Building a sustainable DSO begins and ends with trust.
By Jeromy R. Dixson, DMD MBA
The key to building a sustainable DSO is trust. Pretty cliché, right? While that might seem like the obvious ingredient to building any business, earning trust is critical to accomplishing organizational goals and ensuring that you, as the leader, are granted the ability to lead your team. It’s difficult to establish trust in working relationships, and it’s even harder to build a sustainable company once you lose it.
Building trust within your DSO
With acquisitions, you are typically affiliating whole practices into your organization, with them adopting your brand identity and your team’s culture. This process requires an enormous amount of trust on the side of the affiliating dentist/practice, and it is something all DSOs should take very seriously. It’s all about trust, integrity, building rapport, and building working relationships that benefit everyone involved in a simple, aligned structure. Many times when you are affiliating new practices, these doctors are seasoned and are looking for an exit strategy. You must always deliver on your sales pitch and not overpromise/underdeliver, but if you’ve only been doing this for a few years or you are much younger than them, you must first earn their trust.
The way to accomplish this is to construct your DSO with a compelling and inspirational mission, vision, values and culture. When you have a compelling vision for the future of dentistry, it gives doctors and practices something to join in on that will improve dentistry while also taking care of their teams. The only caveat is that you must deliver on your vision. If you don’t deliver on it, the trust they have in you is gone forever. It’s tough to get that back (if not impossible), both from the doctor and the team. So, you need to start with a vision that allows for others to trust you and give you a chance. If you do it right, you will be able to use those practices as references and leverage those references into more business.
Another key component of your organization trusting the new affiliate is to conduct proper diligence. This ensures the new acquisition is a great fit for the organization. A well-constructed system of questions about the dentist and the practice will help ensure there are no surprises post-acquisition, eroding trust. Also, another simple diligence hack is to investigate some primary elements of their procedure mix. The most important things to look at initially are the percentage of revenue from hygiene, and the percentage of revenue from crowns and fixed prosthodontics. Crowns and fixed prosthodontics tend to drive practice revenue and profitability up or down, depending on whether they are in normal ranges. If they are significantly higher or lower than 25-35% of a practice or group’s revenue it will require additional diligence. I also look at the percentage of the overall revenue from hygiene, hoping for an opportunity or as a signal for over-treatment. If the percentage of hygiene to overall revenue is under 25-35% it likely indicates an over-treatment planning issue, while a percentage over 25-35% likely indicates under-treatment planning and a significant revenue-increasing opportunity post-acquisition.
Three pillars of a solid DSO house
Building a sustainable, investable DSO while maintaining trust might seem like an insurmountable challenge, but it is possible.
My favorite way to illustrate the key components of a sustainable, investable DSO is using the analogy of a “DSO house”. Picture a very simple, basic house or structure that has a solid foundation on the bottom, a robust roof on the top, and three major pillars in between holding up the roof from the foundation.
The foundation of the DSO house symbolizes your mission, vision, values and culture. A good foundation in a house is the building block for all the rest of the house, ensuring that infestation or erosion from elements or pests does not occur. Mission, vision, values and culture, when safeguarded and protected from negative external influences, can be the protection and foundation for your company. For these things to act as the foundation of your business, you need to ensure that they are embedded into every part of your operations and culture. It needs to be compelling and unifying. What binds everyone together? What gets them to work and gives them meaning beyond their paycheck? When you don’t have that dialed into the foundation of your organization, it can create a lot of dysfunction within your DSO. Alternatively, when you have your mission, vision, values and culture woven like a beautiful tapestry throughout every element of your organization, you have created the foundational element of excellence and sustainability.
The three major pillars of your DSO house are clinical leadership and excellence, a synergistic management team and the right financing. When these three pillars are in place, coupled with a solid foundation and a strong, protective roof you have the ingredients for DSO success. Let me explain more about these major pillars:
1. Clinical leadership and excellence
Clinical leadership and excellence are crucial to the success of your DSO. This is the number one thing that you need to ensure quality dentists and patient care, and it’s the one that most DSOs lack or don’t really understand how to create. You must develop leaders within your organization and give your dentists a clear career path with attainable goals. Every DSO struggles with the same issue: How do I find the best dentists? How do I keep them? How do I improve my clinical quality? Improving dentist and employee retention, as well as increasing opportunities for personal and professional development, are key to overcoming this struggle. Employee engagement starts with your DSO foundation and clarity around a long-term career path with your organization. The leadership must engage with your dentists, listen to them and offer career development opportunities that will enhance clinical performance.
2. Synergistic management team
In addition to clinical leadership, you must have a synergistic management team in place working to support and enhance clinical operations. The synergistic management team includes several roles that are working together towards the same goal, and each position should ideally have different strengths. The CEO is typically the inspirational, visionary leader with a broad skillset, and the COO is likely to be process and systems focused with a keen eye for talent, oriented toward execution and team accountability. A CFO who understands dental operations can be extremely helpful, while a PC President, or a CDO/CCO who connects with and manages your dentists proactively, ensuring they are heard may fill out some of the other key areas of your management team. When the management team is properly constructed, with complimentary skill sets, financial alignment and one clear goal, the sky is the limit.
3. The right financing
The right financing or investors are instrumental to the success of even the most well-conceived DSOs. First, a best practice is to forge a relationship with traditional banks (regional business banks tend to be the best first option) and work to establish a lending roadmap for organizational growth. Instead of boldly declaring that your organizational goal is “I want to have 50 practices,” which may scare them off, explain to them that you are growing a group dental practice and focused on setting all of the correct pieces in place to ensure success. Bankers are risk-averse by nature, but if they understand that you have a solid plan they’re more likely to partner with you and support your growth plans. Building a mutual relationship of trust with a financial partner is the best way to ensure that you have the funding needed to achieve your business goals. Once you have gone as far as traditional banking will take you and you want to continue to grow your DSO, private equity or family office investors can be a good option to pursue additional liquidity and growth. The key is to work with a trusted advisor who understands how the investor process works and ensure the fit is right, not just the financial terms of the deal.
The roof of your DSO house symbolizes protection from external elements and disruptions that will erode and destroy your DSO: simple, scalable, and efficient. These protective words are an important test against every new initiative, business process change, new hire, etc. Every decision that is made within the organization should be congruent and aligned with the “simple, scalable and efficient” mantra. If a decision is not congruent with any one of these things, it should be rejected in favor of only items that are aligned with simplicity, scalability and efficiency.
If you’re running a budget or any other decision through your organizational model, it needs to align with the foundation of your mission, vision and values, and meet the criteria of being simple, scalable and efficient. The foundation and the roof of your DSO house will be the protection you need to ensure trust with your teams and organizational consistency as you scale up.
Retaining a winning team
When I operated my initial DSO as sole owner from 2010 to 2013 (and with PE partners until 2015), the current trend of joint venture options where doctors have the ability to obtain equity at the clinical entity level or the DSO level didn’t really exist. Around 2010, I saw the need to do something beyond just having dentist employees, so I instituted a hybrid approach, where there was a profit-sharing partnership career path for my best dentists as an incentive to allow them to feel like a partner and share in the profitability of their practices.
While my initial approach was effective 10 years ago, the DSO landscape has evolved sufficiently in the realm of dentist partnerships with DSOs to the point where I believe that every DSO must have a true equity partnership option at the DSO and/or clinical level to ensure retention of the best dentists. Every DSO I’ve been a part of architecting or as a Board Member since my first DSO has included a true equity partnership option for top dentists. Most often I see top DSOs offering flexible joint venture options, both in terms of DSO-level equity and in clinical equity when offered.
Another part of a winning retention strategy ensures that you hire the right people for the job, ensuring a fit with your organizational foundation. As a best practice, I asked potential job candidates about their plans for the next 5 to 10 years, and I found that most people are pretty honest about what they want for the future. If a dentist said that they wanted to work for me for a few years and then open their own practice, I would immediately (but politely) let them know that they aren’t a fit for my organization, but that I would support them and help them find the right job for them. It’s important to remember that when you are looking to build something sustainable, you must have dentists that will align with your vision; in other words, they are committed long term. At this point, a clear career path with a joint venture or partnership option is a must have in your organization if you want to recruit and retain the best dentists.
Getting the right people and dentists in your organization from the beginning, ones that are connected to you and committed long term, will help you build a better culture, a better team and a sustainable DSO.
When you properly architect your dental group using the basic concepts of the DSO house, you have set yourself on a path to ensure trust with your teams and new affiliates, you will minimize the conditions for over-promising/under-delivering, and you will have set the correct conditions for a sustainable, investable DSO.
Jeromy R. Dixson, DMD MBA serves as CEO of The DSO Project where he is responsible for the overall strategy, design and implementation of consulting services, and provides overall guidance for clients. Additionally, Dr. Dixson is CEO of Dental Capital Partners, a healthcare-focused M&A Advisory Firm where he advises private equity investors and DSO’s. He also works as a trusted advisor on PE-backed DSO boards and dental-focused Advisory Boards.
Dr. Dixson is a three-time INC Magazine 500/5000 awarded entrepreneur, Former CEO Member-Board of Directors of The Association of Dental Support Organizations (The ADSO), and Former Member of The ADSO’s Membership Committee. In 2019, Dr. Dixson was also named to Group Dentistry Now’s Inaugural ‘DSO Influencers to Watch’ List.