There’s one more category which DSO’s sometimes use in their deal structures …

It’s called “Contingent Earn Out”

This category is used when there is some ambiguity around the expected future performance of your practice is fast-growing.

The point is that the DSO wants to avoid penalizing you by giving you a pathway to full value IF certain benchmarks are achieved.

(This also protects the DSO if those benchmarks aren’t achieved)

This has become much more popular since the pandemic disrupted business.

So far we’ve covered some of the more straightforward, and some of the more lucrative categories which DSOs use in their deal structures.

A common element used is a Seller Note.

This is used when the DSO whish to pay some portion of the purchase price over time through a note.

Typically this includes some specified interest rate.

For you, it’s pretty straightforward.

If the DSO is offering this, you need to understand the principle amount of the note, the interest rate, and the term or schedule of payments.

There also may be other conditions to the note.

For example, I have seen notes termed to run concurrently with the initial term of the seller’s employment agreement with the condition that if the seller violated the terms of the employment agreement then some portion of the note would be forfeited.

Why would you take this as part of your deal?

Well depending on the DSO, this can be a route towards ultimately earning a lot more through the deal over time.

Hopefully you read my last email where I briefly went over the opportunity for keeping “skin in the game” and what that means for your long term financial benefit.

There’s another type of Rollover Equity …

Where you don’t receive a percentage of your practices value, but rather the DSO offers you a percentage of the overall DSO enterprise.

The nice thing about this kind of equity is that it puts you in complete alignment with the DSO and their financial sponsor, and your financial benefit is not solely dependent upon how well your practice grows.

Its becoming more common these days for DSOs to pursue partnerships where the selling dentist retains equity interest …

Thus continuing their “skin in the game.”

This aligns incentives between the DSO and you as the lead dentist in your practice.

If the DSO does well, then you do also.

When revenue and profit grows, so does the equity value of your retained interest.

This is one of the categories used in deal structures for DSOs …

In the previous email I talked about the ‘cash’ category of a DSO deal structure.

Cash is pretty obvious, though there are some important details to realize (so if you didn’t read the previous email, I suggest going back).

Let’s cover “deferred cash” today.

Deferred cash is in the name … cash which you’ll get later.

BUT, it’s NOT a note or a loan.

Last week, I introduced to you the concept of the deal structure with a DSO.

The most common and easiest to understand is the category of transactions, which will probably make up part of your deal …

Is Cash

Cash is typically paid at the time of closing in the original transaction.

What is important for you to understand is how much net cash you will have on an after-tax basis …

You might be wondering how a DSO deal actually looks for you …

Dr. Leighton had a potential buyer (DSO) knocking …

Most private equity firms (funding DSOs) are looking at a 5-year time horizon before they look for liquidity on their investment.

This means that 5 years after buying your dental practice, they are going to look at selling their interest - either to a larger private equity fund or a larger DSO - in order to capitalize on the value increase your practice has gained through being a part of their investment.

I’m going to let this story speak for itself.

It comes from one of my former clients and describes in great detail why a DSO is such a good opportunity.

Only thing I’ll say is …

Don’t wait for a heart attack to get the benefits.

“With over 25 years in business and three practices that net mid-seven figures, I had no interest in the details of how to partner with a DSO.

But things change. And, sometimes they change faster than you expect.