DSO, DPO, and DPG: Demystifying Corporate Dentistry Options

You're listening to the Phil Klein Dental Podcast As many of us remember, up until only a handful of years ago, a new dentist out of school or just finishing a GPR usually took the traditional path of working as an associate for private practice or possibly buying an existing practice or even opening up a new one. And then when it came to exiting dentistry, a practice owner would typically plan to sell to his or her associate or to another dentist. Today, things are a bit more complex with the introduction of DSO, DPO, and DPG into the dental professional space. Many dentists are hearing about their colleagues taking some money off the table and at the same time benefiting from the support and services from their corporate acquirer or partner. So in this new environment, there are certainly more options for dentists to change their business model at any point in their career. but it can get a little confusing when trying to differentiate between a DSO, DPO, and DPG. To tell us more about it and try to demystify some of the confusion is Dr. Weston Spencer, a GP working in La Jolla, California, and Chief Dental Officer for a DPG called SPP, which stands for Save Private Practice. Dr. Spencer will be joining us in a second, but first, are you looking for an air-driven handpiece that rivals the power and torque of electric? Well, I have good news. It's finally here. It's called the T-Mac Z and it's from NSK, a company we all know and trust as a world leader in dental handpieces. In addition to being lightweight and ergonomic, this revolutionary air-driven handpiece delivers unprecedented 44 watts of power, allowing it to cut through tough zirconia smoothly and quickly. In fact, the T-Mac Z reduces overall cutting time by 30%. That means less chair time, reducing the burden on you and your patient. Take a test drive of the TMAX Z air-driven handpiece from NSK. For a free 10-day trial, go to nskdental.com and find your local rep to inquire. Experience the power and excitement of the TMAX Z series. Dr. Spencer, it's a pleasure to have you on the show. Thank you, Phil. Thanks for having me. Really excited to be here. Yeah, so again, this is a pretty timely topic. There certainly seems to be a... general trend in the dental space, not only in the dental space, but just about everything. I mean, even my propane gas company was purchased and acquired by a large organization, a corporate organization. I think they're doing it nationally. And my veterinary practice was taken over by a large vet. um i guess they call them vso's i don't know versus a dso but anyway so it's certainly affecting many verticals and as our audience is primarily made up of dentists and we have hygienists and assistants i think it's important for us to differentiate between the acronyms dso dpo and dpg so if you can help us out with that to start this podcast that would be great yeah absolutely so You know, first of all, to that, to your point of where the industry is going, we're seeing so many others go that way. And dentists have been very fortunate for so long, right? Like we have established a really good way of doing business and that's in the private practice. And a lot of dentists get out and plan on that. It's interesting to see a lot of younger dentists recognize that, hey, they're probably going to be a part of a group early on. And that's just because the prevalence of groups nowadays. And it's a great opportunity. I got my start in a group right when I graduated, actually, and worked for a DSO here in California for a few years and then ended up purchasing a private practice on my own. And so as we see these trends going that way, I get asked the question all the time, what's the difference between these different types of groups? So we'll really kind of categorize them as the three. There's a DSO. a DPO and a DPG. And so I'll try to define those as best as I can, or at least the way I kind of see them. So let's start with a DSO or a dental services organization, right? This is the classic big group dental group that's out there. I think we can categorize them specifically in how they kind of partner or work with dentists. When they come in and you join a DSO, majority of that time, it's a full acquisition. you know, where they're going to take over your entire business. They're purchasing your whole business. I think it's unique to say that they're most of the time, if you join a DSO, you're most likely going to become a W-2 employee after that because they purchased your entire business. And so with that comes all of their services. They're going to, they're going to. most likely immediately incorporate a lot of their services into the practice because they have a way of doing things and they plan on doing it that way because they need to get everything they can out of the investment that they just made. Most of the time in a DSO acquisition, you're getting most of your money for selling to a DSO up front. But that is going to come with some, you know, promises to practice for them for however many years. And that's unique to every group, I'm sure. When you're talking about the DSO and it's a complete acquisition, you get all the money up front. Are there any strings attached where the dentist has to work there? And you were going in that direction where the dentist has to work there for a certain period of time. If I'm 66 years old and I'm ready to sell, you know, a DSO approaches me and go, yep. Send me the check, but I don't want to work anymore. Can I still sell to a DSO? In some form or another, they want to get their investment out of what they just put in, right? So if you are 100% tied to that practice, if you're a solo operator, no associate, nobody taking over for you, somebody's got to do that dentistry. for the next few years, it's going to be you, right? Unless you have a plan or you already have established associate. If by taking you out of the picture, they can still make their money, then that's fine. You probably don't have to. But most solo practitioners, if you're going to sell to a DSO, you're going to have a work back period. And that's different for everybody. So I don't want to speak for all DSOs in that sense. But yeah, they're going to have to get their investment out, right? Because they paid you upfront for that. Let's go over to the DPO or Dental Partnership Organization. So this has become a little more popular in the last few years. You're seeing growth of this where it's a little bit of a hybrid. And I'll categorize a DPO as saying that they are going to want to take over or purchase your practice or at least the majority of your business, right? They want to have majority ownership of your business. So let's just call it for a 60-40 where they're going to own 60% of your business. you get to still keep 40%. So benefit there is you're going to keep a little bit of the profits, right? Once all the expenses have been paid, you're going to keep some of the profits. They're going to take some of the profits. But at the end of the day, they are going to still own the majority of your business. Unique to them most of the time. You may become a W-2 employee working specifically for their group. Sometimes you may retain some of your corporation or LLC or however that is. And so that'll be unique to every DPO. But ultimately, they are the majority owners of your business now. This is where they'll get into unique structures where they'll pay you most of that money up front. And then some of that money is tied to working for them. meeting certain demands over the next couple of years. And also that leftover money could be served as equity in their company now. So they are going to probably offer you a small partnership stake in the DPO and you'll get a little bit of upside as that grows. So as their group grows, you're going to get a little bit. So you get a little taste of that with the DPO and that's kind of why it's become a little bit more popular over time. You're going to still retain some of your profits, but you'll get a little taste of the growth with the DPO. 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So let me ask you this, Dr. Spencer, how do the services compare to a DSO? So if you're working in a DPO, are you still getting the benefits and services that a DSO provides? That's a great question. And I think that, not to speak for all DPOs, the ones that we've seen most of the time offer their services at a small cost or at some base cost for that. But that's probably unique to every DPO. And so you'll find... uh versions of that throughout but what we've seen is that oftentimes there will be a cost for services uh after that and that'll be a small cost to the business okay so before we get into the dpg what's the motivating factor for a dentist who's looking to exit or sell his practice to choose between a dso and a dpo i think um you know taking money off the table right now If you compare this to a similar model out there where if you're a solo practitioner and you're growing your business, one way to... you know, earn money or earn money out of your business that you've created is to take on an associate and have that person purchase a percentage of your business. Say they purchased 25 now and then another 25 later, and you're taking money off the table, right, out of your business as it's growing. And hopefully by partnering with that associate, you've grown your business more. And if you take on another associate, so that's the classic way of doing the solo practitioner, growing through the associate model and then eventually selling out. This is similar to that, right? Except with a DSO model, you're really selling out right now. You're taking full advantage. One benefit to the DSO, they're probably going to give you the highest possible valuation, right? Because they want your business. They can turn that for a profit after they do that. So they're going to give you a higher valuation. They're going to give you more up front. So for a doctor who's maybe closer to retirement and is comfortable with working for another business. DSO is probably a good fit for that. Right. The DPO model, on the other hand, is, hey, a little bit of both. Right. You're probably going to take some off the table now. So, hey, I'm in a position. I've grown my business. It's successful. I want to take some money off the table. I still want to, you know, hopefully do things the way I'm still doing them. And and here's this company that has a well established pattern of of being able to, you know, give back to their partners. And we're going to go. And also, by the way, I get. participate a little bit in that in that multiplying growth um so a little bit of my business will participate in that and you'll see some and if they go and and grow uh their business you get to participate in that as well if that dentist that chooses dpo who still owns part of the practice decides okay next month I've had enough, I want to sell now. Are they restricted based on the contract typically with a DPO that they have to stay on for a certain amount of time or can they exit at any time they want and maybe pay a penalty? Their business is going to have some type of contract work back for sure. Again, because they're investing in you with a decent amount of money up front. Right. So there's always going to be some type of covenant to work for some period of time. And then after that, you're free to do what you want. But there's always going to be something there. Right. OK, so let's go to DPG now. Yeah. So a dental partnership group. And this is takes the hybrid model and kind of refines it even a little bit more and puts. the favor back in the private practice, you know, owner's hands. So a DPG will categorize as a group that is growing similar to these other models. However, they're only going to take a minority partnership stake in your business. Okay. So you as the dentist will still own at least 51%. So for most of these, we'll see somewhere between a deal done with 20 to 49%. And we are sharing in the revenue after the expenses have been paid. We're sharing in that percentage revenue. Now, in most DPGs, a lot of the doctors that we've seen that join DPGs will choose to have that money that got exchanged at the time of the deal. Let's say it's 60-40, but now the dentist owns 60% of his or her business still. and the DPG has 40%, there's no change of the corporation or LLC. So that's one key factor. There's a big benefit there. You're not a W-2 employee. You still get to use your pass-through entity to do your taxes the way you want to do it there, right? And so there's a big advantage of not selling away your corporation at that point. And so in the 60-40 split where the dentist has 60 and the DPG has 40, after expenses are paid, then you're splitting in that revenue. Right. Forty percent is going to go to the DPG. Sixty percent stays with the dentist. Right. There could be workbacks potentially. But again, since the dentist is highly motivated to still be he's still the primary owner of this business, they're still incentivized to produce in their business because they're going to take the most out of it. And they're kind of what is nice about this model is both the DPG wants to grow. And they grow because they partner with more and more practices. But the dentist gets to continue to grow by growing his own business and sees the profit that comes from that. Yeah. And what's the exit strategy for the DPG doctor? Well, so a DPG, again, along with some of these other DSO and DPO model, the DPG itself has the opportunity to grow as it partners with more dental practices and take on future equity partners that might be private equity money, other DSOs or other groups. So when those people invest in this company, the dentist who's participating in the DPG also gets to participate in that based off their percentage ownership. in the dpg right so now you're getting a little bit of best of both worlds you still get to private run your business like a private practice without people interfering um in there and then at the same time ride the wave the upside wave of a partnership group doing that now that exit might be different for every group right some may be close to to doing uh some type of capital or equity event uh in the next couple years we see that with a lot of dsos dpos and dpgs as they grow they'll take on financial partners And people will participate in the profits from that as they grow. So once you're a partner in the DPG, you get to participate in the growth of that DPG. Right. But if I have a five-year runway as a dentist, I'm looking to work five more years. And after five years, I don't want to practice anymore. How does the DPG dentist contract allow me to retire in five years? And what happens to my investment? Yeah. So in the ones that we've seen so far, oftentimes the DPG will have potentially first right of refusal to buy the rest of that practice at that value, right? So if the dentist is ready to go, hey, I've done my thing. I helped grow this and now I'm ready to get out. The DPG wants to ultimately take that over because there's a lot of value in that. Hopefully over that time, there's been a strategy put in place both by the DPG and the dentist to put somebody else who's going to come into that, right? And continue that on. And that may be the dentist part. So do you think the traditional solo or small group practice in dentistry will go the same way as did? The solo and small group medical practices? You know, I get asked that a lot. And my first feeling is dentists have done a great job of kind of like avoiding the mass consolidation to this point. I don't think it's going to happen overnight. I don't think it's happening in the next year or two. I think we could probably fast forward 10 or 20 years and see a lot of consolidation. And so, yes, I do believe it's going to happen. Is it going to happen to the extent? of medicine. I mean, medicine has hospitals, right? You know, so that kind of, and naturally groups form because of those things. You don't see a lot of that in dentistry, but we're seeing massive, massive trends right now going that direction. We often talk with doctors and kind of share the idea. So ADA said in 2020, this is just pre-pandemic, that by 2030, so in the next 10 years, There's about 180,000 practices nationwide. 100,000 of those would most likely go through a change of ownership in some way due to the demographics of dentists, a lot of other factors happening on that. So if the majority of the businesses out there are going to go through some type of change in how they're doing it, and the more momentum groups get, they're going to be a big, big part of that, right? We were low teens. Five, six years ago, we were low teens in terms of percentages of groups owning dental practices. Now we're high teens, almost to 20 now. And that's just in the first few years. 20, 30 years before that, it was very, very low. And now all of a sudden, we're seeing this uptick. So everybody feels it. I think that's one thing for sure. We can't avoid the feeling. I'm 42 years old, and I'm seeing a lot of my colleagues join some type of group in some way or another. right now. And I'll go to a dental meeting and everybody's talking in one way or another with a group, whether or not they're going to join it or not, and what's the benefits of this one and that one and the other thing. So it's a really hot topic. And yes, I do think the momentum will carry us there. I'm not on board with the idea that we're going to all be practicing for a corporation in 15 years. I just don't think that's true. There's going to be plenty of room for dentists to still run private practices. The question is, Do you want to do that? Do you want to keep doing your own thing? Or are there benefits to groups that you could take advantage of and still do your own thing? Without a doubt. We're in a lot of these different groups now. Yeah. And I think COVID, the whole pandemic drove some of those dentists to start rethinking their strategy long term or even short term, whatever you want to call it. Yeah. Because, yeah, the regulatory burdens that a dental practice undergoes is just. really stunning. And for them to focus on clinical dentistry and then worry about all the other facets of dentistry, which is, you know, infection control and HIPAA and just, there are so many things, HR, insurance, liability issues, and so forth. There's a lot on their plate. And some of these dentists are just saying, you know, I didn't sign up for this. When I went to dental school, I wasn't really even trained on most of this stuff. And the financial part of the business is also... big part, marketing a practice and so forth. Let me ask you this. Is a dentist missing out if he or she doesn't jump on the bandwagon now? Or for that particular dentist who wants to stay in the entrepreneur realm of practicing dentistry, is it better just to continue as an independent dentist and grow their practice that way? Yeah, that's a great question. And I think that's unique to every dentist because I think there's a whole lot of different mindsets for dentists. There are very entrepreneurial dentists, right, who want to grow their own business and then have multiple locations and do all those things. And, yes, you can do that on your own. I did that on my own for a few years. I had multiple locations, and it burned me out, right, having to do all that. And so if you're entrepreneurial -minded and you see where the momentum is going, Jumping in early with a group where you have support, capital, other things where if you want to be entrepreneurial, hey, go acquire a bunch of practices and do it with a group behind you. Doing it now and riding that wave while it is hot, it's moving that direction. Healthcare is an incredibly profitable business to invest in. And dentists do it well. So that's why there's these opportunities out there. So yes, is it a good time to do it now? And could you potentially miss out? It's just like anything else. As a group grows, your ability to have a larger equity stake in that group diminishes as that group grows if you join later. Does that make sense? Because your equity stake in that could be smaller, smaller, smaller if you wait too long. So the short answer is yes, you could miss out. But I don't want to say every dentist, it may not be for every dentist either. So I don't want every dentist listening and saying, God, I got to join a group. If that's not for you and you just love doing your own thing, being your own manager and running your own small business, stick to it. You got a long runway still. It's not going to be next year that somebody is going to be banging down your door to have to make you change. But I think the opportunities are great right now. Dr. Spencer, thanks very much for your insight. Excellent podcast. It's certainly good to know that dentists have more options throughout their career as far as taking some money off the table and planning an exit strategy and also benefiting from the services from these corporate entities and also benefiting from the growth of these corporate entities. If you want to find more information about Dr. Spencer's company, the website is sppdental.com and on Instagram at SPP Dental Partners. Again, Dr. Spencer, thank you very much for your time. Thank you, Bill. Pleasure. 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