Understanding a Cash Flow Analysis: Hidden Risks for Buyers and Sellers

When evaluating a dental practice acquisition in Florida, the cash flow of the business will be the variable that holds the most weight when determining fair market value. Most financial statements at first glance will look underwhelming due to the fact that most practice owners try to show as little profit as possible to pay less in taxes each year. The goal for the seller when having a cash flow analysis done is to ensure that you go through your general ledger and inform your advisor what is personal and/or a one-time non-recurring expense. In our industry, we call these adjustments or “add-backs,” and examples are outlined below. The goal of the buyer is to verify that the adjustments are true, accurate, and justifiable. We are going to discuss several warning signs and pitfalls that buyers and sellers should identify before moving forward with a purchase or sale.

Examples of One-Time Non-Recurring Expenses:	Examples of Personal Expenses:
● Replacement of HVAC unit ● Replacement of any large dental equipment ● Renovation of office	● Travel ● Salaries & Wages for family members who do not work at the practice ● Auto expenses

The Cash Flow Analysis Basics

As noted above, terms such as cash flow analysis, seller’s discretionary earnings, or net earnings all refer to the same core concept: the amount a buyer is expected to take home before taxes, depreciation, amortization, and interest, after removing the seller’s personal and one-time expenses. In simple terms, it reflects how much money a buyer would earn if they operated the practice with the same revenue and expense structure as the seller—before factoring in loan payments for the acquisition or income taxes.

A common mistake among first-time practice buyers, especially without proper guidance, is taking a financial statement at face value. The profit shown on paper is often misleading and, by itself, largely meaningless. An accountant’s role is to help the owner minimize reported income to reduce tax liability, and the degree to which this is done can vary widely from one dental practice and accountant to another.

Why Cash Flow Analysis Is Critical for Sellers

For a seller, engaging a broker or accounting firm to analyze cash flow allows for the proper identification of expenses that can be adjusted, or “added back,” such as vehicle costs, travel, and officer compensation. In many cases, sellers also run personal purchases through categories like office expenses, utilities, or repairs and maintenance. These are common items that often go unnoticed unless specifically reviewed and discussed.

The seller’s objective is to accurately present the highest defensible level of cash flow. As a general rule of thumb, dental practices are often valued at approximately 2.25 times each dollar of profit. By way of example, overlooking $10,000 in personal expenses can result in roughly $22,500 of unrealized practice value.

Pro tip: If you try to go by memory, you will forget something. I would suggest that you obtain a copy of your general ledger for the time period being analyzed and go through it line by line.

Another pitfall is when sellers make estimations. Since you will have to be definitive at some point in the process, we highly recommend doing the work on the front end as this will pay dividends for several reasons. What if a buyer determines during due diligence that you thought your wife’s salary was $70,000 in the trailing twelve-month period being analyzed but when a buyer asks for the payroll report it is actually only $40,000? Now you are working backwards because this would be a hit to the profitability of the practice by $30,000 which would likely be deemed material and potentially cause a buyer to adjust their offer. Furthermore, when a buyer gets a package of information that is clean, current, and accurate it helps create trust and streamlines the process. We see it happen all the time where a buyer requests a document and then it takes the seller weeks to put that together. Buyers often begin to question whether information is being withheld, which can slow down or jeopardize the deal.

Why Cash Flow Verification Is Essential for Buyers

For a buyer, it is critical to validate the larger claimed expense adjustments to confirm they are accurate and supportable. Request source documentation and detailed reports to substantiate what is being represented. As noted earlier, reliance on a seller’s estimates or memory is often where discrepancies arise and diligence issues begin.

By way of example, if a seller’s office expenses are $40,000 but the seller claimed an adjustment of $20,000 because he estimated that 50% of this expense category were personal Amazon expenses, you will want to ask for a list of the seller’s Amazon purchases for the time period being examined to verify. What if you determine that there was only $5,000 in personal expenses instead of $20,000? This would result in a $15,000 hit to the profitability of the practice.

Another issue we see is that some brokers will just start adjusting items like dental lab or dental supplies to an industry norm if certain expenses are above average to inflate the profitability of the practice. This approach is often used to artificially inflate perceived profitability, and in most cases, it is not appropriate. If a seller is utilizing a top-tier lab that is expensive, but they have a cosmetic-driven practice, this lab could be a key contribution to the practice’s performance and reputation. Normalizing or removing it can distort the true operating model and fundamentally alter the character of the practice.

Essential Cash Flow Analysis for Florida Practice Transitions

The cash flow is the foundation of practice value, yet it is also one of the most overlooked elements in a transaction by buyers, sellers, and brokers. We reviewed how sellers can maximize value by properly identifying personal and one-time expenses, while on the flip side highlighted why buyers must carefully verify the larger adjustments through documentation rather than estimates. As we tell all our sellers, make sure your financial statements are clean, current, and accurate.

Get Expert Guidance for Your Florida Practice Cash Flow Analysis

Don’t navigate the complex world of practice valuations alone. Whether you’re buying your first practice or planning your exit strategy, understanding cash flow analysis is crucial to making informed decisions. Contact our Florida practice transition specialists today at (877) 335-0380 to ensure your cash flow analysis is accurate, comprehensive, and maximizes your practice value.

Avoid the Kiss of Death: The #1 Mistake New Practice Owners Make

The default rate for dental practice owners is less than 2%, making it the third lowest of any business sector in America. While failure as a practice owner is rare, it does happen, and we’ve seen it firsthand throughout Florida. In nearly every case, we noticed a recurring trait among new practice owners in the Sunshine State. These ambitious dentists spent excessive amounts of money on equipment and décor to build their “dream office” without considering the devastating effect on cash flow that these additional loan payments would have.

Putting Lipstick on the Pig

Do you think patients in Florida are going to notice if you have new chairs or 20-year-old reupholstered chairs? The short answer in our opinion in most circumstances is NO. The office has to be clean, presentable, and well-maintained. You do not need new equipment to achieve that level of professionalism. Patients are much more concerned about two critical factors:

1. How much you are going to hurt them

2. How much their treatment is going to cost

Below are some real-world before and after examples from doctors who bought practices through us and made thoughtful, cost-effective renovations and equipment investments over time. In this case, this Florida doctor did not spend more than $50,000 to achieve his goals of creating an office they felt comfortable working in without overextending cash flow.

Smart Renovations for New Practice Owners

The key is to have a clear vision for your practice transformation. Simple updates like wall color, artwork, ceiling tiles, baseboards, reupholstering of dental chairs, and flooring are all cost-effective items that can make a huge difference in patient perception. Pro tip – utilize AI tools to upload a photo of a room in your office and ask for different renovation ideas to generate before and after concepts for your Florida practice.

Baby Steps: The Smart Approach to Practice Transitions

When purchasing a practice, it’s important to understand how patients interpret renovations and new equipment purchases – even when necessary. The initial perception among existing patients is often, “I bet Dr. Jones is going to raise fees and try to sell me treatment I don’t need.”

As a new owner, you have not yet earned goodwill with these patients. That’s why we advise buyers throughout Florida to make minimal, if any, changes during the first six months following a transition. This period allows you to observe, evaluate, and identify genuine opportunities for improvement at multiple levels of the practice.

When it is time to invest in upgrades, renovations and equipment purchases should be phased in gradually. Whenever possible, avoid completing a major renovation all at once. A staged approach protects cash flow, manages patient perception, and allows improvements to be made strategically rather than reactively.

Making Smart Investment Decisions for Your Practice

It’s important to remember that these are general principles for practice owners near you. We advise you to put on your business hat and ensure that any investment in equipment or décor delivers a meaningful return on investment. Emotional decisions like building a “dream office” can be the kiss of death for new practice owners.

To put this into perspective, consider the following example: If you’re purchasing a practice that currently refers out all implant placements, and you plan to place implants yourself, should you invest in a CBCT if the practice doesn’t already have one? The answer is: maybe.

It depends on volume and financial analysis. How many implant cases can you scan in-house versus referring out for scans or relying on a mobile unit? If you’re placing only three implants per month, the numbers likely don’t justify the purchase. But if the fees that patients currently pay for outside scans would cover the monthly loan payment on a CBCT, then the investment may make perfect sense for your practice.

Call Today to Schedule Your Consultation with Florida’s Premier Practice Transition Experts

The takeaway is simple: run the numbers first so you can make informed, data-driven decisions to ensure every major purchase truly makes cents. Whether you’re buying your first practice or planning your exit strategy, the experienced team at Doctor’s Choice Practice Transitions is here to guide you through every step of the process.

Don’t make the costly mistakes that derail new practice owners. Contact our Florida practice transition specialists today at (877) 335-0380 to learn how we can help you avoid the kiss of death and build a thriving, profitable practice that serves as the foundation for your successful career.

Buying Real Estate? Understanding the Benefits of Cost Segregation

What if there was a way to accelerate your depreciation on commercial property and save tens of thousands of dollars in taxes right away? This strategy is called cost segregation, and while it’s well-known among tax professionals, very few property owners actually implement it.

Here’s what you need to know about this powerful tax strategy. Doctor’s Choice Practice Transitions works with dentists navigating real estate decisions, and understanding cost segregation can be a game-changer for practice owners who own their buildings.

What Cost Segregation Is and How It Works

Your commercial property can currently be depreciated over 39 years, which means minimal tax savings each year. A cost segregation study separates the components of a building into different asset classes so they can be depreciated over shorter time frames, allowing you to realize more tax savings now.

Dental offices are uniquely positioned to benefit from cost segregation because they contain a wide range of specialty equipment and interior buildouts. Dental chairs, X-ray equipment, plumbing for operatories, cabinetry, and lighting are examples of components that can be classified into 5-, 7-, or 15-year depreciation schedules, allowing you to show more depreciation immediately and reduce your tax burden.

Potential Tax Savings

Unlike a 1031 exchange or other popular real estate tax strategies that have specific guidelines and strict timelines, you don’t have to designate that you’re doing a cost segregation study prior to purchasing real estate. This is something you can do immediately after a purchase or even years later.

The tax benefits can be substantial. As a rule of thumb, 20% to 40% of a commercial property built out for dental use can often be reclassified into accelerated depreciation schedules. For example, if you purchase a building for $1 million and a cost segregation study allows $250,000 to be moved into shorter-life property, you could gain more than $80,000 in additional deductions in the first year alone.

How a Study Is Performed

There are specialized companies that conduct cost segregation studies, and they generally cost $3,000 to $5,000, depending on the size of the property. More importantly, these companies can give you a general estimate of potential savings before you hire them.

Clients who go through the estimate process rarely choose not to move forward with the study. While cost segregation can deliver significant tax savings, be aware that depreciation recapture may apply if you sell the property in the near future. This is something to discuss with your tax advisor when evaluating the strategy.

Ready to Explore Cost Segregation?

If you own commercial real estate for your dental practice and haven’t explored cost segregation, now is the time to learn more. The potential tax savings can be substantial, and the process is more straightforward than many dentists realize.

Doctor’s Choice has connections to professionals who have successfully helped clients implement this strategy. If you’d like a referral to a specialist in cost segregation studies, reach out via our contact form.

DISCLAIMER: We are not an accounting firm, nor are we giving tax advice. If you are interested in this tax strategy, we always suggest that you consult with your accounting team.

We have weekly conversations with dentists who tell us they are satisfied because their collections are flat even though they are taking more time off as they approach retirement. On the surface, this feels like a success: production is steady, collections haven’t dropped, and patients are still being seen. But what we’re seeing beneath the surface tells a very different story.

The truth is that flat or slightly improved collections can mask shrinking margins. Leases climb every year. Staff salaries and benefits have risen sharply. Supplies and lab costs have escalated. Insurance reimbursements are not keeping pace. In short, if collections are flat or even modestly up, most practices are quietly sliding backward in terms of profitability and that has direct implications for practice health, value, and long-term sustainability. Below is an illustration to help put this into perspective.

 

The Hidden Cost of ‘Stable’ Collections: A Three-Year Analysis

Category	2024 (Actual)	2025 (Projected with Increase in Expenses)	2026 (Projected with Increase in Expenses and Decrease in Collections)
Collections	$1,000,000	$1,000,000	$970,000
Lease / Rent	$50,000	$51,500 (+3%)	$53,045 (+3%)
Payroll (Staff wages)	$250,000	$270,000 (+8%)	$291,600 (+8%)
Payroll Taxes & Benefits	$30,000	$32,400 (+8%)	$34,992 (+8%)
Dental Supplies	$60,000	$61,800 (+3%)	$63,654 (+3%)
Lab Fees	$70,000	$72,100 (+3%)	$74,263 (+3%)
Professional Fees	$20,000	$21,000 (+5%)	$22,050 (+5%)
Malpractice Insurance	$4,000	$4,200 (+5%)	$4,410 (+5%)
Workers’ Comp Insurance	$3,000	$3,210 (+7%)	$3,435 (+7%)
Office Supplies	$15,000	$15,750 (+5%)	$16,538 (+5%)
Telephone & Internet	$10,000	$10,500 (+5%)	$11,025 (+5%)
Waste Removal	$2,000	$2,100 (+5%)	$2,205 (+5%)
Utilities	$15,000	$15,750 (+5%)	$16,538 (+5%)
Total Expenses	$529,000	$560,310	$593,755
Net Profit	$471,000	$439,690	$376,245
Net Margin	47%	44%	39%
VALUE – 2X NET PROFIT	$942,000	$879,380	$752,490

 

What This Analysis Reveals About Practice Value

If your practice holds consistent with collections it is likely that your profitability will not over time. More than likely, your expenses are never going to decrease. The power of compounding interest can be a blessing or a curse and, in this case, it is a negative where expenses can get out of hand quickly if not managed. Using the data above, a seller would have gotten an extra $189,510 for their practice if they sold in 2024 compared to 2026 even though collections only dropped $30,000 for one year.

 

Industry Data Supporting These Trends

• Staffing Pressures: According to the American Dental Association’s Health Policy Institute (HPI), staffing remains the number one operational challenge for practices. In late 2024, 62% of dentists reported staff recruitment and retention as their biggest issue, and average wages rose between 6–10% year-over-year.

• Supplies and Labs: A Becker’s Dental Review survey in 2024 reported that over 85% of practices saw supply costs increase by at least 5%, and more than a quarter saw increases of over 10%. Similarly, nearly 80% of practices reported higher lab fees.

• Overhead Increases: Focus Partners’ 2023–2024 data showed 95% of practices experienced higher supply costs and 82% saw lab fee increases during the same period.

• Profitability Benchmarks: Blue & Co.’s 2025 Dental Benchmarking Report found that while average practices saw margins squeezed to 20–25%, top-performing practices maintained margins as high as 39%, thanks to strategic fee schedule adjustments and aggressive overhead management.

• Insurance Reimbursements: ADA HPI research has repeatedly shown that insurance reimbursement rates are growing much more slowly than inflation, creating a structural profitability gap unless practices negotiate higher fees or shift payer mix.

 

Strategic Actions to Protect Practice Profitability

• Review your fee schedule every year. Use ADA benchmarks or regional surveys to ensure you are keeping pace with inflation and cost of care.

• Renegotiate insurance contracts. Push for higher PPO reimbursements to avoid being locked into outdated rates.

• Monitor overhead proactively. Wages, labs, and supplies are increasing at faster-than-inflation rates—don’t let these categories erode margins without action.

• Optimize your payer mix. Too much dependence on low-paying plans will reduce practice value and profitability.

 

Planning Your Exit Strategy with Realistic Expectations

While some planning their exit strategy may not need top dollar for their business as they still enjoy practicing dentistry and know that revenue and profits are declining as they ‘let off the throttle’, others may need to be more strategic to ensure they achieve maximum value for their business to meet certain goals for retirement. If you need the money from the sale of your business, the key takeaway is to not fall victim to complacency and maintain collections but also manage your overhead.

How to Sell Your Practice with No Brokerage Fees

Practice owners are well-known entrepreneurs. You are used to doing things yourself and doing it “your way.” When the time comes to sell your practice, you may naturally think that it can’t be that difficult to locate a buyer, could it? Why do I need to pay a broker to sell my practice?

What if I told you that you could probably find a buyer for your practice without the help of a broker? I always use the analogy with sellers that finding a buyer is like getting on first base; you are still a long way from home base or in this case, a closing. “Finding a buyer” is the key term here and getting that deal to a closing in an efficient and seamless manner while ensuring that you got the best price possible is the difficult part.

While the title of this article may be deceiving, the truth really is that a reputable and experienced broker in your market should be able to bring a competitive buyer pool to the table that will pay for their commission and still hopefully net you more money than doing it alone.

Think of it this way, to get to a closing you must get two doctors, two spouses, two attorneys, two CPAs, and one bank to all to say “yes”. This is much easier said than done.

Below are three reasons as to why you should consider using a professional when the time comes for you to sell your practice.

Getting Top Dollar

You may be able to find a handful of buyers on your own but know that you are limiting your buyer pool which can leave you wondering:

1. Did you get top dollar for your practice?

2. Did you find someone who is the best fit for your patients, staff, and practice as a whole?

3. Were you able to accomplish your ideal transition plan? E.g. Being able to work-back part time post sale to transition into retirement

The monetary aspect of a sale/transaction is an important one but generally it is not the only consideration. From the monetary aspect, we are oftentimes bringing 10+ buyers a quality practice opportunity which creates a hyper competitive environment and will oftentimes net you more money even after having to pay a commission. When making a major life changing decision like selling your practice, you do not want to lose sleep thinking to yourself, did I get a fair price? Was this person the best fit?

Qualified Candidates

Another pitfall that ‘for sale by owner’ doctors fall into are dealing with unqualified and/or unrealistic buyers. You may find a few buyers on your own, but can they get the funds to follow through and close? Are they “tire kickers” and trying to get a steal on your practice? We vet all our buyers before a seller ever speaks one word to a prospective buyer as we understand that time is money, and we don’t want to deal with people who are not serious about making a transaction or just difficult to work with. Currently most major metropolitan areas have the luxury to have a substantial buyer pool to not have to deal with these doctors who are obstinate. By using a broker, we take that workload of pre-qualifying buyers off your shoulders so you are not wasting your time.

The Value of a Middleman

Being able to communicate and work through conflict is something that sounds so simple but oftentimes is the sole cause of what ‘kills’ a deal. People are not good at communicating and working through conflict and to back my argument, the divorce rate in America is now ~40%. One job role of a broker that many overlook is that of being able to help mediate conflicts and provide an outsider’s opinion based on our reputation and experience. The opposing party is much more likely to tell the broker, a third party, what their true concerns are whereas we have seen it happen time and time again where a buyer may squash a deal for something that was so minor and there was an easy solution. The other party may never know what the ‘true’ reason was for backing out of the deal as they were scared to have a direct conversation. I would tell you that 7 out 10 concerns brought forth by a party are able to be remedied without having to even approach the opposing party as there was a simple solution or answer that the broker was able to provide.

Building off that, we are trying to bridge the gap between two very different generations of millennials and baby boomers. For example, we can have a practice that operates at 50% overhead and has net earnings of $500K+ but if it does not have newer chairs, CBCT, modern decor, etc then a buyer may need some convincing as generally the younger generation buyers want new and modern as they come from a technology age and want something familiar. It is our job to explain to them that if you are making $500k per year then overtime you can replace the equipment and decor. While the solution was simple, most buyers take everything at face value and will buy a practice that is new & modern but makes no money before buying something that makes sense from a business and numbers standpoint.

Why Doctor’s Choice?

Doctor’s Choice Practice Transitions is a team of experienced consultants who specialize in helping only dentists with their transition needs whether that be a doctor-to-doctor deal or affiliating with a DSO. We are privately owned and operated (just like you) and have a proven track record of success for the past 33 years. Doctor’s Choice has 11 agents in every major metropolitan area throughout Florida while other brokers only have one to three people who cover the entire state. Due to the lack of local support, these smaller brokerages will insist that you do the showing without them there! We believe that being involved in every step of the process and holding your hand through the entire process is what sets us apart from others. When interviewing brokers, it is essential to do your research and evaluate their experience, reputation, and services before deciding who to trust your legacy with. Our best suggestion when interviewing brokers would be to ask them to provide a list of practices that they have sold near you within the last few years. From there ask for a list of references so you can speak to previous clients firsthand about their experience with said broker. Most salespeople can talk the talk, but who is actually providing results for their clients?

The next chapter of your life starts HERE. Contact us today to learn more about Doctor’s Choice and find out how we can help you.

When a dentist suddenly passes away, their spouse or family faces both personal and professional challenges. We deal with this situation multiple times per year, and while we have tried to get in front of dentists to have a more detailed plan of action in this circumstance, it is human nature to have the mindset that “it won’t happen to me.” Our suggestion is for you to select a dental practice broker in your area who has an outstanding reputation, multiple references, and testimonials then list out their contact information somewhere for a loved one to find alongside of this article in the event of the unforeseen.

Your family will need to have a structured approach to handling the situation; balancing the need for clear, practical steps with sensitivity to the emotional difficulty of the circumstances. This article will serve as a vital roadmap to alleviate challenges and optimize the sale outcome.

 

Time is of the Essence

Seek emotional support and give yourself and the team members of the practice a few days to grieve the loss. During this difficult time, we have to learn to balance the emotional wellbeing while also making business decisions to maximize the sale of the business. The more time that goes by, the less the practice is worth. If the practice is not sold within 60 to 90 days, the value of business becomes nominal.

The first step is to contact a broker who specializes in dental practice transitions. They can guide you through the immediate necessities, including:

• Putting together a plan of action
• Valuing the business
• Connecting you with trusted advisors
• Helping you find a temp dentist to work the practice until sold

 

Keep the Practice Open

After the dentist’s passing, you will want to notify the team members immediately. Clarify that they are still employed with the practice and they do not need to find another job. It is important they know that your plan is to keep the practice running and that you will find another doctor to take over the practice to where they will be vital to their success. If you cut hours or pay, they will more than likely be inclined to leave the practice, which hurts the value of the business. If possible, retain all the team members to keep familiarity within the practice. The team members are the only remaining known to the patients.

A dental practice broker should be able to find a dentist to help work the practice for 30 to 60 days while they locate a buyer. In an ideal scenario, the practice will be able to at least break even after paying the overhead of the practice, which includes compensation to the temp dentist. If not, this further stresses the need to complete the sale sooner rather than later, as the family will be spending money to keep the practice going until the sale is completed.

A major pitfall we oftentimes see is that the family finds a local dentist with their own practice nearby to see their patients until a buyer is found. This can cause concern in the eyes of any prospective purchaser that patients sent to this local dentist may not return to the selling practice giving them another reason to attempt to lower the purchase price or not purchase the business at all.

From here, you will need to plan out a communication strategy for notifying patients. We recommend that the staff and family try to keep the passing of the doctor under the radar for as long as possible. If the word gets out to the community and patients, the likelihood of the patient finding another dentist due to the uncertainly of who will be taking over the practice increases. We recommend telling patients that there is a family emergency, and that “Dr. Doe” will be caring for our patients at this time. Notice to the patients about the selling doctors passing should be addressed when you introduce the new doctor via a transition letter done post-closing. With that said, if a patient gets wind of the situation before you’re ready, the team should be prepared to confirm the news and reassure the patient that you are looking for a dentist to continue the quality of care in the practice.

 

Finding a Motivated Buyer

In this situation, your highest offer may not be your best offer as finding a buyer who has the ability to close quickly and is financially qualified is of greater value. Utilize your broker’s market knowledge and expertise to help you evaluate any interested parties. If a buyer takes 30 days to conduct their due diligence, and then does not close, that could cost the family one month of overhead and, more than likely, a lesser purchase price. As more time passes, the risk of word getting out to the community increases and, in turn, so does the likelihood of more patients requesting their records to be transferred to another dentist. The longer the practice goes unsold, the value continues to drop, and the less money your family will receive from the sale.

Each situation is unique and the steps above may need to be adjusted according to your circumstances. It’s crucial to consult with professionals who can provide personalized advice and support during this challenging time. In the event that you are in a rural area and are not able to locate a buyer, and closing the practice is the only option, consult with professionals to do so in a manner that is respectful to patients and staff, and complies with legal and professional standards.

It is not often that we have new agents join the company as many of our current and past team members have been with us for a number of years. While we are in the business of helping our clients transition into retirement, I guess it is only fair to allow some of our agents do the same! With that said, we are grateful for Morcie Smith who represented us over on the West Coast of Florida for close to 15 years. We wish him the best as he transitions into retirement and passes the baton to Shawn Smith (no relation).

With that said, we’re excited to welcome Mr. Shawn Smith to the Doctor’s Choice team as he joins us in supporting our clients on the West Coast of Florida. I say this with humility that due to the success of our company, it allows us to bring in top tier talent to not only continue to provide the same results and service but take it to the next level. We can say with confidence that Mr. Smith has the attributes and credentials to make this happen.

You can learn more about Shawn below.

—————————

Shawn, a Kentucky native, has built a distinguished career spanning over 20 years in commercial banking and financial services. A graduate of the University of Kentucky with a degree in Marketing and Sports Nutrition, Shawn discovered his passion for helping business owners achieve their financial goals early in his career.

Throughout his banking tenure, Shawn held multiple leadership positions across diverse markets, earning recognition as part of the top 1% of bankers nationwide. He has successfully led teams that achieved similar top-tier accolades, reflecting his commitment to excellence and results-driven approach. While Shawn’s expertise spans various industries, he developed a particular affinity for assisting doctors and dentists with tailored financing solutions.

Eager to expand his impact, Shawn transitioned to Doctors Choice Practice Transitions, a company he has long admired for its stellar reputation, client-first philosophy, and proven results. Joining Doctors Choice allows Shawn to combine his extensive experience and financial expertise with his passion for helping clients achieve their dreams of practice ownership, growth, and transition.

Outside of work, Shawn is a devoted family man. He and his wife, Laura, are proud parents to four children (3 girls & 1 boy) as well as their dog, Winnie the Poodle, and a fish named Ludafish. A lifelong music enthusiast, Shawn has been playing guitar since the age of seven. He and his family love living in Florida, where they enjoy sunny days boating, building sandcastles on the beach, and creating cherished memories together.

In recent years, numerous accomplished practice owners have reached out to us, expressing a desire for an improved work-life balance and seeking assistance with the managerial aspects of their businesses to devote more time to clinical dentistry in turn, their overall happiness. Regrettably, many of these professionals have adjusted their lifestyles to their earnings and are reluctant to reduce their income, leading them to press on until they reach a state of burnout and dissatisfaction. I’m here to highlight that solutions exist NOW and I want to point out several overlooked factors that could render an affiliation with a DSO considerably more appealing due to your yearly income post affiliation being more than you probably suspect. Affiliating with a DSO isn’t solely about just the financial gains at only the time of sale. Let’s delve into some of the cash flow streams you need to consider when affiliating with a DSO.

 

General Overview – There are four cash flow streams in a DSO affiliation:

1. Cash at closing; typically, 60% to 80% of the enterprise value determined.
2. Associate Compensation; generally, 30% of your personal collections.
3. The potential upside of your equity that you rolled with the DSO; estimated to be 2x to 3x.
4. Profit distributions; depending on the type of equity you roll, you could receive 20% to 40% of the distributable EBITDA every quarter. This is a missing link that almost everyone overlooks.

 

Cash at closing

Most DSOs are looking to be the majority equity holder where they purchase 60% to 80% of your business and the seller retains to 20% to 40% of equity. Generally, a buyer/DSO would prefer to allow a seller to roll as much equity as possible as it mitigates risk and allows them to stay more cash-liquid to purchase more practice opportunities. If it is determined that your business value is $4M, you should expect to be paid 60% ($2.4M) to 80% (3.2M) in cash at closing. Why a seller would roll 40% equity as opposed to 20% equity varies but it is mostly narrowed down to two considerations:

1. How much longer do you plan on practicing? If you plan on practicing for more than 5 years then considering a larger equity roll may make sense for you as you could go through multiple recapitalization cycles with your DSO.
2. What is your appetite for risk? A DSO buyer will tell you everything you want to hear and how great their equity is but in reality, we tell all our clients to treat the equity rolled as “poker money” as you could get a huge return, or you could lose it all if the DSO goes belly up which is why choosing a reputable DSO with past performance is so important. Oftentimes, your best offer from a monetary perspective may not be when you consider the full picture.

 

Associate Compensation

If you are a major producer in the practice, you should expect to have to work back for three to five years post-affiliation. During that time period, you should expect to make 30% of your adjusted collections.

If you collected 1.25M as a provider, you would make 30% of this which is $375,000.00. Almost always, it makes more sense to take as little compensation as possible for associate compensation as that will factor into your EBITDA and ultimately your business evaluation. Let me explain.

If your provider collections amount to $1.25 million and you receive a 30% compensation rate, your earnings would be $375,000. However, many try to negotiate a higher percentage of compensation (E.g. 35%) as is commonly thought to benefit them and result in more overall cash in their pocket. If the same provider collections of $1.25M is run at 35%, your associate compensation then becomes $437,500. The difference between $437,500 and $375,000 is $62,500 in additional yearly compensation which sounds great at face value but what you are forgetting is that your EBITDA would also be reduced by $62,500.00 and if you are being paid a 6x of your EBITDA then you would be reducing your enterprise value by $375k (6x of $62,500) using this example.

3-year associate comp at 35% = $1,312,500

3-year associate comp at 30% = $1,125,000

Difference of $187,500 in associate compensation over 3 years.

As you will see when you run the math, taking 30% compensation instead of 35% will net you $187,500 over a three-year period as the increase in enterprise value is greater than the associate compensation at a higher percentage.

 

Understanding the Potential Upside of Your Equity

DSOs typically present two distinct equity options, each with its own set of advantages and disadvantages. We will explore the nuances and perform an analysis of the financial implications inherent to each model.

a) HoldCo Equity (AKA Parent Equity)

Initial Scenario:

Original Investment: Dr. Smith rolls over $500,000 of equity into the DSO’s HoldCo at the time of selling his dental practice.

HoldCo Portfolio:

Initially, the HoldCo, through its DSO, owns 10 dental practices, including Dr. Smith’s, with a combined annual EBITDA of $2 million.

Over five years, the DSO strategically acquires 10 additional practices, doubling the number to 20. These acquisitions increase the combined annual EBITDA to $6 million.

Valuation Increase:

Assuming a valuation multiple of 6x EBITDA at the time of Dr. Smith’s sale, the initial valuation of the HoldCo (and thus the DSO) was $12 million (6 x $2 million).

Revised Valuation: After the growth strategies are implemented, the new valuation at a similar multiple would be $36 million (6 x $6 million), reflecting the improved profitability and scale.

Impact on Dr. Smith’s Investment:

Initial Stake: Dr. Smith’s $500,000 represented a 4.17% equity stake in the HoldCo ($500,000 / $12 million).

Value of Stake After Growth: With the HoldCo now valued at $36 million, Dr. Smith’s 4.17% equity stake is now worth $1.5 million ($36 million * 4.17%).

Conclusion:

Dr. Smith’s initial $500,000 investment in the HoldCo equity has tripled to $1.5 million due to the DSO’s successful execution of strategic growth initiatives, including acquisitions, operational efficiencies, and the introduction of high-margin services. This example illustrates the potential for significant value appreciation through equity rollover in strategic transactions, particularly in growth-oriented industries like dental services.

b) Joint Venture Equity (AKA JV or Site Level Equity)

Initial Scenario:

Dr. Smith’s EBITDA at the time of a sale/affiliation is $400,000 and he was paid a 5.5x of his EBITDA, which gives us an enterprise valuation of $2.2M. Of that 2.2M purchase price, Dr. Smith elected to roll 25% equity in the JV. 25% of $2.2M is $550,000.00.

Valuation Increase:

Let’s then fast forward two years post-affiliation and now Dr. Smith’s EBITDA is $475,000.00; an increase of $75,000 and the DSO decides to go to market and they sell for 13x of their global EBITDA. Dr. Smith’s practice/group would now be valued at $6,175,000 (13 x $475,000). If Dr. Smith’s equity roll was 25% then he would see 25% of the $6,175,000 which is $1,543,750.

Impact on Dr. Smith’s Investment:

In this scenario, the $550,000 he originally invested got a 2.8x return to net him an additional $993,750.

*Disclaimer: There are various different structures from DSOs on how you will get paid on any upside of your equity. The example above is what we typically see but it all varies per DSO.

 

Profit Distributions

In my experience, the most neglected aspect by sellers unfamiliar with the process is the potential for profit distributions when considering an affiliation with a Dental Support Organization (DSO) that offers JV equity. For instance, if you maintain a 25% equity stake in the JV, you’re generally entitled to 25% of the practice’s profits after deducting the DSO’s management fees and any capital expenditures.

To put this into perspective, imagine the practice’s distributable EBITDA (post-management fees and capital expenditures) amounts to $400,000 for the year. Holding a 25% JV equity stake would entitle you to $100,000 (25% of $400k) of this total. This distribution is in addition to any salary received as an associate. This crucial detail is frequently overlooked by many sellers when calculating their potential annual income.

 

Conclusion

If this article hits “home” and you are looking for a solution, let’s discuss your options as there is so much more to an affiliation with a DSO than anyone knows at face value. This is just the tip of the iceberg.

In the realm of dentistry, practitioners often focus on perfecting smiles and ensuring oral health. However, when it comes to securing their financial future, dentists must also consider strategic investments. One avenue that deserves serious attention is real estate ownership. While leasing may seem like the convenient choice and does offer some benefits, delving into property ownership can offer dentists a myriad of perks that far outweigh the simplicity of leasing.

1. Equity Building: Leasing means paying rent without accumulating any ownership stake in the property. Conversely, owning real estate allows dentists to build equity over time. Mortgage payments contribute towards ownership, gradually increasing the dentist’s share in the property. As the mortgage decreases and property values appreciate, the dentist’s net worth grows substantially. As a rule of thumb, depending on the area, most property values double every 10 to 15 years.
2. Long-Term Financial Stability: Dentistry is a stable and lucrative profession, but financial stability shouldn’t solely rely on patient flow. By investing in real estate, dentists create a potential future secondary income stream that can withstand fluctuations in the economy. When it comes time to retire, you could retain the property while selling the practice to become a landlord and have residual income for years to come as part of your retirement plan. If being a landlord is not something you desire to do, you will have the ability to also sell the property with your practice. In fact, a practice that includes the sale of the property has shown to increase appeal and salability.
3. Control and Flexibility: Leasing puts dentists at the mercy of landlords who dictate terms, rent increases, property modifications, and lease assignment. On the other hand, owning real estate grants full control. Dentists can customize the space to suit their practice needs without seeking landlord approval. Additionally, they have the flexibility to expand or remodel the property according to their vision, fostering practice growth and efficiency. One major hurdle in the sale of a practice is getting the landlord to consent to a lease assignment or new lease terms.
4. Tax Advantages: Real estate ownership offers dentists a plethora of tax benefits. Mortgage interest, property taxes, depreciation, and maintenance expenses are all deductible, reducing the overall tax burden. Furthermore, owning commercial property opens doors to additional tax deductions, such as operating expenses and depreciation of improvements. These tax advantages can significantly enhance cash flow and boost long-term wealth accumulation.
5. Hedge Against Inflation: Inflation erodes the value of currency over time, diminishing purchasing power. However, real estate serves as a hedge against inflation. Property values and rental income tend to increase with inflation, preserving the dentist’s wealth and ensuring financial security in the face of economic uncertainty.
6. Legacy Building: Beyond personal financial gain, owning real estate allows dentists to leave a lasting legacy. Property ownership provides a tangible asset that can be passed down to future generations, securing their family’s financial future.
7. Aggressive Landlords: Commercial landlords often earn a reputation for being aggressive in their dealings with tenants. Whether it’s stringent lease terms, frequent rent increases, or assertive negotiation tactics, their behavior can significantly impact businesses. The aggressive nature of commercial landlords is shaped by a combination of market dynamics, investment pressures, economic factors, and legal considerations. While landlords have the right to maximize returns on their investments, excessive aggression can have negative consequences for tenants and the broader commercial real estate market. Achieving a balance between landlord profitability and tenant satisfaction is essential for fostering a healthy and sustainable commercial real estate environment. Landlords will always make a business decision which could be at your mercy.
8. Running the Numbers: To gain some perspective, consider this scenario – If your office lease costs $4,000 monthly, that’s $48,000 annually. Over a 30-year period, you’d end up spending $1,440,000 with nothing to show for it when you retire. Moreover, this calculation doesn’t even factor in the typical 3% annual increase in your lease, which compounds overtime. As a result, it’s highly probable that you’ll have spent over $2 million in total.

In conclusion, while leasing may offer short-term convenience, the long-term benefits of real estate ownership far outweigh the simplicity of renting. Dentists who venture into property ownership secure their financial future, build equity, gain control, enjoy tax advantages, hedge against inflation, and leave a lasting legacy. Therefore, it’s evident that for dentists looking to maximize their wealth and secure their future, owning real estate is not just a prudent choice but a strategic imperative.