I’ve had several conversations of late with orthodontists interested in joining or starting DSOs. They want me to advise them as to how to proceed in any number of variations on a deal that makes them part owner of a DSO. They tell me of “incredible opportunities” to “get in on the ground floor” with DSO startups as the resident orthodontic authority. They regale me with “awesome scenarios” and “once in a lifetime chances” where they plan to join an established DSO who “knows how to do pedo/GP and just need an orthodontist.” These conversations have always been a part of my life but of late it seems to happen several times a week. The upshot being that as I have gained perspective I think I’ve come to a better understanding of the real question and can finally give some decent advice.

Let me start by saying what I tell all those who question me about starting and scaling a DSO: I tried to do exactly that and failed. More than once. As I have mentioned on OrthoPundit numerous times. I also am in the process of building my one and only office where I will be the one and only orthodontist working only three days a week for as long as I own said office. The point being that I may not be the best person to advise someone on how to have success in the DSO space. I do, however have some insight into the DSO phenomenon and the wider dental landscape as I discussed a few days ago.

So let’s cut right to it. It’s a matter of what you want. I used to think I wanted to grow a DSO and sell it for 100 million dollars. I knew several people who wanted the same thing and we all talked about it among ourselves and with others in the field. I actually met one or two people who told me they sold for more than 100 million and one even told me he was sure I could do the same… That being said, I’ve never known anyone who was able to accomplish this lofty goal – or even get half that much for their practices. I’m not saying it doesn’t happen, I’m saying it’s not that common. DrBicuspid put out this article the other day and it got me wondering how many DSOs are out there with more than 100 locations. I bet it’s not more than a few dozen and that may seem like a lot until you think about all the people who have tried to scale a DSO! The odds are stacked against any given group practice hitting the big time no matter how you slice it. And the DSOs who have had massive success have taken decades to do it. Now, there are some fast-growing DSOs in the orthodontic space these days and they may blow the curve when it comes to how things have been done in the past but only time will tell. These rollups are like a game of musical chairs and at some point someone will get left holding the bag. Just make sure it’s not you!

This brings me to the title of this piece and the answer I give now when asked a question like “Should I join this DSO…” It basically comes down to what you want out of life. If you want 100 million dollars then you’ll have to do something big, on a grand scale and take big risks. You’ll have to make sure you get significant equity that can’t be diluted in a company that is relatively young, well-funded, growing fast AND you’ll have to make sure someone doesn’t take your equity from you along the way. This is the big risk, big reward scenario that is so sexy at first glance but it is also the game that will suck the life out of you, leave you with no time for family and stress you to the max. And all that may be worth it to you.

If, on the other hand, you’d like to end up with 20-30 million dollars in the bank without working yourself to death then you might consider taking the boring old owner-operator path. You can easily produce 4-6 million a year, put away more than a million bucks a year in a defined benefit plan (or some other deferred taxation vehicle that fits you) and a captive insurance company while seeing patients 4 days or less a week and having plenty of free time. If you do this for 10 or 15 years and don’t do anything stupid, it doesn’t take a mathematician to see where you’ll end up. Seems pretty obvious to me these days but I wish someone would have told me all this back in 2004 when I graduated orthodontic residency!

Such is life. It seems I have to learn everything the hard way.

4 thoughts on “20 Million or 100 Million?

    1. What is a captive insurance company investment? Nice post!

      1. I’ve asked Peter Strauss to answer this. He literally wrote the book on captives.

      2. Thanks for asking!

        A captive insurance company is your own insurance company. An organization that has a substantial amount of insurable risk establishes a captive insurance company to insure the risks of its owner. The company pays insurance premiums to the captive rather than to an external insurance company. If premiums exceed claims, the company can recapture the excess – that is, the profit. Meaning you keep the profits.

        In addition, the premiums paid to a captive insurance company are deductible to your operating business, just as any other insurance expense. For companies with large insurance premiums, that can create substantial savings compared to simply self-insuring. The premiums collected by the captive are tax-free up to $2.2 million annually, and indexed for inflation. Currently $2.3 million!

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