The DSO Premium: Is the Higher Multiple Actually Worth It?

But the premium should not be treated as free money.

A transaction price is only one part of economic value.

The rest may include cash at closing, rollover equity, earn-outs, employment compensation, restrictive covenants, transition obligations, and the economic value of control the dentist is giving up.

The first distinction is between cash and contingent value.

Cash at closing is certain subject to closing conditions.

An earn-out depends on future performance and contract terms.

Rollover equity depends on the value and eventual liquidity of the retained interest.

Those are different assets and should be valued differently.

The second distinction is between price and control.

A dentist may receive a higher price while giving up meaningful discretion over staffing, purchasing, technology, marketing, compensation, scheduling, and growth decisions.

That does not make the transaction bad.

It changes what the dentist is selling.

The third distinction is between practice value and personal career value.

A DSO transaction may include a future employment relationship. The dentist should therefore model not only the purchase consideration but also expected post-close compensation, time commitment, performance requirements, and career flexibility.

A thoughtful DSO analysis should compare at least three scenarios:

1. Sell to the DSO. 2. Sell to a traditional private buyer. 3. Continue owning the practice for a defined period.

The third scenario is especially important.

The correct alternative to a DSO deal is not always another buyer.

Sometimes it is keeping the asset.

Once those three scenarios are modeled, the premium becomes easier to evaluate.

The right question isn’t “Who offered the highest price?”

It is:

“Which path creates the highest risk-adjusted lifetime economic value for the dentist?”