The Transition Advisor's Corner - Random Musings from the Front
The Transition Advisor's Corner - Random Musings from the Front
The purpose of this blog is to share current, real world, experiences on the topics of practice valuation, practice transition, retirement planning, and building equity value - over time - in your dental practice.
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seanepp
seanepp

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The DSO "Premium"

The DSO "Premium"

10/7/2026 1:37:00 PM   |   Comments: 0   |   Views: 66
If you’ve been around dentistry long enough, you’ve probably heard the term DSO or group “premium” referenced.  

The perceived “premium” stems from the fact that for certain practices, group dental buyers are often able to offer a Total Enterprise Value (TEV) in excess of what independent dentists would likely be willing to pay.

So, as an illustrative example, let’s use a $5MM collections practice generating $1.5MM (15% margin) of EBITDA and $2.0MM (40% margin) of Seller Discretionary Earnings (SDE).

Independents may offer:

90% of receipts or 2.0x SDE or $4.5MM and $5.0MM TEV, respectively

Groups may offer:

5.0-7.0x EBITDA or $7.5MM to $10.5MM TEV, respectively

This means the low end of the independent market and the high end of the DSO market are arriving at TEVs that are $6MM apart, with the upper limit at 2.3x the lower limit!

The crucial difference:

Most doctor-to-doctor transactions are 100% bank financed and the sellers are fully paid in cash at closing; nothing is being left at risk or deferred to a subsequent transaction

Most doctor-to-DSO transactions have meaningful cash at close (>50% cash) with the difference being taken up by a combination of seller debt, earnouts, and/or equity

The amount being paid at cash by DSOs is not set by the DSOs but rather their own lenders via the financial covenants set forth in their credit agreement.  The primary covenant is the “incurrence test” which is usually expressed as a ratio of debt to cash flow.  Private equity and private credit investors all speak EBITDA and their contracts reflect it.  In today’s market, it is rare to see an incurrence test greater than 4.5x and usually closer to 4.0x.  So, in a 15% EBITDA margin practice, the limit of that test 4.0 x 15% = 60%.  This 60% becomes the amount available to pay the seller at close in cash.  Many groups will try to explain this as their “philosophy” when it is actually the lender's covenant.  

Given the opportunity, PE-backed companies default to paying with debt whenever they can to leverage their own equity returns.  Hence “leveraged” finance…

So, what’s the point of all this?  The point of all this is to call out the fallacy of the DSO Premium.  There is no premium if it is not paid in cash.  What you bought was more likely a wildly out-of-the-money call option.  It is completely speculative and it pivots entirely around future recapitalization events.

So, what happens when that bridge (the non-cash consideration) becomes a pier?  What if the platform is unable to provide liquidity “at the next turn” or as they promised up front?  

If you took 4.0x in cash at close and 3.0x in non-cash at close, what did you really get?  As a practical matter you chose 4.0x or 60% of revenues in the doctor-to-DSO deal when you had the option of 6.0x or 90% or revenues in the doctor-to-doctor transaction.  How does that make you feel?

What the market is slowly waking up to is that:
  • An excessive amount of DSO/Group equity has been issued and that equity was never more than blue sky in someone's Excel workbook;
  • Valuations based on vapor and projections with no rearview mirror informing the path forwards;
  • “Rollover” equity that shifts to become a permanent, illiquid layer that is either kept parked down at the JV level or simply not allowed to receive liquidity by the next buyer for fear of mass provider flight
  • Recurring requests to extend employment agreements with the promise of some new layer of equity that aspires to claw back the value of their already lost rollover equity
Long story short, the market most certainly has noticed.  Platforms are not recapping at all or in some compromised form, e.g. preferred stock issuances funding partial recaps.  For every proven, healthy operator, it seems like there are ten more operating in the Zone of Insolvency.  

When the dust settles, the sector will realize that many (most?) groups were paper tigers and most of the perceived premiums paid were almost always with paper that turned out to be worthless funny money.  Something painfully ironic to frame as a reminder so as not to repeat!

None of the foregoing means there’s anything intrinsically wrong or bad about groups or private equity or private credit.  

All it means is that if you are going to assume credit or equity risk in a DSO, it is worth a doctor’s time and expense to conduct thorough due diligence on the platform itself.

Be safe, have fun, don't die!

Sean
Category: Ethics, Jurisprudence and Malpractice, Financial Planning and Investments, Health, Wellness and Ergonomics, Practice Management, HR and Accounting, Practice Transitions
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