How to Take Your Dental Practice From Solo to DSO

Business Of Dentistry Podcast

This week I am joined by Brian Colao, Director of the leading US law firm Dykema. The firm handles the legal intricacies of expanding your business to a DSO. They offer advice on what practices are best for your business. On episode 91 of Business of Dentistry we specifically talk about how to take your dental practice from solo to DSO. More About Business of Dentistry Today Brian and his staff represent 350 group practices and DSOs in all 50 states. They handle any and all legal matters regarding compliance that could impact a group practice or a DSO. They help solo practitioners roll their organizations up to affiliate with DSOs, or he helps them get set up to do private equity deals because that's the way the industry is heading. But if a solo wants to stay solo Dykema can help with any legal issues that affect their practice. The first step to going from a solo to a DSO is to create a plan for expansion, and have your financing in order. You can do this either through bank financing or groups that offer DSO-specific financing like Citibank. As soon as a solo practitioner has lined up adequate financing to start acquiring or opening up additional offices then it's appropriate to restructure as a DSO. When I asked Brian to give a ballpark on how much capital is needed to begin a project like this, Brian says there are many variables that will determine the amount. It depends on where you are expanded, and what geographic part of the country you are in. An example is Dallas, Texas, where he is from, the general rule of thumb there is half a million dollars per de novo office. As far as acquiring practices, the financing needed could be anywhere from a couple hundred thousand dollars up to 7 figures (depending on how big they are). If your plan is to acquire as you can afford it, it becomes difficult to hit critical mass. You have to decide if it's appropriate to take on non-dental investors and establish 15 or 20, rather than one or two at a time. It depends on your preference for your expansion plan. I also asked him what most of his clients have as their end game, and he says the end game for everybody is to roll it up and sell it. But how you get there depends on how much fun you are having in your current position. He knows a lot of young, aggressive people who are in their 30s now, and want to roll up and sell so they are financially secure by the time they are 40. They go for as much financing and/or investor funding as they can get so they can grow their organization go from 5 or 10 to 25 or 30. You can't typically fund a plan like that yourself, unless you are independently wealthy. A solo doctor would have a very difficult time doing so on their own without some type of outside investment. But if you are adding one or two a year and having fun there's no rush to do anything differently. The range for the final sum when selling also varies, according to Brian. If you are doing a deal with an established DSO, a national DSO, it's probably around 5.5 to 6.5x EBITDA (Earnings before Interest, Tax, Depreciation and Amortization). Now that's a conservative deal. The multiple is lower in this type of deal but your future participation is limited. You can stay and exit after a few years If you're looking for a higher return (which also carries a higher risk) you'll want to consider doing a private equity deal. Some of those have paid as much as 18x EBITDA! But they require substantial future investment. If you do a deal like that you're going to have roll over up to 40-45% of the amount you get paid as a reinvestment into the new entity. You'll also have to hang around for up to another 5 years. And the future of how you do it and what your return is depends on the operators, the dental entrepreneurs' continued involvement in growing the organization. No one is going to give you a 14 or 15 multiple to exit your practice on the spot! You have to stay involved and be in a leadership role.