Elevating Your Practice: The Sub-DSO Strategy Dentists Are Using to Build Wealth

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Matt Zolfo

By Matt Zolfo, merger and acquisition consultant, Professional Transition Strategies.

Doctors with an entrepreneurial mindset are always looking for opportunities to grow their practice. Some will go the traditional route, using bank financing to open new locations or acquire practices, perhaps with a goal of building their own dental service organization (DSO). Others will seek a strategic partnership with an established DSO instead.

Your best path forward depends on your goals, but it’s important to understand that the industry’s current status on the consolidation curve gives you a unique opportunity — one that won’t last forever. Here’s a closer look at how the dental industry’s equity arbitrage market is evolving and what it means for you.

Understand Dental Industry Consolidation

Looking at how equity arbitrage transformed medical marketplaces in the past is instructive: Harvard Business Review analyses show that about 60% of providers participate while 40% do not. The participation rate is consistent across fields.

Industry consolidations are a one-time opportunity, so it’s critical to understand the consolidation curve so you can leverage it to drive growth. Any doctor who will be practicing over the next three to five years, regardless of age, has an opportunity right now to participate in an equity arbitrage consolidation market.

About 40% of dentists won’t participate — they’ll open a dental office, serve their communities and eventually sell their practice for 60% to 80% of collections, which is what most dentists did 10 years ago. Others plan to grow solo practices on their own and eventually sell the organization they’ve built to a DSO.

But if you own multiple practices or are planning on growing with new locations, you can participate in equity arbitrage events via a sub-DSO strategy now, leveraging the growth of your practice footprint as an investment vehicle. It’s a smart move because the growth trajectory of a solo practice will never outpace the growth of equity value in a group of practices.

Use a Sub-DSO as a Wealth-Building Tool

A sub-DSO arrangement gives practice owners access to wealth-building opportunities in the equity arbitrage consolidation marketplace without taking on the risks of growing a practice by traditional means. In a sub-DSO, the practice owner transacts their business for a large upfront payment and typically retains a percentage of ownership. The equity isn’t held at the DSO or practice level – it exists in a holding space that allows room for expansion.

This can be a huge advantage for practice owners. There’s a saying in the dental practice startup sector: Operating one practice is easy, two is taxing, and three is make-or-break. That’s because it’s difficult to acquire and centralize the infrastructure and expertise you need to support additional practices, such as acumen in marketing, credentialing, hiring and firing, accounting, etc.

If you choose to partner with a DSO, you won’t have to face those headwinds alone. A strategic partner can remove risk and help shoulder the cost of growth because they already have the administrative infrastructure in place. You can plug into it and grow exponentially as a majority or minority partner and owner/operator of a sub-DSO.

Grow Faster With Less Risk

The opportunity is here today, but the sooner you act the better because the consolidation wave is expected to end in the next five years. We’re at the peak of consolidation in the dental industry, and the arbitrage upside of equity is extremely valuable right now, so this is the ideal time to maximize your return.

Because of where we are on the consolidation curve, it’s much easier to increase a $1 million investment to $5 million via a sub-DSO than it would be to generate that level of practice value growth on your own. There may still be opportunity two years from now, but the upside in equity arbitrage will decrease as consolidation accelerates.

A real-world example can demonstrate how a sub-DSO strategy works. A North Texas practice owner in his early 40s had two partners and four locations. When the pandemic hit, the doctor successfully weathered the storm but found it exhausting, and he had a decision to make: Should he keep building his practice on his own for the next five years and try to double or even triple in size or find a partner to share the load?

He explored options with a trusted broker, which generated 75 inquiries, conducted 12 buyer interviews and narrowed the options to three prospective partners. The doctor chose a DSO and transacted 60% of his business, retaining 40% of equity for himself and his partners.

With the cash proceeds, the doctor purchased a fifth location within three months of the closing and is now experiencing 28% growth as a sub-DSO, leveraging the acumen and assets of a group with a strong track record of success.

Keep Control While You Maximize Value

There are about 375 DSOs in the U.S., and business models vary. Most are doctor owned and operated, and the DSO doesn’t affect daily operations. But some of the largest DSOs operate hundreds – or even well over a thousand practices – and they aim to standardize clinical operations.

Doctors who are looking for a partner should evaluate their options carefully, preferably with guidance from an advisor who has experience with successful practice transitions. Specifically, it’s important to know the capital source (private equity or debt) and how fast the DSO is growing. It’s also critical to understand how the management team generates value.

Ultimately, the partnership question boils down to math, and a trusted advisor can help you understand whether you’d be better off bootstrapping your business or using the value of your equity to grow faster with a partner.

Whatever you decide, keep in mind that you can only transact your business once, so you need the peace of mind of knowing you made the right decision for yourself, your team, your patients and your legacy. Don’t go it alone — find the expertise you need to make the most of your shot.

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