Understanding Key Differences Between Dental Service Organizations and Orthodontic Service Organizations

Bruce Bryen, CPA, CVA
Bruce Bryen, CPA, CVA

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. He is also a financial writer for several dental journals. You may contact him at 609-502-0691 or at Bryenb@baratzcpa.com.

There are several differences in dental service organizations and orthodontic service organizations.

Comparing the Orthodontic Service Organizations to a Dental Service Organization

It was only a matter of time before orthodontic groups got involved with service organizations for some of the same reasons that general dental groups did. The ability to save money with overhead costs, find an exit strategy, and to be larger and more successful than in a single practice with 1 or a couple of locations became very appealing to orthodontic groups.

For the orthodontist, he or she thought that it may have been unprofessional to go ahead with a multi-practice group and with administrators operating the financial side of their practices. Just like the general dentists, some thought it was not the way they wanted to be viewed as a big business to their patients. When the general dentists learned about the cost efficiency, increased gross revenue, and having better exit strategies, they began to turn to the Heartlands and Aspens of the world for acquisition. As the orthodontists study what the dental service organizations (DSOs) are doing and how they see a large amount of money when another DSO acquires the one to which they belong, the orthodontists get excited. Besides the acquisition by a larger DSO, the general dentists see the initial public offering (IPO) and the stock of a public company as even larger pot at the end of the rainbow.

How do orthodontists learn more about the orthodontic service organization?

Having an advisor with some knowledge of DSOs and the startup, as well as the existing successful DSO is a big help to the dental certified public accountant (CPA) or financial advisor. Understanding the heartache of attempting to start up their own orthodontic service organization (OSO) based on their experience, management ability, and financial success is not a good way to be successful in this writer's opinion after seeing failures, frustrations, and delays with startup DSOs. The smart orthodontist knows who to hire based on that person's experience with dentists and seeing who succeeds and who does not.

A singular orthodontist who may own 1 or more locations may be very successful and have a reasonable amount of money for the startup, but if he or she listens to someone with experience, the learning curve will be more efficient with fewer mistakes along the way. There are so many unknowns, especially the amount of money needed and administrative know how of those in charge of "business side" of the OSO.

Stroking the egos of practice owners who have joined in is a major concern. Arranging for terms of supply cost, financing options, and the price as well as the terms for acquisition of the practices being observed to join the startup, can make or break the structure of the OSO group. Segregating the clinical and administrative side of the venture will be something new for the solo owners of the orthodontic practice attempting to being the OSO on his or her own. Knowing the laws of the state and how to structure the legal entity of ownership takes a lot of time and knowledge. It may be cheaper to pay an expert than to spend the time learning how to do these things on his or her own.

The successful OSO and its formation, map for success, and driving force.

The successful OSO had to be a startup at 1 point in time. It went through the problems with incorporation, growing pains of personnel problems, administrative choices, financial constraints, and the problems that orthodontic practices joining rather than starting their own OSO do not have to do. Not necessarily all, but some of the issues in the following sentences are listed so that those reading this article can think about the stress of money, personnel, and bureaucratic problems that cost the OSO time and money, as they did the existing successful OSO.

The first points are to consider for the orthodontist are the financial and administrative side of the organization. There are multiple points because the amount of money and the correct personnel are both important for the success of the OSO. Individual office managers and the orthodontist will not be able to operate the financial side of the OSO because their time will be taken with the clinical side of the practice. The administrative side of the practice should be properly run by businesspeople who may have dental backgrounds. The first practice may be the easiest, but once there is another, each prior orthodontist owner will have his or her own clinical and administrative models that have worked. These models may be different from each other's.

The third and fourth practices acquired will need a strong administrative team to prepare the model for the organization, set budgets, obtain lines of credit at the banks, amongst other important tasks. Without a well-versed administrative team, there will be chaos on the financial side of the OSO. The driving force for the acquisition of additional practices and finding the right location for them, will be those with the vision for the pot of gold at the end of the rainbow. Not just in terms of money, but also in terms of patient satisfaction. The money will come.

Bureaucratic necessities become a safeguard for the OSO as they are with the DSO

If the orthodontists think of the OSO as a business with committees and boards of directors, they will have a better chance at success. Individual practice owners may have a difficult time with this concept since they are used to making financial, personnel, and other types of decisions on their own. Now there will be groups to discuss important decisions with before those decisions can be implemented. This will delay things, but it will also force a more complete understanding of why, where, and how much the decision will cost, and how much it will be worth over the short and long term for the OSO. This teaches the orthodontists to be more business-minded in their planning.

Another change is that the OSO will want to report as much income as they can. There will be tax planning, different from the type that the orthodontist is used to in the sense that the larger OSOs and the IPO want to see big profits, easy to understand financial statements, and fairly large tax bills for the OSO or any flow to the individual owners. This is what a larger company with shareholders looks for in projected acquisitions.