Dental entrepreneurs: Should you start your own DSO?

Jeremy Booth, Dental Tribune International

Mon. 15. July 2024

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For decades, dentists around the world have profited from high demand for dental clinics by selling to a dental support organisation (DSO), entering practice roll-ups together with associates or taking advantage of equity arbitrage. However, the wave of consolidation in mature dental markets like the US may be about to break, ultimately leaving owner-dentists with ebbing transitional options. Stanton Kensinger, lead broker at Professional Transition Strategies, spoke with Dental Tribune International about whether now is a good time for dental entrepreneurs to start their own DSO and the advantages and risks involved.

Mr Kensinger, would you say that now is a good time for dentists to be considering starting a DSO?
A common question we hear from dental entrepreneurs is whether they should turn their multi-site practice into a mini-DSO by acquiring new locations and building a DSO infrastructure. Many dentists assume this will make their practice even more attractive to a DSO or private equity group in the coming years. However, they need to realise that the wave of consolidation in industry is finite and has to break at some point. Based on data gleaned from other consolidated industries and through extensive research, we can assume that this will happen within the next five years. That means the future will hold fewer opportunities for dentists who are looking to sell their practices, certainly when compared with the sale values and deal structures that we are seeing today.

With that in mind, it is essential to know that creating any form of DSO is cumbersome and time-consuming and that the endeavour can result in dentists missing out on wealth building that existing DSOs can provide through a more immediate acquisition. Instead, we recommend that entrepreneurial dentists who want to continue growing their business consider a joint venture or sub-DSO deal structure. This strategy offers wealth-building opportunities to practice owners without the risks associated with solo growth. In this structure, the owner receives a substantial upfront payment and retains a percentage of the practice-level ownership. As the practice-level EBITDA (earnings before interest, taxes, depreciation and amortisation) grows, so do the profit distributions and transactable EBITDA at recapitalisation or upon the restructuring of debt and equity as the result of selling the DSO to a different private equity firm with additional practices having been brought into the ecosystem.

The sub-DSO model is advantageous for practice owners because managing multiple practices is challenging, owing to the need for centralised infrastructure and expertise in areas like marketing, credentialling and accounting. Partnering with an established DSO alleviates these challenges. A strategic DSO partner provides the necessary administrative support, enabling exponential growth as a majority or minority partner and owner-operator of a joint venture or sub-DSO.

Stanton Kensinger, lead broker at Professional Transition Strategies. (Image: Stanton Kensinger)

What are the primary financial advantages of starting a DSO compared with running a single dental practice?
Starting a DSO theoretically offers more significant economies of scale, increased bargaining power with suppliers and lab costs and potentially higher profitability owing to shared administrative functions and standardised processes. That having been said, it is important to remember that these financial advantages can often be offset by the substantial time, effort, stress and capital required to establish and scale a DSO. In contrast, selling the practice to an existing DSO with these frameworks allows the dentist to capitalise on these benefits without the upfront costs and operational complexities.

Could you elaborate on the typical initial costs involved in setting up a DSO, and how do these compare to the potential long-term financial benefits?
Setting up a DSO involves significant initial costs, including legal and regulatory expenses, C-suite executive-level managers, human resources, marketing, recruitment and operational set-up for centralised functions. Additionally, there are costs associated with acquiring additional practices.

When seeking new practices, it is imperative to determine how these acquisitions will be financed. For example, many banks will cap the sum lent to a dentist at US$1.4 million to US$1.8 million (€1.3 million to €1.7 million).* Conversely, institutionally backed capital, like private equity, can lend more to practices because it relies on private investors.

Dentists should also remember that their time is money. If the dentist is spending less time with patients in order to create a DSO infrastructure, it can significantly impact clinical productivity. If the dentist wants to delegate responsibilities by hiring new associates, he or she will need to take on the cost of providing a fair wage to these employees. When working with dentists who are considering creating their own DSO, I always reiterate that these substantial investments are coupled with a learning process, and that can result in a delayed return on investment.

In your experience, what are the critical factors that determine the successful founding of a DSO?
The successful founding of a DSO requires substantial capital, strong leadership, business acumen, expertise in scaling operations and a strategic vision for growth. Practices must also be staffed with skilled clinicians to help cover the work of owner-dentists while they are focusing on running a positive cash flow business. The most successful dental entrepreneurs must also develop robust systems for managing compliance, finance, marketing and human resources. Even when these elements and processes are in place, the complex and nuanced nature of founding a DSO can make for a risky business decision.

Could you comment on some of the successful financial strategies you have observed from dentists and groups who were new to this business model?
We have seen dentists successfully create many multi-site mini-DSOs, and often these dentists were already business-oriented and managed by the numbers. They took the time to hire the right management team, build trust with their back-end support and create a positive, autonomous clinical culture where associates thrived.

“We have seen dentists successfully create many multi-site mini-DSOs, and often these dentists were already business-oriented and managed by the numbers.” 

However, it is important to keep in mind that this is a rare occurrence. Often, we see dentists attempt to build their ecosystem and fall short for a variety of reasons. Building their own mini-DSO is a significant risk, and for this reason, we want dentists to first consider all of the available options. After thoughtfully analysing their options, many dentists will opt to pursue a joint venture or sub-DSO deal structure because it significantly decreases the risk they take on by tapping into private equity funds and an existing DSO’s established infrastructure.

Do you have any closing thoughts on starting and growing a mini-DSO?
Not all dental entrepreneurs are equipped to tackle this kind of endeavour on their own, so regardless of how many partners or practices they have, it is recommended that they work with a seasoned practice broker who can effectively navigate the acquisition process and identify key considerations that a dentist or group of dentists may overlook.

Creating their own DSO must be a labour of love for dentists who pursue it, as it can be incredibly challenging and time-consuming. The time it takes to create a mini-DSO, combined with the limited runway left in the consolidation wave, could prevent the dentist from tapping into the wealth-building options that we see in the market today. Many entrepreneurial dentists should consider other routes, such as a joint venture or sub-DSO model that allows for cash upfront for their practice and opportunities to grow their ecosystem’s EBITDA utilising an established DSO infrastructure. Doing so can save the dentist time, get rid of personal guarantees and net the dentist more on his or her entrepreneurial journey.

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