How Do Businesses Determine Whether a Worker Should Be Classified as a 1099 Contractor or W-2 Employee?
For a dentist considering retirement or looking to reduce the administrative demands of running a practice, an offer from a Dental Service Organization can provide liquidity and access to broader business support.
Before accepting, however, it is important to understand how the deal structure, tax consequences, employment terms, and long-term obligations could affect both the sale proceeds and the dentist’s future role.
A Dental Service Organization (DSO) provides nonclinical business support to dental practices, often including billing, human resources, recruiting, procurement, technology, marketing, and administrative infrastructure. The dentist typically continues to control clinical care, while the DSO supports the business side. DSOs acquire or affiliate with practices to build scale, centralize overhead, expand into markets, and create predictable earnings across multiple locations. Some are dentist-led, while others are backed by DSO private equity investors seeking growth through acquisitions. For owners, that can create liquidity and reduce administrative burdens, but it also means joining a larger organization whose financial objectives, operating model, and exit timeline may differ materially from the dentist’s own priorities.
A DSO offer is rarely just a check at closing. The headline price may include cash paid immediately, rollover equity in the acquiring organization, an earnout tied to future performance, escrow or holdback amounts, and post-closing compensation for the dentist. Some deals require sellers (Dentist) to remain for three to five years, and deferred payments may depend on maintaining production for 36 months or longer. Each component carries different risk, timing, and tax consequences. In a dental practice sale, dentists should compare guaranteed proceeds with contingent value, understand how EBITDA adjustments affect price, carefully model after-tax cash proceeds rather than focusing solely on the stated multiple or total consideration, and ensure the transaction’s post-sale requirements and incentives align with their personal, financial, and professional goals.
Tax structure can materially change what a dentist keeps. An asset sale allocates the purchase price among equipment, receivables, goodwill, restrictive covenants, and other assets, while an equity sale may produce a different tax result. The allocation matters because the IRS treats a business sale as the sale of separate assets, each with its own character. Depreciation Recapture may convert part of the gain on depreciable or amortizable property into ordinary income. The timing of earnouts, installment payments, rollover equity, and transaction expenses deserves review. Where Section 1060 applies, buyer and seller generally report the agreed allocation on Form 8594. Tax modeling should occur before signing the letter of intent.
Dentists often focus on price and discover later that the employment terms matter just as much. Negotiate clinical autonomy, scheduling expectations, production targets, compensation methodology, staffing authority, leadership responsibilities, benefits, vacation, termination rights, malpractice coverage, and the expected transition period. Restrictive covenants deserve special attention because enforceability varies by state and continues to change. The documents should also make clear who controls patient care and treatment decisions, particularly in states with corporate-practice-of-dentistry restrictions. Ask what happens if production falls, the dentist leaves early, or the DSO changes strategy. The best economics can deteriorate quickly if an earnout, equity stake, or employment arrangement depends on obligations the dentist cannot realistically satisfy.
Preparation should begin before the DSO sees the practice’s numbers. Start with a defensible dental practice valuation, normalized earnings, financial statements, tax returns, debt schedules, provider production data, and documentation supporting unusual adjustments. Conduct Financial Due Diligence on your own business so the buyer does not discover issues first. Review records, leases, employment agreements, payer contracts, licenses, compliance matters, and technology obligations. Then model cash needs, retirement timing, taxes, and the value of any rollover equity or earnout under outcomes. DSO offers can move quickly, with some contingencies running only 60 to 90 days. Assemble tax, legal, and financial advisors before negotiations begin, not after the letter of intent arrives.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Vijay Vaswani, partner in Bennett Thrasher’s Mergers & Acquisitions Transaction Advisory practice, or call us at 770.396.2200.
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