DSOs: Why and Why Not

This is a good news story!

The Dental Services Organisation, known more commonly as the DSO, has lured practitioners with a well-crafted and presented sales-pitch that paints a vivid utopian picture of practicing dentistry in their business model.    But before we dispel these myths let’s take a moment to review what has happened over the past decade or so throughout most of the developed nations around the globe.

Countries including US and Canada, Australia and New Zealand, and the United Kingdom have experienced the influence of the centralised corporately-controlled DSO practice model which is established and operated with the same business model and purpose as many large corporations in other industries.  They thrive on merger and acquisition; in the first 2 – 5 years they focus on taking fiscal and management control of hundreds or even thousands of what they consider to be outlier[1] dental practices, through acquisition of the practice assets funded by private equity investors.  Because they know nothing about dental practice operations and performance, they rely on EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), buy assets (not shares) and a 5 – 7-year service contract that puts responsibility for any financial losses on the selling dentist.

While those dentists are publicly referred to as “partners”, they are in reality, human capital because the dentist is their workhorse – generating billings and revenue to serve the interests of the multi-layered DSO management team and shareholders (investors).

Ultimately, the goal of the DSO is to sell the company to another investor group at a profit, which means that they must show a profit year over year.  This is usually accomplished by attracting more investors in order to acquire more practices, and by selling off or merging the lower performing practices with higher producing practices to create a more “efficient” model.

Ironically, all of the promises made by the DSO that were so appealing to the dentist-owner – i.e.  relief from HR and other management responsibilities – become more challenging because the DSO management teams are woefully unprepared for the unique needs and culture in private practice.  Dentists tell us that their biggest regret as a result of acquisition of their practices by DSO groups is the mistrust by the employees and patients and that rather than being “relieved” of their obligations as the practice Principle, they often find themselves in a conflict between their professional (and personal) ethics and the DSO’s expectations for production.  Having heard these comments innumerable times, I surmise that this result is due to the conflict between expectations and requirements of the DSO and the very things that made the practice so successful – patient-centred philosophy and empathetic care.  My observation:  dentistry is condoning the monetization of the dentist-patient relationship.

The latest tactic used by DSO groups is focused on recruiting students to join them after graduation by offering to pay their tuition in exchange for a service contract.  Promises made to these somewhat naïve young people can include: mentorship and guaranteed salary for up to two years.

So, whether you are the owner of a target outlier practice or dental student considering your options when entering private practice, you may be tempted to say to a DSO recruiter, “Hey, where do I sign up?”.  Like most things in life, when something sounds too good to be true, it usually is.   The saddest phone calls I receive are from dentists who usually start that conversation with, “Can you help me get out of this mess?”.  The answer is that I am not a lawyer, and once they have signed the DSO contract and happily deposited the cheque, it’s a legal matter.

Prevention is the best way to protect your interests.  So, whether you considering any business transaction you have the right (and responsibility) to make an informed decision.  Here are some tips that may help you to avoid potential risks and regret:

  1. Ask open-ended questions
    1. Start with asking yourself why you are considering this option. What do you gain and lose in that choice?
    2. When seeking more information from other persons, start your question with – how, when, where, why or who – to ensure that the answer begins a conversation that can reveal much more than the other person may actually want to share.
    3. “What-if” questions pertain to future situations and circumstances. These are important because we should not rely upon only the “best case” scenarios that are sometimes used by sales-people and recruiters.
  2. Have realistic expectations
    1. Take off your rose-coloured glasses. Nothing is perfect.
    2. You will make a sacrifice – what is it, and can you live with it?
  3. Read and ensure that you understand the contract(s)
    1. Seek counsel of a trusted lawyer and business advisor who are familiar with the type of transaction you are contemplating
    2. Make certain that the terms and conditions of your contract(s) accurately reflect the answers
  4. Avoid long-term pain for short-term gain
    1. Don’t be pressured into making a decision before you have all the facts
    2. Remember that money today is discounted, especially when the recipient is in a subservient position

Dentistry remains a relationship business.  And because of that, the reality is that the future of independent practice is brighter than ever!  Penetration by DSO groups globally, including the US, is still under 20%.  That means independent practices can survive and thrive, even under perceived threat by third parties.

Watch this space for support for your independent practice.  We’re striving to provide innovative solutions and opportunities for dental professionals at all stages of their career – now and into the future!

 

[1] An outlier dental practice is one which generates more revenue and cash flow than the average practice; considered extremely successful.