By Michael S. Byrd, JD, Partner, ByrdAdatto

In many states, only doctors can own a medical spa, unless you set up a special organizational structure to manage your practice.

Dental Service Organizations (DSOs) and Management Service Organizations (MSOs) share similar business and legal compliance characteristics. DSOs are management organizations in the business of providing all back-office business management services to dental practices. MSOs, on the other hand, provide similar business services to support medical practices.

Learn more about MSOs by reading here or by watching our webinar on the topic.

The common thread between MSOs and DSOs in the private equity world is that they tend to manage practices that operate like a retail store from a business perspective and like a health care practice from a regulatory compliance perspective. In the DSO market, this looks like branded chain of dental offices typically found in retail real estate space. Similarly, the MSO market looks like retail elective health care services, such as medical spas, weight loss centers, and IV therapy centers. In addition to the business similarities of DSOs and MSOs, the regulatory hurdles are similar for the management of dental and medical practices, and the legal solutions to these regulatory hurdles are structurally the same.

The DSO market is the mature older brother of the emerging MSO market. Tusk Partners recently with fascinating insights titled "What private equity looks for in acquiring a DSO." The article highlights the financial condition of private equity in the DSO market, noting a strong seller's market. The key indicator of this financial market for 2017 is a valuation multiple of around 10.5 times EBITDA. The article additionally highlighted feedback from private equity professionals on the question of what private equity looks for when evaluating a DSO business. The salient points from the feedback highlighted in this article is:

• PE Investors are typically growth oriented, versus value oriented. It's important to be clear that the business strategy is in alignment with private equity strategy.
• The founders must be able to clearly articulate a vision for the next 3-5 years.
• The founders must be able to clearly communicate the competitive advantage (secret sauce) over the competition.
• The DSO must be compliant from a regulatory standpoint. Compliance includes the legal structure from a corporate practice perspective, as well as patient privacy and patient billing.
• The DSO must be able to articulate a strategy to attract and keep clinicians.

Businesses in the younger and emerging MSO market would be wise to pay attention to the trends and developments in the DSO market. Private equity is coming in to the MSO market even though it is several years younger than the more developed DSO market. Clint Carnell, the CEO of The HydraFacial Company and founder and chairman of Orange Twist Brands, has a deep background in private equity funding. After discussing the legal regulatory complexities of the MSO model and the insights from the Tusk Partners article, I asked Clint what he believed to be the most important strategy in building an MSO towards private equity funding. Clint succinctly and profoundly responded "You have to keep it simple." Clint's response is telling, as it spotlights the business from the view of a potential private equity investor. Private equity investors must be able to clearly understand the business itself, the value proposition, and the business's vision. If the MSO house is not in order from either a regulatory or business perspective, private equity will quickly run.

ByrdAdatto represents DSOs and MSOs in all stages and helps build and maintain compliant structures that are designed to withstand the scrutiny of private equity due diligence. If you have any questions regarding your DSO or MSO business, need assistance with corporate structure, or merger and acquisition activity, please contact ByrdAdatto. AmSpa members receive a complimentary 15-20 minute annual compliance consultation call.

Michael S. Byrd , JD, is a partner with the law firm of ByrdAdatto. With his background as both a litigator and transactional attorney, Michael brings a comprehensive perspective to business and health care issues. He has been named to Texas Rising Stars and Texas Super Lawyers, published by Thompson Reuters, for multiple years (2009-2016) and recognized as a Best Lawyer in Dallas by D Magazine (2013, 2016).