The Practicon Viewpoint by Ann Page Griffin

THINKING ABOUT SELLING YOUR PRACTICE TO A DSO?

GET ANSWERS TO THESE QUESTIONS FIRST

According to practice transition experts, 10% to 15% of practice sales are now made to corporate entities, primarily Dental Service Organizations (DSOs). If you're considering sale of your practice to a corporate group, first examine all the details with due diligence, and get answers, not only to the following questions, but to any other concerns you might have as well.

• How will the value of your practice be determined? Most corporate evaluations are based on future earnings, not on past earnings before the dentist's compensation is deducted, as is the case in traditional sale evaluations. Be sure that you understand the method of calculating practice value based on a multiple of the future practice Earnings minus the dentist’s compensation but Before deduction for Interest, Income Taxes, Depreciation, and Amortization (EBITDA).
• What multiple will be used to calculate this value? In other words, will EBITDA be multiplied by 4, or 5, or 6, or X to determine the value of your practice?
• Will your accountant and/or attorney be provided with a complete explanation of the evaluation method? Will they be free to negotiate with the corporate buyer? Is there a limit to the time the evaluation might take?
• Can you contact other dentists who have sold to the same DSO? Talking with them might help you determine the multiple used to evaluate other practices similar to yours in your region. Keep in mind that the multiple is influenced by many factors, such as cash flow, profit level, group or solo practice structure (with group being preferred), multiple office locations, etc.
• Will accounts receivable (A/R) be included in the sale? Will patient credit balances also be included? How will A/R and credit balances be evaluated? Remember that, in a traditional sale, these two items typically remain with the seller.
• What will be included in the sale? Can you retain the building if you desire? Must you sell all furniture, decorative items, art work, etc.?
• Will a portion of the selling price be retained by the corporate buyer at closing to protect against any practice liabilities? If so, how much will be withheld? When will the seller receive the withheld amount?
• Will you, the seller, have to continue working in the practice following the sale? If so, how long? How will compensation be calculated? Will benefits be included? Will you be free to set your own clinic hours, personal time off, vacation time, and so on, or must you meet the demands of the corporate buyer's schedule?
• If the seller is to be compensated based on collections, what is the percentage you will receive? Is there the possibility of bonus pay? What is the average collection percentage in other practices owned by the same corporation?
  
• Will you, the seller, receive full appraised value at closing? Or will you be expected to accept equity (stock) in the corporate entity as part of the purchase price?
  
• If equity is to be substituted for cash, how and when can the stock be liquidated? If sold, must the corporation approve the purchaser? Who determines the value of the stock? Furthermore, how will the equity/stock be taxed—as compensation or as capital gain?
• What information and paperwork related to the practice will the corporate buyer require? Obtain a complete list of items to be submitted, such as agreements, covenants, contracts, tax forms, insurance policies, financial plans, seller's retirement plans, benefit arrangements, etc. that the buyer might demand. Are you willing to provide such information?
• Will your practice modalities be affected or dictated by the buyer? Will you be free to order supplies, instruments, and equipment as you choose? Or will the new corporate owner buy supplies and equipment only from their central vendor? Will you be comfortable working under such conditions if you must agree to work in the practice for a period after the sale?

This is far from an exhaustive list. Seek the counsel of an attorney and a CPA with extensive experience in negotiating the sale of dental practices to corporate buyers, just as you would if you were making a sale to another dentist.


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