DSO Earnout Structure: What to Expect After Your Practice Is Acquired
The headline number a DSO quotes you is not what shows up at closing. A typical deal pays 60 to 80 percent in cash at close, with the remaining 20 to 40 percent split between an earnout and rollover equity. The earnout is the part most sellers understand least, and it's where the deal you signed and the deal you live are often different things.
How the earnout actually works
An earnout holds back part of the purchase price and pays it out over 2 to 3 years if the practice hits agreed targets, almost always EBITDA maintenance or growth. Sell for $4M with a 25 percent earnout and you get $3M at close. The last $1M arrives only if the practice keeps producing at the level that justified the price.
Sounds fair on paper. The catch: after close, you don't control most of the levers that drive EBITDA. The DSO sets fees, picks the PPO participation, approves hiring, and decides whether that associate you needed gets budgeted. If their central office makes a call that drops production, the earnout you're missing is your money, not theirs.
Terms to negotiate before you sign
Floor versus cliff. A cliff structure pays zero if you miss the target by a dollar. A graduated floor pays proportionally, so 90 percent of target earns 90 percent of the earnout. Never accept a pure cliff.
Control carve-outs. Get language that adjusts targets if the DSO changes fee schedules, drops insurance plans, cuts your hygiene days, or fails to replace departing staff within a defined window. Without this, you're guaranteeing results in a business someone else runs.
Measurement definitions. Whose EBITDA? The DSO will layer management fees and corporate allocations onto your P&L after close. Your earnout targets should be measured before those charges, and that word "before" needs to be in the contract.
Your required hours. Most earnouts assume you keep producing at your historical level. If you're planning to cut back to three days, say so in the agreement, or your own schedule change becomes their excuse.
Earnout versus rollover equity
Don't confuse the two. The earnout is deferred purchase price with conditions. Rollover equity is ownership in the DSO or its holding company, usually 10 to 30 percent of your deal value, that pays off only at the DSO's next recapitalization. The earnout has a defined payout window; the rollover is a bet on someone else's exit timeline, typically 3 to 7 years out and sometimes never.
A deal that's 70 percent cash, 15 percent earnout with a graduated floor, and 15 percent rollover in a DSO with a credible recap history is a very different risk profile than 60 percent cash and a 40 percent cliff earnout, even if both flyers say the same headline price.
The question that cuts through it
Ask the DSO: of the last ten earnouts you wrote, how many paid out in full? A good group will answer with a number. A vague answer is your answer.
Before you get to earnout mechanics at all, run through whether selling to a DSO is the right move in the first place, and use the due diligence checklist to see what the buyer will be scrutinizing on your side of the table.
