The financial upside of joining an OSO can be impressive, but practice sellers should do their homework to be aware of the many key changes that will occur.
By Bruce Bryen, CPA, CVA
If you’re looking to join a group of orthodontic practices, there are a few things you will want to be aware of at the onset. You’ll need to know what the Orthodontic Service Organization (OSO) is looking for in an orthodontic practice wanting to join, and you should also do a little homework to learn what might work best for yourself in the transition.
You might wonder, what are some of the points of interest to the OSO in the practice that wants to be acquired? And you should consider these questions: At what age is best for the acquisition? How strong a work ethic is necessary to convince the OSO that the selling individual orthodontist is right for them?
Money is always a major issue during negotiations for a sale, but it is not the only point of concern. Sometimes money is not the most critical area that is discussed while the negotiations are under way. Other concerns include the projected gross revenue and net profit margins, the employee incentives, and the benefits to the seller and to the OSO.
Even though there can’t be a direct refusal based on the age, health and work habits of the potential seller, it is easy to see these points as stumbling blocks in the progression of the talks. The future potential of an older orthodontist will rarely be acceptable to the OSO because the potential for the anticipated gross revenue and budgeted net profit would be limited compared to a younger orthodontist. The ability to teach the staff and to be involved with the new orthodontic hires would be limited based on the age of the acquired orthodontist and his or her desire to stay with the practice and to develop more years of growth.
What are some of the specific areas for the selling orthodontist to consider when deciding to sell his or her dental practice?
When the orthodontist makes the decision to sell his or her practice, it may be that the OSO offers such an upside in terms of compensation that the seller concentrates solely on that type of buyer. After going through the guidelines that the OSO uses to determine the ability for the seller to have the OSO complete the acquisition, many times the sale will not take place. The OSO wants an orthodontist who is on the younger side in age with a strong work ethic and in reasonably good health. If the potential selling orthodontist is older or in less than satisfactory health, that will probably disqualify this sale from ever occurring. One of the concepts the OSO wants to see in a seller is someone who wants to continue to work for a few years, expand the practice gross revenue and net income and to assist in marketing the practice to provide continuity to it.
When existing patients and new patients see similar staff, the same orthodontist plus potentially new orthodontists added, they then have a sense of comfort from familiarity. The marketing and the existing and new patients will feel a sense of the continuance of personnel and not worry about retirements or seeing someone new most of the time. There will still be many of people they know when bringing children and grandchildren or for their own general consulting about their potential for braces and other treatment. The OSO is not the only organization interested in acquiring orthodontic practices. Even though it may seem as if there is a trend towards the OSO, there are still many solo and partnership traditional orthodontic practices that want to expand and have the feel of these more classic types of practice.
What does the orthodontist look for in a buyer when disregarding the OSO?
There are many orthodontists who like the administrative side of their work. They may have children or friends that they want to have join their practice. They want to expand the old-fashioned way, which is a little bit at a time. Being their own boss and not reporting to a corporate entity like an OSO is attractive to them. Making hiring decisions and knowing that the solo orthodontist or one in a partnership relationship will be working with the new hire is an appealing thought to them.
Keeping what is being earned and developing a schedule for time off is also an important factor. The OSO incentive for the big increase down the road when a potential venture capital company or a hedge fund may take over, may keep the orthodontist working under a certain stress condition to keep performing at a high level. Not enjoying working with those who are co-workers is a bad feeling if the OSO has employees that the acquired practitioner has trouble with while at work. The decision to hire and fire is not that of the acquired orthodontist, but it is the OSO who makes those decisions. This may not be a good situation and certainly will take an owner of an individual practice an amount of time to get accustomed to accepting.
From a compensation standpoint, the OSO touts the future and the riches it will bring to the orthodontist. The solo or small partnership owner understands that upon a sale to another non-OSO arrangement, the future is now and the funds that are received are all his or her own. The future is what he or she makes it.
Comparing a typical OSO acquisition to an individual sale without the OSO incentives for the pot of gold at the end of the rainbow:
From a financial perspective, the orthodontist will probably earn less in the early years of the merged practice with the OSO than he or she is earning from his or her own practice. The upside for the OSO is much higher, if attainable, with the OSO rather than with the individual or partnership practice. The marketing approach for the OSO is that their size will attract hedge funds, venture capital companies, and others with big ideas for them. Full administrative staffing will allow the orthodontist to work with his or her skill sets and to continue to produce revenue while not spending time on non-income producing items like accounting and other administrative jobs.
About the Author
Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. You may contact him at Bryenb@baratzcpa.com.
