its risks. Overpromised equity returns and unrealistic financial projections can lead to significant disappointment and financial hardship. By engaging a knowledgeable adviser, practice owners can ensure their partnership aligns with both immediate needs and long-term professional and financial goals.
Ryan Mingus is managing director of Tusk Partners and has more than 12 years of sales and leadership experience in the dental and healthcare industry, most recently as the business development director for strategy and optimization at Align Technology Inc. Mingus earned his bachelor's degree in economics and business from the Virginia Military Institute and his Master of Business Administration from the University of San Diego. He also held the rank of captain in the U.S. Army National Guard.
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
