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What's Missing from your DSO Structure?

You’ve built your practice with hard work and sweat equity. When it’s time to enjoy the fruits of your labor, you have options.

Practice consultants Kevin Arnold and Diwaker Sinha, of TUSK Partners, offer tips to help sellers find the right private equity or dental support organization arrangement to get the full value out of their businesses.

Scalability and Infrastructure

Two words to keep front and center when considering a sale: scalability and infrastructure.

To attract private equity, it’s important you can show your practice is a scalable platform — can you prove your business can grow? The other option is making sure your practice is a strategic investment, especially for dental support organizations (DSOs), who mainly want to see consistent growth in patients and profits, no matter the number of offices you have.

So, what do private equity investors want to see when they look for scalability? It’s the ability to go out and acquire new patients, merge practices efficiently and maintain profitability while growing.

If a buyer has to invest in more infrastructure to scale your business — adding management, equipment, or operations systems — your business’s valuation will be lower.  

Investors are looking to make sure you have good leadership and systems in place. They want to see that your same-store sales are consistent. And they want to see that your infrastructure can be maintained while growing.

For example, Arnold and Sinha say equity investors want to see you adding locations about every 90-to-120 days, or about three or four offices a year, while maintaining good, consistent operations in your existing locations.

“Simultaneously as you are adding locations, we would tell our clients, you don’t want to miss a beat,” Sinha said.

You should be working toward a structured deal with six or eight shared practices. And when you’re acquiring locations, define what you want so you’re adding the right kinds of practices that attract investors.

When you’ve developed your practice into a scalable business, you’re ready to sell.

Choosing Private Equity or a DSO

Whether you decide to go the private equity or dental support organization route depends on your preferences.

“What does your exit process look like?” said Sinha. “Is there a number you’re thinking of? If so, why that number? Are you looking to stay on post-sale, or are you looking to exit within a year to two years? Do you want to grow with a financial partner or a strategic partner?”

While private equity investors seek out scalability, strategic partners may be ideal for smaller practices with three to 15 offices where you can show consistent growth.

Finally, when it comes down to the final negotiations, Sinha says focus on structure over price. For example, an offer of 10 times earnings and 50% cash may not be as good as a deal that gets you eight times earnings and 80 cents on the dollar.

Good things to keep in mind as you build your practice toward a future, profitable, sale

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