How Should a DSO Evaluate Provider Dependency?
Provider dependency measures how much practice revenue depends on one dentist, usually the selling owner, and therefore how much revenue could be at risk if that provider reduces production or leaves.
One useful metric is owner doctor production ÷ total doctor production.
Example
Total doctor production of $2 million with owner production of $1.5 million gives owner dependency of 75%. That practice carries more transition risk than an otherwise similar practice where the owner generates 30%.
Dependency is not automatically a deal killer
A high-dependency practice can still be attractive when the seller remains several years, strong associates exist, the recruiting market is favorable, demand exceeds current capacity, or the DSO has proven recruiting infrastructure. The key is pricing the risk and solving the transition.
Evaluate more than percentage
Also examine procedures performed by the owner, the owner's schedule, patient loyalty, associate capacity, hygiene referral patterns, local recruiting conditions and specialty relationships. Replacing a bread-and-butter GP may be easier than replacing a seller responsible for nearly all advanced surgical cases.
Link structure to risk
Provider risk can influence valuation, cash at closing, earn-out, employment term, retention incentives and replacement planning. The structure should reflect the operating risk.
Standardize provider-dependency analysis across acquisition targets.
Open the Provider Dependency Risk EstimatorMarket ranges on this page are illustrative planning ranges, not offers. Involve qualified legal and tax advisers on any transaction.