Dental and Medical Counsel Blog

The demand for dentistry services is up—which means that the demand to buy dental practices is also up. Dental service organizations (DSOs) are among the most enthusiastic buyers of existing dental practices, and they can bring an economy of scale that allows these practices to operate more inexpensively (and in more areas) than before.

For dentists who are hoping to retire soon, or who just want to have a complete picture of their available options, it's a good idea to take a few steps to make your practice more appealing to a potential DSO purchaser. Below, we'll discuss how you can begin to plan for a potential sale, value your practice, and assess your sale options.

Why Consider Selling to a DSO?

Though DSOs make up a significant portion of potential dental practice buyers, they need to earn your sale like any other buyer. Some reasons you might consider selling to a DSO can include: 

• You want to focus on dental work and relieve yourself of the administrative burden of managing your office's bookkeeping, HR, marketing, and many other time-consuming tasks. Dentists always have the option to continue working after selling to a DSO (either for the DSO or elsewhere), but will no longer be responsible for office overhead and the often-complicated taxes that can come from owning a dental practice.
• You're ready to retire but are having trouble attracting private buyers. One reason DSOs tend to dominate the dental market is because not many people or organizations have deep enough pockets to purchase a popular dental practice. Starting a practice from scratch can cost nearly half a million dollars. It can sometimes be tough to find a private buyer who is willing to pay the true fair market value of your business.
• You feel your practice will be more successful if you can take advantage of the economies of scale that a DSO offers. For many practices, it can be easy for the burden of administrative overhead to cut into patient time. Since DSOs offer built-in marketing material and strategies, billing, and hiring and HR processes, they can help keep the business part of your business moving forward while you and your staff focus on treating patients.  

Regardless of why you might consider looking for a DSO buyer, it's important to find one who makes you feel comfortable about the future of the business you've worked so hard to build.

What Are DSOs Looking For?

Although DSOs are all different, they tend to have a few key traits they're looking for when they consider purchasing an existing practice.

• Motivated team. So much of a dental practice's value is built on goodwill, and this often hinges on a DSO retaining many of the practice's current employees. If the office environment is negative, a DSO may quickly pick up on this and move on.
• Urban and suburban market appeal. DSOs tend to gravitate toward practices that are located within 60 miles of a major population center.
• Annual revenue of $1 million or more. If you're close to this threshold, a few strategic changes can be enough to bring your revenue over the line.
• A facility with at least five operatories. Because they offer such an economy of scale for their practices, DSOs often aren't interested in practices they deem too small.
• A dentist who will stay on board for at least two years. Keeping current office staff is important to retaining goodwill—and so is keeping the dentist. DSOs usually want to purchase from a dentist who is willing to stay on board and continue working for the DSO for at least two years after the sale. 

How to Plan for the Sale

Some dental practices may need only a few minor tweaks (if any) in their operations to be an attractive option for a DSO buyer. Others may need to make more substantive changes if they want to get multiple competitive offers.

In either event, it's important to start planning early. Even if you decide you don't want to sell for a few more years, the steps you put into place now can make your business more valuable (and improve your cash flow in the meantime), no matter when you decide to sell.

Increase Patient Count and Operating Hours 

Many dental offices tend to operate on "banker's hours," which can mean chairs are empty more often than they're filled. A DSO will want to see a practice that is operating on at least a full-time basis; if you tend to be seeing patients less than five days a week or less than eight hours a day, you may want to consider expanding your hours. Increasing the number of patients you see on a weekly basis is the key to increasing the potential value of your business.

In some cases, it can make sense to take on a part-time dentist or hygienist (or two) under a contract arrangement. This can allow you to increase your patient hours without spending more time at the office; and when patients don't need to wait weeks for an appointment, it can be easier to attract new ones. (Having more than one dentist in the office can also improve your ability to take on higher-paying emergency cases.)

Give Your Office Some Curb Appeal

If your office has had the same décor for years, it's probably time for an update. Worn carpets, chipped countertops, or dated magazines can make your business appear shabby and dated. 

These improvements don't need to involve an extensive renovation; something as simple as a few bright prints on the walls, a rug to cover problem areas on your carpet, or clean, sleek furniture can give your office a much more modern look. 

It's also worth considering what (if any) upgrades you'd like to make to your dental equipment. It doesn't always make sense to purchase expensive equipment you'll only use for a few years before selling your practice; but to the extent this equipment can allow you to see more patients or perform more extensive procedures than before, it may be a good investment. 

Know (and Improve) Your Stats

What's your per-patient production rate? Your case acceptance rate? The average number of minutes spent on each patient? The percent of accounts sent to collections?

Although not every dental practice will have all these figures at their fingertips, a DSO will want to know the statistics on your patients and the services you provide. There are a number of different software programs that can help you categorize and track your hours worked, patients seen, procedures performed (and billed), and collection rates. Once you begin tracking these measures, you'll also be able to spot and highlight improvements over time—something a DSO will love to see.

Attract New Patients—But Don't Forget About Your Loyal Ones

For many practices, one of the main parts of preparing for a potential purchase involves expanding your patient base. In the age of social media, this can be easier than ever—some well-placed social media ads, referral discounts, or discounted rates for initial exams can go a long way toward bringing in new clients. 

But it's often far easier to keep an existing patient than it is to find a new one. If you have some patients who haven't been in for a while, sending out a reminder postcard or email can prompt them to make an appointment. Ask patients for feedback, and be receptive to anything your patients have to say about things like wait times, staff friendliness, and the overall atmosphere of your practice. 

Valuing Your Practice

One rule of thumb for valuing your dental practice is the 80 percent rule—your practice is worth 80 percent of what you billed last year. But this, like all general rules, doesn't account for the many variables that could increase or decrease your practice's value.

If you have significant overhead costs that can't be reduced, the value of your practice may be lower than average. Meanwhile, dental practices with especially low overhead costs can be more valuable. If, like many dentists, your practice was impacted by the COVID-19 shelter-in-place restrictions, your 2020 income may not be representative of a more normal year; you may instead need to average the last several years. The 80 percent rule is meant only to provide a starting point for more detailed valuation approaches.

Other valuation methods include:

• Income-based valuation. Many appraisals use an income-based valuation method, like the capitalized earnings method or the discounted cash flows method. These methods measure your practice's pre-tax cash flow, which can often be a much different number than 80 percent of your prior year's billings. 
• Net asset valuation. This calculates the value of the practice's assets (including chairs, equipment, and computer hardware) plus the value of "goodwill." Goodwill can be a tough thing to quantify, but usually makes up the bulk of a practice's value.

Your Sale Options

Although DSOs purchase their fair share of private dental practices, a DSO sale isn't your only option.

• Private sale. You may be able to sell to another local dentist or a new (or new to the area) dentist who is looking to strike out on their own. Although it sometimes can take longer to find a private buyer than to find an interested DSO, if your timeline is flexible, it's often a viable option.
• A sale to an associate. If you already have another dentist in your practice, a buyout may be an option.

If you do end up going with a DSO, seek out multiple offers if at all possible. Not only will this help you know whether the offers you're getting are fair, but it can provide you with some leverage if the buyer you're leaning towards isn't the one offering the highest price. 

Key Takeaways

• Dentists who are considering selling their practices should start the preparation process early.
• Selling to a DSO can provide many advantages, but the DSO will be looking for a few key business traits. 
• Going into this process alone can be intimidating and may not net you the best price. 

For answers to your questions about selling your dental practice, or for help in navigating the sale process, get into touch with Dental & Medical Counsel to schedule a complimentary consultation with attorney Ali Oromchian.