DSO activity has increased significantly in recent years, and many dental practice owners have either been approached or are actively considering these opportunities. The offers can appear compelling, often including a large upfront payment, operational support, and a path toward reducing clinical workload. However, DSO transactions are complex, and the headline number rarely reflects the full financial picture. Understanding how these deals are structured is essential before making a decision.
How These Deals Are Structured
Most DSO transactions involve multiple components rather than a simple sale. These often include an upfront cash payment, an earnout tied to future practice performance, and an equity rollover, where a portion of the value is retained as ownership in the DSO.
The upfront cash component is straightforward. The remaining portions require closer evaluation. Earnouts depend on the practice meeting certain production or revenue targets after the sale. Equity rollovers may offer long-term upside, but their value depends on future events and performance that are not fully within the seller’s control.
As a result, the total value of a deal may differ significantly from the initial number presented. Understanding how much of the offer is guaranteed versus contingent is critical.
Valuation and EBITDA
DSOs typically value practices using a multiple of EBITDA, which represents earnings before interest, taxes, depreciation, and amortization. The multiple applied can vary depending on factors such as practice size, location, specialty, and growth potential.
It is important to understand how EBITDA is calculated in your specific case. Adjustments to expenses or revenue can materially affect the final valuation. Reviewing these calculations carefully ensures that the offer reflects the true performance of the practice.
What Changes After the Transaction
After a DSO transaction, the structure of the practice often changes. Operational decisions such as hiring, scheduling, and vendor relationships may shift depending on the organization.
The level of control retained by the dentist varies by agreement. Some arrangements allow for continued autonomy, while others involve more centralized management. Understanding these changes in advance is important, as they can affect both daily operations and long-term satisfaction.
Evaluating the Full Picture
A DSO offer should be evaluated based on its full structure rather than the headline price. Key considerations include how much of the payment is received upfront, how achievable the earnout targets are, and how the equity component may perform over time.
It is also helpful to compare the DSO option with alternative paths, such as continuing to operate independently, bringing on associates, or pursuing a traditional sale. Each option carries different financial outcomes, timelines, and levels of control.
From a financial perspective, having a clear understanding of your current performance is essential. Your numbers provide the foundation for evaluating whether an offer aligns with your goals.
Conclusion
DSO transactions can be a viable option depending on a dentist’s goals and circumstances. However, they are complex agreements where the details significantly impact the outcome. Taking the time to understand the structure, evaluate the risks, and compare alternatives can lead to better decision making.
If you are considering a DSO transaction or have questions about how an offer fits into your overall financial plan, our team is available to help you evaluate the details and think through your options.