Dental service organizations continue to expand, and a successful transaction can create long-term revenue opportunities. Still, acquisitions often involve legal complications that might not be obvious until after closing.

Many problems begin during the due diligence and structuring stages. A rushed review, incomplete agreements, or misunderstandings about ownership restrictions can create expensive setbacks later. State laws governing dental practice ownership and clinical control also vary widely, which means a transaction model that works in one jurisdiction may be problematic in another.

Ownership Structure Violations

DSOs can run into trouble when an acquisition structure doesn’t line up with state dental ownership laws. In many states, non-dentists can’t directly own a dental practice or control clinical decision-making.

These issues come up when buyers use standard acquisition templates without adapting them to state-specific requirements. Even a structure that makes financial sense could violate state rules concerning the practice of dentistry. Some common ownership structure mistakes include:

• Allowing non-dentist investors to hold ownership interests that state law prohibits
• Giving management companies too much authority over clinical operations
• Using compensation structures that look like unlawful fee-splitting arrangements
• Creating governance models that weaken the licensed dentist’s authority
• Missing state-specific requirements for professional entities

Purchase agreements and management service agreements need to be carefully reviewed before closing. Regulators usually look beyond the wording and focus on how the arrangement actually works in practice. A DSO may describe itself as a management company, which may not hold up when business personnel have too much influence over patient care decisions.

Improper Control Over Clinical Decisions

Clinical independence is a serious legal concern for DSO acquisitions. Even if your management arrangements are legal, licensed dentists usually must control:

• Diagnosis
• Treatment planning
• Patient-care staffing decisions
• Clinical protocols

That means you’ll run into problems if your operational oversight starts crossing into practicing dentistry, as that may create the impression that business personnel are directing patient care. These common acquisition-stage risks include:

• Employment agreements that limit a dentist’s independent clinical judgment
• Bonus structures that place too much emphasis on treatment volume
• Policies requiring management approval for treatment plans or clinical staffing decisions
• Nonclinical executives getting involved in patient care decisions
• Operational rules that interfere with the dentist-patient relationship

These problems are often more noticeable after closing, once the practice starts integrating the DSO’s systems and operations. A transaction may look compliant in the paperwork, but day-to-day operations can tell a different story.

Inadequate Due Diligence

Some DSOs focus heavily on revenue projections. They may rely too heavily on seller representations without independently verifying critical information. That can leave buyers responsible for compliance violations or other problems after closing. A thorough review should go beyond financial statements. Look for:

• Associate agreements containing restrictive covenants or compensation disputes
• Existing management agreements that conflict with the proposed acquisition
• Pending board investigations or disciplinary matters
• Billing and coding practices that raise fraud concerns
• HIPAA compliance deficiencies
• OSHA violations and workplace safety concerns
• Insurance participation restrictions and assignment limitations
• Real estate lease provisions affecting transfer rights

Licensing issues deserve particular attention at this point. Expired licenses and related issues can delay closing and expose buyers to future regulatory action.

Poorly Drafted Transaction Documents

Ambiguous language and incomplete risk allocation provisions can leave both sides fighting over responsibilities that should have been addressed during negotiations. Purchase agreements should clearly define:

• The assets or equity interests to be transferred
• Responsibility for pre-closing liabilities
• Indemnification obligations
• Earnout calculations
• Employment transition terms
• Restrictive covenant obligations
• Patient record access and transfer rights
• Conditions required before closing

Integration terms matter just as much as purchase price provisions. Don’t risk unstable transactions by failing to address these expectations before closing.

Post-Closing Compliance Risks

Closing the acquisition doesn’t mean the legal work is over. Many DSOs run into compliance issues during the integration phase, including:

• Improper delegation of clinical responsibilities
• Billing errors after software conversions or coding changes
• HIPAA issues during patient data transfers
• Employment classification disputes
• Marketing practices that violate applicable regulations
• Missing or outdated permits and registrations
• Stark Law or Anti-Kickback concerns for referral relationships  

Internal audits and regular compliance reviews can help catch problems early, before they turn into regulatory investigations or expensive claims. On the other hand, buyers who ignore compliance issues during integration often end up spending far more time and money fixing issues later.

Learn More About DSO Acquisitions from Our Experienced Lawyers

DSO acquisitions involve far more than negotiating price and signing contracts. Careful legal review during every phase of the transaction helps reduce unnecessary risk. Mahan Law – Dental Attorney works with DSOs, investors, and practice owners on acquisition-related legal matters. Contact us today to learn how we can advise you.