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This week I am joined by Brian Colao, Director of leading US law firm Dykema, who untangles the intricacies of the legal process of expanding your business to a DSO, offering you advice on what practices are best for your business.
Dykema represents approximately 350 group practices and DSOs in all 50 US states, handling any matter of legal or compliance issues.
Are you a solo dental practitioner wanting to expand your business?
At Dykema, Brian helps solo practitioners roll their organization up to either affiliate with DSOs, or do private equity deals.
If you’re a solo practitioner with no intention of expanding, Dykema can still come in handy, helping you with any legal issue you might experience.
If, however, you are interested in building your own DSO, Dykema can help you reorganize your business and get a higher ROI.
So what are the first steps?
What you would need first is a rough plan for the expansion. You don’t have to have it all figured out, but there are a few questions that are essential for this early stage.
Some of these questions include:
How many offices do you expect to have in the next couple of years?
Are these offices going to be in the same state? Or in different states?
What is your target audience? Are you a Medicaid practice audience, or are you going to be a private pay or a pediatric specialty? What are you trying to accomplish?
Where is the intellectual property held? If you have a trade name, who owns it? Have you registered that trademark?
Where is the equipment held? Are there any liens on the equipment right now? Who holds the leaseholds?
The next step is to secure financing. When it comes to financing, you basically have two options:
You can either apply for additional bank financing
Or you can check out some groups like Citibank (that has a DSO-specific program) or others
How much money do you need to get started?
This pretty much depends on where you’re expanding. For Brian, who lives in Dallas – Fort Worth, Texas, the rule of thumb is $500k per de novo.
Acquiring new practices can mean anything from a couple hundred thousand to seven figures, depending on how big these practices are.
Many solo practitioners choose to acquire as they can afford to do it, and that, on average, means one or two new offices every year. Keep in mind that if you choose this gradual strategy, you’ll have a hard time hitting critical mass.
If you prefer to take it slow, adding a new practice every year or so, and you’re having fun while you’re at it, there’s probably no need to rush.
However keep in mind that, because of the consolidation of the industry, the endgame for everyone is to roll their dental practice up and sell it.
How much ROI can you get?
If you choose to make a deal with an established DSO, you will probably end up with 5.5 to 6.5 times, sometimes 7 times, your EBITDA. This is the conservative approach, where the multiple is lower, but your future participation is also limited, giving you more freedom. You can stay on if you choose, or you can exit after a couple of years. It’s up to you. You won’t be tied to this deal for a large amount of time.
Now, if you prefer something riskier, but with a higher return, you should go for a private equity deal. Some of these deals have paid up to 18 times EBITDA. The downside is that you will have to invest a lot of time and money. You will probably have to roll over up to 40-45% of the amount you get paid. You have to reinvest in the new entity and hang around for up to five years.
If you’re in your late 50s or 60s, generally a private equity deal is not for you. That’s because normally people in this age range prefer to take the safer deal, ensure a smooth transition, take the money off the table and just exit after two years.
If you’re 50 or younger, it depends on your preference. The important thing is to understand the deal you’re making and the involvement it will take.