The Emergence of DSO’s: Myths vs. Facts
Myth #1
“I can only sell my practice to a corporate (DSO) because what bank is going to lend to a dentist who is two years removed from dental school, has $345,000 of student loan debt, and a negative net worth, let alone offer 100% financing to purchase a dental office?”
FACT
Each year, over $4B in dental practice transitions occur. Yes, that is a “B”, as in billions! Approximately $3B of that is financed by the general institutional lenders. Lenders like Bank of America, Wells Fargo, US Bank, TD Bank, and PNC each have their own specialty small business dental divisions. Not to mention, the SBA and smaller local banks are willing to lend to the dental community. The TRUTH is, a newly minted doctor with student loan debt, good personal production, and some savings can qualify for 100% financing!
Myth #2
A first-time practice owner can’t afford to make their practice loan payments and pay expenses associated with the practice, their personal living expenses, student loan payments, and savings accounts if they purchase a practice.
FACT
A first-time owner can absolutely purchase a practice, cover all personal and business expenses, and still save money. Typically, dental specialty lenders offer 100% financing plus working capital to cover transition and operational expenses. Additionally, less than 1% of dental loans ever default, which means the dentists are performing in the practice, paying their bills, and saving money. In fact, funeral homes and veterinarian hospitals are the only industries that suffer fewer losses than the dental industry.
Myth #3
Running a dental practice is too complex and stressful, and a dentist will have an easier and better career working in corporate dentistry. The corporate dental model handles all aspects of the business that the doctor would rather not deal with, providing peace of mind.
FACT
To some, allowing someone else to handle the day-to-day business management might seem appealing, but what you don’t know is that you will pay handsomely for it. That “peace of mind” comes with an inflated cost. Let’s look at the numbers: Normal associate income as a W2 employee is based upon individual production only and ranges from 25%-30%, depending upon the corporate dental model. As the owner of a practice, a doctor will make 35%-40% of their personal production plus all hygiene profits and the tax benefits as the business owner. This equation can reach in excess of 50% of practice collections. So, for a practice that collects $1,000,000 in annual revenue, that could be a $200,000 difference per year!
Myth #4
“A DSO will buy my practice, so I won’t need a transition specialist.”
FACT
DSO’s have requirements for the practices they buy; typically requiring $800,000 a year in collections, five operatories, you must work for them for 2-5 years as a W2 employee, and the practice has to be in an area where associate dentists are easy to find. As Sean Hudson, former President of the NAPB, says: “If you have all of those things, I will find a doctor to buy your practice!”
Myth #5
DSO’s pay more for dental practices.
FACT
While it is true that they appear to pay a favorable percentage of gross collections, the truth is it requires inclusion of your accounts receivable and a work back requirement of 2-5 years. If they pay you 75% of collections but you must work as a W2 employee for them for 2 years, the amount you lose by being an employee in those 2 years really makes the sale price 37% of collections. A 3-year work back makes the true sale price 17%