Guest post – By Jeffrey E. Wherry, CFP®, CLU®, ChFC®, of Treloar & Heisel, our insurance partner

If you’re a practice owner, you may have been approached by a dental support organization (DSO) about selling your practice. While this option can seem appealing—eliminating the responsibilities of managing staff, payroll, and equipment—selling to a DSO is a major decision that requires thorough consideration.

Here are some action steps to take:

Develop a financial plan for keeping your practice

Before you dive into selling, you’ll want to create a “baseline” financial plan based on the assumption that you keep the practice. Think of this as your control scenario, much like in a scientific experiment. Essentially, you need a comprehensive financial overview.

Examine your goals, assets, and options to maximize your wealth. This may involve setting up retirement plans, reassessing loan payments, and identifying any insurance coverage gaps.

As a practice owner, you may have greater flexibility in setting aside pre-tax funds in retirement accounts like defined contribution and defined benefit plans. Fully explore these options to grow wealth and manage debt effectively. Once this “baseline” plan is in place, consider working with a wealth advisor to project potential future outcomes to give a clear picture of what might happen if you choose not to sell.

Explore a financial plan based on selling to a DSO

If you decide to sell, the sale price typically reflects a multiple of projected future earnings. You’re essentially trading the income you’d earn over time as an owner for a lump sum payment. Since you may only have one chance to make this sale, you should use the proceeds wisely.

The money from the DSO sale should support your future financial needs. It’s crucial to evaluate how this lump sum can be managed to secure long-term financial independence. While it’s tempting to use some of the funds for lifestyle improvements, this money often plays a critical role in sustaining your future financial stability.

Expect a potential drop in income

Many dentists who sell to a DSO experience a drop in income after the sale. As an associate rather than an owner, you may not take home as much as before. Consider how you’ll adjust for this potential decrease and plan for the impact it may have on your lifestyle.

Consider the tax implications

When you receive a lump-sum payment, taxes are a major consideration. Your financial advisor should collaborate with your accountant to determine the tax impact and identify any strategies to minimize your tax bill, helping to make the most of your proceeds.

Decide how to allocate your sale proceeds

Once you have a clear understanding of the tax impact, it’s time to decide how to allocate your funds. Some people focus on paying off debts, while others might consider investing. Make sure to complete a thorough evaluation of all options, including potential long-term effects before making these decisions.

Prepare for changes in retirement plans

After selling, you’ll no longer have access to the same retirement plans your practice provided, such as 401(k) matches and profit-sharing contributions. Some DSOs offer 401(k) options, but these often lack the same benefits you enjoyed as an owner. If you have additional retirement savings accounts, like a cash balance plan, these will likely end as well.

Evaluate earn-out agreements

DSO deals often include an “earn-out” provision, where you receive additional income if you meet certain targets over a set period. For example, a DSO might offer a two- or five-year earn-out. While this can be an attractive part of the offer, it’s important to consider the potential impact if you don’t meet the targets and how this could affect your financial outlook.

Assess stock components in the deal

Many DSOs include stock as part of the sale price. While DSOs may predict that their stock value will increase over time, this isn’t a guaranteed outcome. It’s prudent to model both scenarios—what happens if the stock value grows and what happens if it doesn’t—so that you’re prepared for either outcome.

Take time to make an informed decision

Ultimately, selling to a DSO could mean a decrease in income and requires a plan to effectively manage your sale proceeds. By creating a benchmark plan for the “no-sale” scenario, you can compare it with the potential returns of selling. Some clients find that selling provides only a slight financial improvement, while others see minimal difference and choose to maintain control of their practice. For others, selling is an easy decision after understanding the trade-offs.

Keep in mind, if you proceed with a sale, you’ll likely need to sign a contract requiring you to stay with the DSO for a period, such as two to five years.

Find support for your practice needs

If you are considering selling your practice to a DSO or any other type of practice transition, working with an experienced team of advisors can help you feel confident in your decision. Our Build Your Team program can connect you with our extensive network of healthcare-specific experts for free.

Connect with financial advisors, attorneys, practice transition specialists, and more today.