The Earn-Out Trap: Why Your DSO Deal Isn't Done Yet

You negotiated hard. You got a strong multiple. The letter of intent is signed, due diligence is underway, and closing is scheduled for next quarter. The total consideration looks excellent on paper — but a meaningful portion of it isn't paid at closing. It's deferred, contingent on future performance.

That deferred portion is your earn-out. And if you don't understand how it works — in precise contractual detail — there is a real possibility you will never collect it.

What an Earn-Out Actually Is

An earn-out is a contractual mechanism that ties a portion of your transaction proceeds to the future financial performance of the practice after the acquisition closes. In dental transactions, earn-outs are typically structured over one to three years and pegged to EBITDA, collections, or some combination of production metrics.

The rationale offered by the buyer is that it aligns incentives: you stay engaged, production remains strong, and everyone benefits. The reality is more complicated. Once the transaction closes, the DSO controls the operational and financial infrastructure of the practice. How revenue is recognized, what costs are allocated to your practice, how your management fee is calculated, and whether central overhead is charged back — all of those decisions directly affect the EBITDA number your earn-out is measured against.

You are being asked to hit a target while someone else controls much of the field.

The Specific Language That Matters

Earn-out risk is not theoretical — it lives in specific contract provisions that are often buried in exhibits and schedules. Here is what to examine before you sign:

Definition of EBITDA. How is it calculated? What add-backs are permitted? What central costs are allocated to your practice entity? A management fee that increases post-close can compress your EBITDA without any change in your clinical production.

Operational control provisions. Does the agreement give the DSO discretion to change staffing levels, fee schedules, payer mix, or operational protocols in ways that affect your revenue or cost structure? If so, who bears the earn-out risk when those changes reduce your performance?

Non-interference language. Some agreements include provisions prohibiting the buyer from taking actions specifically designed to defeat the earn-out. These provisions are worth fighting for — and their enforceability varies by state.

Dispute resolution. If you believe your earn-out was miscalculated or manipulated, what recourse do you have? Binding arbitration? Litigation? A 30-day notice period followed by a 60-day cure window? The process matters almost as much as the substance.

The Rolled Equity Problem

Many DSO deals include a rolled equity component — you receive a minority ownership stake in the acquiring entity in addition to (or in place of) a portion of the cash consideration. This is presented as upside participation: when the DSO eventually sells or recapitalizes, your equity converts to cash at the new valuation.

The risk is illiquidity and dilution. You have no control over when the next transaction happens, at what multiple, or whether additional equity raises will dilute your position before that event. Rolled equity in a private equity-backed DSO is a bet on a future exit you cannot influence.

Understand the cap table. Understand your liquidation preferences. Understand what happens to your equity if the DSO underperforms and is recapitalized at a lower valuation than the deal you entered.

What Protecting Yourself Looks Like

The single most important thing you can do is retain an attorney who specializes in dental transactions — not a general business attorney, and not the attorney the DSO recommends. You want someone who reads these agreements regularly and knows where the leverage points are.

Beyond counsel, insist on audited financial statements and a clear, unambiguous definition of every metric your earn-out depends on. Request a cap on management fee increases during the earn-out period. Ask for monthly reporting with the right to audit.

None of this makes the deal adversarial. It makes it honest.

The Earn-Out Trap — DSI's forthcoming book — walks through the full transaction document stack line by line, with annotated examples and the questions every dentist should ask before closing. If you're in an active deal process, subscribe for early access.