The Practice Transition Conundrum:
The Unanswered Questions Practitioners Face Amidst the Proliferation of DSO Exit Offers
The fever surrounding DSO exit offers has become the defining spirit of an era in dentistry.
Once, young dentists graduated from school with the expectation of settling into a stable, multi-decade career, albeit with above-average income as a reward for their efforts.
In today’s landscape, however, professionals of all ages and career stages are considering offers from DSOs and private equity firms, enticed by the promise of substantial multiples and high valuations. This phenomenon was non-existent in the 80s and 90s, representing a significant shift in the dental field. What underlies all of this? Has money truly become so easily accessible without any attached conditions? What economic factors have contributed to this new reality, and can it be maintained over time?
The surge of private equity presence that is inundating the dental sector has previously impacted other industries before reaching ours, offering valuable lessons for us to absorb.
Practice Sale vs Buyout – Who shoulders the burden of risk?
The real estate world has an age-old saying: it’s wiser to control the terms than the price.
I’m willing to pay any price you suggest… IF I can dictate the terms. Today’s DSO purchase terms involve a smaller upfront payment for a practice and a substantial portion of the “purchase price” deferred to the future without guaranteed outcomes. Additionally, you’ll transition into a minority “partner” employee role, with limited decision-making authority.
In the past, it was common for the seller (often an experienced practitioner whose body had endured the toll of a lengthy career) to negotiate the terms of a practice sale to an associate or a younger doctor, in what was known as a private sale.
However, the dynamics have shifted dramatically. The negotiators for private equity are seasoned professionals. They may discuss impressive multiples and attractive sums, but these figures are built upon meticulously crafted terms tailored to their interests. The legal experts drafting these contracts are working on behalf of the private equity firms—not you, the sole owner. These terms frequently encompass multi-year commitments, contingencies, and performance benchmarks carefully stipulated by the DSO.
Do these terms align with your aspirations and non-negotiables? Have you clearly defined these for yourself?
Certainly, some doctors have successfully achieved the exit they aimed for and found significant success in certain instances, but the evolving landscape, marked by rising interest rates, market saturation, and the proliferation of DSO groups, is bringing about change. Many of the triumphant “case studies” of DSO transitions are from a few years back… the terms are evolving.
Taking equity off the table – what is your plan for what happens next?
Another vital question to confront during this process is: What is your post-sale plan?
As a practice owner, you wield complete authority over your practice—a valuable asset. This encompasses the power to make decisions and bear the consequences of those choices, both positive and negative. This ability to influence outcomes has significantly contributed to your achievements. However, selling your practice entails relinquishing ownership of this asset, which you have managed and which has generated consistent, sustainable income (though hard-earned) for you.
You’re essentially taking your chips off the table and putting them… where?
Do you possess a plan to generate the necessary cash flow to replace your existing practice income? What strategies do you have for the next phase of managing that equity? Have you dedicated the same effort and intention to shaping your assets after your practice as you did to attain success in your practice?
For most individuals, the default approach has been to entrust investments to third-party money managers and financial advisors, often yielding suboptimal outcomes. This approach also exposes you and makes you susceptible to significant market fluctuations, over which you have zero control.
Beware of recency bias – surviving in a new world of operational efficiency
The high-flying era of the past thirteen years, marked by substantial multiples and accessible financing, facilitated noteworthy expansion and substantial exits. Although numerous practice owners reaped substantial benefits, these gains were largely built upon inflated valuations driven by speculation and an unprecedented influx of inexpensive funds in search of returns.
As Bob Dylan aptly put it, “the times they are a changin’.”
We are undergoing more than a fleeting shift in the market. A considerable long-term transformation is underway, as a 40-year cycle of decreasing interest rates (initiated in 1980) draws to a close. We now find ourselves entering a phase of increasing interest rates—an unfamiliar landscape that diverges from the experiences of most contemporary investors. Over the past four decades, it was relatively effortless to ride the upward trajectory of the markets with limited expertise and witness positive returns. Presently, however, the cost of capital has surged at a faster pace in the last 14 months than ever before in our history. This presents a significant paradigm shift that will influence pricing and liquidity moving ahead.
Assets that were purchased at elevated prices during a period of boundless optimism will encounter pressure. This strain will impact organizations that acquired these assets under the presumption of the “greater fool theory”—the belief that they could effortlessly consolidate and then sell them to the subsequent buyer in line at an even higher multiple in mere months or years.
The rules of the game are indeed in flux.
Do you want to trust your nest egg to the future of these markets?
We are stepping into an economic environment where accurately projecting the exact amount of capital you’ll ultimately possess in a practice buyout spread across several years is challenging. Similarly, relying on traditional models to confidently estimate the funds required to maintain your family’s standard of living amidst escalating volatility and potentially stagnant returns presents difficulties.
The era of relying solely on market indexing and anticipating consistent positive returns has drawn to a close. It is now imperative to establish a contingency strategy, a “Plan B,” for your diligently accumulated nest egg. This plan should offer a dependable, passive income stream capable of substituting the income earned through your practice.
Becoming your own financial advocate – the key to securing your future.
Now, more than ever, is the time for practitioners to become their own financial advocate, get clarity, and chart a pathway to financial security without relying on a Hail Mary practice buyout or the volatility of the markets.
Assessing the decision to sell or not to sell should be based on careful consideration of your core desires and non-negotiables and a well-thought plan for the future.
- How do you define success and what specifically do you desire for your future lifestyle, choices and options?
- What is your required monthly cash flow which will sustain your family’s lifestyle on an ongoing basis based on that vision?
- Do you have a plan to generate that cash flow through the prudent orchestration of those proceeds into other investments after a practice sale?
- Is your future reliant on the “best case scenario” in which the proposed sale of your practice meets all of the contingencies for maximum profit over a multi-year period? What is your “Plan B” if the highest multiples are not realized?
- What choices and options do you desire for control of your time? (see above: how do you define success? Beware of merely trading one set of golden handcuffs for another)
- Do you have a plan for securing your nest egg in the event of market recession, serious correction or prolonged period of stagnant returns?
Most practitioners will only experience a single practice sale in their lifetime. This transaction holds immense significance, representing a pivotal move accompanied by a substantial reinvestment phase. The stakes have never been higher.
Each practitioner must shoulder the responsibility of advocating for their own financial interests, investing the necessary time and effort to cultivate the skill set required for success in the upcoming stages of life. Recognize that nobody possesses a greater concern for your future than you do.
Your future should be constructed upon a robust financial blueprint that doesn’t hinge on a speculative “home run” exit strategy or banking on market volatility. Attaining financial independence from your practice prior to the point of sale grants you the autonomy to navigate the process on your own terms. It also affords you the freedom and opportunity to shape a practice that caters to your needs, without the compulsion to relentlessly pursue high production and constant growth.
To formulate such a blueprint, you’ll need guidance, education, clarity, and the same level of dedication that propelled you to your achievements within dentistry.
Are you up to the challenge?
ABOUT THE AUTHOR
When his young daughter was hospitalized with leukemia, Dr. David Phelps, DDS was able to turn to his alternative investments, step away from his dental practice and be by her side. From this experience, he created Freedom Founders in 2012. This community helps dentists and other professionals take control of their retirement investments to produce passive cash flow, security and live life on their terms.
To contact Dr. Phelps, visit www.freedomfounders.com.
FEATURED IMAGE CREDIT: Piotr Swat/Shutterstock.com.