The momentum for dentists selling to a contracting with DPMs has been steadily increasing for a number of reasons. For one, DPMs are willing to make large up-front payments of cash and/or stock (or other forms of securities) as part of the sale transaction. Since pre-IPO stock can greatly appreciate in value upon a public offering, and since publicly traded DPM stock also may have great potential for growth, DPM securities represent a possible windfall for the recipient dentist. In addition, DPMs claim they can operate dental practices more cost-effectively than the dentist and rescue the dentist form the time-consuming drudgery of paperwork, hiring, marketing and management tasks. The promised result is that expenses will be reduced and the dentist will be able to increase revenues by putting more patients in the chair. DPMs also can provide the practice with capital to acquire new equipment or to recruit and train new dentists.
Typically, the DPM buys the stock or assets of the dental practice for what is commonly portrayed as a percentage of gross revenues, although this is not too far akin from the physician practice management approach of characterizing the purchase price as a multiple of the practice's earnings. Goodwill is included in the purchase price and the parties may choose to include or exclude accounts receivable. Generally speaking, goodwill is the difference between the fair market value of the practice's "hard assets" (e.g., equipment, furniture, leasehold improvements, inventory, supplies, etc.) and the total value placed on the business (not counting accounts receivable) as a going concern, and reflects the value of customer (patient) relations, reputation, and other intangibles which translate into earning power of the business being acquired. Where much of the furniture and equipment is leased or where its value is highly depreciated, a greater portion of the purchase price is devoted to goodwill.
As part of the sale closing, the DPM and the practice (or a successor practice in the case of a stock purchase) enter into a long-term management relationship whereby the DPM becomes responsible for managing the practice's non-clinical aspects and paying for the practice's ordinary expenses (except professional compensation), although it deducts such expenses from the revenues it collects for the practice. The DPM also receives a management fee for its services, often based on a percentage of either the practice's gross revenues or its net earnings, although formulas vary. Any practice revenue, which remains after payment of the management fee and practice expenses, is available for professional compensation. A DPM with multiple practices under management in a particular geographic area may be in a position to obtain managed care contracts collectively for such practices, thereby insuring more patients and generating more revenue for both the practices and, ultimately, for itself.
The underlying premise is that, although the selling dentist's net income is initially reduced by the DPM's management fee, the dentist has been compensated for that reduction in the sale transaction, and eventually the dentist will earn as much or more than before because of the management efficiencies, economies of scale and marketing opportunities offered by the DPM. For dentists feeling increased competition and time management pressures, the allure of cashing in and becoming free of the daily headaches of running a practice is strong. However, the arrangement is not without risk.
While DPMs are often well capitalized, the price of their publicly-traded stock has been volatile and varied. In some cases, the value of DPM stock has as much as tripled in value in less than one year while others, the value has sunk below its IPO price. The current shake-out in the physician practice management sector is a perfect example of the volatility and growing pains that are to be expected with DPMs. There is also a risk that the DPM's pre-IPO stock may become worthless if the company never actually does an IPO. This bull market cannot last forever. Most importantly, the transaction may not produce the long-term benefits sought-that is, practice and income growth-if the DPM lacks strong management abilities, or if the DPM is more interested in improving its balance than through a commitment to "same store growth" of the practices it acquires. If this is the case, the practice will have taken on a partner that drains revenues in the form of the management fee and adds nothing to the equation. For this reason it is extremely important to conduct a thorough "due diligence" investigation to determine if the DPM can deliver on its promises and to assess the DPM's corporate culture and philosophy. As is evident in the physician practice management sector, some companies are better at what they do than others.
Dentists considering DPM offers should also consult with their financial and legal advisers to determine the tax consequences of the sale transaction. Key questions include how the purchase price should be paid and how it should be allocated among the various purchased assets, including goodwill. Practitioners who operate as C corporations will find that, unless they sell their stock (which is usually avoided by DPMs), the face two levels of tax - corporate and individual - that produce effective tax rates of up to 60%. Further, even if the dental practice is a corporation that has converted to S corporation status, if the conversion occurred less than ten years before the sale, "built-in gain tax" on the proceeds of the sale transaction could greatly diminish an anticipated windfall, although there may be ways to reduce the tax liability.
Some states, like Florida, place statutory restrictions on dental practice management arrangements. The restrictions can pose significant challenges for DPMs in terms of attracting practices and structuring the management relationship. One such restriction, the prohibition on the corporate practice of dentistry (the "corporate practice doctrine"), is especially troublesome. Without getting too complicated, DPMs can offer lucrative purchase prices in part because of financial accounting standards that permit them to use extended amortization periods and consolidate the earnings of the practices they acquire on their own balance sheets. Without the availability of such accounting methods, certain DPMs might be forced to reduce their purchase prices, and consequently, would be competitively disadvantaged in attracting good practices. These same standards require DPMs to exert near complete control over the practices they manage (other than control over clinical decision making). This becomes a difficult, but not impossible, goal to attain with the corporate practice doctrine since it generally prohibits anyone other than a dentist or an entity owned solely by dentists to employ a dentist or control the practice of dentistry. In Florida, for example, the corporate practice doctrine also restricts non-dentists from controlling the use of dental equipment or decisions or policies relating to fee setting, payment methods, patient scheduling or hiring and firing office personnel, some of which are clearly non-clinical in nature. The result is that DPMs must walk as fine line between financial accounting requirements and state law in structuring their transactions.
In addition, state laws which prohibit "patient brokering" and "fee-splitting" may limit the ability of DPMs to provide certain marketing services to or receive percentage-based management fees from the practices they manage, an issue presently being litigated in Florida in the physician practice management arena. Unfortunately, much of the law, which governs DPM transactions, has not caught up with marketplace for them. As a result, despite the seeming attractiveness of many DPM proposals, dentists should be careful as they navigate these largely new and uncharted waters.