> ## Documentation Index > Fetch the complete documentation index at: https://dso.getlemma.com/llms.txt > Use this file to discover all available pages before exploring further. # How investors read DSO financials > How to prepare practice, support-company, and consolidated financial views; test ASC 810 rather than assume consolidation; and support dental quality-of-earnings diligence. An investor may acquire support-company equity, an interest in another lawful entity, assets, debt, or a combination, depending on state ownership rules and the transaction. Financial reporting is a separate question: US GAAP consolidation follows the applicable voting-interest and variable-interest analysis, not the DSO label or the purchase perimeter. Diligence should preserve each legal entity's books and show exactly how any combined view was produced. ## Three views, three purposes | View | Shows | Who wants it | | ---------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------------- | | **Per-entity** | Each PC and the DSO, standalone | Operators; fee-coverage analysis | | **Consolidated or combined with eliminations** | The reporting perimeter selected under GAAP or a clearly labeled management presentation | Auditors, lenders, the board, transaction teams | | **Support-company standalone** | The management company alone | Investors or lenders evaluating that entity and its fee stream | Produce all three from month one. The cost is low when you have two entities and prohibitive when you have twelve and no history. ## Do not assume the practices consolidate The threshold question is whether GAAP requires consolidation, permits no consolidation, or calls for another presentation. A management-services relationship alone does not answer it. Because US GAAP consolidation does not run on equity ownership alone. Under **ASC 810**, an entity consolidates a **variable interest entity (VIE)** when it is the **primary beneficiary**, meaning it has both **power** (the ability to direct the activities that most significantly affect the VIE's economic performance) and **economics** (the obligation to absorb losses or the right to receive benefits that could be significant).1 Facts that an ASC 810 analysis may examine include: * Which activities most significantly affect the practice's economic performance and who has current power to direct them * The management fee, loss support, guarantees, loans, variable interests, and rights to significant benefits * Kick-out, participating, termination, and substantive professional-control rights * Related-party and de facto agent facts, including the substance and effect of transfer restrictions1 The conclusion requires an auditor's fact-specific analysis and may change when agreements or operations change. Do not draft clinical or ownership control to reach an accounting outcome. **A reporting perimeter is not a transaction perimeter.** If a consolidated or combined presentation includes patient-service revenue, identify which entities earned it, the GAAP basis or management convention for inclusion, eliminations, and the security or assets actually being offered. Show legal-entity and combined views with unambiguous labels. ## Define the valuation unit before quoting EBITDA Transaction materials may quote support-company EBITDA, practice EBITDA, adjusted consolidated EBITDA, or a pro forma cohort measure. Define the entity perimeter, period, eliminations, provider-compensation normalization, fee assumptions, and every adjustment before applying a multiple. Adviser-published practice, group, and platform ranges are directional market observations, not evidence that the same earnings automatically receive a higher value after aggregation. See [DSO economics](/concepts/finance/dso-economics). Everything in diligence works toward a narrower question: **which earnings belong to the transaction perimeter, are supportable and repeatable, and survive the legal, payer, provider, and capital structure being underwritten?** ## Quality-of-earnings adjustments A quality-of-earnings (QoE) review normalizes reported EBITDA. The adjustments that recur in DSO deals: | Adjustment | Why | | ---------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | **Normalize friendly-dentist compensation** | Was the dentist-owner paid market rate for the dentistry they produce? Under-market comp overstates the PC's residual and, through the fee, the DSO's earnings. Over-market comp does the reverse. | | **Back out credentialing J-curve losses** | New PCs and newly acquired practices lose money for months while payer enrollment catches up. Whether those losses are "one-time" or a recurring cost of the growth model is a real argument, and it is worth having your own answer ready. | | **Reconcile fee revenue, receivables, invoices, and cash** | Unpaid accrual revenue can still be valid. Its age, collectibility, disputes, practice fee coverage, and cash conversion affect quality and valuation. | | **Normalize acquisition run-rates** | A roll-up's trailing twelve months mixes partial-year acquisitions. Buyers generally re-derive the pro forma adjustments and test their assumptions. | | **Remove owner personal expenses** | Standard everywhere. | | **Normalize related-party rent** | If the DSO leases from an owner-affiliated entity, is the rent at market? | | **Adjust for non-recurring items** | Legal fees for a restructuring, one-time PMS migrations. | | **Run-rate recent changes** | A fee that changed mid-year gets annualized, see the red flag below. | | **Assess fee sustainability** | If the fee is above what the PCs can support long-term, the buyer will haircut it. | **Prepare the fee bridge.** Tie the formula to invoices, practice expense, support-company revenue, receivables, cash, credits, deferrals, disputes, and eliminations. Explain aged or unpaid balances and show the authority for every payment path. ## The KPI set underwriters pull Beyond the financials, diligence pulls operating metrics, because they predict whether the earnings persist. In dentistry the list is specific: | Metric | What it tells them | | --------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | **Hygiene reappointment rate** | The share of hygiene patients who leave with the next visit booked. Published surveys often place hygiene at 25–35% of general-practice production, subject to specialty and definition, and buyers may examine recall performance.2 | | **Active patient count, with the definition** | The revenue base. "Active" may mean seen in 12 or 18 months, so buyers need the report parameters as well as the number.3 | | **PPO write-off percentage** | The gap between gross and adjusted production, by plan. Participating practices commonly write off 30–45% of gross, so the contract mix can materially change projected margin.4 | | **Payer mix and network posture** | Direct contracts, leased-network participation, Delta Premier versus PPO, and Medicaid share; each may have different durability and transaction treatment | | **Net collection rate** | Whether you collect what you're contractually entitled to after write-offs | | **Days in AR** and % over 90 days | Working capital intensity and collection discipline | | **Production per dentist and per hygienist** | Productivity, and how much of the model depends on individuals | | **Dentist retention / turnover** | Continuity of clinical capacity, patient relationships, and the cost of replacing providers | | **Fee coverage ratio per PC** | Can each entity actually pay its fee from collections? | | **Credentialing pipeline** | How much revenue is waiting on enrollment, especially after an acquisition | | **Same-store growth** | Growth from existing sites versus growth from adding sites | Two metrics deserve extra attention. For the **fee coverage ratio**, show by PC whether collections cover clinical compensation, direct expenses, and the management fee. For **same-store growth**, use the group's own cohort analysis. Major DSOs do not publish comparable same-store figures, so an unsupported industry benchmark adds little credibility.5 ## Red flags that kill or reprice deals In rough order of severity: **1. An MSA or operating reality that conflicts with governing dental law.** A prohibited fee or control term can threaten enforceability, licensure, collections, and the transaction thesis. The OCA and *Packard* decisions refused enforcement and a specific restitution theory under the law and claims before those courts; they do not make every payment universally unrecoverable.6 Quantify the state, entity, agreement, remedy, and operational exposure rather than predicting one buyer response. **2. Fees repriced retroactively before the raise.** Restating prior periods at a higher fee to inflate DSO EBITDA is the classic tell. It converts a valuation question into a credibility question, and credibility is priced across the whole deal. **3. Negative PC equity propped up by undocumented intercompany loans.** Shows the PC's economics don't work and that the group papers over it with transfers. Both problems, plus a documentation failure. See [Intercompany loan note](/reference/legal/intercompany-loan-note). **4. Commingled accounts.** Shared accounts, expenses paid from the wrong entity, no separation. Signals that corporate separateness is nominal, the exact CPOD argument. **5. Management fees accrued but never paid in cash.** Discussed above. **6. Friendly dentist concentration or instability.** One nominee owning every PC, or an owner in dispute with the group, is a single point of failure over the entity holding all the payer contracts. **7. Clinical compensation that rewards unsupported treatment, referrals, or lay-directed sales.** Production-based dentist compensation is not categorically unlawful. State control rules, documentation, payer terms, fee splitting, federal-program business, and the design of each metric matter. The California Aspen settlement specifically restricted per-sale hygienist incentives for the settling parties.7 **8. Stale agreements.** An MSA drafted in 2021 and never reviewed, in a state that changed its law in 2025 or 2026. **9. Missing corporate records.** No board minutes, no consents, no evidence the PC ever governed itself independently. **10. Payer participation with no documented transition path.** A buyer will test every material payer by contract holder, TIN, NPI, location, rendering-provider linkage, assignment or consent rule, change-of-ownership requirement, and effective date. No universal rule says that every asset purchase terminates participation. The problem is closing without the payer's written determination and an executable billing plan. See [Working capital and AR lending](/concepts/finance/working-capital-and-ar-lending). ## What to build now If a raise or sale is plausible within three years, the cheapest possible time to build these is today: * **Per-entity and DSO-standalone financials**, monthly, from the start * **Every management fee calculated, invoiced, recorded, reconciled, and collected or aged under a documented policy** * **Intercompany funding documented in the permitted form**, with tax, entity, solvency, professional-practice, and pricing terms supported for the facts * **Intercompany balances reconciled monthly** and equal-and-opposite * **A documented MSA review cadence plus event-driven reviews** for legal, ownership, service, fee, and operating changes * **A valuation or pricing-support cadence matched to the formula, law, contract, and transaction risk** * **Board minutes** showing the PC governing itself * **A clean KPI pack** with the metrics above tracked over time, including hygiene reappointment and write-offs by plan * **Identical charts of accounts** across PCs, so consolidation is mechanical Groups that do these things get through diligence in weeks. Groups that don't spend months reconstructing, and pay for the gap in price. ## Sources 1. FASB ASC 810, Consolidation. On the power-and-economics primary beneficiary test and the related-party/de facto agent guidance (including parties subject to agreements restricting transfer of their interests), see BDO, [Control and Consolidation Under ASC 810](https://www.bdo.com/getmedia/8a458199-b9e0-4445-8b0e-f8f1bd7a180f/Control-and-Consolidation-Under-ASC-810.pdf) (May 2024); Deloitte, [Primary Beneficiary](https://dart.deloitte.com/USDART/home/codification/broad-transactions/asc810-10/roadmap-noncontrolling-interests/chapter-2-glossary-selected-terms/2-22-primary-beneficiary). Confirm application to your facts with your auditors. 2. Hygiene production share and recall benchmarks: Dental Economics / Levin Group annual practice surveys, cited in [DSO economics](/concepts/finance/dso-economics); recall as a valuation driver: BCAT, [Dental hygiene recall](https://mybcat.com/blog/dental-hygiene-recall/). 3. Buyer diligence convention per transition-advisor checklists, e.g. ADS Transitions, [due diligence checklist](https://www.adstransitions.com/resources/articles/dental-practice-transition-due-diligence-checklist/). 4. PPO write-off ranges as compiled from ADA fee-survey commentary and consultant datasets: Veritas Dental Resources, [write-off reality check](https://veritasdentalresources.com/post/the-true-cost-of-dental-insurance-participation-a-write-off-reality-check) and [PPO write-offs](https://veritasdentalresources.com/post/ppo-write-offs-are-just-the-beginning-the-hidden-financial-burden-crushing-todays-dentists) (consultant-sourced ranges). 5. Major DSOs report unit counts, not same-store sales; e.g. Heartland Dental's public releases give practice counts and growth mix only (company release, August 5, 2025). No public same-store benchmark exists for the sector. 6. *In re OCA, Inc.*, 552 F.3d 413 (5th Cir. 2008); *Packard v. OCA, Inc.*, 624 F.3d 726 (5th Cir. 2010). See [DSO case law](/reference/legal/dso-case-law). Colorado SB 25-194 (Dental Practice Act sunset revision, effective January 1, 2027): [DDS Lawyers summary](https://www.ddslawyers.com/as-corporate-practice-of-dentistry-concerns-escalate-colorado-enacts-stricter-regulations-over-dso-involvement-in-dental-practices); see [DSO laws by state](/reference/legal/dso-laws-by-state). 7. California AG, [settlement with Aspen Dental over corporate practice](https://oag.ca.gov/news/press-releases/attorney-general-bonta-announces-settlement-aspen-dental-over-corporate-practice) (May 7, 2026).