I am often asked during speaking engagements by older dentists “When is the DSO (Dental Service Organization), fad going to end?” While I sympathize with the sentiment, I have to answer truthfully that I see no end in sight to the growth of DSO practice ownership. I only see DSOs’ share in the market growing in the future. It may be not something that present dental practice owners want to hear, but it is also a fact supported by all the recent data. It’s akin to closing the stable door after the horse has bolted. In other words….. that ship has sailed.

What is the state of current DSO impact on dentistry and dental practice sales? Understand that accurate facts are very hard to come by because there are very few people or groups researching this trend. What research is being done tends to be biased depending upon who is doing the research and for what purposes it is being conducted. This is what we do know:

• Recent evidence suggests that over 4000 DSOs are operating in the United States today.
• According to a 2022 article in Dental Business the 10 largest DSOs owned over 7000 dental practices nationwide.
• Today about 20% of dental practices in the U.S. are owned by a DSO according to a 2022 DSO trade publication
• The same trade publication predicted that by 2030 between 50%-65% of dental practices will be owned by a DSO.
• According to Planet DDS the annual DSO practice ownership growth rate will be 11.2% per year between 2023-2030.
• Less than 40% of dentists under 40 own the practice they work in.
• For 2023 over 70% of new dental school graduates were predicted to work in a DSO for at least their first two years after graduation.

With these statistics, it is pretty easy to see that DSO practice ownership is not a passing fad. A better question to ask might be, “Will there be any independently owned dental practices 25 years from now?”

But before discussing what practicing dentistry will look like in 25 years, let’s discuss how we got to where we are now. In 1985 almost 84% of dentists owned the practice they worked in. This indicates that in 1985 the vast majority of dental practices were owned by a single dentist or a couple of dentists in partnership. Those practices on average collected roughly $375,000 per year and netted roughly $180,000 per year. The average dentist graduated from dental school owing approximately $35,000 in loan debt. The average young dentist earned approximately $40,000 in their first year out of dental school and was easily able to make their roughly $630 per month student loan payment.

Fast forward to 2022. According to the research the average dental practice in this country collected $771,000 and had net profit of somewhere around $300,000 for the year. In 2022, the average dental school graduate had over $350,000 in student loan debt, with monthly payments of over $2700 per month in payments. That same new grad could be expected to earn approximately $80,000 their first year if they worked for an individual dentist and over $140,000 if they worked for a DSO.

Since 2000 insurance reimbursement has not kept pace with inflation and has declined in some cases, while overhead at dental offices has increased from 52% in 1985 to nearly 70% today. It is easy to see that the financial rules of practice ownership have changed and not always for the benefit of the individual dental practice owner.

Into this harsh reality stepped, the DSOs. In theory, DSOs function to remove all of the administrative responsibilities from the dentist owner thereby freeing them up to concentrate on doing what they are good at, the dentistry. That idea was fine in theory but that grand view is not how most DSOs are operated. The DSO is the owner, at least by any operational definition. They serve as the employer for the dentists that work in the practice and by definition, those employee dentists have to abide by the work rules of the DSOs. These rules may cover anything from production quotas to the type of dentistry that can be treatment planned. Many dentists find this to be a very restrictive environment to practice in.

When a dentist sells their practice to a DSO, nearly 100% of the time there will be a requirement that the selling dentists remain as an employee dentist for between 3-5 years. To ensure the retention of the selling dentist some of the sale price is “held back” in some form and paid out over the time that the selling dentist remains with the practice. Most times there are practice collection numbers that the practice must maintain for the selling dentist to be paid the hold-back money that is owed to them. The most recent research also indicates that when a dentist sells their practice to a DSO, they take a 40%-50% pay cut from the earnings they received when they owned the practice.

You may rightly say, I can see why a young dentist may want to work for a DSO since their income is so much higher, but why would anyone sell their practice to a DSO? This a fair question and the answers mostly come down to a single factor….. money. Not actual money but perceived money. As we have said the average dentist that sells their practice to a DSO will net about 50% less money (salary) than they did when they owned the practice. This is not well publicized by the DSO and is minimized in any discussions by the DSO with a potential practice seller. What is attractive to most practice owners that sell to a DSO is the total selling price and not just the money they get at the time of practice sale or in compensation when they work in the practice for the post sale years. The total number looks big. In fact, it can often be 20-35% more than a private buyer will pay for the same practice. It needs to be kept in mind that the stated purchase price may look very good but it does come with some strings attached.

By way of example, let me describe a DSO deal I have just concluded. The practice in question collected $1,800,000 in 2022. It would sell for $1,500,000 on the open market. The DSO offered $2,000,000 and it was accepted. The selling dentist was required to stay 3 years. The owner was paid $1,700,000 at closing and he could earn an additional $100,000 per year as a retention bonus (holdback of purchase price) over the next 3 years, without the responsibility that comes with owning a dental practice. This seller had hoped to work another 3 years and wanted to lock in the premium that he received for the practice sale. During those 3 years his compensation will be 50% of what it had been when he owned the practice.

Was it a good deal for the seller? In this case the seller was happy with the $1.7 million he got up front but did not want to retire from practice completely just yet. He was very tired of all the responsibility that comes along with practice ownership. This turned out to be a good deal for this seller, but we were only able to conclude that after exhaustive due diligence on our part and lots of discussion with the DSO.

I am often asked why can and do DSOs pay more for dental practices than individual buyers. The reason is simple really, it is money. ALL DSOs want to grow, and acquire more practices to increase profit for the company. This profit is termed EBITA. EBITA can be defined simply as profit, except for DSOs, profit is calculated AFTER they pay the dentist. The DSO hopes to buy your practice for 4 or 5 times EBITA, and then they hope to sell it for 12 or 14 times EBITA.  Make no mistake, all DSOs are for sale if they get the right price. This can lead to substantial profits for the principals of the DSO. Think in terms of tens of millions of dollars for each executive at the company. This is why most DSOs are always looking to grow and why they are looking to buy practices.

DSOs are able to buy practices this way because they rely on venture capital to finance their practice purchases which means that they do not have to pay bank interest rates since their money comes from their stockholders.  As such, they are only paying these Venture capital groups a portion of their yearly profits from the practice owned until they sell. They do not have to repay the loan principal until the eventual sale of the DSO. This way they have capital left to use to buy more practices. It is a very sweet deal for the DSOs.

Couple this with the fact that many dentists are not great at business matters, it is easy to see that once a DSO owns the practice, they usually see not just a growth of revenue but containment of costs which substantially increases the coveted EBITA, which leads to a higher price when the DSO is eventually sold.  As I mentioned earlier, all DSOs will be eventually sold.

There are lots of variations on a theme with DSOs and the dentists that work in them. The latest idea making the rounds is stock ownership in the DSO corporation by the Employee dentists. Whether you roll some of the proceeds of the sale of your practice into ownership equity or you invest as an associate, you too, can own a piece of the DSO. Some words of caution though. Even though it is called stock, don’t think of it like stock in General Motors, it is not publicly traded. What this means is that normal rules about you being entitled to review financial information about the company do not apply. Also, the company sets the stock price and you cannot sell your stock to anyone other than the company itself. What it comes down to is that if you are going to trade money that you invest with the DSO for stock ownership, you will have to have blind trust in the DSO, because once in, it is not easy to get out, even if you leave the DSO. DSOs make the claim that you  may earn 3, 4, or more times the amount of money you invested when the DSO is sold, but you need to understand and be willing to accept that is far from a guarantee.

DSOs can, under the right set of circumstances, be a good alternative when looking for a buyer for your dental practice. If you decide to consider an offer from a DSO, be careful and make sure you have very competent, experienced advisers to help you through the process. But make no mistake, DSOs are here to stay and will be a significant part of all of our dental futures in the years to come.