Beyond the DSO/OSO Buyout: Understanding Post-Deal Earnings

[MUSIC] Hello and welcome to the Orthodontic Products Podcast. I'm your host, Allison Warner. On today's episode, we're discussing one of the biggest financial concerns orthodontists have when considering a DSO or OSO partnership. Whether they can rebuild or even grow their annual income after the transaction closes. While many deals provide significant upfront payouts and future equity opportunities, doctors still want to understand what post-transition compensation really looks like and how large organizations work to improve practice profitability over time. In this conversation, we explore how compensation structures typically change after a partnership, the operational strategies, DSOs and OSOs used to drive growth, and the financial questions orthodontists should be asking before making a decision. Back with us to talk about this is Ty Ramsay, of mergers and acquisitions advisor with professional transition strategies. The firm has completed more than 600 transactions nationwide representing more than 1 billion in deal flow. During our discussion, Ramsay explains how organizations evaluate post-transition earning potential, what operational changes can influence the doctor's income after partnering, and why understanding the full financial picture extends beyond salary alone. Here's our conversation. Ty, thank you for joining me again. I really appreciate it. Yeah, I'm really happy to be here. I had a great time last time and looking forward to chatting again. Yeah. Okay. So many orthodontists worry that after partnering with the DSO or OSO, that they won't earn the same annual income they were making beforehand. How common is that concern in your conversations with doctors? Well, there are. I would say if you're just looking at go for W2 income, yes, that can be the case. It depends. They could end up making more. It depends on the structure. There are multiple buckets that we look at, and then we do a five-year estimated wealth accumulation based on amount of cash at closed time value of money. They go forward, comp, their equity, and how that appreciates. And even the rent on their building if they own the building, because that can be another lever that they didn't think of as we can get in. Negotiate for a triple net lease with a long-term multi-million, sometimes multi-billion tenant instead of having Bob's burgers as a building you own, you now own a building that McDonald's is the tenant. So that can be, but anyway, there's four buckets that we consider. One of them is cash and close. The other one is the go-forward comp. The other one is the equity in the group and what that is eventually going to be worth. Those are really the three buckets and then a 3A is the rent in the long-term kind of lease if they own the building. So, while there can be, I would say the normal go-forward comp rate for an orthodontist is going to be anywhere from 1500 to maybe 1400 to 2000 per DM. It can also be a percentage of collections, but the way they need to view it is if they were to step back from the business and just wanted to own it and just take the profit that it spun off every year. What would they pay an associate and they're becoming an associate, but really they're not. They're becoming a partner of this group and working together and then they'll be paid a fair doctor wage moving forward. But like I said, we look at all those different factors and come up with a wealth creation plan for them where we always compare it against that as quote. Okay. Well, I'm kind of curious when doctors do say like I want to get back to what I was making before the deal. What are they actually referring to? Are they talking about salary or they're talking about distributions or lifestyle or just overall wealth creation? Yeah. I'd say overall wealth creation, but not all doctors pick just the highest offer. We return on a good practice. We'll return normally five, six, seven, sometimes eight, nine offers to choose from. They don't always pick the highest offer. It's all about cultural fit too. I call it a mental return on investment. There's a lot of my clients that have told me, hey, I never thought about this, but once I see minted in an exit plan and eventual exit plan, whether it be five years, 10 years down the road, I say so much stress just came off of because now as a private practitioner, I mean, God forbid something happens and they can't practice tomorrow. The value of their practice just plummets and the value of their biggest asset, just plummets. What we do is allow them to take some chips off the table and diversify their biggest asset. It's not just about getting back to what you were earning before. We take many different things into consideration. But yes, in general, if you're looking at just W2 moving forward, in orthodontist, I would say going right is going to be anywhere from 1500 to 2000 per day. Keep in mind, they're getting a nice lump up front. We do a full analysis, time value of money versus their seller discretionary earnings. We're always comparing against status quo. Here's what you're doing now. Here's what this looks like moving forward. There's no surprises moving forward. The last thing we want is for them to feel like it's a reverse mortgage. Arabian cases where we've told clients, hey, we don't think this is good for you. We'd love to do the deal for you, but as your advisor, it's my job to tell you, if I think it deals good or bad, I don't think it's a great deal for you. That's happened before. Can you give an example of what would a bad deal look like in terms of your compensation down the road? I would say a bad deal looks like for any craft players out there, you're betting all on the come. You're betting a lot on future events. Very little cash at close. You've got tons and tons of equity awarded with a bunch of ifs, hands, and butts. You might be taking that head on go forward, comp, and the whole deal is dependent on the equity and the appreciation of the equity. To me, that's the worst kind of deal where you just have a huge amount of equity that's awarded to you and not much cash. You've talked a little bit about this, but I would like to have you go a little bit deeper when a doctor transitions into that DSO as a partnership. How does their compensation structure typically change? Yes. They'll go from just a bunch of, they normally legally run a bunch of tax treatments through. Cars may be paying family members who help out, things like that. All that stuff, they might buy a tone beam or they might pay a consultant 50,000 for the year and be able to write that off. So all that stuff goes back to their ebid, which is earnings before interest taxes depreciation and amortization. All DSOs and OSOs base their offers on a multiple of the ebid. So their comp structure, all those one time type of expenses or capital expenses, all those, the expenses will continue going forward. It won't count against them in most cases or there are certain cases where they do what we call a joint venture type of deal. So if they spent 100,000 on a column beam and had a 60, 40 joint venture partnership, they might pay 40,000 in the group pays 60. But just their pure comp, they're going to be normally on a per DM or a persting-in-edge of collections. But also, we normally negotiate some kind of growth bonuses in there or even profit share moving forward. If it's a joint venture situation where they still retain a portion of their practice's ownership or their practice grows, the more their profit grows, the more their income grows. So and you can, it's two different structures, two different ways to grow your income post-party. Okay. Within the practice, what are some of the biggest operational changes that can directly impact a doctor's income after these partnerships? Yeah, just, you know, these, the DSOs and OSOs will do a full analysis of the practice with us prior to making an offer. And if a practice is really maxed out and they don't see a lot of room for growth, they not not making an offer. But a lot of times they have a whole bunch of levers they can pull. Schedule optimization, helping with staffing. Materials are going to be 30% cheaper. There are a lot of, maybe they had a retainer program that hadn't been implemented before, but they have 100 scenarios where it's been very profitable, so they might recommend. I'll make the doctor do that, but recommend it. It's to both of our benefit if we add a retainer program, development's running. So they have all kinds of, just imagine a consultant advising some stuff. It's like having a consultant with live data all the time with 50, 100, 200 locations of data that they're always pulling from. So they just have all these different levers they can pull to make the practice more profitable. And the average growth first year of a practice joining a DSO or OSO is about 9%. And that's average across all the different kinds of groups. In orthodontics, I would say at least the clients I've had, I've had multiple clients grow over 20% the first year. Okay. But what do you think is the key driver of that success for those practices, those 20%? It's just, I mean, it's just a matter, like I said, of pulling all those levers, just following a partnering with the group while completely keeping their autonomy. People need to remember the grit. We screen out tons and tons of groups. They're groups that I call activist groups that come in and that the doctor joins. They're just part of the spreadsheet. They use their materials. They follow a script. They do everything by playbook to cutter. And those are the groups that have turnover doctors every 18 months that you hear about. The groups we work with, the majority of our doctor led doctor own doctor found. And doctors name stays on the door. Staff stays the same. They're the product. They're investing in the doctor as the product. And they want that product to carry on as long as they can. So the last thing they want to do is come in, make a bunch of changes. They do take the back office off the doctor's plate. The stuff they don't, we're doing anyway, accounting payroll, that kind of thing. But that's probably one of the biggest things when the doctor just has time to just do orthodontics and not dedicate it to a bunch of back office stuff. They can easily grow along with best practice that they have basically a buffet plan of best practices that have worked at other practices. And if they can choose from. So there's, it's just any number of ways they can grow. Yeah. I think we've really emphasized before the fact that, you know, with removing that back office responsibility from the doctor's plate, there is going to be more time to see patients. So yeah, absolutely. Yeah. What's, what in your opinion separates partnerships where doctors successfully regain or exceed their prior income from those where doctors end up disappointed financially? I would say, I mean, in most cases, having good broker representation, that's my job is to make sure that they're one of the biggest decisions that a labor make. It's going to be a good one and to give them all the information that we can so that they can make an educated decision. Just like if you, you know, God forbid, I had to go to some big court case, you were involved in. And you probably wouldn't have a great outcome if you just went in and represented yourself versus ironing and attaining. Well, you know, when I joke with orthodontist, you know, I wouldn't, I could, I mean, maybe not legally, but technically I could watch a YouTube video of how to treat a class to did to and then treat it. My outcome is going to be very different from yours because that's what you did. Just like conversely with us, my outcome is going to be very different than yours on a practice transition. There's a great example of a, it was an oral surgery practice that we partnered in December and they had gone to market and we do all specialties by the way, but they had gone to market on their own and they let me know this after we had successfully partnered them, but they gone to market on their own, gotten a couple offers rejected them tired, made it come to market. We got eight out, we got nine offers. The one they went with being over 50% better than what they got on their own. Okay. So yeah, I would say, you know, you need great representation to do that. Okay. For orthodontist who are considering a partnership, what financial questions should they be asking to better understand their post-transition earning potential? Yeah, that's something that there's a hundred different things that go into that and I would just suggest that they get a free valuation done with us. It's a complete valuation on the practice underwritten by dental CPA. Helps uncover any blind spots. It could mean millions of dollars to them in the future. Now, we compare their supply spin, their payroll, their marketing, their rent versus industry averages, take all kinds of demographics into consideration. And then we present them with this 15 to 20 page document that's a complete valuation on their practice and we use that to market their practice if they decide to go to market, but there's no obligation. The free valuation is theirs to keep. Yeah. Well, but I'm just also curious, like, even if they're just preparing and they want to walk into that conversation with you, what should they be thinking about in terms of those financial questions so that they can feel prepared coming in to sit down with you even? Yeah, yeah, they need, I mean, they need to, I mean, they need to step back and take a look in the mirror and say, hey, you know, what have we, where are my weak spots? And a lot of times they don't know. So they don't know the questions to ask, we help with that, but it's going to, you know, maybe their payrolls really high. Maybe their rents really high. Maybe they can, you know, start doing same day starts and drastically increase revenue. Maybe, you know, it's just a whole number of things. But they always want to make sure that they have, you know, their expenses and their payroll under control and they're, you know, for a start. And they also want to make sure they have a great culture. That's very important as well. These groups can see through a bad culture and they won't, you know, they won't make investments. They want like-minded doctors that have great cultures in their office. Yeah. Okay. Well, Ty, thank you for being with me again. Mm-hmm. Right. Thanks for having me. I really enjoyed chatting about it. Great. Thank you. As always, thank you for joining us. Be sure to subscribe to the Orthonautoproducts podcast to keep up with the latest episodes. And be sure to check out OrthonautoproductsOnline.com to keep up with the latest industry news. Until next time, take care.