DSO Partnership Terms for California Dentists: A Guide

Key Takeaways

• SB 351-compliant California DSO affiliations keep clinical control with the dentist-owned PC while the DSO provides non-clinical support through an MSA. The Attorney General is actively enforcing these rules through multimillion-dollar settlements.

• Management fees must be set at documented fair market value. Percentage-of-revenue structures can be risky and now face heightened scrutiny after the 2026 Aspen Dental settlement.

• Equity rollover in DSO deals typically ranges from 20–45% of total consideration and is illiquid for 5–7 years, so DSO quality and performance can be critical to seller outcomes.

• Post-termination non-competes in PE- or hedge fund-backed MSAs are void under SB 351, while sale-of-business non-competes can remain enforceable if properly structured under B&P § 16601.

• McLerran & Associates runs a competitive 45–60 day bid process among vetted DSO and private buyers to help California dentists increase value. Schedule a free, confidential discovery call to compare your options.

How California’s Corporate Practice Rules and SB 351 Shape Your Options

California law prohibits non-dentists from owning or controlling a dental practice under Business and Professions Code section 1625 et seq. and the corporate practice of dentistry doctrine. In practice, every compliant DSO affiliation in California uses a PC/MSO structure. A dentist-owned professional corporation holds the clinical license and employs clinical staff, while the DSO, operating as a Management Services Organization (MSO), owns non-clinical assets such as equipment, software, and supply contracts, and provides non-clinical services under a written MSA.

SB 351 adds Division 1.7 (commencing with Section 1190) to the Health and Safety Code and renders statutorily void certain non-compete and non-disparagement provisions in MSAs involving private equity- or hedge fund-backed MSOs, subject to narrow carve-outs for bona fide sale-of-business non-competes otherwise permitted under California law. Existing agreements are not grandfathered and must be updated for compliance.

Enforcement now occurs in real time. On May 7, 2026, the California Attorney General announced a settlement with Aspen Dental Management, Inc. requiring $2 million in penalties and $300,000 in patient restitution, along with injunctive relief prohibiting the DSO from replacing practice owners, owning practice property, basing management fees on revenue or profits, enforcing non-compete restrictions on clinicians, or advertising without clearly identifying the independent dentist-owner. A second major enforcement action followed. On June 26, 2026, the Attorney General announced a $4.4 million civil penalty against a separate MSO and permanently enjoined it from using MSAs that grant complete authority over advertising, payor negotiations, equipment selection, or the hiring, firing, and compensation of licensed professionals.

For a selling dentist, this enforcement environment is a due-diligence imperative, not just a compliance topic. Affiliating with a DSO whose MSA structure is non-compliant can expose the dentist’s own license to Dental Board disciplinary action. McLerran & Associates vets buyers like investments, steering clients away from structurally risky DSOs before they ever reach the negotiating table. Understanding what makes a DSO structurally risky starts with the MSA itself, specifically how clinical control is allocated.

Clinical Autonomy in California MSAs Under SB 351

A compliant California MSA must reserve exclusive control over all clinical decisions, including diagnosis, treatment planning, clinical protocols, clinician hiring and firing based on clinical competency, supervision, medical records ownership, and prescribing authority, to the dentist-owned professional corporation rather than the MSO.

The distinction between dentist-friendly and DSO-friendly clinical autonomy clauses can be material. The table below illustrates how the same subject area can be drafted to favor either party.

Subject Area	DSO-Friendly Language	Dentist-Friendly Language	SB 351 / Settlement Standard
Treatment decisions	DSO sets clinical protocols and production targets	PC retains sole authority over diagnosis and treatment plans	MSO cannot exercise authority over diagnostic test selection or treatment plans
Clinical hiring	DSO approves or directs all staff hiring and compensation	PC makes all final hiring and compensation decisions; DSO may provide market data only	DSO may provide only market data; licensed owner retains sole authority to set compensation and make final hiring decisions
Advertising	DSO controls all marketing without owner review	PC owner holds review and veto rights over all advertisements	Practice owner retains review and veto rights over all advertisements and prior written approval rights over quarterly marketing initiatives
Patient records	MSO holds or controls access to patient records	PC owns all patient records; MSO has no ownership or content authority	PC must own all medical and dental records; MSO is limited to non-clinical services

Management-Fee Benchmarks in California-Compliant MSAs

Management fees, meaning the amount the PC pays the MSO for non-clinical services, can be one of the most consequential economic terms in any affiliation. California MSAs must set MSO compensation at fair market value. Fee structures resembling a percentage of practice revenue risk violating Business and Professions Code section 650 fee-splitting prohibitions and require detailed fair-market-value justification or an independent valuation opinion.

Safer California MSA compensation structures include flat monthly fees set at fair market value, fees tied to operational metrics such as square footage or full-time-equivalent staff, and documented time-and-materials billing. Percentage-of-gross-revenue or net-income fees remain risky and now face heightened scrutiny after SB 351. The Aspen Dental settlement reinforced this point. The DSO agreed not to base service fees on revenue, sales, or profits of affiliated practices.

Where percentage-based fees are used, Business and Professions Code section 650(b) permits MSO compensation based on a flat fee, cost-plus, or a percentage of gross revenue if the compensation is commensurate with the fair market value of the services furnished, as confirmed by the California Court of Appeal in Epic Medical Management, LLC v. Paquette, 244 Cal.App.4th 504 (2015).

Equity Rollover Mechanics in California DSO Deals

Equity rollover refers to the portion of the sale proceeds a dentist receives not as cash at closing but as ownership shares in the DSO platform. That stake can grow in value if the DSO is later sold or recapitalized. Rollover can be a key driver of total proceeds because, as McLerran & Associates’ multi-year forecasting shows, the quality of the DSO can matter as much as the percentage rolled.

Equity can be held at two levels, each with different risk and return profiles.

• Joint-venture (JV) equity: Ownership at the individual practice level, typically with distributions. This structure can create a higher floor but a lower ceiling on upside.

• Holding-company (holdco) equity: Ownership in the DSO parent, with no distributions during the hold period but potential for a significantly higher payout if the platform exits at a premium multiple.

Rollover equity in dental DSO structures is typically illiquid for 5-7 years. McLerran & Associates models these scenarios across 3-, 5-, 7-, and 10-year horizons so clients can compare real after-tax proceeds before signing.

Earnout Negotiation in California DSO Transactions

An earnout is a deferred payment tied to the practice hitting agreed financial targets after the deal closes. These targets typically use EBITDA, which means earnings before interest, taxes, depreciation, and amortization, or the practice’s operating profit before those deductions. Earnouts transfer post-close performance risk to the seller, so their structure can be one of the most important terms to negotiate.

Earnouts in dental DSO transactions commonly represent 10% to 30% of total consideration and are paid over 12 to 36 months based on performance targets. Most earnouts include clawback provisions if EBITDA drops in year 1 or year 2 after close, placing post-close performance risk primarily on the seller. (Source: Redefine Web, DSO Dental Model Real Owner Playbook)

McLerran & Associates controls the narrative around EBITDA from the first day of engagement, building a diligence-grade analysis that holds up when the buyer’s quality-of-earnings team scrutinizes it. That upfront work creates the credibility needed to negotiate for pro-rata earnout provisions, so a near-miss on a target still pays most of the earnout, and to push for later earnout start dates that account for integration disruption. These protections are rarely offered voluntarily. They are usually won through a competitive process where the seller has leverage, and that leverage comes from preparation.

Non-Compete Limits and Restrictive Covenants After SB 351

Under California Business and Professions Code section 16600, non-compete agreements are generally void as a categorical prohibition, with no reasonableness analysis, as confirmed by the California Supreme Court in Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, although narrow exceptions such as for the sale of a business or trade secrets remain.

SB 351 added a healthcare-specific layer. Under California Health and Safety Code section 1191(d)(1), a management or asset-sale contract with a private-equity- or hedge-fund-controlled entity in a healthcare practice shall not include any clause barring a provider from competing with the practice after termination or resignation. However, sale-of-business non-competes remain potentially enforceable in genuine California dental practice acquisitions even after SB 351, but post-termination non-competes imposed on providers through PE-backed MSAs are void.

The following 10-term checklist covers the restrictive covenant and clinical-autonomy provisions many California dentists review before signing an LOI, meaning a letter of intent that sets the deal’s key terms, or an MSA.

• Confirm post-termination non-compete clauses are absent or limited to a valid sale-of-business exception under B&P § 16601.

• Verify non-solicitation of patients is narrowly scoped to active solicitation only, not passive communication.

• Confirm non-disparagement clauses are absent from PE- or hedge fund-backed MSAs, as required by SB 351.

• Confirm the PC retains sole authority over diagnosis, treatment planning, and clinical protocols.

• Confirm the PC makes all final hiring, firing, and compensation decisions for clinical staff.

• Confirm the PC owner holds review and veto rights over all advertising and marketing materials.

• Confirm the PC owns all patient records and the MSO has no ownership or content authority over them.

• Confirm management fees are set at documented fair market value and are not based on revenue, sales, or profits.

• Confirm the MSO cannot replace the PC owner or require ownership forfeiture upon termination of the MSA.

• Confirm the MSO does not hold an assignable option to acquire ownership of the PC, a structure the California Attorney General has actively challenged in litigation.

Why a Structured 45–60-Day Competitive Process Benefits California Sellers

A practice owner usually sells once in a lifetime, while a DSO negotiates deals every week. Going directly to a single DSO, or working with a generalist broker who knows only one or two buyers, can mean negotiating from a significant information disadvantage with no competitive tension to push the price up.

McLerran & Associates runs a structured, auction-like bid process, typically 45 to 60 days, among a vetted pool of well-qualified DSO and private equity buyers, generating around 10 offers per listing. Poorly run DSOs are blacklisted before the process begins, so clients see the real market without exposure to buyers known for poor post-close environments. The result is often a valuation approximately 30% higher than owners achieve selling on their own, and a transaction rate of roughly 85% to 90%, compared to an industry norm closer to 35% to 40%.

The current market rewards preparation. DSO buyers are applying greater scrutiny to practice financials, operations, staffing, and transition risk, and are walking away from deals involving provider risk or clinical continuity issues. A diligence-grade EBITDA analysis done before the deal goes to market, not after, can be one of the most effective defenses against a re-trade.

Find out what your practice could command in a competitive auction. McLerran & Associates offers a no-obligation consultation to walk through the process.

Comparing DSO Affiliations and Private Buyers in California

The highest bidder is not always the right partner. Because as much as 40% of a DSO deal can be paid in equity rather than cash, affiliating with an undercapitalized or poorly run DSO can put a significant share of the seller’s proceeds at risk. McLerran & Associates vets buyers like investments, evaluating DSO profitability, growth trajectory, management team strength, and private equity backing before any buyer reaches the table.

For owners in the $1.5 million to $3 million revenue range who can genuinely go either direction, the side-by-side comparison below illustrates how the two paths can differ across key dimensions. Specific outcomes can depend on practice size, specialty, market, and deal structure. The ranges below reflect general market observations and should be evaluated against your specific numbers.

Dimension	DSO / Private Equity Affiliation	Private Buyer (Doctor-to-Doctor)
Valuation basis	EBITDA multiple; generally higher headline price for larger practices	Percentage of collections or multiple of net cash flow; typically lower headline
Cash at close	Commonly 60%–85% of total consideration (Source: CTA Acquisitions, M&A Advisor for Dental Practice)	Typically higher cash percentage; simpler asset-sale structure
Equity rollover	10%–30% or more into DSO holdco or JV; illiquid until platform exit (Source: CTA Acquisitions, M&A Advisor for Dental Practice)	None; seller exits with cash
Post-close commitment	Typically 3–5 year employment agreement	30–90 day transition; cleaner exit
Clinical autonomy post-close	Retained by PC under compliant MSA; subject to SB 351 protections	Transferred to buying dentist; seller exits clinical role
Close timeline	Typically 3–6 months due to corporate diligence and complex legal structures	Typically 60–120 days with simpler asset-sale structures

McLerran & Associates’ CPA-led EBITDA analysis and multi-year financial forecasting quantify these differences in real after-tax dollars across 3-, 5-, 7-, and 10-year horizons. That work helps ensure the choice between paths is made with full information rather than a guess. The firm’s roughly 85% to 90% transaction rate reflects not just deal volume but also the level of preparation that can keep agreed values from being re-traded at the finish line.

Frequently Asked Questions

What management-fee structures comply with SB 351 in California?

The safest California MSA fee structures are flat monthly fees set at documented fair market value, fees tied to operational metrics such as square footage or full-time-equivalent staff, and time-and-materials billing. Percentage-of-gross-revenue fees remain legally permissible under Business and Professions Code section 650(b) if supported by an independent fair-market-value analysis, but they now carry heightened scrutiny after the 2026 Aspen Dental settlement, which prohibited the DSO from basing service fees on revenue, sales, or profits. Any fee structure that functions as a share of clinical revenue, or that creates a financial incentive for the MSO to influence clinical decisions, can risk violating both SB 351 and the corporate practice of dentistry doctrine. Sellers may want a dental-specific attorney to review the MSA’s fee provisions before signing, and McLerran & Associates can help identify red flags during the negotiation process.

How much equity do California dentists typically roll over in a DSO deal?

Rollover equity, meaning the portion of sale proceeds received as DSO ownership shares rather than cash, can vary based on practice size, EBITDA, and the specific DSO’s deal structure. The ranges and typical hold periods are discussed in the Equity Rollover Mechanics section above. Because this equity is illiquid until the DSO exits, a timeline covered earlier, the financial health and growth trajectory of the DSO can matter enormously. McLerran & Associates models rollover outcomes across multiple scenarios and vets DSO buyers before they reach the table, so clients see what they are actually investing in.

Are non-competes enforceable in California DSO affiliation agreements?

Post-termination non-competes in California are broadly void under Business and Professions Code section 16600, and SB 351 added an explicit prohibition on non-compete clauses in MSAs involving private equity- or hedge fund-backed DSOs. The narrow exception that can remain enforceable is a sale-of-business non-compete under section 16601, meaning a restriction tied to the genuine sale of practice goodwill, limited to the geographic area where the practice operated and a reasonable time period. A post-termination non-compete that functions as an employment restriction, rather than a true sale-of-business covenant, is void under California law regardless of how it is labeled. Sellers can benefit from confirming that any restrictive covenant in their LOI or MSA is structured as a potential sale-of-business exception and does not extend to activities such as teaching, consulting, or expert witness work. McLerran & Associates negotiates these terms on the seller’s behalf and coordinates with dental-specific legal counsel.

What is the difference between JV equity and holdco equity in a DSO deal?

In a DSO affiliation, rollover equity can be structured at two levels. Joint-venture, or JV, equity represents ownership in the individual practice or a regional entity. It typically comes with ongoing distributions, meaning regular cash payments from practice profits, which can provide a more predictable income stream but limit the seller’s participation in the DSO platform’s overall growth. Holding-company, or holdco, equity represents ownership in the DSO parent company. There are generally no distributions during the hold period, but if the DSO is later sold or recapitalized at a higher valuation, the upside can be substantially larger. The right structure can depend on the seller’s financial goals, tax situation, and confidence in the DSO’s growth trajectory. McLerran & Associates produces multi-year, multi-structure financial forecasting that models both options in real after-tax dollars, so clients can compare them side by side before negotiating the LOI.

Why does running a competitive process matter more in California’s current DSO market?

California’s regulatory environment, with SB 351, active Attorney General enforcement, and pending appellate litigation over PC/MSO structures, has raised the stakes for both buyers and sellers. DSO buyers are applying greater scrutiny to practice financials, staffing, and transition risk, and are increasingly requiring minimum five-year post-close employment commitments. In this environment, a seller who approaches a single DSO directly has limited leverage and no reliable way to know whether the terms offered are close to market-standard or heavily DSO-favorable. A structured, competitive process that generates multiple offers from vetted, well-capitalized buyers can create the negotiating tension that produces stronger cash-at-close, clearer equity rollover terms, and more protective earnout structures. It also helps surface the right fit, meaning a DSO whose compliance posture, management team, and post-close support model align with what the seller wants for their practice and their patients. McLerran & Associates runs this process on the seller’s behalf, with poorly run and structurally non-compliant DSOs screened out before the first offer is received.

Conclusion: Taking Control of Your California DSO Partnership Terms

California’s DSO landscape in 2026 is more regulated, more scrutinized, and more consequential than it has been in the past. SB 351 and the Attorney General’s enforcement actions have clarified what a compliant affiliation can look like and made the cost of a non-compliant one significantly higher. For a premier practice owner weighing affiliation, a four-part journey can separate a deal that protects a career’s worth of work from one that quietly erodes it. Understand your options under California’s PC/MSO framework, create competition among vetted buyers, find the right fit whose compliance posture and support model match your goals, and focus on maximizing your outcome across cash, equity, and earnout.

McLerran & Associates is a dental-only sell-side advisor and advocate that runs both DSO and private-buyer paths in roughly equal measure. That approach gives California practice owners a genuine side-by-side comparison backed by a CPA-led, diligence-grade EBITDA analysis that holds up when buyers look under the hood. With roughly 2,000 successful practice sales, approximately $2 billion in closed transaction volume, and a transaction rate of roughly 85% to 90%, the firm focuses on preparation and execution that help practices reach the closing table.

Ready to explore your options? McLerran & Associates provides a confidential consultation to discuss your practice, your goals, and what a compliant California DSO affiliation could mean for your outcome. Call (512) 900-7989, email info@dentaltransitions.com, or visit dentaltransitions.com/contact-us.