The DSO Deal – What You Better Know (Dental Law Radio, Episode 15)
Within the next few years, it’s likely that 60% to 70% of all dental practices will be owned by a DSO. That’s what some industry observers are predicting, and if that’s the case, says host Stuart Oberman, you’d better understand the elements of what’s involved in an acquisition. From the letter of intent to the closing, Stuart covers the key highlights in this episode. Dental Law Radio is underwritten and presented by Oberman Law Firm and produced by the North Fulton studio of Business RadioX®.
Intro: [00:00:02] Broadcasting from the Business RadioX Studios in Atlanta, it’s time for Dental Law Radio. Dental Law Radio is brought to you by Oberman Law Firm, a leading dental-centric law firm serving dental clients on a local, regional, and national basis. Now, here’s your host, Stuart Oberman.
Stuart Oberman: [00:00:26] Hello everyone, and welcome to Dental Law Radio. The topic of the day, DSO. The DSO deal, what you better know. I can’t tell you how many times a day, a week, a month we get calls from buyers or sellers. “I want to form A DSO. I want to scale a DSO. I want to sell the DSO. I got private equity, I want to be a DSO. I want to buy ten practices. I want to sell my practice.”
Stuart Oberman: [00:00:57] And I will tell the doctors, one, you got to take a step back – I don’t care if you’re buying, selling, merging, acquire – you have to understand the nature of the deal. It is not like it is ten years ago. Honestly, it’s not like it was five years ago or even, frankly, two years ago. We’re seeing a whole different metrics in there in the world. There’s a whole cottage industry now that does nothing but DSO deals, whether it’s law firms, consultants, buying, selling. Everyone is into the DSO deal. I think they estimated that, probably, within the next couple of years 60 to 70 percent will be group-owned practice. Now, we’ve got to understand what that means.
Stuart Oberman: [00:01:46] What does a group-owned practice mean? So, you got different levels. You got your docs, “I own maybe one to five.” Then, you got your mid-levels, you know, maybe it’s 10 to 20. Then, you got the big boys, maybe 20 to 40. Then, you got the really big boys, really big boys. There’s a big difference on economy of scale. But a lot of our guys are middle market good doctors. They want to grow. They’re a little tired. They want to get out of the chair a little bit. They want to make some revenue. Their backs getting sore. They see what the market is. It is an absolute brutal market from a legal standpoint. It is a brutal market from an accounting standpoint.
Stuart Oberman: [00:02:34] And I’ll tell you, most CPAs have no idea what this constitutes. I hate to say that, but most do not. Some are very good, some are under the cloak. We work with clients all over the country. We’re very, very fortunate we have a lot of exposure in this area and we deal with a lot, a lot of resources.
Stuart Oberman: [00:02:51] So, what I want to do is, I want to take apart a DSO deal. This is a seven day topic. We’re trying to drill it down pretty good. First and foremost, you got to understand what a letter of intent is. That’s the key. That’s the start. So, what do you do on a letter of intent? Everything looks good, you agree. And then, all of a sudden, the one page letter of intents are dead. Now, we’re talking 10 or 15 page letter of intents. I want to walk through what these are. I don’t care if you’re a buyer or a seller, you have to know what you need to know before you walk in the door. I’m trying to be generic on these as far as the terms go. And I would urge you that this is a whole different market. DSO is a whole different world, that’s if you’re going to scale.
Stuart Oberman: [00:03:46] So, first and foremost, you got to understand the terms of the purchase. Nonbinding agreements, what is it? It’s a mutual understanding, reflection of the parties, and it should never be a binding LOI. Now, you’re going to have some confidence in there that they’re going to be, you know, enforceable but should be nonbinding. If you sign a nonbinding agreement, you’re getting really, really bad advice.
Stuart Oberman: [00:04:11] So then, you have to look at what the overall transaction is. You’re thinking, “What in the world does that mean?” Every detailed LOI on DSO side has a term sheet. Everyone that we ever run across. I’ll say it’s Exhibit A, call it what you want. So, what is it? What does it include? “Well, Stuart, you know, I dealt with a broker one time and the LOI was three pages.” You might just shred that in this world.
Stuart Oberman: [00:04:43] So, what is the terms? Here it is. This is what you need to look for. You need a seller, you need a buyer, the purchase price. What’s your price reduction? There’s always price reductions. What’s your holdbacks? What’s your equity rollover treatments, your in-seller indemnification clauses. Yes, you have obligations.
Stuart Oberman: [00:05:07] So then, all of a sudden, you get into what we call bonus performances. Well, what in the world is that? So, that’s broken down in various categories. You never knew that before. You have performance bonuses. You got primary bonuses. You got 12-month collections. You got 24-month collections after closing. Yes, you’ll be held accountable for those performance bonuses. Trust me, you are not walking in there with no obligations. That’s a performance bonus. All that’s listed separately.
Stuart Oberman: [00:05:38] So, what about a primary performance bonus, your PPB parameters? “Oh, never heard of that.” So, what happens if that’s not met? What happens if you’re PPB is not met? What if it’s not earned in a specific year? How are you equating that? How is that calculated? Do you even know what that is? So then, in addition to that, you got additional performance bonus opportunities. So, what does that mean? So, you calculate what happens if your bonus exceed calculations for the 12 or 24 months. “Well, I didn’t know I had that opportunity.” These are the things that if you are not careful with, you’ll be leaving tons and tons and tons of money on and off the table. These are all performance bonuses.
Stuart Oberman: [00:06:38] If you think you’re going to walk into a DSO, whether you’re buying or selling, and not have performance bonuses, you are sadly mistaken. The days are gone where you’re going to sell your practice to a DSO. Or you’re going to buy one and the seller is going to be out on the road in 90 days, it doesn’t happen.
Stuart Oberman: [00:06:59] So then, you got to look at what are your additional performance bonuses. I know we’re getting a little deep here, but I want to run through this. Your APB parameters. You got targeted achieved, targeted not achieved. So what if you hate it, you got to prorate it. Does your CPA have any idea what these numbers are? So, now, we say, “Well, we’re just looking at the price.” So, now, you got the assets purchase agreement. A lot of times the government allocations are not included. What if you have a high subsidy of insurance or governmental payments? You got to look at those numbers. If you’re a CPA, you got to know these numbers. What are your earnout hurdle reductions? “I didn’t know I had those.” You’re always going to have earnout reductions.
Stuart Oberman: [00:07:48] So then, they say, “Well, you know what? We’re going to take a percentage of your sale price. And, now, I want you to hold back equity in our company.” That is a risk always. Are you getting more money upfront? What’s the next three to five years look like? What’s the recap look like? So then, you’ve got to take a hard, hard look, are you Class A preferred shares, Class C shares? You have to understand what those ramifications are as far as your obligations and your rights.
Stuart Oberman: [00:08:29] I will tell you that probably under these particular classes, you will not have many rights and you’ll be at the beck and call of the DSO. You got to understand that. You got to get these agreements up front before you even sign the final dotted line. Because once you sign the documents, it’s too late. You can’t get into these documents. You got to drill deep pretty hard before those.
Stuart Oberman: [00:08:54] So then, you work through the other areas, employment issues, you and your staff. How long is the employment? Employment of your staff, you want to protect your staff. It’s not going to happen. Post-closing role, what are you going to do? Are you going to be clinical director, going to be chief dental officer? How much time are you taking off? “Well, I’m going to work 246 days a year.” No, you’re not. You’ll never hit your numbers. “Well, that’s not what I wanted.” Well, you’re in the wrong game. Because you’ll have some strict numbers you got to hit. And it’s not going to be at your control because you’re going to have expenses that are going to come off your bottom line. What’s additional compensation? “Well, I don’t know what that is.” Then, you better know.
Stuart Oberman: [00:09:45] So, that’s a very, very generic overall concern regarding performance bonuses. Again, that’s pretty deep stuff. We’re talking documents and documents, documents. But I want to give you a brief overview as to what you need to look at, and what you should be prepared for, and what you need to know before you even get into the game, and your CPA needs to know.
Stuart Oberman: [00:10:09] So then, “Well, you know, we’re going to sign a noncompete.” You bet you are. You’re not going to work for another DSO for a couple of years. “Noncompete is probably two years, 25 miles. That’s a long way.” “Yes, it is, Doc. Yes, it is.” You’re going to be tied. You’re getting millions. You’re going to be tied. So, if you’re buying a practice, you better tie that doctor down. If you’re selling, you better know what you ramifications are as far as radius goes.
Stuart Oberman: [00:10:37] What’s excluded assets? There’s always excluded assets. Liabilities, are you in debt? Do you know all your debt? What’s your intellectual property? Do you own your logo? Do you own your trademarks? What are your holdbacks? Cash upfront, cash being held back? Are you repurchasing Class A shares, C shares? Are you getting equity rollover as collateral? What’s the tax consequences of that? Is it a taxable event or is it tax deferred? What’s your tax allocation in the purchase price?
Stuart Oberman: [00:11:13] There’s a big difference in a DSO and a normal sale as far as your tax allocations go as far as personal goodwill. Some are liberal, some are not. Those are things you got to drill down with the CPA. This is not a 30 day process, guys.
Stuart Oberman: [00:11:27] Let me tell you, if you’re buying, you better do your due diligence. You better have a due diligence checklist, folks. If you’re selling, you better be prepared to be worn out. You’re talking about [inaudible] earnings. You’re talking about a lot, a lot of information that’s going to be passed hands down through a lot of information. So, due diligence is going to be extensive. You get a $40 million deal, they’re going to wear you out. But you got to be prepared for it. It’s a journey.
Stuart Oberman: [00:11:59] So, one of our recommendations is, before you even start this process, get your documents upfront, get your numbers, get them loaded up, and ready to roll. Because once that process starts, it rolls quickly. And it goes quick.
Stuart Oberman: [00:12:14] So then, you got a question, “Well, they’re going to tie me down. They don’t want to deal with anybody else for 60, 120, 180 days.” You’re right. What if the deal falls apart? You’re off the market for four, six, eight months. You got no way out. You’re stuck. So, you need to understand that the offers that you get will tie you up. So, you better pick a good one. I know what’s going on upfront because otherwise you’re going to be off the market for a while and time is money in these deals.
Stuart Oberman: [00:12:52] So, how do you terminate an LOI, Letter of Intent? A couple ways, which [inaudible] the asset purchase agreement itself. When the buyer sends you a letter saying, “You know what? I’m good. I don’t want to do this anymore. The numbers didn’t add up. Sorry. We no longer wish to proceed.” You’re done but you’re still an exclusive period. Or the expiration of an exclusive period. “We’re done. We’re closing.”
Stuart Oberman: [00:13:23] So, there’s a lot of information, guys. A lot information, and it’s really way beyond this particular scope, if you will, as far as the DSO deal. This is a whole seminar, a whole topic. But we’re getting a lot of questions on this, a lot of questions every day. How I form it? How I buy it? How I sell it? What do I do? How to consolidate a merging? What do we need?
Stuart Oberman: [00:13:54] First and foremost, if you’re a buyer, you’ve got to have the right people around you. It doesn’t matter if you’re a doctor or DSO. Of course, you already know that if you’re a DSO. But if you’re a doctor, you got to be prepared to scale. You’ve got to have your systems in place before you do anything else. There’s no way that you can purchase three practices without your internal partitions being set. There are a lot of headaches.
Stuart Oberman: [00:14:18] If you’re selling, you got to be prepared for the rigors of selling to a DSO. You got to be prepared to have performance bonuses. You’ve got to be prepared to, possibly in some case, work a little harder. If you think you’re going to sell and work three days a week like you were doing before, it’s probably not going to happen. Expect to hit all your numbers, and you will be expected to hit your numbers. Again, you got performance bonuses, you got primary performance bonuses, you got additional performance bonuses, you got top additional bonuses.
Stuart Oberman: [00:14:52] So, you got to look at all those parameters and make sure you know exactly what you’re buying, what you’re selling, what’s the company like, what’s the cap rate. What are you looking at, Class A preferred shares, Class C shares, or vice versa? What are you looking at on that side? What’s the compensation on the chief financial officer side? Post-closing, what was expected there? The non-competes, your holdback numbers. So, those are all the things. And, again, you’ve got to have people, especially on the financial side, who understand this. And on the legal side, it gets very complex – very, very complex on our side. So, there’s a lot of pieces here.
Stuart Oberman: [00:15:44] So, that’s the sort of the DSO. You know, it’s hot all over the country. A lot of money to be made in these areas. But there’s a lot of risk. And it’s not for everyone. Some doctors want to scale, some don’t want to scale. So, basic parameters. Hopefully, you’ve picked on a couple of topics that you need to take a look at or be aware of, if you are not or your CPA needs to be aware of.
Stuart Oberman: [00:16:12] So, yeah, give us a call. We do it every day. We love what we do. We have access to a lot of information on a national basis because of the DSO market. And if you have any questions, give us a call, 770-886-2400. My name is Stuart Oberman. Feel free to reach out to us or e-mail at stuart, S-T-U-A-R-T, @obermanlaw.com. And thank you for joining us. And we will see you on the next DSO deal.
About Dental Law Radio
Hosted by Stuart Oberman, a nationally recognized authority in dental law, Dental Law Radio covers legal, business, and other operating issues and topics of vital concern to dentists and dental practice owners. The show is produced by the North Fulton studio of Business RadioX® and can be found on all the major podcast apps. The complete show archive is here.
Stuart Oberman, Oberman Law Firm
Stuart Oberman is the founder and President of Oberman Law Firm. Mr. Oberman graduated from Urbana University and received his law degree from John Marshall Law School. Mr. Oberman has been practicing law for over 25 years, and before going into private practice, Mr. Oberman was in-house counsel for a Fortune 500 Company. Mr. Oberman is widely regarded as the go-to attorney in the area of Dental Law, which includes DSO formation, corporate business structures, mergers and acquisitions, regulatory compliance, advertising regulations, HIPAA, Compliance, and employment law regulations that affect dental practices.
In addition, Mr. Oberman’s expertise in the health care industry includes advising clients in the complex regulatory landscape as it relates to telehealth and telemedicine, including compliance of corporate structures, third-party reimbursement, contract negotiations, technology, health care fraud and abuse law (Anti-Kickback Statute and the State Law), professional liability risk management, federal and state regulations.
As the long-term care industry evolves, Mr. Oberman has the knowledge and experience to guide clients in the long-term care sector with respect to corporate and regulatory matters, assisted living facilities, continuing care retirement communities (CCRCs). In addition, Mr. Oberman’s practice also focuses on health care facility acquisitions and other changes of ownership, as well as related licensure and Medicare/Medicaid certification matters, CCRC registrations, long-term care/skilled nursing facility management, operating agreements, assisted living licensure matters, and health care joint ventures.
In addition to his expertise in the health care industry, Mr. Oberman has a nationwide practice that focuses on all facets of contractual disputes, including corporate governance, fiduciary duty, trade secrets, unfair competition, covenants not to compete, trademark and copyright infringement, fraud, and deceptive trade practices, and other business-related matters. Mr. Oberman also represents clients throughout the United States in a wide range of practice areas, including mergers & acquisitions, partnership agreements, commercial real estate, entity formation, employment law, commercial leasing, intellectual property, and HIPAA/OSHA compliance.
Mr. Oberman is a national lecturer and has published articles in the U.S. and Canada.
Oberman Law Firm
Oberman Law Firm has a long history of civic service, noted national, regional, and local clients, and stands among the Southeast’s eminent and fast-growing full-service law firms. Oberman Law Firm’s areas of practice include Business Planning, Commercial & Technology Transactions, Corporate, Employment & Labor, Estate Planning, Health Care, Intellectual Property, Litigation, Privacy & Data Security, and Real Estate.
By meeting their client’s goals and becoming a trusted partner and advocate for our clients, their attorneys are recognized as legal go-getters who provide value-added service. Their attorneys understand that in a rapidly changing legal market, clients have new expectations, constantly evolving choices, and operate in an environment of heightened reputational and commercial risk.
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