IS YOUR PRACTICE A CANDIDATE FOR SALE TO DSOs?
- Annual Collections: Somewhere in the $600,000 to $700,000 per year range is often a minimum. $800,000 per year and up is preferred. $1 million+ per year is most attractive to DSOs.
- Seller’s Willingness To Work After The Sale: Most DSOs want contractual agreements that require the seller to stay and work for the DSO after the sale. 3-years is a common requirement. 1-2 years might be accepted by some DSOs. In rural areas, where DSOs would have more difficulty attracting associate dentists to replace the sellers, 5-years might be required.
- Number of Operatories: DSOs want enough operatories to allow future growth. 5 operatories is often a minimum. 4 might be acceptable to some DSOs if the practice is strongly desirable in many other ways. 6-7 operatories, or more, will appeal to most DSOs.
- Medicaid: No Medicaid is preferred. 10% to 15% to possibly 20% of collections coming from Medicaid might be acceptable if the practice has other highly desirable attributes.
- Facility: DSOs prefer practices that have nice looking offices in good locations with visibility to significant amounts of traffic.
- City Versus Rural: Although some DSOs will consider small towns or more rural areas, practices in decent size cities are preferred. They offer larger population markets from which to draw patients, creating more growth potential. It is also easier for DSOs to recruit associate dentists to such cities.
- Profitability: DSO’s typically want practices with good profit margins.
SALE PRICES: EVALUATE THE WHOLE PACKAGE
- Holdbacks: Most DSOs do not pay the full sale price at the time of the sale’s closing. Often DSOs “holdback” 20% to 30% of the sale price, to then be paid to the seller when the seller completes his / her work commitment to the DSO --- endling typically +/- 3 years after the sale.
- Total Return: Price is not the only factor to consider. One should also consider what we call “Total Return”, which is the total of the sale price plus the income that a seller might make working for the DSO for 3-years after the sale. Once you sell, you will no longer receive any of the profit generated by your hygiene department. Plus, while you may now realize a 36% to 42% profit (or more) on the dental work that you personally do in your practice, after a sale, while working for a DSO, you might only be paid 30% or 32% of the collections that come from your personal dental work.
Based on the post-sale salary offer made to you, and the proposed sale price, a calculation should be made. After 3-years will your total return from the DSO be favorable, or will it be less than you would have received if you retained ownership of your practice for 3 more years, realized the full profit potential from your personal work and from your hygiene department for those 3 years, and then sold your practice at a lower price? If your profit margin is good, if you have a good hygiene department, and if the compensation percentage from the DSO is not high enough, retaining ownership and selling 3-years later may provide the best total return.
ESTIMATE YOUR ANNUAL INCOME POTENTIAL
WORKING FOR A DSO AFTER YOUR SALE
Collections From Your Personal Work In 2021: $_____________
X’s Possible Compensation Percentage: X’s .32 (32%)
Rough Estimate Of Your Annual Salary: $____________
If You Have This Problem: Some dentists code their software to show production for themselves, hygienists, and associates dentists separately, but may lump collections from hygienists (and possibly associate dentists) in with the owner’s collections. If your software is coded that way, you might have difficulty getting the amount of your personal collections. This isn’t totally accurate for several reasons, but you might assume that your percentage of total collections is about the same as your percentage of total production. To get a rough idea of your personal collections:
- Calculate your percentage of total production; then
- Multiply that percentage times (Xs) total office collections to estimate your personal collections.