Dental service organizations (DSOs) are the fastest growing segment of dentistry, and they have ushered new concepts into the marketplace. One of these new ideas is the “invisible DSO,” which may be clever branding, but it does not tell the whole story about how these kinds of entities work.
All DSOs garner their value by providing support services more efficiently than individual practices can do on their own and by creating a backbone that can support many practices that have been acquired or started up.
Invisible DSOs, or more accurately joint venture (JV) models, are no different in terms of their end goals, but they can provide much different results. Joint ventures invest in dental practices where the doctor remains as the owner, operating under the doctor’s brand and aligning the incentives for the doctor owner and the group.
In a JV transaction, the dentist sells a portion of the practice but retains an equity ownership position that is typically a minority stake in their own practice or a smaller group of practices under the DSO called a sub-DSO. The type of equity retained depends on the dentist’s goals and transaction structure, which varies based on levels of risks and rewards.
In many cases, the retained minority equity position will be far more valuable than the initial practice was. However, because the dentist is not taking all their chips off of the table, there is less certainty in this kind of deal. Further, if the dentist can roll their equity into a holding company, the transaction will typically be more lucrative in total.
When structured correctly, a joint venture eliminates a vast majority of the uncertainty when the time comes to transition. What’s more, the partnership secures the dentist’s financial future with cash up front, profit distributions, and a retained ownership stake to transact in the future. The overall goal is to choose a group you trust that will continue growing as your partner moving forward.
Methods for growing your dental practice under the umbrella of a joint venture include practice enhancement and acquisitions. Strategies to accelerate internal growth and profitability could involve lower product and team benefit costs, payer negotiation leverage, and enhanced marketing expertise.
Investing in established practices can also be valuable as you can retain minority stakes in your own portfolio of practices and potentially transact all of them with your JV partner when they recapitalize. So, not only are you more diversified in your practice success, but it becomes less risky as your partners take just as much (if not more) risk and are betting on your success just as you are betting on theirs.
The Bottom Line
No DSO is truly invisible, because if it were, it wouldn’t be creating any value. You want your partner to create value, and a joint venture is a great way making all parties’ incentives work together.
With both new and established groups from which to choose, the goal is to create a desirable situation that attracts multiple offers. In this way, the dentist can be assured that they see all of their options and if an invisible DSO is the right one for them.
Mr. Francis is the founder and CEO of Professional Transition Strategies. He has worked in the dental and medical field since 2005 consulting for practices, medical device companies, and groups of practitioners. He has used this knowledge to consult more than 50 startup companies and dental practices, as well as help build well over 100 dental and medical practices across the country. He has owned all or part of more than 20 practices and has been an investor in multiple DSO concepts. He created Professional Transition Strategies (formerly Headwaters Practice Consultants) to facilitate the sale of over 350 dental practices as a buyer’s representative, seller’s representative, or transaction broker. He and his family live in Colorado Springs where he enjoys golfing, skiing, and hunting as often as he can.