Beware of the Self-Serving Referral Fee when selling to a DSO

WARWICK, R.I., Sept. 29, 2022 /PRNewswire/ -- For over 20 years, the Choice Transition team of experts have provided successful transition consulting and brokerage services exclusively to dentists. Choice Transitions designed its DSO product to provide its sellers with several DSO offers so you can select the deal which fits your goals the best – and with no fees or risks to the seller.

Has a colleague, friend, equipment rep, accountant or other dental vendor pushed you towards one DSO in particular? If so, chances are they are receiving a significant referral fee from that DSO for doing so. But their financial gain could be your substantial loss. Here's why...

• Competition drives demand, which in turn determines purchase price. Even if the DSO you were referred to is the "right one", without competition you are surely leaving considerable compensation on the table. You should never entertain only one DSO, giving them exclusivity to control the negotiations.
• The recommendation could be biased. They may not have your best interest at heart, but rather their own financial incentive. They are not trying to find you the best "match" meaning purchase price, post-closing compensation, length of contact, equity retention, and real estate considerations. They are just pushing you towards the one DSO that gets them the referral fee.
• -true story. We were contacted by a seller in the Mid-Atlantic who was considering selling to a DSO that their accountant recommended prior to our engagement. That DSO offered $8.5M. We were able to create interest in the practice, and a top-tiered DSO stepped in with a $10.5M offer. Their accountant, who they placed all their trust in, convinced them to go with the original DSO. Why? Because he was receiving a significant referral fee from that DSO. He cost his clients $2M for his own gain.

Your colleague's great deal does not necessarily translate into you getting your best deal. The DSO market is constantly changing. DSOs have Venture Capital funds they must use to buy practices within pre-set time frames; Quality of Earnings (QE) teams they rely on who fully investigate the financials in order to approve the deal; and an Integration team who smoothly transition the office from a solo practice to the DSO. Therefore, one month a DSO may have funding they need to earmark for new deals, or may have availability for their QE or integration team, and therefore are offering top dollar for a practice and willing to proceed quickly. But the very next month, that same DSO may not be willing to offer multiples as high, or even be interested in a less than perfect practice if they have several deals now in their pipeline. Therefore, even though your colleague sold to DSO "A" and highly recommends them does not mean you should place all your eggs in DSO "A"'s basket because DSO's "B" and "C" may be offering much better packages when it is your time to sell. And chances are very high your colleague is being offered that referral fee to push you towards the DSO he/she sold to.

-true story. One DSO in particular was known for applying high multiples to their EBITDA calculations, thus generating very high purchase prices. That DSO underwent an "event" where they were acquired by a new Venture Capital firm, who then established new buying guidelines. They set the maximum multiplier to 5x EBITDA, well below that of most DSOs purchasing today. Therefore, if your colleague sold to them before the event, they likely received a 7x-9x multiplier. If you followed your colleague's recommendation to sell to that same DSO after the event, you would have been capped at a 5x multiple.

The bottom line is that you should have your practice presented to several DSOs, if possible, to be confident that you made the right choice when selecting who you will be teaming up with for the years to come.

Scott Cabral
Choice Transitions, LLC
(877) 365-6786 Ext.222
[email protected]

SOURCE Choice Transitions