TUSK Practice Sales

Welcome to the TUSK Practice Sales podcast, the premier podcast featuring the industry’s most influential thought leaders, providing the latest insights and trends for healthcare practice owners across the globe.

Kevin Cumbus

Hey, welcome back. I am so happy to have you here today. We get asked so many times about valuation. What’s my practice worth? Does specialty matter? Does it matter if I’m a GP, or if I’m an endodontist, or if I add endo to my group? These are all great questions, and really, absolutely do impact value. There’s been such a change over the last, call it 10 years. You know, when DSOs first got started, it was really a roll up of general practices, and look at Heartland Dental Care. Right today, well over 1,000 locations, primarily, almost 95% GP based. The origin story there is that they wanted to roll up practices that have recurring revenue, i.e., hygiene. So, you think about 20-30% of revenue is going to be recurring. With that patient base it felt less risky. Again, private equity is always trying to identify risk and make really good returns on risk adjusted assets. So when private equity understood that, they go, “Look, this feels like the least risky asset inside of the world of dentistry. So that’s where the origin story started for DSOs, buying and aggregating individual dental practices inside of General Dentistry. But in 2015 that’ll change. Smile doctors broke onto the scene and rapidly connected with and affiliated with orthodontists throughout the nation, from inception to first round exit, the return on equity was breathtaking. The doctors early in on that deal have done exceedingly well, and that they stayed in on the cap table, they’ve created transformational, multi-generational wealth. Well, you know, private equity groups are kind of like lemmings. And when one group makes money, the rest pour into it. And we have seen this playbook play out again and again across all industries. Yeah, there are multiple groups now involved in orthodontic roll ups. We are seeing it in Pedo, specifically, Perio, specifically, endodontics and oral surgery. We’ve been on the front line and seeing this from the best seat in the house, helping our clients across all these specialties, choose the right group to partner with so they can exit without regret. Today, I am joined with a good friend and colleague, Director here at TUSK, Mr. Kevin Sauer. Kevin is, he’s basically a lifer inside of dental like a lot of us are. He really cut his teeth and earned his stripes at Pacific Dental Services, was there almost a decade, and since then, has sat in so many seats and so many companies and deliver value to them. Before joining us, he was COO of a large and growing group, and he brings all that knowledge to our conversation today. Today, he is leading and running multiple transactions for TUSK across multiple industries, and I couldn’t be happier to have him with us today. Sauer, thanks for joining.

Kevin Sauer

I appreciate you inviting me to participate in this exercise, looking forward to being here with you.

Kevin Cumbus

So, let’s start at the top here. So, what type of experience do you have with specialty space? What type of experience does TUSK generally have when you look at the deal volume? What type of volume are we talking just based in our world today?

Kevin Sauer

At a high level, from the TUSK perspective, there’s no specialty that that we haven’t touched, or we don’t deal with right now, today. You know, we’re representing Endo, Oral Surgery, ortho, you know, GP with specialty, Pedo ortho platforms. So, I don’t, I mean right now, and pretty much at any given point in terms of volume, I think we’re generally dealing with every single specialty, whether we have deals currently in market, deals under LOI, or deals about to enter the market. And so, I can’t think of another group advisor that’s more well versed and up to date with the current specialty market?

Kevin Cumbus

Yeah, we see a bunch. When you’re representing a specialty practice or group, who are the buyers for something like this, right? Because we’ve got, we have these DSOs that are focused exclusively on one specialty or broadly across specialties. What does the buy side look like today if I’m the owner of a specialty practice?

Kevin Sauer

It’s a wide buyer pool, to be honest, from traditional GPs, centric DSOs that have specialty, to what one might think is a traditional GP group, but little does the seller know or the market know that they have as much, or just almost as much, especially as they do GP. And then you have, you know, you mentioned Smile Doctors a minute ago. I mean, think of Smile Doctors, but for just about every specialty platform now. They might not be as robust or have the 300 locations, because Smile Doctors has, you know, a 9 year head start, but just about, or, I think, every single individual specialty, now has their own segment of buyers or DSOs for that specific specialty. And then we’re also now seeing groups that were, take ortho, for example, that were might have been historically just ortho, but now they’re looking at ortho and Pedo, and then you’re taking Ortho-Pedo groups that are now looking at becoming Ortho, Pedo and Oral Surgery groups. And so you’re seeing, so it’s a wide swath from GP that have specialty to that specialty-only specific group to a group that might have just one or two specialties, to multi-specialty platforms, and then now, depending upon the size of the seller, we’re not even talking about new private equity, that’s chomping at the bit to look to get into the market and establish a new specialty platform with one of our clients or sellers. So, the market is pretty wide open right now, and there’s a lot of players in the mix.

Kevin Cumbus

Yes, it sounds like it’s been kind of an evolution, right? I think about the Smile Doctor’s model. They were hyper specific on what they wanted. They said no more than they said yes, because they were only looking for ortho. And now, I mean, there are more options than ever when it comes to selling your specialty practice. With your clients, what’s that education process like? Do they come in saying, “This is what I want to do,” and they only want to do one thing. And maybe the process. What is it like from a client’s perspective when they come in working with you?

Kevin Sauer

Yeah, it’s always such an interesting part of the job, because just about, if not, every single one of my clients that comes to us, and ultimately, I get to represent them, they come in because they are aware of maybe one or two, if it’s a specialist, one or two groups within their specialty. And so, if you’re an orthodontist, you know, you might come in and say, “I’m aware, or I have a buddy that works at a Smile Doctors and or a Southern Ortho Partners, and then they might know very little about all the other groups out there. And so, you know, I had a client who just went under LOI, who came in, he’s a specialist. And, you know, he knew of one or two local groups based on his geography in the United States, and going through this exercise of being in marketing, our marketed process, opened him up to more than half a dozen seriously interested mutually, from his perspective and from the buyer’s perspective, buyers that he had never even heard of and had no idea that was out there. And then, you know, it’s kind of pulling on the thread then that leads to other conversations of not only are there other buyers out there, but there are other models out there. Because if I come to us, and I know of only one or two groups, because I have clients or friends, sorry, friends, from their perspective, that went with them, they know that model, and they generally know that model only. And so, you know, we get to not only introduce new buyers, but open their world to different models. And a lot of times, you know, they come in thinking one thing and where they ultimately end up is vastly different from where they originally set out on the onset.

Kevin Cumbus

That’s awesome. It’s like that old phrase, you don’t know what you don’t know, right? You only know what you’re exposed to, what you read or what you hear about at the dental meetings or at the bar with your buddies, so that’s awesome. I think that’s one thing that’s unique and special about what we do is bringing the waterfront of opportunity to our clients, to maybe open their eyes to what is possible or could be possible. That’s awesome. A question I get asked a lot, Sauer is, “if I could build a GP-based group practice or a specialty-based group practice, which one should I build and why and what would be more valuable when it came time for me to exit? How would you answer that question?

Kevin Sauer

Well, I hate to be cliche and a little vague. But the truth is, if you’re building a strong business, whether it’s GP focused or specialty focused, if the foundation is right and you’ve got the right, you know, cultural fit and alignment and the right partner doctors in there, you really can’t go wrong. You can be crazy successfully either way. But if you press me, I mean, at the end of the day, specialty businesses are typically valued higher than GP businesses. You look at the Heartlands of the world, you used them as an example earlier. Obviously, they have seen a tremendous amount of success, and multiple times over, over the years, and they will continue to. And there will be the MB2s of the world who are, who are GP focused businesses, but MB2, as an example, does have a ton of specialty within their group too, and they have been successful, and will continue to be successful. But if I was, you know, backed into a corner, specialty businesses on an individual basis, up to a platform basis, typically trade higher than GP businesses.

Kevin Cumbus

We live in a world of, “it depends”, right? But like, apples to apples, celery to asparagus, everything held equal. I mean, that’s been my general experience as well. It’s there. And, you know, I’ve always kind of thought through the why on that. The profit margins can just be so much more rich. I remember we were representing an $11 million EBITDA deal. It was an ortho group, $11 million EBITDA ortho. It had 63% EBITDA margins. And I remember taking that deal to market, and everybody’s like, no one believed us, right? They’re like, well, this is wrong. You’ve done math wrong. And we quadruple checked it before we sent it out, and it’s real, and it’s really, frankly, linked to compensation, right? Because if you’re a general dentist and you’re compensating your associates 30-35% of collections, you cannot get 65% profit margin. It’s mathematically impossible to get there, given the other fixed costs, like rent that are there, plus the salaries and wages, plus the variable cost of supplies and labs. But in ortho, it’s unique, right? Because you can actually pay your associates a fixed salary, and if they’re producing like our client was, our client’s associates for $3 million of collections, the profit margin just, I mean, just materializes really, really quickly. What I’m getting to is, compensation is a big driver of EBITDA on these deals. What are you seeing from a market’s perspective about what they want to pay specialists and the impact that has on EBITDA and valuation?

Kevin Sauer

Yeah, before we go to market, or when we go to market, we recreate financials for our clients, you know, from the general ledger back up, to ensure that we are finding the accurate EBITDA for which the buy side is going to value the business. One of those variables that you can play with, to some degree, to really your question is competition on a go forward basis? Is it a salary? Is it a per diem? On a per diem basis, you know, is it, you know, higher or lower? You know, a higher salary is good for the doctor ongoing, but it’s going to lower that EBITDA, and therefore the valuation up front. You know, is it a percentage of collections? And so different buyers, you know, there are a lot of buyers out there that are pretty flexible. So, take Ortho as an example. An orthodontist might want to make $1,500-$1,750, or $2000 you know, dollars per day. In the buy side, the buyer is going to say, yes, yeah to all of it. They’re okay. But it’s going to change, again, it’s going to change that EBITDA. There are some groups out there that’ll say, “Okay, I understand what you guys have in your model, and your doctor wants this per diem. We’re going to, we’re going to look at it from a salary perspective, and they’re going to pay the salary, which comes out to around the same as the per diem.” Others will say, you know, “We have to account for…”, and we see this sometimes more with GP focused groups that have specialty where they’re going to come in, and they might compensate a little bit higher than a specialty specific group, because it might be a little bit more challenging for them to recruit and or replace our client long term, if or when our client decides to leave. And so if we have, let’s say, per diem, or maybe it’s a 35% of collections, you know that a group a buyer might say, “I see what you’re doing, but we’re going to pay you 40% and so, and that’s how you’re going to get on an ongoing basis, because we have to account for you, to replace you, you know, if and when you decide to leave one day.” You know, I had a client last year who was an oral surgeon, and I believe in our model, we had 35% baked in collections on an ongoing basis.

Kevin Cumbus

35% commission on the collections?

Kevin Sauer

They were going to pay him 35% of collections on an ongoing basis.

Kevin Cumbus

Perfect. Got it.

Kevin Sauer

And so, you know, that was what we had baked into our model, and most of the buyers were totally fine with that. And that was kind of in the realm of what they generally paid. However, this specialty group paid 30%. And so, I hadn’t seen one that low, but our client was very happy with it, because he was a rock star, and he was pranking, and so 30% of what he was collecting or producing, and then collecting on an annual basis was more than enough for his annual cash flow needs. And then it was able to pretty significantly increase his EBITDA, and therefore valuation, when we were taking that 5% you know, of compensation off his collections, and taking that in and adding that back to his EBITDA.

Kevin Cumbus

Let me wrap a little math around that. Big round numbers – What was his personal collections in that deal, if you can remember.

Kevin Sauer

Yeah, it was about two and a half million.

Kevin Cumbus

All right, so two and a half million, I’m going to take 5% of that, which is the difference between 35% and 30%, right? This is the way most the DSOs were thinking – we’re going to copy them at 35, this one DSO was going to copy them at 30. 5% of 2.5 million is $125,000. Now let’s apply a multiple to that, something relatively conservative. What do you want to that, a 6 or a 7?

Kevin Sauer

Let’s do a 7, because he got well north of that. But let’s do a 7.

Kevin Cumbus

Let’s do a 7 on that. So, if we multiply 7 times $125,000, it comes up to $875,000, and the impact was greater than that. So, if he had done a deal with one of the other handful of DSOs that paid 35% of collections and gotten the same multiple, he would have been leaving $875,000 on the table and not even know it. That’s the impact this has.

Kevin Sauer

Yeah, and ultimately, I mean, there are a lot of things that tipped it to that buyer’s favor, but that definitely was one of them.

Kevin Cumbus

That’s awesome.

Kevin Sauer

Because then you pull a thread, and then it’s personal income taxes on a go forward basis, about the 35% or majority of capital gains taxes at close on that $850,000, and so it’s meaningful.

Kevin Cumbus

That’s awesome. You run so many transactions and worked with so many specialists. Are there any key takeaways, lessons learned, surprises, aha moments that you’d want to share with our audience today, for many of the deals you worked on?

Kevin Sauer

Yeah, so you just brought up one of them that we talked about. So, I won’t get into that again. The compensation piece is a big piece. Rent is similar to that as well, too, right? Where rent can be tweaked a little bit, up or down. Is it a fair market value you’re paying, especially if you own on the building, are you paying above fair market value, and that’s what you want to make on a go forward basis? And we can fight for that, and we can talk about escalators and so on and so forth and negotiate that. Again, that’s going to increase or decrease your EBITDA, and therefore valuation accordingly. If you’re any platform, but especially a specialty platform, you know, one of the things to think about is, if you have associates, how are you going to account for associates? And this is something that we run into or come across all the time. And you know, I’ve, personally had clients who rely almost 100% of the practice’s collections off their associates. And therefore, of course, everyone is valuable, but they’re even more valuable to his or her business. Yeah, and you need to be able to count for these people. And because the buyers that are acquiring, you also want to know that the associates are going to come along for the ride too. And so, you know, we had a deal last year that got cut up because, you know, our client had five associates, I believe. And we had to account for every single one of them to ensure that they were happy. And one of those associates, can, they do hold some power during this process. And so, all that being said, you know, our client ended up carving out some equity. Our client ended up carving out some cash because, the difference between our client when they close, they’re not having to pay taxes on any rolled equity at the time of close. But if you gift some equity to associates, they feel the tax implications that year, that they receive that equity. And so those are all things that definitely a big learning to go through. And different buyers will treat them differently. And if you have the right buyer, the right partner moving forward, they will bend over backwards to try to accommodate it and make it work. But not all buyers are the same, and for some it might be a little bit too overwhelming for them, and so they might not want to do the deal. Another reason why you go wide and far when you’re going out. I had one more client. I’ll just make this quick, but it was a GP focused office that did have ortho in it, and, you know, the ortho was still up and coming in the practice, but our client and the buyer saw a huge potential for it, and so they also part of the deal was that our client needed to carve out some equity for that orthodontist, and that orthodontist needed to sign a new contract with the buyer. So, yes, it was a deal, and our client was driving it, and our client was the sole owner, but through the transaction, we, our client, the buyer, had to work alongside the orthodontist too to ensure that he was happy with the deal and that there was enough incentive in the deal, both now and in the future for that orthodontist, too. But it was worth it for our client, because having ortho in it made his deal so much more valuable to the buyer, and therefore to our client. And so, he was able to get a premium multiple because we were able to pack package it accordingly. And ultimately, you know, everyone was very happy, the buyer, our client, and the orthodontist.

Kevin Cumbus

I remember that deal really fondly. That was a lot of fun. You know, something about ortho, and the orthodontists know this, but maybe general dentists or pediatric dentists, that are layering in ortho into their business. We all know it, but the accounting of it is interesting. Starts are a predictor of future income, and your production doesn’t fall to EBITDA right out of the gate, unless you kind of take prepayment for that case, you know, the minute you sign the case. What I’m getting to is, there really can be a sizable cash to accrual adjustment there that can be very meaningful to the positive or to the negative. And you look at the situation you were just talking about, the orthodontist had been in there for a matter of years, but starts had really kicked up, and there was long term value creation in all of those starts that I know you worked really hard to get them credit for. So, I mean, you’ve got to be deep in this world to extract all the value that the entrepreneurial specialist deserves in trades like this. Because if you don’t know how to do it or ask the right questions, no buyer in their right mind is going to give you credit for it.

Kevin Sauer

No, and that’s right, just to add on to that, I mean, of course, I’m biased, right? But it’s because I’ve sat there, and I and I’ve fought the battle and walk alongside my clients in this journey. And everyone thinks about total enterprise value, and how much cash am I getting, and what’s the Holdco or what percentage Am I retaining? And I know, you know, we probably said this ad nauseam, but it that just scratches the surface of how detailed and intimate every detail is it within the broader scope of every deal. And you know, there’s just, there’s just so many moving parts, and there’s so much opportunity and or potentially value money left on the table if you don’t know where to look or how to handle this or how to get, for our client, how to get what’s theirs. In every deal, you know, something comes out more like, okay, yes, just like anything in life. You take that and you apply that to your next deal. And I take this learning, and I apply it to my next deal. When you’ve done as many deals with us, you have a good dispensary to pull from of knowledge that you’ve learned along the way to apply and help your next client out. Because the buyers, they’re good buyers out there, but you know, they’re also capitalists. Just like all of us, you know, they’re not going to spend if they don’t have to, and if the client’s not aware of it, they’re not going to spend.

Kevin Cumbus

Yeah, that’s well said. Well man, I’ve so enjoyed this time with you, but before I let you go, I would like for you to kind of open the duffel bag that you carry around with your crystal ball in it, dust it off and give us a give us a look into the future. You know, we’re coming off high interest rate environment, inflationary wages, recovering from great resignation. Pitch book data says 2023 was the hardest M&A market, second hardest M A market in the last decade, although somehow, some way, we enjoyed one of the greatest inside of TUSK. What do you think is going to happen in the specialty space in 2024 and beyond?

Kevin Sauer

Right now, I think there’s a lot of potential clients or doctors sitting on the side, because they look at the macroeconomic environment and they say, “Oh, it’s not a good time, so let me focus on the business.” And I’m not saying that’s the wrong thing to do, but what it’s doing is the sellers that are coming to market, they are well positioned, because they are good businesses, good assets. And maybe there’s not as many of them as there might have been a couple years ago. And so, buyers are champing at the bit to still participate, and yes, cost of capital is higher, but we don’t know. They might be using money that they financed 2, 3, 4 years ago when interest rates were still significantly lower, and they still have some dry powder to use, or they’ve got a new debt facility, and they are still, you know, their mandate is still to spend it. And so all that to be said, coming back to, I don’t know that valuations are going to increase. That’s because right now, I’m still seeing, personally, valuations at very high levels, and truth be told, especially deals that I’m representing right now and have in the past year, they are no less in terms of multiple than they were 2, 3, 4 years ago. The difference is buyers are taking a little longer. Buyers are taking a closer look under the microscope, you know, so they’re spending a little bit more time. But once they realize that the assets and the businesses are good, they’re still coming in hot and heavy to acquire these. I mean, I’ve got a deal right now just went under LOI, ortho Pedo platform that just went north of 10. You know, an endo group that sold right around there, say, multiple. I’ve got another Pedo-Ortho group that is going to sell well north of 9. And so, I’m not saying that if you’re a specialty, you’re for sure going to come in and get a 9-10x multiple. But what I am seeing is that if there’s more people sitting on the side because they think it’s not the right time because they’re just projecting and think the cost of capital, cost of labor, is higher for their business, therefore it’s not the right time and buyers aren’t going to spend, there still are buyers, a tremendous amount of buyers, and because of our pool, we are finding them and I think it’s still a great time to you know now and not on the horizon for clients and doctors to – if now is the right time for you. And I’m not saying you need to force it right now. If your long term plan was you were going to sell in 5 to 10 years, I’m not saying sell now, but if you were thinking, “Well, I wanted to sell now, but now I’m going to wait another 3 or 4 years and try to get past this, then I don’t think that’s the right outlook because right now I still think, based on valuations, amount of buyers, and what we’re seeing in deal structures, now is just as good a time as ever.

Kevin Cumbus

Awesome. Sauer, I can’t thank you enough. Thanks for all you do for your clients. I know you’re out there representing them and fighting a good fight. And really, that’s how you’re able to achieve these incredible multiples for them. So thank you for your time. I’ll let you get back to your day job. This has been awesome. Thank you, Kevin. I love having somebody on the pod who is right there at the front lines daily, hour by hour, minute by minute, talking with buyers, and can give us kind of a snapshot view of what they’re seeing each and every day. Who would have thought that valuations are where they are today? I mean, again, it’s been a choppy, tough market, especially at the high end of the market, right? You look at deals $50 – $100 million in EBITDA. 10 of them failed last year. Yet in our world, sub $20 million in EBITDA, we are still seeing deals get done at double digit multiples today, and rates haven’t even gone down yet. So to Sauer’s point, if you’re sitting there with a two year perspective, you may want to strike while the iron is hot and take advantage of this unique stitch in time of the market. We’re always willing to talk with you. Feel free to give us a ring. Thank you again for tuning in, and we’ll see you next time.