Tom Bodin, a Practice Integration Advisor with Buckingham Strategic Wealth, works with dentists to help them achieve financial freedom through a comprehensive approach to wealth management.
When talking about transition models, we tend to get a lot of questions about corporate dentistry. The term corporate dentistry is nebulous, with no identified threshold for when an entity serving as a Dental Service Organization (DSO) goes from an individual or group of individuals who own and manage a handful of dental offices to something more like the national players with hundreds of dental offices across multiple states. For the purposes of this article, I will speak in broad terms when I refer to “corporate dentistry” and DSOs, considering them any entity whose mission is to aggregate dental offices to achieve economies of scale. Across this spectrum of DSOs, we have seen certain similarities in transition models, which, like all transition models, carry pros and cons for the seller.
In any transition, the seller needs to think through their financial, physical and quality-of-life objectives. Sellers need to reflect on whether they are ready to transition, and they should have a clear, unbiased view of where the transition path they choose will lead. A sale to a DSO often has common characteristics: there are responsibilities after the sale, the sale terms are not immediate, and frequently the sale proceeds are not entirely in cash.
Some questions specific to a DSO sale are:
How will you be paid for your equity? Extracting the equity you have built up in your practice is the reason for a practice transition. Corporate dentistry purchase agreements often carry complicated payment terms, which can sometimes include partial cash payments, prolonged payment schedules and equity in the corporate entity. Equity in a privately held DSO should be carefully considered. While the equity portion of a purchase agreement is often touted as a future windfall, it is illiquid in the interim. What’s more, that future cash event to buy out your equity will likely be outside of your control.
What role and responsibility will you have after the sale? Similar to the role reversal transition model, a corporate purchase often carries a stipulation for retaining employment of the selling dentist for a certain number of years. This benefits the buyer by keeping continuity for existing patients after a brand change. This may also benefit the seller. If the seller wants to shed some of the responsibilities of management but continue clinical work and preserve some level of income, this arrangement can be ideal. It should be noted, however, that clawback provisions for the buyer based on certain production and collections targets are often involved. It is not always the case that the seller will be absolved of all management responsibilities. If you are hoping to finish your clinical career at the same time as you transition your practice, you will want to be cognizant of this potential responsibility.
How will you be compensated after the sale? As working within the new entity is often a requirement of the transition contract, you should know how you will be compensated for this clinical work. You may receive a straight W-2 salary, a salary plus bonus, or a percentage of production or collections, or it may involve ongoing payments from your buyout. These compensation models can carry different tax treatments.
How long will you need to work? The terms of a corporate buyout will stipulate your obligated length of employment. This can have a physical and emotional impact. If you are ready to sell and walk away, this obligation may not be appealing. If you have a clear sense of your financial plan and want to shed certain management responsibilities, your employment term should align with your financial goals. Don’t assume the buying entity will be willing to extend your employment term beyond the stipulated period.
Are you ready to be an employee? Shedding those management responsibilities and continuing your clinical work may be a motivator in looking at a DSO sale, but think through your emotional readiness for this role change. Serving as the captain of your ship came with real pressures: weekends handling administrative tasks in the practice, difficult personnel decisions and hard conversations. But it was your ship. Are you ready to take off the captain’s hat and join the crew?
The decisions surrounding transitions (which, as we’ve discussed, include transition model, type of transition you envision and the timing of your transition) will impact what is possibly the largest financial event of your life. As such, they should align with your financial, physical and quality-of-life objectives. For additional background, see recent articles from my colleagues on the five basic dental transition models and on some of the tax implications to consider in a transaction.
In our next article, my colleague Mike McAninch will tackle practice debt and how to align your capital decisions with your debt payment ratio. If you have questions related to transitions or any of the other topics we cover in this blog, please reach out to any of Buckingham’s Practice Integration Advisors. We are here to help you understand your options and reach your ideal destination.