Key Takeaways
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DSO offers differ on cash at close, rollover equity, and earnout terms, and each piece can be taxed and timed differently.
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Normalize every offer into a single after-tax, multi-year figure by modeling goodwill, equipment, non-competes, rollover equity, and earnouts across 3- to 10-year horizons.
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Use a side-by-side comparison to track valuation basis, cash percentage, equity structure, earnout mechanics, employment terms, compensation, clinical autonomy, staff retention, non-compete scope, and management-fee details.
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JV-level equity can provide ongoing distributions and lower risk, while holding-company equity can offer higher upside with more illiquidity and platform risk.
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A structured, competitive process with multiple buyers can help Cleveland-area practice owners see the full economic picture of each offer.
Schedule a free, confidential discovery call with McLerran & Associates.
Step 1: Normalize Every Offer Into One After-Tax, Multi-Year Number
Start by converting every component of every offer into a single after-tax, multi-year figure so the offers share a common unit of comparison. That requires knowing how each component is taxed and when the seller is likely to receive it.
In a typical DSO asset sale, the purchase price is allocated across asset classes under IRC §1060 and reported on IRS Form 8594. Goodwill, which tends to represent the largest share of a dental practice’s value, is generally taxed at long-term capital gains rates, currently a combined federal rate of up to 23.8% (20% federal capital gains plus 3.8% net investment income tax) for high earners. Equipment allocated in the sale is generally subject to depreciation recapture taxed as ordinary income at rates up to 37%. Non-compete payments are also taxed as ordinary income. The allocation between these categories is negotiable and can meaningfully affect after-tax proceeds.
Rollover equity, the portion of the deal paid as an ownership stake in the acquiring DSO entity rather than cash, is generally not taxable at closing when structured correctly as a tax-deferred exchange under IRC §721 (for LLC interests) or IRC §351 (for corporate stock contributions). Tax is deferred until a future liquidity event, such as a recapitalization or platform sale, which may occur years later. When that event occurs, the gain is typically taxed at long-term capital gains rates if the equity has been held long enough.
Earnout payments, which are contingent payments tied to post-close performance targets, carry a more complicated tax profile. Earnouts tied to the selling dentist’s individual production after closing are structurally likely to be recharacterized as ordinary compensation income rather than capital gain. Earnouts tied to practice-wide EBITDA or collections are in a better position for capital gains treatment, but this depends on how the agreement is drafted. A qualified tax advisor can help evaluate any proposed earnout terms.
To normalize offers, model each one across 3-, 5-, 7-, and 10-year horizons. For rollover equity, apply conservative recapitalization assumptions, such as one recapitalization event in years five through seven, and stress-test the equity value against scenarios where the platform underperforms. This type of multi-year, multi-structure financial forecasting and cash-flow modeling helps owners compare real after-tax proceeds across deal structures rather than headline numbers.
State taxes add another layer. Ohio does not impose a separate capital gains tax; most capital gains from personal investments are treated as ordinary nonbusiness income and taxed under Ohio’s individual income tax brackets (a flat 2.75% on nonbusiness income over $26,050 in 2026), while capital gains classified as business income are taxed at a flat 3% rate. Because those rates differ from a state with no income tax, a Cleveland seller’s after-tax result will not match a generic national model. Model state taxes explicitly for each offer.
Find out what your practice is really worth with a comprehensive practice valuation.
Step 2: Build Your Master DSO Offer Comparison Table
After the after-tax modeling is underway, create a side-by-side comparison that captures every material deal term. The example below shows how two offers might compare for a Cleveland practice. The figures are illustrative and show how to structure your own working table.
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Comparing DSO offers dental Cleveland: a normalized, term-by-term comparison framework for Cleveland-area dental practice owners. |
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Deal Term |
Offer A (Example) |
Offer B (Example) |
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Total valuation basis |
$4.2M (6.5x EBITDA) |
$3.8M (5.9x EBITDA) |
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Cash at close |
70% ($2.94M) |
60% ($2.28M) |
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Rollover equity |
20% ($0.84M) |
25% ($0.95M) |
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Earnout |
10% ($0.42M) |
15% ($0.57M) |
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Employment commitment |
5 years |
3 years |
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Doctor compensation |
30% of collections |
28% of collections |
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Clinical autonomy |
Seller controls diagnosis and treatment planning |
Buyer approval for certain procedures |
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Staff retention |
Key staff guaranteed for 24 months |
No written guarantees |
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Non-compete |
5 years, 10 miles |
7 years, 20 miles |
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Equity structure |
JV-level equity |
Holding-company equity |
Use your own version of this table to highlight where offers differ on cash certainty, equity risk, earnout difficulty, employment terms, and post-close flexibility. Those differences often matter more than the headline valuation.
Step 3: Understand JV-Level Vs. Holding-Company Equity
The equity structure row in the comparison can be one of the most consequential line items in the deal. Letters of intent often describe it briefly, yet the structure can drive a large share of the long-term outcome.
JV-level (practice-level) equity is a stake in the entity holding the seller’s own practice or a regional group of practices. Its value moves with the seller’s own practice’s earnings, and the seller generally receives a share of the profits along the way through distributions. The seller retains some influence over the value of this stake through continued clinical performance. The ceiling on upside is lower than holding-company equity, and the floor is higher because distributions provide ongoing cash flow.
Holding-company (holdco) equity is a stake in the parent company that owns the entire DSO platform. Its value moves with every practice in the group rather than just the seller’s own office, and it typically pays only at a recapitalization or sale of the whole platform. The seller is a minority holder in a larger business whose performance and sale timing sit outside their control. The potential upside is higher, and the risk is higher because there are no distributions in the interim.
The realized value of either structure depends heavily on the capital stack above it. Sponsor capital in DSO platforms typically arrives as preferred capital that is repaid first, often with a compounding accrual. That means common equity, where selling dentists usually sit, may not see a dollar until the platform clears that hurdle. In one worked example, a platform had to reach roughly 13% above its value at signing before common equity received a single dollar, and roughly 21% growth just to break even on the rolled position. Sellers can request a cap table and a distribution waterfall model showing what they receive at various exit valuations before signing.
As much as 40% of a DSO deal can be paid in equity rather than cash, which means the seller is effectively underwriting the DSO like an investment. Evaluating the DSO’s profitability, growth trajectory, leadership, and financial backing can help dentists decide whether that equity component fits their risk tolerance.
Get a second opinion on your equity structure before you sign.
Step 4: Decode Earnout Mechanics Before You Sign
Earnouts, the contingent portion of the purchase price paid only if the practice hits defined post-close targets, can be where sellers lose the most money quietly. Earnouts typically represent a similar share of total deal value in DSO transactions, and the definition of the target metric is the decisive factor in whether any earnout money is paid.
The three most common earnout metrics in dental DSO deals are collections, production, and EBITDA (earnings before interest, taxes, depreciation, and amortization, which is a measure of operating profitability). Collections and production targets are harder for a buyer to influence and therefore can favor the seller. EBITDA targets should explicitly exclude management fees and parent-company allocations. Otherwise the buyer’s own charges can reduce or eliminate the payout even when the practice performs identically to its pre-close baseline.
Cliff structures, where missing the target by any amount means receiving nothing, are particularly punishing. A practice that misses its target by a single percentage point can lose the entire earnout. Pro-rata structures avoid that outcome and pay a percentage of the earnout based on how close the practice came to the target. Because that difference can be worth hundreds of thousands of dollars, non-punitive structures such as pro-rata provisions or a later start date that accounts for integration disruption in the first months after close can be worth pursuing.
Sellers can also negotiate audit rights, which give the right to review the books behind the earnout calculation, and a named dispute resolution mechanism. An earnout is a measurement system the seller will live inside for three to five years, administered by the other side.
Step 5: Read The Management Fee And MSA Terms
The management services agreement (MSA), the contract governing the ongoing relationship between the dentist-owned clinical entity and the DSO’s management company, is often longer and more consequential than the purchase agreement itself. Most MSAs run 20 to 40 years and are difficult to unwind, which means a DSO sale signs the seller into a multi-decade operating relationship.
The management fee, what the clinical entity pays the DSO for its services, is typically structured as a percentage of collections. Management fees in DSO MSAs are typically priced at 15%–30% of the clinical entity’s collections, with the exact rate depending on the scope of services, practice size, and negotiating leverage. Some DSOs use a cost-plus model or a tiered structure where the percentage declines as collections rise.
The key question is what the fee actually buys. At minimum, the fee should cover compliance, HR, payroll, IT, billing, and recruiting. Deeper infrastructure such as marketing, supply chain, de novo development, and growth capital should also be explicitly listed in the MSA’s service schedule rather than left to a vague catch-all. The MSA governs the economics of the ongoing relationship, but it is not the only contract that shapes what the seller can do after closing. The next set of terms, including clinical autonomy, staff retention, and non-compete scope, sits in the purchase agreement and employment documents.
Step 6: Negotiate Clinical Autonomy, Staff Retention, And Non-Compete Terms
Clinical autonomy, staff retention, and non-compete scope are governed by contract language. Treat marketing claims about them with skepticism. Each deserves explicit negotiation before the letter of intent is signed, because post-LOI leverage to modify these terms can be significantly reduced.
On clinical autonomy, the agreement should specify which decisions remain exclusively with the licensed dentist, such as diagnosis, treatment planning, clinical referrals, and prescribing, and which operational decisions transfer to the DSO. The practical issue is whether the reservation of clinical authority operates in reality, not merely whether the contract contains an elegant paragraph labeled “Clinical Independence.”
On staff retention, verbal assurances carry no legal weight. Staff retention terms should be negotiated explicitly in the Asset Purchase Agreement, including which roles are protected, for how long, and what happens if the DSO restructures those positions post-close.
On non-compete scope, Ohio enforces non-compete agreements subject to a reasonableness standard covering duration, geographic radius, and the scope of restricted activity. Non-competes in DSO transactions are typically geographically defined around each supported location and duration-limited. Enforceability varies by state. The non-compete determines what the seller can do next, including whether they can open a new practice, join another group, or practice in a neighboring county, and deserves the same scrutiny as the headline valuation.
Step 7: Factor In Cleveland And Northeast Ohio Buyer Context
Cleveland and the broader Northeast Ohio market present a specific buyer landscape that shapes both achievable multiples and negotiating posture. Midwest markets, including Northeast Ohio, can attract somewhat lower EBITDA multiples than comparable practices in high-growth Sun Belt markets such as Phoenix, Atlanta, or South Florida. This difference reflects buyer density, population growth dynamics, and the relative concentration of DSO acquisition activity in faster-growing metros.
The practical implication for a Cleveland seller holding two term sheets is that the local market alone may not generate the competitive tension needed to push offers to their ceiling. A national buyer process that brings in well-capitalized DSOs and private equity platforms from outside the region can offset local discounting by creating genuine competition among buyers who view a premier Northeast Ohio practice as an attractive addition to a national or regional platform.
McLerran & Associates has a dedicated Cleveland office led by Justin Klingshim, with recent closings in Ohio. The firm runs a structured, auction-like bid process, typically 45 to 60 days and often generating around 10 offers, among a vetted national pool of buyers, with poorly run or undercapitalized DSOs excluded from the process. That competitive structure can help convert a local market discount into a national market outcome.
Frequently Asked Questions
Is A DSO Affiliation Worth It?
Whether a DSO affiliation is worth it can depend on the practice’s size, the owner’s goals, and the specific deal structure, including how much of the total consideration is paid at close versus deferred as equity or earnout. For owners of premier practices generating $1.5 million or more in annual revenue who want to take meaningful chips off the table while continuing to practice, a well-structured DSO affiliation can produce a higher total economic outcome than a doctor-to-doctor sale, provided the equity component is underwritten carefully and the earnout terms are non-punitive.
What Is The Top Dental DSO In The US?
By supported office count, the largest DSOs in the United States operate networks of hundreds to nearly 2,000 affiliated locations across multiple states, backed by major private equity sponsors. The “top” DSO for any individual seller can depend less on platform size and more on fit, including the buyer’s track record with practices of similar size and specialty, the quality of its post-close support infrastructure, the strength of its financial backing, and the terms it offers for cash at close, equity structure, and earnout mechanics.
How Do I Know If My EBITDA Is Being Calculated Correctly?
EBITDA (earnings before interest, taxes, depreciation, and amortization) is the primary valuation basis for DSO transactions, and the add-backs applied to arrive at “adjusted EBITDA” are where much of the negotiation happens. Common add-backs in dental practice sales include owner-doctor compensation above market rate, related-party rent adjustments, personal-use expenses, and one-time items such as legal settlements or build-out costs. A buyer’s quality-of-earnings team will scrutinize every add-back, so the seller’s EBITDA analysis needs to be diligence-grade, built by a CPA, documented, and defensible, before the practice goes to market. A weak analysis gets renegotiated down after the letter of intent is signed, and that renegotiation is where the loss occurs.
What Happens To My Rollover Equity If The DSO Struggles Financially?
Rollover equity in a DSO deal is a private, illiquid minority stake in a company the seller does not control. If the DSO underperforms, takes on excessive debt, or enters financial distress, common equity holders, which is typically where selling dentists sit in the capital structure, can recover little or nothing after secured lenders and preferred equity holders are paid. Sellers can stress-test their retirement and cash-flow plans against scenarios where the rollover equity is worth zero and can request a cap table and distribution waterfall model from any DSO before signing a letter of intent.
Can I Negotiate A Higher Cash-At-Close Percentage?
The mix of cash, equity, and earnout is negotiable, and restructuring the same headline number to increase cash at close, even by shifting 10 to 15 percentage points from equity or earnout to cash, can move a significant amount of certain money into the seller’s account on closing day with no change to the total stated value. The feasibility of a higher cash-at-close percentage can depend on the buyer type, the practice’s size and profitability, and the competitive tension in the process. A seller negotiating with a single DSO has limited leverage, while a seller running a competitive process among multiple vetted buyers can have substantially more.
Conclusion: How To Compare DSO Offers With Confidence
The highest headline number can be the worst deal once equity level, earnout targets, and non-compete scope are priced in. Two offers that look similar on the surface can produce very different after-tax, multi-year outcomes depending on how cash, equity, and earnout are structured, what the management fee actually covers, and whether the earnout metric is one the seller can realistically influence post-close.
McLerran & Associates is a dental-only sell-side advisor that normalizes competing DSO offers into one after-tax, multi-year number, creates competition among vetted buyers through a structured auction-like process, and defends valuation through diligence so the agreed number has a better chance of holding at close. With a dedicated Cleveland office led by Justin Klingshim, recent closings in Ohio, and a national buyer network that can offset local market discounting, the firm gives Northeast Ohio practice owners tools to compare offers with greater confidence.
Schedule a free, confidential discovery call with McLerran & Associates.
