Practice Transitions to DSOs, DMOs, SGNs, and Similar Organizations
Trending Formats for Acquisition
Bruce Bryen, CPA, CVA
For those who were practicing in the 1990s, today’s trends in practice transitions may bring back painful reminders of what was occurring during that time. Similar to current buyers, the consolidators of dental practices back then were offering management services to dentists as well as the acquisition payment and a transitional exit plan. In those early years, the consolidators were entrepreneurs who may or may not have been licensed dentists. They either had management skills personally or hired people with management skills to run the business operations of the dental practices they were acquiring, and were also involved in the marketing, administrative chores, and other business functions that dentists did not enjoy. Insurance issues, personnel matters, and the everyday stresses of business operations can be problematic for dentists and helped to steer these organizations into acquiring dental practices. Most of them lacked sufficient capital backing, so they had to be creative in their approach to funding the acquisitions. For these organizations to survive, the seller was usually required to continue working during the transition. However, when compared with today’s models, there are major differences among the approaches with which the practices were purchased and financed. There is an important reason why today’s formats will probably succeed where those in previous years failed.
Past and Present Acquisitions: Similarities and Differences
Today, financially strong buyers are involved with dental practice acquisitions. Years ago, most of the funding for these purchases came from a combination of small amounts of cash, promissory notes, and stock in capitalized businesses. Although the management skills available may have been similar, because the early companies were underfunded, they really could not afford to include the best management people in their organizations. In many of the transitions, the acquired dentist was counted on to provide some of the skills that these companies were promising. In today’s standard of dental service organizations (DSOs), dental management organizations (DMOs), and small group networks (SGNs), many have aligned themselves with venture capital firms that have access to large amounts of money. These businesses employ attorneys, CPAs, CVAs, MBAs, and other financial and valuation experts. They have expertise and plenty of cash to assure long-term survival, growth potential, and success. In addition, they hire strong, experienced management personnel and successful former financial officers, as well as individuals with operational expertise.
Comparisons among DSOs, DMOs and SGNs
The DMO and DSO are similar in that each employs highly qualified advisors with excellent administrative abilities. They are usually owned by a combination of venture capitalists, one or a few dentists with entrepreneurial attitudes, and sometimes the business advisors as well. These are larger organizations where the earnings of the dental practices acquired are a key ingredient to their purchase. The safety and growth potential of the practices add features that are enjoyed by the investor, known to the dentist, and an attraction for future acquisitions. Some of these organizations own up to one hundred or more acquired dental offices.
The SGN offers much the same as the DSO and DMO, but on a smaller scale. These are companies that own approximately 25 practices or less and are primarily created by entrepreneurial dentists who have developed the skills of the business advisors employed by the larger companies. Dentists who own SGNs normally stop the acquisitions when they reach a point where they are no longer satisfied with their ability to manage the number owned or when their financial risk becomes too great. Sometimes they look to sell their smaller group to a larger DSO or DMO.
Regardless of the size of the organization, the ability to have an exit strategy in place is a major factor in the dentist’s mind when considering selling to one of these groups. Although all types want the dentist to continue working for a period of time, the smaller groups want more time allocated to the clinical side than the larger companies because the SGN consists primarily of dentists and the organizations purchased. The sale price is always negotiable, but as the price begins to rise based on a percentage of gross revenue, more of the payment is based on the future success of the group that has been joined. Today’s models allow for a much larger portion of the payment to be paid in cash on the purchase date—sometimes up to 100% of the acquisition price. Stock options and notes are also involved to a degree, but they represent just a part of a well-capitalized company plan for growth. In all of these cases, the first few years provide income for their sale price. The larger groups usually require less working time from the seller (up to two or three years), whereas the smaller groups can need more (up to about five years). The compensation arrangement is generally structured at around 25% of the dentist’s collected production. There are bonus incentives as well as other benefit packages available, but the overall goal is to increase the value of the enterprise. Future payments based on the value of the stock help the dentist understand that the company itself is what will drive the long-term value and upside return. In these scenarios, if the dentist who is selling does not have a sufficient sum of money saved from his or her years of work, the modest payment for services may not be attractive enough to motivate the sale.
The Bottom Line
The bottom line to the seller is supposed to be one of a much less stressful environment, an enormous reduction in decision-making responsibility, and an easier life. Many of these arrangements are already working very well for the sellers as well as for the DSOs, DMOs, SGNs, and other similar business models. For the dentist looking for an exit strategy, the concept is certainly something to consider.
About the Author
Bruce Bryen, CPA, CVA, is a certified public accountant and certified valuation analyst with over forty years of experience. Mr. Bryen is a principal at RKG Tax & Business Services, LLP, an affiliate of Robin, Kramer and Green, certified public accountants located in Fort Washington, Pa. He specializes in deferred compensation, such as retirement planning design; the determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He also served as Chairman of the Board of a regional bank. Mr. Bryen is experienced in providing litigation support services to dentists with Valuation preparation and Expert Witness testimony in matrimonial and partnership dispute cases, as well as damage claim presentations. He is also a financial writer for several dental journals. His website can be found at www.Bryen-BryenLLP.com.