Steps needed to start a DSO

October 27, 2020
Bruce Bryen, CPA, CVA
Bruce Bryen, CPA, CVA
Bruce Bryen, CPA, CVA

Bruce Bryen is a certified public accountant with over 40 years of experience and is a part of RKG Tax & Business Services LLP, an affiliate or Robin Kramer & Green, with offices in Marlton, New Jersey and Fort Washington, Pa. 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. He is also a financial writer for several dental journals. You may contact him at 215-641-8300 ext 123 or at bbryen@rkgcpa.com, or through www.Bryen-BryenLLP.com.

Capitalization, good advisers, and top-notch personnel make a successful dental service organization.

When a group of professional dentists with a reasonable amount of capital and available credit are interested in starting their own dental service organization (DSO), good dental financial advisers can show them how to organize and run the operation.

An alternative is for these dentists to buy into an existing DSO with its own issues, making an offer that includes their time, experience, and track records. It is much better to be on the ground floor of a startup as a founder. The price of starting a new DSO will be lower, which may be a prime consideration for the dentists.

There is a tremendous amount of work to get a startup DSO even to the point where certificates of registration can be filed with the appropriate regulatory bodies. The best-available certified public accountant (CPA), legal team, and internal administrators should be retained to have a strategic starting point and to not waste time or money with advisers unfamiliar with DSOs. These professional expenses are substantial but necessary so that the appropriate capital structure and key personnel are available from the outset. Many startup DSOs flounder because they go cheaply into the capitalization, hiring personnel with inappropriate experience and offering less-than-desirable compensation packages.

What are the steps needed for the startup DSO?

The appropriate amount of capital is critical, and experienced dental advisers should be retained to advise what amount is necessary to start. Hiring the right personnel based on experience and selecting incentive compensation packages to keep employees are also part of the initial steps. The first hire other than the professional dental team probably should be the DSO’s chief financial officer (CFO).

The founding owners should not make the mistake of hiring a chief financial officer and then having the CFO also act as an office manager. It should be assumed that the founding dentists know how to interview, hire, and compensate the dental team, including hygienists and dental assistants. A dental CPA or dental financial consultant may be needed to interview CFO candidates and to suggest incentives that these experienced personnel are used to seeing in compensation packages. This may be a change for the founding dentists, who likely are used to being totally in charge of their dental organizations, including personnel and work descriptions.

The chief financial officer and dental financial advisers also can bring insight into contacts with investment bankers, hedge fund operators, and venture capitalists, as well as lending institutions.

The organizational structure of the DSO

A dental CPA can help the founders with the DSO’s organizational structure, as well as properly capitalize the DSO and establish lines of credit. One of the first decisions is whether to organize as an LLP, LLC, S corporation, or other type of business entity, based on the DSO’s short- and long-term goals.

The structure of the business will enable outside investors and advisers to obtain access to the results of the operations in a less-than-complicated manner. For example, in privately owned non-DSO types of practices, the owner/dentist may try to minimize their personal income tax so that the dental office reports little taxable income and has a resultant small profit and little or no tax. For a DSO, this is a bad choice, if the goal is long-term growth. Outside investors and dentists who may want to acquire interests in the venture will have their own advisers analyze the DSO data. They will want simplified reports without long explanations about why this is not a profitable organization. The financial results of each dental office that is part of the DSO group should be available quickly for the owners and potential investors to review. The last thing an investor wants is to wait for a report; that makes it seem as though something is wrong.

Competition, ownership stakes and the flow of funds

The founding dentists will face stiff competition for key personnel and, once they are hired, should let them run things administratively. A good analogy is a professional football team purchased by very wealthy business people. They think that since they are so successful at running a business, they also must know how to run a football team. Interfering with the coach and general manager will reveal what little the owner knows about running sports side of the football team. A dentist who has a successful dental practice may feel the same way about running a DSO. But the dentist will learn very quickly that it is not the same thing.

If the owners capitalize the organization properly with experienced personnel, the DSO will be successful.