Introduction
Selling a dental practice to a Dental Service Organisation (DSO) can appear to be an attractive financial opportunity for practice owners. A large upfront payment, combined with reduced responsibility for administrative tasks, can make the decision seem beneficial in the short term. However, the financial consequences of such a decision can extend far beyond the initial payment. The value of a profitable dental practice is not limited to its current sale price; it also includes the future income, growth, and appreciation that the owner could receive by maintaining ownership. For this reason, dentists should carefully evaluate both the immediate benefits and the long-term costs before transferring ownership.
Understanding the Appeal of DSOs
DSOs have become increasingly common within the dental industry because they can take responsibility for many of the administrative functions involved in operating a practice. These responsibilities may include payroll, human resources, marketing, accounting, purchasing, and other business operations. For dentists who want to spend less time managing the business or are approaching retirement, selling to a DSO may seem like a convenient solution. The immediate financial payment can also make these transactions particularly appealing. Receiving a substantial amount of money at once can provide financial security and eliminate some of the risks associated with independently operating a practice. However, the size of the initial payment does not necessarily represent the total value of what the dentist is giving up. A practice that continues to generate profits for many years may ultimately be worth significantly more to its owner than the amount received at the time of the sale.
The Hidden Cost of Selling
One of the most important considerations is the future income that a practice can generate. A successful dental practice may continue producing substantial profits year after year. When ownership is transferred, however, the new owner receives the economic benefits generated by the practice in the future. This creates an important distinction between the immediate sale price and the long-term financial value of ownership. A dentist may receive a significant payment when selling a practice, but that payment must be compared with the profits that could have been earned by continuing to operate the business. Over a period of ten years or more, these missed profits can become extremely substantial. Therefore, practice owners should not evaluate an offer solely according to the size of the cheque they would receive. They should also consider projected profits, operating expenses, future growth, and the potential increase in the value of the practice. In some situations, maintaining ownership may provide greater long-term financial benefits than accepting a large payment immediately.
Loss of Ownership and Control
The consequences of selling a practice are not limited to finances. Ownership also provides dentists with control over how their businesses are operated. After a sale to a DSO, a dentist may continue working at the practice but no longer have complete authority over important business decisions. Decisions involving staffing, scheduling, budgets, equipment, purchasing, marketing, and other operational matters may become subject to corporate policies. The dentist who previously had complete control over the practice may instead become an employee or associate working within an organizational structure established by the new owner. This change can affect professional independence as well as the ability to make decisions according to personal preferences and the needs of patients. Although administrative support can reduce the workload associated with running a practice, it can also reduce the level of autonomy that comes with independent ownership.
Evaluating Long-Term Wealth
A dental practice can represent much more than a source of employment. For many owners, it is an important asset that can generate wealth through ongoing profits and increasing business value. As the practice grows, its financial performance and market value may also increase. For this reason, dentists considering a sale should examine the decision from a long-term perspective. Instead of focusing only on the immediate payment, they should calculate the potential income they could receive by continuing to own the practice. Factors such as annual profitability, cash flow, expected growth, expenses, and future valuation should all be considered. A thorough financial analysis can help determine whether a proposed sale actually supports the owner’s long-term financial objectives. Comparing the immediate proceeds with the potential lifetime earnings from continued ownership can provide a much clearer understanding of the true cost of selling.
Conclusion
Selling a dental practice to a DSO can provide immediate financial benefits and reduce many of the administrative responsibilities associated with independent ownership. However, the decision can also involve significant long-term financial and professional consequences. Transferring ownership may mean giving up future profits, potential appreciation in the value of the practice, and a degree of professional independence. Ultimately, dentists should evaluate a sale based on its total long-term impact rather than focusing exclusively on the initial payment. By considering future earnings, profitability, practice growth, ownership value, and professional autonomy, practice owners can make more informed decisions about whether selling their practice is genuinely in their best financial interest.
Reference:
Dental CEO Podcast Ep.70: How Selling to a DSO Costs Dentists Millions