Every Dental Support Organization (DSO) has a different model to manage their groups of dozens or hundreds of “affiliated” dental and specialty practices. Some acquire 100% of practices and operate under a single brand, others start practices from scratch and many DSOs act as “silent partners” when acquiring interests in practices. We call the silent partners “Invisible DSOs”.
Invisible DSOs purchase the majority of a practice for cash today and provide support, capital and guidance, but are not visible outside of the practice with the owner/doctor remaining in the practice. They believe in the value of the local doctor continuing as an owner in the practice with his/her local brand and goodwill.
The various DSO models each have their plusses and minuses, but we have found that the Invisible DSO has been most attractive to our doctor clients over the last 12 months. This may be in part due to the fact that our average client is about 50, and not yet ready to retire, and is typically extremely successful. It also may be due to the fact that Invisible DSOs are currently paying the highest values for practices of ALL specialties.
Note: Research indicates that OWNER operated practices outperform employee operated practices by a significant margin.
Benefits to the Invisible DSO #1:
- The doctor may get significant cash up front, but retains equity ownership in the practice. Owners operate their practices like owners, not employees.
- Doctors can choose which of the silent partner’s various support services, they want to access. Some doctors may want help in marketing, billing/collecting, recruiting, human resources, etc. Some may not, but the owner doctor makes that decision. No wholesale changes in the practice are required.
- Because the doctor is motivated like an owner, not as an employee, the owner doctor does not have to be “managed”, reducing overhead for the Invisible DSO vs. Conventional DSOs.
- The entrepreneurial doctor has a direct benefit via ownership to continue to manage efficiently with a new focus on rapid growth funded by a partner’s capital. The owner doctors’ motivation is not only to increase their current income via practice profit distributions quarterly, but also to increase the ultimate liquidation value of their retained equity. This mindset benefits the Invisible DSO partner. Ex: Doctor with silent partner’s capital acquires competitive or complimentary practices in which the doctor now has ownership.
- Gain a motivated doctor and successful practice in their network which may fill in gaps in their overall service capabilities and enable them to capture lost revenues. Ex: Buy the orthodontist down the street from your five pediatric practices.
Benefits to the Doctor
- Doctors selling 60 to 90% of their practice for cash now can secure their financial future at today’s high valuations and low capital gains tax rates. Note: Do you think tax rates are going UP or Down?
- Doctors can outsource to their new silent partner the practice activities which do not interest them, frustrate them or are not the highest and best use of the doctor’s time. This is customized by doctor, not dictated by a new, rebranding, 100% owner.
- Doctors get risk free upside gains in the growth of the practice via their retained ownership.
- Doctors gain the resources of a much larger entity; capital, purchasing, recruiting, marketing, supplies, insurance contracts etc. without giving up their autonomy and local presence.
- Certain doctors gain significant referral revenues from other practices affiliated with the Invisible DSO in their area. Ex: Invisible DSO owner of multiple orthodontic practices buys local OMFS and refers to them.
- The doctor has significant upside potential via their retained ownership. Ex: A practice which can increase its bottom line by 10% per year using a partner’s resources is worth 65% more in year five than they are today. Therefore, the doctor’s retained ownership value increases by 65%.
- The doctor secures a known, contracted buyer for their retained equity interest, at a known value formula, when they are ready to exit in the years down the road.
The logic of the owner/active doctor model has been proven over many years and is not unique to dentistry. See the secret to Chick Fil A’s success here, (HINT: Owners on premises!)
By providing doctors with the resources of a larger organization, creating referral synergies and retaining local brand goodwill, Invisible DSOs achieve higher returns at the practice and parent level. These returns are far better than DSOs buying 100% of dental practices and rebranding them to national or regional brands with employee doctors.
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