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.
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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. In his experience this type of deal isn’t generally for dentists who are older because they don’t typically want to stick around that long.
Our next topic is what happens and what it means when you reorganize from a dentist-owned practice to a DSO. To put it simply you split the clinic from the administrative. The dentist still practices dentistry and the dental practice or the clinical entity is still going to employ all the clinical personnel. But all of the non-clinical administrative support functions and non-clinical employees will be performed and operated by a management entity rather than a practice.
Usually these organizations are legally structured as LLCs, you can set up as another entity but these tend to be the most advantageous tax structures for these type of organizations. Brian also explains why you shouldn’t do a C corp and why you should convert if you are a C corp right now.
We wrap up by talking about the first steps to take if you want to do this: set up a plan for your expansion. Think about and decide if you want to stay in your state, or go regional. You’ll want to know many offices you expect to have for the next 5 years. And you’ll need to answer other questions like who is your target market, do you own all of your equipment and do you own the trademark for your business name?
Once you have these questions answered and your plan is in place Brian shares what happens next, and why a dentist-owned DSO is easier to work with than a non-dentist-owned. Join us for that and more on episode 91 of Business of Dentistry!