14: JV DSO's

Welcome to DSO Secrets. I know what it's like to be an entrepreneur in the dental industry. I've had my ups and downs just like you. There's so much opportunity to be excited about, but so few resources to get answers. From here on DSO Secrets, we get you those answers so you can change the lives you're meant to bless and achieve your personal success.

When I was working as an associate rat at a school, I never imagined I could own these many practices with this amount of support. So thank you.

You have helped build my marketing mind

to a whole new level. You have this natural talent, this unique ability.

Hello everyone, this is your fearless host, Emmett Scott, and I'm so glad to have you here on another episode of DSO Secrets. Now, last week I talked a lot about the different financing options that are out there, and I want to dig into one specifically, which is partnering with other dentists or non dentists at the practice level. But to do so, I first have to kind of talk about the DSO structure and how I would do it. Ideally would be using what I call a sub or JV DSO structure. Now, if you've listened to my other podcasts, you know that I believe that having the DSO mindset is critical if you want to grow and scale your practice. I don't like the terms multi practice or group practice because I think they put you into a mindset that is more about the number of locations you have versus using the concept of a dso, which is about being a dental support organization. And if you're a dentist who only plans on you being the only dentist in an office for the rest of your life, then none of that matters. But the day you hire an associate, I believe your mindset around how you're going to support them, even if it's just for your one location, is important. So today I'm not going to talk though so much about DSO mindset as I am about DSO entities and how you set up the entity in such a way to maximize your financial interest and your ability to support the mindsets that we've talked about in DSO Secrets. So, first of all, what is like a DSO entity? So when you look at a practice entity like a PLLC or a pa, one of the things in most states that you'll notice is only other dentists can own that entity, which is fine as long as you are going to only partner with other dentists. And there's some pros to only partnering with other dentists. First of all, it's a lot easier because you're just in One entity structure, you have to figure out your operating agreement within that PLLC or pa, but it's just that one entity, there's very low regulation issues to regulatory issues to worry about. If two dentists partner, no one really cares and they don't think that there's going to be a lot of misalignment that could happen. At the clinical level, we which is another pro is that you can get alignment there at the clinical level, expecting that partnering with another dentist that they have a good perspective on patient care and that aligns with your great perspective on patient care. That might be a big assumption. But let's say in theory that that is a pro, that the two dentists have an easier time aligning the than maybe a non dentist and a dentist. Some of the cons, probably the biggest one is if you're only partnering with dentists, eventually if you ever want to exit, you'll only be able to sell to other dentists and other dentists don't have the capital that some non dentists do. So when you think about having built out 10 locations, then you want to sell to another dentist, it's going to be very difficult for that dentist to raise enough money to pay you for those 10 locations versus a private equity firm or other non dentist entity. So partnering with non dentists, you know, the pro is they have a lot more sources of financing, they can frankly just access more capital and, and oftentimes they bring a different expertise. So you might argue that it's actually easier to get alignment with non dentists because you can divide and conquer. You can say, listen, I'm the dentist, I'm over the clinical. The non dentist says that sounds great, you're over that, I'll be over hr, it, marketing and those various components and then you get alignment on where both parties need to be touching stuff. So in some ways that can be simpler, others might perceive that as more complicated. Probably the biggest con with partnering with non dentists is there is a lot more regulatory components to figure out around your entity structure. And let me just say up front that I am not an attorney and this is not legal or, or accounting advice that I'm providing, but just based on my experience in organizing a DSO and what we're going to be talking about today is a JVDSO structure joint venture dso. So typically you will go to an attorney if you want to partner with a non dentist and you will get a set of documents that work for your state and determine the right fee structure that allows you to provide services to the practice and then charge that practice a fee that then is brought up from the PLLC or PA up into an LLC structure. And what that allows is now the non dentist can be equity owners or can invest in that DSO in that LLC structure that is supporting the PLLC and pa. And that opens up the doors for you as a dentist to open up more locations to provide more access to care. Because you now have a way for non dentists to participate without them impacting your clinical care or your clinical entity. So that's a very basic perspective on DSOs. And what I want to drill down on is that you can actually use that structure to partner with other non dentists or with dentists at an individual location level. So let me give an example. Let's say that I have a dentist who wants to open up a location with me and they're going to put in half the money. And I'm going to put in half the money. They want to partner with me as a dentist because I have experience in money as a fellow dentist. So these are two dentists partnering together. We could just open up a PLLC together and each own it. 50, 50. But what would be better is to set up a LLC with a DSO arrangement so that Both of us were 50, 50 partners up at the LLC or DSO level. Therefore, later on we can sell that entity to a non dentist. Now, if I am the primary dentist organizing this structure, I can then go through and do this with multiple dentists along the way. And I can even set up a parent DSO that is an entity that owns my 50% with all of them. So over time, as I build out practices, I have dentist partners, each of them 50% partners with me or whatever percentage you work out. And then I have built up over time an interest in multiple locations. I can then sell my interest to a non dentist. They could sell their interest to a non dentist. The practice level would always have to be owned by a dentist. But the DSO or JVDSO entities could be sold or be participated in by non dentists. So you think, well, you know, is that worth it? You could wait and do that near the end of an exit. You could do that along the way. Either way, where it really comes in to benefit is if you're ever partnering with a non dentist. So let's say that someone says, man, I'd love to open up a practice with you, but I'm not a dentist. You say, well, you can't open a practice and own the practice with me. However, we could set up a DSO for that practice and you could invest in that, that could then loan the money to to the practice and we could have a fee structure in place as you provide services or as that entity provides services to the practice that allows you to then pull up those fees and participate in the income of that dso. By doing that, I open up the door for friends, family and other investors who can only maybe participate at one practice location to start being a part of my dso, growing and scaling, but doing in a way that I'm not having them invest in the parent dso. So hopefully this is clear. It's hard without a whiteboard to create all of the entities in your mind, but hopefully you see that you could have a parent DSO and then under each of the or over each of the practices as you partner with different individuals, whether they're dentists or non dentists, you can have these JVDSO structures. Now, do you need an attorney to help you? I would highly recommend that you have an attorney to help create that structure and there's many out there that specialize in this to make sure that you do it well. The other thing that I would say you need is a good CFO who is moving the money in a regulatory compliant way. Otherwise you can, you can run crossways with regulatory items even if you have the right structure in place. But the big benefit of creating some of this, and it can feel complex, is that you now open the door to bridge the gap for additional financing to come in to allow you, as you move from 1 to 2 to 5 to 10 to 20 locations, to partner with more individuals, both within dental or those who have an interest to be in the dental space until you reach a mass where it's appropriate to have private equity be an investor. So hopefully this is helpful. If you have questions or want clarifications, please join us on our private Facebook group @DSO Secrets. Love to see you there and appreciate you listening. Until next time, keep smiling. Thank you for listening to DSO Secrets. Join our community on Facebook @DSO Secrets and get answers and resources to some of your most challenging questions. If you want to get a copy of the seven secrets of any DSO, go to our website at dsosecrets.com and we will get that emailed to you. Remember, don't go at this alone. Let us be your team while you build your team.