21 August 2026

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DSOs and Rising Interest Rates—How Their Relationship Effects the Stakeholders

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As interest rates shift in our economy, the related factors cause issues with variable products being offered that have a lot to do with interest rates.

It’s important to understand how dental service organizations (DSOs) get their financing and their capital investment to see why interest rates cause such a shift in their outlook. As a particular DSO is created, among its first functions is to obtain an infusion of capital and also have lines of credit and long-term credit financing with lenders for its needs. One of its most important requirements is to be able to assure themselves of the financing necessary to acquire dental practices until those offices reach a point where they are throwing off enough income to pay back the financing.

This then creates sources of capital for their growth and allows an internal source to assist in dental practice acquisitions. In the event that interest rates rise, the costs that the DSO incurs also then rise and decrease the income and cash flow of the DSO as they have used financing for acquisitions. This prevents them from their purchase of other dental practices as easily as with cheaper financing before any increase in interest rates. It also may deprive the DSO of funds to pay the performing, already owned dental practices of their incentive payout. These incentives were a large part of the reasons that many dental practices signed up with DSOs. Compared to what a dentist would receive selling to another dentist, these incentives, if reached, are like the pot of gold at the end of a rainbow.

A sample offer from a DSO to a dentist considering a sale or merger with the DSO

A sample of a DSO merger or an acquisition of a dental practice along with the dentist/owner of that practice is offered in the following description:

There is always an amount of money offered to the dentist upon signing the agreement to join the DSO to entice him or her to opt into it and when comparing it to the offer to sell to another dentist. The selling dentist is then given a large upside to the agreement by having points of time that when certain goals are reached, additional monies, shares of ownership or promissory notes become available from the DSO.

These incentives can stretch out over a period of years and can be more enticing as time goes on and if the goals are met. There are other fine points that offer the dentist additional upside of joining the DSO. One of the most important non-monetary issues that most dentists enjoy is the fact that the DSO offers the dentist a life of administrative ease compared to owning his or her practice or selling and remaining with the acquiring dentist for a period of time. The DSO has a separate company that is responsible for all of the administrative work that the dentist would have been doing alone or with a dental CPA or office manager. This includes all of the hiring, firing, setting of wages and just about any other administrative chore imaginable.

The DSO looks for those who have strong business backgrounds or are recent graduates of good business schools to fill these positions. Insurance company communication, accounts receivable billing and collection services and accounts payable and payroll as well as payroll taxes become the responsibility of the DSO and not the dentist. Previously the dentist was the one relied upon to perform these administrative services or he or she had to hire those with experience in completing these jobs.

Are there other benefits offered to the dental practice being acquired by the DSO?

Besides being relieved of almost all of the administrative duties by the DSO and its staff of business hires, the dentist and the dental practice have other important responsibilities from which they are no longer required to be involved with or to even supervise.

The follow-up for each patient and communication with dental office personnel will no longer be required. The administrative staff will be responsible for keeping the patient up to date with his or her clinical and administrative requirements as well as their payment responsibilities if the case requires additional services. This frees up the dentist’s time to be able to treat more patients during business hours and to offer additional services if they are needed.

This may allow the dentist and the office to be more productive and create a larger cash flow to the practice and to himself or herself.

With additional time to spend with the patient, some higher end services at higher fee schedules can be offered. This is because the clinician doesn’t have to worry about paying employees or any other administrative chore.

The higher interest rates and their effect on the short and long term profits of the dental practice itself as well as the DSO.

As one can see from reading this article, higher interest rates are a detraction to the DSO and make long and near-term expansion much more difficult. The reverse is true about interest rates when they are falling. Money in the form of borrowing becomes much easier to obtain and is cheaper to pay back to the lender. Expansion by the DSO by way of acquiring more dental practices becomes easier and more profitable. Current cash flow from the existing practices also increases. Personnel become happier since performance bonuses will now be available at a cheaper interest rate cost to the DSO and to each individual dental practice owned by the DSO.

The future of dentistry with its primary masters being the DSO.

Until there are little market fluctuations with interest rates, those DSOs and individual dental practices that have higher than the norm in capitalization will be the ones with the growth models built into their presentations. They will be able to continue acquiring dental practices since they will not be subject to the volatility of interest rate fluctuations compared to those who have used more leverage for growth. Editor’s Note: Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He is a regular contributor to Dentistry Today and more articles on finance and practice acquisitions can be found at dentistrytoday.com. Bryen specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. You may contact him at Bryenb@baratzcpa.com

Source: https://www.dentalcetoday.com/