Key Takeaways
- Arizona DSO deals commonly combine an asset sale, a management services agreement with a 5–9% management fee, and a 3–5 year post-sale employment commitment.
- The MSA is usually the most consequential document. Focus negotiation on fee basis, escalators, enumerated services, termination rights, and change-of-control protections instead of purchase price alone.
- EBITDA normalization and cash-at-close comparisons can be some of the main factors that drive real value. Document every add-back before signing the term sheet to reduce the risk of re-trades in diligence.
- Restrictive covenants in Arizona are governed by common law. Negotiate narrow geographic and time limits plus a termination-without-cause carve-out to preserve future practice options.
- McLerran & Associates negotiates these Arizona DSO partnership terms on the owner’s behalf every day. Protect your position before you sign.
How Arizona Law Shapes DSO Ownership And Clinical Control
Arizona is commonly described as one of the more permissive states on dental practice ownership, but the state still regulates how dental practices are owned and controlled. The corporate practice of dentistry (CPOD) doctrine, which holds that clinical dentistry and clinical decision-making must be delivered and controlled by licensed dentists, is enforced through a registration regime rather than an outright ownership ban.
In practice, this means that a non-dentist entity may own a dental practice only if it registers with the Arizona State Board of Dental Examiners and names a licensed Arizona dentist responsible for clinical services at each office. Clinical decision-making must remain with the licensed dentist. The dentist-owned professional corporation (PC) remains the entity that employs the dentist, holds the dental license, and retains clinical authority. The DSO, by contrast, provides administrative and business services such as HR, billing, marketing, IT, and procurement under the MSA. Together, these two entities form the lawful, decades-old response to the CPOD doctrine, as opposed to a loophole.
The practical negotiation point for Arizona dentists is clear. Arizona’s corporate practice of medicine doctrine is stricter than many other states and does not permit any non-physician to make clinical decisions, so a national DSO management services agreement template drafted for another state may not satisfy Arizona’s clinical-judgment protections under HB 2026. The MSA should explicitly preserve the PC’s and the dentist’s authority over clinical matters, the hiring and firing of clinical staff, treatment planning, and patient care decisions. Contractual ambiguity around clinical control can lead to regulatory challenges, and reserved authority over clinical functions can create leverage over licensed professionals even if that authority is never exercised.
One key diligence item for any Arizona seller is registration. Confirm that the acquiring group has registered, or has a plan to register, each Arizona office location with the Arizona State Board of Dental Examiners and understands the three-year renewal cycle. A failure to register can create civil penalty exposure and potential registration revocation under A.R.S. § 32-1213(H)(3).
The Arizona DSO Management Services Agreement And The Management Fee
Because Arizona’s CPOD doctrine requires clinical control to stay with the dentist-owned PC, the MSA becomes the central document in any DSO affiliation. It is frequently longer and more consequential than the purchase agreement. The MSA governs how the practice is run for the next decade or more. Many Arizona dentists focus on the purchase price and devote less attention to the MSA, which can weaken their position.
The table below shows how the MSA’s most consequential terms break down across three negotiation positions: what to push for, what the market typically offers, and when to walk away. Use it to decide where to spend your negotiating capital before you sign.
| Term | Push For This | Market Position | Walk Away |
|---|---|---|---|
| Management fee percentage basis | Fee on net collections actually received, with a tiered or declining structure such as a higher rate on the first tranche and a lower rate above a threshold | Flat percentage of collections, often in the high single digits to low double digits depending on services | Fee on gross production billed rather than collected, or a fee above 25% without a detailed enumerated services schedule |
| Fee escalator | CPI-linked escalator with a hard annual cap such as 3%, based on McLerran & Associates figures | CPI-linked escalator with a 3% cap | Open-ended escalator or one tied to “platform overhead” |
| Schedule of services | Fully enumerated line-item schedule specifying every service the DSO will provide, with HR, accounting, billing, marketing, IT, procurement, credentialing, compliance, and strategic planning each named separately | Enumerated schedule plus a clear amendment process | “Such other services as the DSO deems appropriate” language with no enumeration |
| Unilateral fee increase right | No unilateral increase right, with any fee change requiring written consent of the PC, based on McLerran & Associates figures | Notice requirement plus a cap on any unilateral increase, with a PC consent right above the cap | DSO discretion to reset the fee on notice alone, with no cap and no consent right |
| Term and renewal | Initial term of 10 years or fewer and a mutual termination right at year 10, with a mutual termination right at year 10 sometimes traded for a smaller upfront check | 15–20 year initial term with for-cause exit only | Perpetual term or automatic renewal with no PC exit right |
| Termination for cause | Narrow, objectively defined cause events and a cure period of at least 30 days for remediable breaches, based on McLerran & Associates figures | Defined cause events with a cure period | Broad “material breach” language with no cure period and no objective standard |
| Change of control | PC consent right on any DSO sale, rollover equity conversion on founder terms, and a change-of-control clause that addresses whether the MSA follows a platform sale unchanged and whether the new owner can renegotiate the fee | Notice of DSO sale plus a limited renegotiation right | Automatic assignment of the MSA to any acquirer with no PC consent and no renegotiation right |
Arizona law adds one more layer to the fee discussion. All services provided by an Arizona MSO to a professional corporation must be compensated at fair market value. A management fee that cannot be supported by an enumerated services schedule and a fair-market-value analysis can create regulatory risk, such as a potential fee-splitting characterization, and tax risk, such as IRS reallocation authority under Internal Revenue Code Section 482. Coordinate with your CPA and Arizona counsel on both points.
Purchase Price, Cash At Close, And Rollover Equity In The Term Sheet
The term sheet functions as a marketing document. It presents a headline number, typically expressed as a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization, meaning the practice’s operating profit before financing costs and accounting adjustments), but the headline number rarely matches the amount you receive at close.
EBITDA normalization is often where the real negotiation begins. Buyers calculate normalized EBITDA by adding back to net income items such as owner compensation above market rate, owner personal expenses run through the business, non-recurring costs, family-member payroll above market rate, and depreciation and amortization. Every add-back you win and document increases the earnings base the multiple is applied to. A $50,000 improvement in annual EBITDA at an 8x multiple adds $400,000 to practice value. Add-backs should be documented before the term sheet is signed, because DSOs often challenge undocumented adjustments in diligence and attempt to re-trade the number. McLerran & Associates builds a CPA-led, diligence-grade EBITDA analysis up front so the numbers tend to hold when buyers scrutinize them.
Cash at close versus deferred consideration is the next major variable. A higher multiple applied to an aggressive EBITDA base can produce less value than a lower multiple applied to clean, buyer-accepted earnings once escrow, earnouts, rollover equity, and holdbacks are subtracted. Compare offers on estimated cash at close rather than headline enterprise value.
Rollover equity, meaning the portion of the deal paid in DSO ownership rather than cash, can represent 10–30% of sale proceeds reinvested back into the DSO platform as a minority shareholder position. McLerran & Associates’ figures put the potential equity component at up to roughly 40% of a deal. Equity may sit at the joint-venture level, which offers distributions and a higher floor but a lower ceiling. Alternatively, it may sit at the holding-company level, which offers no distributions but a higher ceiling that can multiply several times over on a future recapitalization. Rollover equity is illiquid, sits behind sponsor preferred equity, and can be worth zero in a downside scenario.
Before signing the term sheet, establish in writing:
- Dilution protection on future equity issuances
- Exit and buy-back rights, including what happens if the DSO underperforms
- Valuation mechanics on a future recapitalization
- Liquidation preferences, redemption rights, and change-of-control treatment
- “Good leaver” and “bad leaver” definitions, because some deals set the bad-leaver buyback discount at 50% or worse
Think of the DSO as an investment you are underwriting rather than only a buyer writing you a check. McLerran & Associates evaluates buyers like investments, helping owners assess a DSO’s profitability, growth trajectory, leadership, and financial backing before any paper is signed.
Employment Agreement And Restrictive Covenants For Arizona Dentists
The employment agreement shapes your working life after the deal closes. As noted in the Key Takeaways, most DSO-backed dental transactions include a 3–5 year employment agreement. The compensation structure, typically a percentage of production or collections, is where negotiation often matters most. General dentistry rates commonly run 30–35% of net collections, with higher rates for specialty work. Negotiate the compensation base, with production generally more seller-favorable than collections, along with schedule and hours expectations and the protocol for handling unpaid receivables.
Termination provisions deserve close attention. Some dental employment contracts specify that the non-compete survives regardless of how employment ends, while others include language that voids or narrows the restriction if the dentist is terminated without cause. A termination-without-cause carve-out can protect you. If the DSO terminates your agreement without cause, a narrower restrictive covenant can preserve more of your future options.
Restrictive covenants in Arizona follow common-law analysis. Arizona has no dentist-specific non-compete statute, and the FTC’s non-compete rule never took effect and was withdrawn at the federal level around February 2026. Enforceability turns on reasonableness in scope, geography, and duration, and the employer must show a legitimate business interest. The Arizona Supreme Court in Valley Medical Specialists v. Farber, 194 Ariz. 363 (1999), held that covenants involving physicians receive heightened scrutiny because of the doctor-patient relationship and the public interest.
A sale-of-business covenant, which is tied to the goodwill you are selling, is treated more favorably than a pure employment non-compete. The buyer pays for goodwill and is viewed as entitled to protect it, and the seller receives compensation for the restriction. Standard restrictive covenants in dental practice sale agreements commonly run a 5–15 mile geographic radius and 2–5 years, while buyers often initially draft 25+ miles and 7+ years. Push back toward a narrower scope. Also confirm what happens to the covenant if the DSO is acquired or restructured, because the change-of-control scenario is frequently left unaddressed in the initial draft.
Arizona’s restrictive covenant law continues to evolve. Confirm current Arizona law with counsel before signing.
Key Economic Terms Many Dentists Overlook: A/R, Retained Debt, Tail Coverage, And Real Estate
These terms can shift net proceeds by 15–30% of the purchase price and are among the most commonly overlooked in DSO transactions.
Accounts receivable (A/R). Pre-close A/R is typically retained by the seller, with the buyer collecting on the seller’s behalf for 90–180 days under a billing services agreement before transferring uncollected balances back. A precise A/R cutover date matters because it determines which payments belong to you and which belong to the buyer. Clear mechanics for insurance payments billed before close but paid after, and a defined remittance schedule, help you know when to expect collections. If the buyer insists on a vague “collected” definition that gives them discretion over what counts, that term can justify walking away. The mechanics can affect $50,000 to $300,000 in value.
Retained debt and equipment leases. Written clarity on which liabilities stay with the seller and which transfer is essential. Equipment leases with personal guarantees create particular exposure, because if the DSO assumes the lease but the guarantee is not released, you remain on the hook. A seller-friendly position includes a full release of any personal guarantee on assumed obligations. Market terms often include assumption of equipment leases with a best-efforts release of the personal guarantee. Language that leaves the personal guarantee intact with no release mechanism can be a reason to reconsider the deal.
Malpractice tail coverage. Tail coverage extends your malpractice insurance to cover claims arising from pre-close clinical activities that are filed after the sale closes. Tail coverage costs typically range from $25,000 to $200,000 depending on specialty, claim history, and policy structure, and in DSO transactions the seller is typically responsible for tail coverage at a cost of roughly 150–250% of one annual premium. Buyer-paid or split-cost tail coverage, negotiated in the LOI, can materially improve your net proceeds. Market terms often place the cost on the seller with a defined minimum coverage limit and duration. A deal that omits tail coverage provisions entirely leaves a significant gap.
Real estate lease treatment. The way the DSO handles your lease has significant implications for your personal guarantee. The DSO may take an assignment of your existing lease, negotiate a new lease, or take a sublease. When a dentist owns the practice real estate, dental sale agreements typically use one of three structures: selling the real estate to the buyer at closing, leasing to the buyer on a 5–10 year term with renewals, or leasing with an option for the buyer to purchase at a predetermined price. If you are a tenant, a full release of your personal guarantee on the existing lease as a closing condition can protect you. Short lease terms, meaning anything under five years remaining, are an active concern for DSO buyers and can affect your valuation, so address this before going to market.
How A Dental Partnership Compares To A DSO Affiliation
A dental partnership and a DSO affiliation are two structurally different transactions that often share a label in casual conversation.
A doctor-to-doctor partnership, sometimes called a vest-out, is a transaction between two licensed dentists. A buying dentist typically acquires roughly 50% of the practice now, with the remaining share vesting over time as the buyer earns into full ownership. The selling dentist in a walk-away sale typically works back only about 4–8 weeks before exiting. Because the buyer is another clinician, the deal structure is usually simpler than a DSO affiliation. McLerran & Associates has worked this path for roughly 35 years and maintains a large premier private-buyer pool across the country.
A DSO affiliation is a sale to a corporate buyer. The dentist sells the practice, typically as an asset sale, to a DSO-affiliated entity, signs an MSA, and commits to a multi-year employment term. The deal is more complex, the buyer is a sophisticated institutional counterparty, and the proceeds often include a mix of cash, rollover equity, and potentially an earnout. The MSA governs the practice for years after the employment term ends.
The right path can depend on your practice’s size, profitability, and your personal goals. Because McLerran & Associates works both paths in roughly equal measure, the firm can prepare a side-by-side valuation so you can compare your worth and likely outcome on each path before deciding.
Pre-Signature Checklist For Arizona Dentists
This checklist is organized by document and can be brought to your Arizona attorney and CPA before you sign anything.
Professional Corporation And Clinical Control
- Confirm the PC structure is properly formed and registered with the Arizona State Board of Dental Examiners under A.R.S. § 32-1213.
- Confirm the MSA explicitly reserves clinical decision-making, clinical staff hiring and firing, treatment planning, and patient care protocols to the PC and the dentist.
- Confirm the acquiring group has a plan to register each Arizona office location and understands the three-year renewal cycle.
MSA Management Fee And Services
- Enumerate every service the DSO will provide and reject “such other services as the DSO deems appropriate” language.
- Lock the fee percentage, the escalator cap, and the consent right for any increase above the cap.
- Confirm the fee is calculated on net collections received, not gross production billed.
- Confirm the change-of-control clause addresses what happens to the fee and services if the DSO is sold.
Purchase Price And EBITDA
- Document every EBITDA add-back before the term sheet is signed so the number is less likely to be re-traded in diligence.
- Confirm how the buyer defines “normalized EBITDA” and what replacement compensation rate they will apply to your clinical production.
- Compare offers on estimated cash at close rather than headline enterprise value.
Rollover Equity And Earnout
- Confirm whether equity sits at the joint-venture level or the holding-company level, and what distributions, if any, are paid.
- Establish dilution protection, exit and buy-back rights, and valuation mechanics on a future recapitalization.
- Confirm “good leaver” and “bad leaver” definitions and the buyback discount applied in each scenario.
- Confirm earnout metrics, the measurement period, who controls the accounting, and whether you can influence the variables that determine payout.
Employment Agreement And Restrictive Covenants
- Confirm compensation base, rate, schedule, and clinical autonomy language.
- Negotiate a termination-without-cause carve-out that voids or narrows the non-compete if the DSO terminates you without cause.
- Confirm the non-compete’s geographic radius and duration are reasonable under Arizona common law and push for the narrowest defensible scope.
- Confirm what happens to the covenant if the DSO is acquired or restructured.
- Confirm current Arizona law on restrictive covenants with counsel, because it has been evolving.
A/R, Retained Liabilities, Tail Coverage, And Real Estate
- Confirm the A/R cutover date and the remittance mechanics for insurance payments that straddle close.
- Confirm which liabilities stay with the seller and which transfer, and push for a full release of any personal guarantee on assumed obligations.
- Confirm who pays for malpractice tail coverage, the minimum coverage limits, and the duration, and negotiate buyer-paid or split-cost in the LOI.
- Confirm real estate lease treatment and push for a full release of your personal guarantee as a closing condition.
Equity Buy-Back And Exit Rights
- Confirm buy-back rights, exit rights, and what happens to your equity if the DSO underperforms or is sold before a recapitalization.
- Confirm transfer restrictions, drag-along provisions, and the vesting schedule on rollover equity.
McLerran & Associates’ Phoenix office, led by Brian Carroll and covering the Mountain West, works with Arizona dentists on these terms. The team runs a structured, auction-like bid process that typically generates around 10 offers in 45–60 days and defends the EBITDA the firm underwrote through diligence so the agreed value is more likely to hold. The firm’s roughly 85–90% transaction rate, compared with an industry norm closer to 35–40%, reflects what can happen when a dental-only sell-side advisor controls the narrative around your EBITDA and creates competition on your behalf.
If you are still deciding whether to sell, you can join the McLerran M&A Summit on October 29–30, 2026, and get educated before you decide. Attendees receive 4 CE credits and a complimentary practice valuation, which is typically a $2,500 value.
Frequently Asked Questions
What Is The Difference Between A DSO Term Sheet And The Final Deal Documents?
A DSO term sheet, sometimes called a letter of intent or LOI, is a preliminary document covering the proposed purchase price, deal structure, due diligence timeline, and transition arrangements. Most of its provisions are non-binding, but confidentiality clauses and exclusivity (“no-shop”) provisions are typically binding from the moment both parties sign. Once exclusivity begins, the seller’s ability to negotiate drops significantly because the buyer knows there are no competing offers on the table. The final deal documents, including the asset purchase agreement, the MSA, the employment agreement, and the equity documents, are where the actual terms are set. A DSO’s LOI is drafted by experienced transactional attorneys and written to favor the buyer. The time to involve legal counsel and a sell-side advisor usually comes before the LOI is on the table. McLerran & Associates negotiates LOI terms on the owner’s behalf so the seller can shape the conversation from the start.
How Does Arizona’s Corporate Practice Of Dentistry Framework Affect My MSA?
Arizona enforces the corporate practice of dentistry doctrine through a registration regime in which a non-dentist entity may participate in a dental practice only if it registers with the Arizona State Board of Dental Examiners and names a licensed Arizona dentist responsible for clinical services at each office. The practical consequence for your MSA is that the agreement should explicitly preserve the dentist-owned professional corporation’s authority over all clinical matters, including treatment planning, clinical staff hiring and firing, patient care decisions, and clinical scheduling. A national DSO template drafted for a more permissive state may not include this language, and contractual ambiguity around clinical control can create regulatory exposure under Arizona law. Arizona counsel should review the MSA specifically for clinical-control language before you sign. You should also confirm that the acquiring group has registered, or plans to register, each Arizona location and understands the three-year renewal cycle, because a failure to register can create civil penalty exposure and potential registration revocation.
What Should I Know About Rollover Equity Before Signing A DSO Term Sheet?
Rollover equity is the portion of your deal paid in DSO ownership rather than cash. It can represent a meaningful share of your total proceeds, and McLerran & Associates’ figures put the potential equity component at up to roughly 40% of a deal. Rollover equity can sit at different levels in the DSO structure, with joint-venture equity typically offering distributions and holding-company equity often offering more upside on a future recapitalization but no interim distributions. Rollover equity is illiquid and can be high-risk, so dentists often benefit from understanding dilution protections, exit rights, and downside scenarios before committing.
