The allure of partnering with a dental service organization (DSO) often lies in assurances of financial security, operational support, and a path to long-term success. However, not all DSO partnerships always live up to their initial promises. Dental practice owners may find themselves in a partnership 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. The guidance of a trusted advisor can help in this regard.
When Promises Fall Short: Cautionary Tales
While DSOs may present attractive offers, practice owners must be wary of situations where overly ambitious financial projections fail to deliver. Here are some anonymized examples of what can go wrong, as shared by dentists who have previously sold their practices:
Equity that underperforms: A group of dentists partnered with a DSO that promised large 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 realized little to no financial benefit from their equity, which had been touted as a cornerstone of the deal.
Unrealized buyout potential:Another practice sold to a DSO with the assurance that its retained equity would dramatically increase in value during a subsequent recapitalization event. When the recapitalization occurred, however, 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, directly boosting the value of the retained equity. But the marketing efforts failed to produce the expected results, which led to stagnant growth and equity values that never reached the projected milestones.
These situations highlight the point that DSOs may sometimes overpromise and underdeliver on financial outcomes, particularly regarding equity returns. For practice owners, this can lead to several troubling consequences, including a 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. A second consequence could be an assortment of costly legal and operational entanglements due to disputes over unfulfilled financial promises. Thirdly, because many dentists view the sale of their practice as a key component of their retirement strategy, a misaligned DSO partnership could lead to compromised long-term financial stability if promised equity returns do not materialize.
Avoiding the Pitfalls
Navigating the complexities of a DSO partnership requires expertise and due diligence. An experienced advisor can play a pivotal role in helping practice owners avoid the pitfalls of overpromised and underdelivered returns in the following ways:
Realistic valuation assessments: Advisors scrutinize a DSO's financial projections and ensure that equity valuations are grounded in realistic market expectations.
Structured negotiations: Skilled advisors negotiate terms that protect the seller, such as guaranteed minimum payouts or transparent equity growth benchmarks.
Strategic due diligence: By evaluating a DSO's past performance, growth trajectory, and recapitalization history, advisors can provide data-driven insights to guide decision-making.
Tailored exit strategies: Advisors help practice owners structure deals with flexibility around roles and responsibilities post-close.
Selecting an advisor with a thorough understanding of dental practice transitions and DSO partnerships is critical. Qualities that a practice owner should look for in an advisor include proven industry expertise with a track record in dental mergers and acquisitions, and being exemplary in transparency and integrity. Additionally, an advisor should have comprehensive service offerings available and be capable of handling every aspect of the transition process, from financial analysis to legal review and cultural fit assessments.
Partnering with a DSO can be a transformative opportunity for practice owners, but it is not without risks. Overpromised equity returns and unrealistic financial projections can lead to disappointment and financial hardship. By engaging a knowledgeable advisor, practice owners can ensure that their partnership not only aligns with their immediate needs but also supports their long-term professional and financial goals.
About the Author
Ryan Mingus
Managing Director, TUSK Practice Sales
(tuskpracticesales.com), a healthcare mergers and acquisitions (M&A) advisory firm
