DSO, Associate, or Family: Which Dental Exit Fits?
Three buyers can take your chair, and each leaves you with different after-tax money, different years at work, and a different say. Here is how to compare them.
By Tim McNeely, CFP®, CIMA®, CEPA®, CPFA® | LifeStone
Same chair. Three possible buyers. Three very different next few years.
A DSO, your associate, or your child can each take over. They do not leave you with the same money, the same hours, or the same say.
Picture your desk after a long day. A DSO's letter sits next to your associate's proposal and a talk with your child you have not finished. You push the papers aside and ask the question none of them answers: "What am I doing Monday morning?" You are the one deciding.
Here is the short answer. Do not pick a buyer by the headline price. Compare each path on three things: what you keep after tax, how many more years you work, and who decides the terms. A broker or qualified appraiser sets your value. This post covers what each path leaves you holding.
Ask a different question
Most owners ask, "Who will pay me the most?" Your broker or appraiser answers that one. The better question is: "If I sign this, what do I keep, and what do my years look like?"
Many owners start close to home. In CEG Insights research, entrepreneurs who had a succession plan were asked which path they favored. 45.1% said family, 31.6% said an internal buyer with self-funding, and 11.4% said an internal buyer with outside funding. These are entrepreneurs in general, not only dentists. Still, they suggest owners often plan an internal or family successor first.
The three paths side by side
This table is qualitative. Your numbers depend on your deal.
| DSO | Associate | Family | |
|---|---|---|---|
| What you keep after tax | Some of the price may be rolled equity or an earnout, and each piece may be taxed its own way. | A seller note may spread your gain across the years you collect. | Your terms to set, but tax rules for related buyers are tighter. A price below fair value can be part gift. |
| Years you work | May include an employment agreement after closing. The length is a deal term. | A handoff you design together. How long you stay is yours to negotiate. | You may stay on to train and hand over. How long is yours to decide. |
| Who decides | The buyer's letter may set most terms. You negotiate them. | You and your associate, plus a lender if your associate borrows. | You and your family. That is the strength and the strain. |
| What can go wrong | Pay may depend on later results, or the job may not be the one you pictured. | Financing may fall through, or you may carry a note whose payments depend on your buyer's success. | Your child may not be ready, or may not want it. A deal that works on paper can strain the family. |
DSO: more terms to read
A DSO deal may pay you for the business and also ask you to keep working. If so, your employment agreement sets how long and for what pay. Rolled equity, if offered, is not cash at closing. An earnout, if offered, depends on results you may not control.
Ask what is cash, what is paper, when each piece reaches you, and how long you are expected to stay. For how each piece is taxed, see how a DSO sale is taxed.
Associate: paid over time
If your associate buys, you may be the bank. The installment method lets you report gain as payments arrive, instead of all in the year of sale (IRS Publication 537). That can change when you pay tax. It also ties what you keep to your buyer's payments.
Some pieces do not spread out. Depreciation recapture is reported in the year of sale (Publication 537). Your CPA shows you which is which. For lender rules, see selling to an associate with an SBA loan.
Family: the most personal, with the tightest rules
Selling to your child feels simple. The tax rules are not. If you sell depreciable property to certain related persons, you generally cannot use the installment method (Publication 537). Section 1239 of the tax code can also treat gain on that property as ordinary income. Whether your child's entity counts as related is a CPA question.
If you sell for less than full value, the shortfall can count as a gift (IRC 2512(b)). Your attorney and CPA should review that together.
The money is half of it. Does your child want this? Are they ready to run the team? Say that out loud before you set a price.
Years you work: the number nobody puts on the offer
Years in the chair decide how the next stretch of your life feels. Each path can ask a different number of years from you.
Ask yourself: How many more years do I want to work? Whose terms do I want to live under? What do I need to keep to stop?
Who does what
- Your broker or qualified appraiser sets your value.
- Your CPA models what you keep after tax on each path.
- Your attorney writes the terms, including who holds the note.
- You decide the life you want on the other side.
You can see the gaps in your plan before you sign anything.
Book your 25-minute Exit Stress Test
Which path would you pick if the price were the same?
Sources
- CEG Insights, Unlocking Entrepreneurial Market Strategies (2024), "Current Business Succession Plan," p. 11 (N = 754).
- IRS Publication 537, Installment Sales: https://www.irs.gov/publications/p537 to 26 U.S.C. 1239, gain from sale of depreciable property between certain related taxpayers: https://www.law.cornell.edu/uscode/text/26/1239 to 26 U.S.C. 2512(b), a sale below full value may be partly a gift: https://www.law.cornell.edu/uscode/text/26/2512
This article is for educational purposes only and is not tax, legal, or investment advice. Consult your own qualified professionals about your situation.