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DSO Acquisitions: Due Diligence and Avoiding Surprises

Many DSOs grow by acquiring established practices or groups. It's extremely important to perform due diligence so you can avoid surprises.

In this video, Dental Care Alliance Executive Chairman Mitch Olan describes all of the areas DCA researches and the questions it asks - including if any of the employees are related to each other.

Here is the transcript:

Amol Nirgudkar: My name is Amol Nirgudkar and I’m the CEO of Patient Prism. I’m delighted to welcome Mitchell Olan here. He is a dear friend of mine, and I've known him over two decades. He is the executive chairman of the board for Dental Care Alliance. He basically was one of the founders of Dental Care Alliance in 1994 when they start out with four offices. And, now they're almost at 300, and he's been one of the leaders of the DSO movement even before the word DSO started. I have him here because I wanted to talk to him about what it means to scale up from four to 300. And the journey has been arduous. There's a lot of lessons that you've learned over the years, some good ones and bad ones. But really, the topic for this segment I wanted to discuss was, as you grow practices, obviously you can start denova once. You can start brand new ones. But most of your acquisitions have been existing practices. What kind of due diligence did you do? Like how did you know, and how did that process evolve as you went from four to ten to 50 to 100? What kind of due diligence did you look at? What did you look at when you were looking at practices to acquire?

Mitch Olan: A good question. Well, you know, the due diligence process has evolved as the sophistication of the business has evolved. Also, the due diligence process is a little bit different for a one-off, or a small office, or a small group of offices, as opposed to a larger group. For a larger group. DCA has been effective at affiliating with some of the largest groups out there. That's one of the differentiators that we're proud of … the ability to affiliate with larger groups. But you have to bring in some additional support and expertise when doing due diligence on those organizations, because they are more complex and large, multi site or multistate.

In looking at affiliating with the one-off practice, it's important you look at the financials. You get the audited financials, the tax returns for the last couple of years. You look at the facility for dated it is. You get some sense of what's going on with the staff, the benefits, what have you. You try to dig as deep as you can into that. What we found is many times an individual seller, a doctor that's looking to affiliate and sell their practice or a part of their practice, they're not going to have the financial sophistication. They're leaning on the guidance from their accountants, their attorneys. And uh, so you're, you're limited as to what they can provide. But, you know, digging into those into aspects is very critical.

Ideally, if allowed to and if you have the time, go a little deeper. When you're looking at the staff, for example, what are their inner personal relationships? Are they family? Are they friends outside of the business? Those things can all come back in some way, shape or form -- positive or negative, and catch you off guard after the deal is done. Looking at financial situations… for us it's always important to look at the selling Doc, to get some sense of where they're at in their personal life. Are they financially strained? What are the reasons for them wanting to get involved in this? Those aren't always easy answers to get to. It’s a little bit deeper. It’s another layer of the onion that you want to peel. But, you know, for the most part, in the one-offs, it's the basic areas of their finances, the facility and the human resources. The larger groups… like I said, we'll bring in an outside firm that specializes in M&A and due diligence to help us, because of all the technicals that are involved in a deal that size.

Amol Nirgudkar: How deep do you guys get in terms of understanding active patients? What are they actually doing? Do these specialists come in and actually look at how the hygienists doing? What kind of case acceptance rates do you have? What's the culture?

Mitch Olan: Yeah, actually, that's a good question. That's the one area that I left out. The clinical due diligence is just as important as the financial due diligence or the facility due diligence. We have clinical leadership within the organization that goes in and does chart audits. We’ll take a sampling of the charts. We'll see where opportunities might be, but we'll also see if there was anything that was done that would raise a red flag. Also, as you work with an outside agency, they will have people that do nothing but that. They can come in and they can go a lot deeper on the larger deals, because as you can tell, if you're affiliating with a group that's got 15, 20, 30, 50 offices, which we have, there's a lot more to look at.

But, we have clinical leadership. We have a clinical committee. We have clinical directors in every market who are affiliated with us, and they come in and work with the due diligence process to make sure that what we are supposed to be getting is actually there. And we've walked away from some deals, candidly,  if they just don't set up right.

Amol Nirgudkar: Even if financially the deal made sense, because of the clinical stuff, have you walked away from deals?

Mitch Olan: That's correct.

Amol Nirgudkar: And how do you avoid surprises? When you look at all the elements, you want to avoid surprises. Have you had many surprises over the years?

Mitch Olan: Yes, we've had surprises. Have we had many? No. As we grow and we do this more and more, you add to the list of areas that you want to look into. But just when you think you know it all, you come across something that's a surprise. But, we’re looking at how they're processing new patients, diagnosing treatment planning, what's coming through the hygiene chair, how hygiene there interacts with the general dentistry side, and then looking at the billing, which is also another critical piece. Is what is being done in the back being properly billed in the front? We’ve run across situations where that hasn't been the case, and each one of these raises a red flag. It provides an opportunity to sit down with a seller to go through the situation. If there's an explanation and if it's a logical explanation… if it's something that can be addressed and fixed, you move forward. If it's something that isn't as easy to address or fix, you might want to take a step back and say, ”Address this, and we'll be back in six months if you want it to continue talking.”

Amol Nigudkar: So, you have some sort of template that you built over the years that looks at clinical, financial, and other stuff, and then, you go through it and if anything is not fixable, you walk away from the deal. Correct?

Mitch Olan: Correct. Or, even if it is fixable, and we feel that it's going to take too much time or we don't have an aligned goal of getting it fixed with the perspective of affiliation and we're not comfortable about it, we'll walk away. There is so much opportunity out there that you don't need to be chasing it. One of the folks within our organization says, “Another bus will come along in ten minutes.” And so, that is something that we try to keep in mind. Even though sometimes it seems exciting at the time, we want to get this deal done, and we want to add to the footprint in a certain market, or whatever the case might be, you have to know when to walk away.

Amol Nigudkar: So that's the great point to leave this segment on. Thanks.

Mitch Olan: My pleasure.

Amol Nirgudkar: Thank you.


About this Industry Leader:

Mitch Olan - Profile Pic

Mitch Olan

Executive Chairman, Dental Care Alliance

Mitch Olan has more than 25 years of experience growing dental practices. When he joined Dental Care Alliance in 1994, it had just four dental practices. Under his direction as COO, Co-CEO, and as Executive Chairman of the Board of Directors, DCA has grown to include more than 300 affiliated dental practices in 19 states. He shares his experience about scaling up, building DSO systems and processes, finding good people to grow with you, navigating the complex web of state-specific DSO regulations, and how to successfully integrate acquired dental practices into the organization.

Mitch is also active in the Association of Dental Support Organizations (ADSO), currently serving as Secretary.

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