Growth through DSO partnership

Partnering with a DSO

Many dentists have grown their practice on their own.  Whether it as at one office or ten, two associate dentists or twenty, many dentists reach a point where they no longer can or want to take on all the financial and administrative responsibilities of owning their practice, or feel they cannot continue to grow without bringing in some outside help.

Dental practices seeking to grow have many options.  Dentists can secure bank financing, raise capital through taking on additional dentist owners in their practice, or look for a private partner that will invest in their growth.

Another path for growth is through partnership with an existing dental service organization, or DSO.  This article explores what such a transaction could look like and some of the legal considerations facing any practice considering a DSO transaction.

The common perception of a DSO transaction is that the dentist sells all of the assets of his or her practice and becomes employed by a large dental practice.  The dentist gives up some autonomy in exchange for being relieved of the day-to-day administrative hassle or owning and running a dental practice.

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However, this is only one way that a dental practice can partner with a DSO.  Many DSOs are willing to consider a variety of structures that will allow all sides to have an ownership interest in and earn returns on their investment in the dental practice and its assets.  Partnering with a large DSO can offer advantages, such as access to capital, better pricing on equipment, and access to the DSO’s practice infrastructure such as IT systems, human resources, accounting and financial tools and other items that it is difficult for a single or multi-office dental practice to develop on its own.

There are many variations of these hybrid ownership models.  The dentist may retain ownership of the local dental practice, and retain a share of the profits of the practice while paying a service fee to the DSO.  The DSO takes some of the administrative burdens away from the dentist, provides access to capital to allow the dentist to acquire new equipment, expand locations or otherwise grow their practice, and the dentist retains day-to-day ownership and control over all clinical operations.

Alternatively, the dentist and the DSO may form a joint venture DSO, where the dentist and the DSO work in partnership to oversee the administration of the dental practice and structure a growth strategy.  In such a model, the dentist and DSO both invest capital in the form of money, equipment and other assets into the joint venture, and share proportionally in the growth of the practice.  The dentist retains day-to-day clinical control of the practice.

Each structure has many variations, and is a result of the DSO’s and the dentist’s negotiations, short- and long-term goals, and many other factors.  Ultimately, the parties will execute purchase and sale agreements, operating agreements, employment agreements and a number of other transaction documents that will govern their ongoing relationship.

Before any dental practice begins discussions with a DSO or any other potential partner, it is important to make sure the practice is ready for sale.  Legal and financial advisors can make sure that the corporate and financial records are organized and ready to go, so any partner can easily evaluate the practice and make decisions.  Accountants and other tax advisors can help the owners understand the implications of any decision, and guide the dentists to make the right choices from the start to minimize the tax burdens of any sale.

Once a partner is selected, it is key that both sides retain legal counsel who can guide them through the process.  Some of the issues that often come up when negotiating these transactions include:

  • What are the exit strategies? Both partners need to be on the same page about how long they want the investment to last, and if they are looking for long-term returns through profits from ownership or looking to sell to a third party in a few years and exit the business.
  • How will decisions be made? Whether it is opening a new office or investing in new technology, both parties will need to be clear on who will have the decision-making power.
  • Can both parties be required to put in more capital? If the joint venture needs capital, such as the money to acquire new equipment, will it use third party financing or require capital infusions from its members?

These agreements must be carefully structured so that all parties’ rights and responsibilities are clear.  In addition, they must comply with state and, in the case of Medicaid providers, federal law governing topics such as corporate practice of dentistry, fee splitting and kickback and self-referral prohibitions.  Without strong legal review and careful structuring, both parties can expose themselves to investigations, fines and board disciplinary actions.

Ultimately, clear communications between the parties and a good understanding of the structure they are agreeing to will make a successful partnership.  The DSO and the dentist need to be in alignment in their goals and vision on the practice’s growth.  Each DSO is different, and dentists should have clear and open discussions with potential partners to find the one that best matches their own goals.