DSOs, Do Your Dentists Understand the Equity They Own?

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If not, it won’t retain them.
Here’s a to-do list for aligning incentives.
By: Roshan Parikh, DDS, MBA

Close your eyes for a moment, and imagine a dentist who recently sold his practice and partnered with a DSO. He has equity in the DSO, but if you were to ask him what it’s worth, he wouldn’t be able to tell you.

Compare that to how much he knows about his investment account: $130K invested over five years, now worth $190K. His GOOGL stock closed up 2% yesterday, while his AAPL closed up 3.5%.

That level of insight is a total mismatch with the reality of his financial situation. Because unlike his investment account, the dentist’s DSO equity is likely his second largest asset after his home, often worth between half a million to a million dollars. 

Now open your eyes. Is that partner dentist part of your organization? If so, you may have a problem.

Dental rollups depend on recruiting and retaining top talent

Let’s take a step back. Despite an unstable economic environment, consolidation within the dental industry is continuing at a breathtaking pace, and rollover equity structures have become the industry standard. These are deals that allow the owner of an acquired practice to transition some of their existing equity into the acquiring business. The goal is to ensure that a sale isn’t simply a cash-out, and that the selling dentist stays on and still has skin in the game, rather than simply checking out or departing afterward. 

But all too often there is little communication around what “equity upside participation” actually means: that is, the selling dentist’s share in the wealth generated if the acquiring business increases in value. So it’s no surprise that selling dentists rarely understand it. They have a more thorough understanding of their investment accounts, even though they’re probably worth far less.

This is a major risk for DSO platforms, who need to not just retain but positively influence the behavior of their dentists to keep existing patients and attract new ones. Patients have a significantly higher probability of staying if the dentists they know and trust with the long-term health of their mouths remain in their positions. This applies not only to senior dentists whose practices were purchased, but also to junior dentists on a partner track that are brought in to help grow the businesses. Retention of top clinical talent is a DSO’s biggest driver of success or failure. When dentists turn over, patient experience is eroded, and that kills enterprise value.

So how can DSO leaders align their interests with those of their dentists, especially when dentists can be skeptical of working in bigger and more impersonal-feeling environments? A dentist who grew a small group practice over decades may not immediately feel the same fire to grow a regional or national DSO that already has dozens or hundreds of locations. As a result, she may be tempted to leave for another role in a more familiar setting, taking her hundreds of loyal patients with her. 

Equity retains dentists, but only if they understand it

The obvious solution is shared ownership: giving dentists upside participation in the success of the DSO allows them to benefit from its success, aligning their and the organization’s incentives. At least, that’s supposed to be the solution. But in practice, equity and its alternatives, such as profit interest units (to name just one other instrument), are hard for dentists to understand and factor into their compensation projections. They have to sort through jargon, complex spreadsheets, PDFs loaded with fineprint, and often the costly counsel of their personal lawyers to establish a working knowledge of an offer’s value, and then again every time they want to check on the value of their positions.

If dentists don’t understand what they own, then ownership loses its value as an incentive. Dentists who sell their practices may feel like they’re giving up their life’s work, not evolving it; and the financial backers of the acquisitions may feel like their money is swirling down a spit bowl, with no assurance that the practice’s most prized asset, its clinical team, is going to stay, let alone outperform.

It’s a lose-lose-lose since that dysfunction is ultimately passed along to patients whose care is negatively impacted or entirely disrupted.

Transparency aligns clinical and leadership incentives

There is a filling for this cavity: transparency. Dentists got into their profession to help people, not manage wealth; they chose dental school, not business school. They need clarity, not jargon; simple platforms, not spreadsheets and PDFs that intimidate them. And more often than not they need education. Even when a DSO’s leadership team is communicating with off-the-charts clarity and concision, there are still terms that need to be defined, and projections that need to be outlined, to make equity feel like a valuable and inspiring asset, not an inaccessible and risky abstraction.

Here’s a to-do list for DSOs looking to align incentives: 

1. Talk to your dentists. See if they actually understand what they own, or if they’re equating salary and total compensation. If they don’t know what their stake in the organization is worth, you may have a long-term issue with retention and performance. 

2. Educate them, as humanely as they educate their patients about the need for scaling and root planing to avoid the long-term risks of periodontitis. Remember: they love dentistry because they love people and working with their hands, not because they love financial tools and corporate forecasts. Meet them where they are, though of course without talking down to them.

3. Check in with them afterward. Schedule one-on-one conversations. Run internal satisfaction surveys. See if your investment in education changed their investment in the growth of the practice. 

4. Change the way you onboard. Use the insights you’ve gleaned to revise how you talk about bringing on prospective dentists at prospective practices. Welcome them into the process of putting patients first, by putting dentists first, by using equity to make dentists a part of something bigger. 

To get started, I recommend using a resource that Pulse Equity put together.

 

 

Pulse is a platform for equity management, specializing in dental and medical practices, that seeks to make the process transparent, simple, and genuinely incentivizing to increase dentist acquisition and retention. Their “Demystifying Equity for DSOs” explains all of the concepts you and your teams will need to know, and gives clear, compelling examples.

 

 

About the Author: Dr. Ro is the Founder and Chief Strategy Officer of DSO Strategy, LLC. He previously served as Head of Dentistry for Walmart, U.S. and was Founder of Great Lakes Dental Partners. He has been practicing dentistry for 15 years.

 

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