September 17, 2023

How to Protect Yourself – The Risk of Partnering with Private Equity Firms (Part 3)

by Spencer Wesley, Realtor®, Dental Practice Broker

This is the third in a series that talks about the risk of coupling your practice to a Dental Service Organization (DSO) that’s financed by a Private Equity firm.

My first blog highlighted some of the risks dentists face when partnering with a private equity-backed DSO. They receive offers that appear generous and are usually above market value, but they come with significant strings attached. As part of the deal, the previous owner agrees to work as an employee and must meet specific requirements before receiving full payment for the business years down the road. Sellers often find there are a lot of hoops to jump through in order to get the money they’re due.

My second blog looked at how private equity firms came to see DSOs as a good investment and how the profit motive behind those investments is impacting the industry. In that blog I also pointed out a harsh truth that some dentists have learned the hard way: if you join your practice to a DSO that gets resold to another private equity firm before the terms of the contract are fulfilled, the new buyer might not honor your original agreement. In other words, you may think you have a binding contract, only to discover the new DSO can impose its own requirements, which may include extending the length of your contract, increasing productivity requirements, and possibly revisiting future payment commitments.

If you are thinking about selling your practice, there are things you can do to protect yourself.

Be Sure You Know What’s in the Contract

Before you sign a contract, ask questions – a lot of them and be specific. Below is a list to give you an idea. The purpose is to clear away the fog around ownership, performance expectations, compensation and the potential impact on treatment. The goal of these questions is to gain clarity for everyone.

  • Who is my employer?
  • Am I ready to be an employee even if I obtain equity in the larger group?
  • Who can create or edit a treatment plan? Who is responsible for the treatment plan? Do I have the authority to disagree with or change a treatment plan?
  • Who owns the dental professional entity? Who owns the business entity?
  • What is the governance structure of the dental professional entity? Of the business entity?
  • Does the business entity have a relationship with any outside investors, such as an equity firm or public company?
  • Is there a management services agreement? If so, does that agreement comply with state laws?
  • What are my employer’s expectations regarding my productivity, patient volume, and revenue? For example, may I take two hours to complete a crown prep?
  • What formula is used for dentist compensation? That is, to what degree is my remuneration based on my productivity?
  • What is the relationship between my compensation and that of the business entity?
  • Who owns the lease agreements for the building? For the equipment? If I buy a practice, will I have the opportunity to own the equipment in full, or will I rent the equipment perpetually? If I can own the equipment, what is the lease term, and is there a separate agreement for a lease-to-own opportunity?
  • May I use any vendor for supplies? Is there a cap on the volume or type of supplies available?
  • May I use a dental laboratory of my choosing? How are lab costs ascertained and apportioned?
  • Who has control over revenue stream distribution, and how is the revenue stream distributed?
  • Who owns patient records? Upon termination, would I have access to patient records? If so, to what extent? Is there a procedure for accessing these records?
  • How are after-hours emergencies addressed?
  • Who makes hiring and firing decisions? Are there any protocols or guidelines for these decisions?
  • May I have access to all contracts and other documentation upon which the above answers are based, so that I may share them with an independent attorney, accountant or professional adviser?

Work with a Professional

My best suggestion for avoiding the pitfalls of partnering with a DSO is to work with a dental practice broker. Selling a practice is complicated and not an undertaking most business owners can manage on their own. A practice broker will get you a fair price that allows you to have a clean break, which is what most dentists are looking for when they start thinking about transitioning.

At the end of the day, if you get an offer for your practice that seems too good to be true, it probably is. Be sure you know what you’re really agreeing to before you sign a contract and if you’re not sure, call us at Engage Ownership Transitioning. We’ll give you answers you can trust.