Elizabeth Macready 00:00

Good evening. Welcome to TUSK’s, Dermatology M&A market update. We’re looking forward to spending some time with you all this evening to recap 2024 as well as diving deep into the market predictions for 2025. My name is Elizabeth Macready. I’m a director here at TUSK, and I specialize in the medical aesthetic space, which includes dermatology and other medical aesthetics industries. I have a background in healthcare that spans about 15 years of practice management, consulting, sales and ultimately private equity getting into the buy side in 2019, so I’ve sat on the other side of the table, and as it relates to mergers and acquisitions, representing private equity groups currently with TUSK, speaking with business owners and dermatologists like yourself to help you understand your current market valuation and how TUSK can help you get the best outcome with your practice sale. Josh, do you want to introduce yourself as well?

Josh Swearingen 01:12

Great to be here, Elizabeth, always a pleasure to put these things together and get them out into the marketplace. My name is Josh. Swearingen, I’ve been in healthcare for, gosh, going on 23 years now. My career spans numerous different jobs. I started in sales, and then I also had the opportunity to run a couple of MSOs, take them to market and actually sell them out off to private equity, which is what some of this presentation is going to be about. And I’ve been working with TUSK over the last several years, representing prospective sellers like yourselves out in the marketplace and working directly with the buyers, trying to negotiate the best possible deals for you owners out there. So great to be here. I’m excited to get dig into the topic tonight.

Elizabeth Macready 01:56

Thanks, Josh, before we move forward, I also want to mention that if you have any questions as we move through the content this evening, please feel free to enter those questions into the Q&A box, and we will follow up with you on answering those questions and we really hope that this can become an informative opportunity for you. I do want to take a moment to tell you a little bit more about TUSK for those that are not familiar with us and joining us for maybe the first time, we have collectively, inside of the four walls of TUSK, a team of 14 team members. So, we run a pretty lean operation. However, even with that lean of a team, we span over 120 years of healthcare experience collectively. So, our team has a wide range of background, 50+ years of investment banking, mergers and acquisitions, private equity and some of the other experiences that Josh and I touched on with ourselves, personally, we have overseen over $1 billion dollars in healthcare deals. We’re very proud to be have been able to represent successfully a large number of practice owners and doctors through their transition in multiple areas of healthcare, and so we believe that we’ve been able to take that experience and use that to be able to, you know, not only help you navigate current trends, but also use that historical experience in your favor when you choose to work with with us at TUSK, and we’ll be spending some more time on some of that knowledge and learnings here this evening. We’ve had closed over 200 healthcare transactions and have been referenced in over 50 publications. So, we love what we do, and we feel like our numbers are something we’re really proud of. Ultimately, our goal is to work with doctors and help you get the best possible outcome with selling your practice and helping you navigate what that can look like in today’s world. I mentioned previously that our team members have a pretty wide range of experiences in various companies and arts of healthcare, and you can see there are many brand names and logos on the screen right now, and each one of these represents a brand or a company that our team members have partnered with, worked for and represented over the years. So one of the things that’s unique about TUSK is while we have a deep rooted experience in finance and investment banking, our team is very diverse and understanding the ins and outs of not only that aspect of your business, but also operations and also, you know, having team members on our team like Josh, who have, you know, owned and operated med spas, personally, we feel that we can use that wide range of experiences, to really dig deep in understanding your challenges day to day, what’s important to you as a business owner, day to day, and each area of your business that makes your practice unique. I’m going to hand this over to Josh as we dive into, you know, some more topics related to current trends that are happening right now with something called, you know, the 2024 election. And Josh, I’ll let you kind of speak to this slide.

Josh Swearingen 05:35

 Awesome. Thank you, Elizabeth. Well, I just want to step back for a half a second here and kind of give a little bit of a broader overview of this evening. I think, you know, when we when we do these updates, we like to spend a little bit of time talking about, kind of the year that was, talk a little bit about some of the trends that we, we noticed over the last year or two years, and then how that might play out in the year ahead. So, one of the things we’re going to start with this evening will be kind of a little bit of a recap of what happened last year, both politically, and then how that actually correlates into the economy. You know, there are some things that you may or may not have tracked throughout the course of the year that impacted how private equity operated. So, we’re going to touch on that a little bit, and then ultimately, we’re going to kind of land the plane at the end of this, and talk about, what is private equity looking for in a business that they’re looking to acquire? Are, are you in a position currently, or what can you do, you know, over the next, you know, 6, 12, 18 months, to get your business ready to be highly desirable for some of these groups out there as they look to acquire and consolidate the marketplace. And then also, what does that consolidation look like within dermatology and in the broader market in medical aesthetics as a whole, and what can we anticipate moving forward based on historically, what we’ve seen in other healthcare industries? So, we’ll kind of touch on a lot of that kind of stuff. As Elizabeth said, feel free to throw questions out there. If we don’t get to them tonight, we’ll certainly reach out with the answer after this is, this has already been done but looking forward to getting into it. So just really briefly, I don’t want to, I don’t want to spend too much time on this, but I would say that really, especially towards the middle two, quarters Q2, Q3, and then a little bit of Q4 heading into the election, the capital markets really kind of ground to a halt, and a lot of that was because people didn’t really know what was going to happen. And in general, private equity has operated very, very well within environments that it understands and knows well. And when there’s any level of uncertainty, things kind of just grind to a halt. And we saw that really from probably March, April, all the way up through the beginning of November, and then when the election happened, and we now have some degree of certainty of what we believe is going to be going on over the next couple of years, politically and then hopefully economically, we saw, saw things starting to loosen up. So, I think that as we go through some of these numbers, you’re going to see, you’re going to see the obvious slowdown. But we are already regularly talking with buyers and regularly interacting with private equity groups talking about what their growth plans are for 2025 because right now, there’s just a tremendous amount of pent-up interest in in consolidation that has not been played out in the market yet because people were too scared to deploy some of that capital. So, one of the first things you’ll notice, and I’m rehashing a little bit here, and I apologize, but as we get into this, we’ve seen, you know, some uncertainty within the interest rate environment. We’ve seen some of that come down. We’re expecting additional cuts throughout the beginning of 2025 provided inflation remains at bay. And I think that a lot of the uncertainty that we were talking we were talking about really centered around what tax policy was going to look like. So, we weren’t really certain what was going to happen with the new tax rates that were being proposed by the Biden administration. We are relatively certain that it is, it seems very likely that the Trump tax cuts will remain in place and probably be memorialized long term, which gives us a high degree of certainty of what we’re looking at down the road so and then obviously, when it comes to personal consumption, inflation and unemployment rate, all of these things were fluctuating to the negative throughout most of 2024 and we’ve just now seen inflation kind of coming to a rest. We’ve seen a little bit of a rise over the last couple months, or last month or so, but we anticipate that it’s actually hitting a point where it’s probably evening out for the time being, and that’s going to help the unemployment rate. It’s going to help the Fed funds rate. We’re going to see capital become less expensive. Some of that slowdown has run concurrently with inflation rates rising. Unemployment rates, again, these are all indicators of relative uncertainty in the market environment and we, you know, are seeing a noted increase in activity over the last few weeks even. And we anticipate seeing that throughout, really, throughout 2025, 2026 as well, in the coming couple of years, especially given where we are politically right now.

Elizabeth Macready 10:23

We’re going to dive into dermatology industry updates and the trends and the you know how private equity shifts along the trend line with some of these macro implications that Josh covered is, is what we’ll spend some time on here in the next section. But as a general overview, I just want to touch on, really dermatology at large. Dermatology is about a $9 billion industry growing at a two, just rough, just over two and a half percent compound annual growth rate, and that’s projected to continue over 2029. The reason for this, what’s aiding in that growth for the projected future is a couple of things: A, is rising incomes, B, broader insurance cover, coverage for dermatology procedures, and C, you know, increased demand for skin care services and that and that growth trajectory is fairly healthy for the healthcare sector in terms of, you know, internally with our dermatologists, we have seen a couple of other trends as it relates to, you know, procedures. For instance, we have seen a 52% increase in non-surgical cosmetic procedures. So those you know, not medical, medically necessary, necessary procedures such as neurotoxins and laser peels and some other more aesthetic things and procedures that consumers are interested in and preserving how they’re they look at aesthetically and exploring those types of new technologies has seen it as surge over the last year or so, but also there’s been some challenges. We’ve seen rising operating costs posing challenges to small practices. I know some of those macro trends we touched on have impacted everybody’s wallet, and the discretionary spend has followed suit. The operating costs of just being a small business owner have risen and created some challenges, which I’m sure you can all attest to. Large practices can benefit from cost synergies and that recruiting power. So when we talk about the private equity groups and the managed service organizations, and some of the benefit that those groups are creating, and the value they’re creating for independent business owners and dermatologists as they’re thinking about transitioning, potentially to a managed service organization through an acquisition, you know, those cost synergies and the recruiting power they’re able to offer those at scale, not as a single you know dermatologist, you know, necessarily right now, you would not be able to compete with. And so, you know, we have seen the consolidation trend continue to be somewhat healthy, and it’s progressing, and we’re seeing a decrease in solo practices right now. In 2012 it was hovering around 26% of the market being solo practitioners of dermatologists, and about 12% fell into that 10 to 50 providers. And so, we’ve seen that shift now from 2012 to 2020, and now we see, you know, even more of these 10 to 50 provider platforms coming and growing. So now that’s gone from 12 to 18% and so that shift, however, despite the headwinds of 2020 economically, 2024, that trend continues to see a strong shift towards consolidation and more and more solo providers joining up with platforms that can offer them these additional supports and cost synergies and recruiting capabilities.  Yeah, thanks, Josh and I agree. And if you can see this graph on the right-hand side, what’s really interesting with the med aesthetics landscape in general, right now, and spanning over the past five years or so, is you see this uptick of demand and interest from private equity because of the now kind of booming interest in aesthetics in general. And so, you can see that figure here that you know, from 2017 3% of the deal count was in aesthetics to in 2023 63% of the deal count was in aesthetics. You know, it exposes a pretty strong opportunity, I think, for dermatologists who are focused in medical dermatology or starting to implement aesthetic procedures. We’ll get into that a little bit more in terms of strategic, you know, outlook, but a lot of interesting, you know, shifts in the market over that period of time and to Josh’s point, it seems like, you know, the outlook is that it’s has a good opportunity to keep that momentum for the future.

Josh Swearingen 14:07

I want to just add something, really fascinating looking at some of these numbers, and I am specifically focused on kind of the consolidation beginning in the early 2010s through now the left graph, I think you know, as you look historically throughout healthcare, you see similar growth in the in consolidation in other industries. I’m referencing general medical and dental and surgical and even some of women’s health, some other various verticals. But what I think it’s really, really interesting is, is in all of the other all of the other verticals, there you get to this point, and it’s almost like a tipping point in consolidation, and that’s usually somewhere in the neighborhood of like 8 to 12% consolidated, where all of a sudden it picks up speed. And the reason for that, in general, is because, you know, you kind of these groups get started, and they start building out scale, and like you’re talking about, they start building out efficiencies. They have better human resources offerings for their team. They can market a little bit easier. And then eventually they get to enough scale where they start really heavily negotiating with pay, with the payer environment, and you start to see a pretty significant variance between what you can receive in reimbursements on the private practice level, versus what you can receive on the group practice level, and all of those things start to combine. And the jump from, you know, 0% consolidated to 10% can take a decade. It can take 10, 12, 15, years to kind of get to that point once private equity starts really getting interested in the space. But the jump from 10 to 20, 30, 40% only, you know, comparatively, only takes, you know, a very small amount of time so that we really, you know, in our spin our world, we kind of call that the golden age of the private practices from a valuation standpoint, and we’re very quickly tipping over into a position where there are enough large groups out there to create a competitive environment for a bit for a business owner who’s selling. And there’s enough of a difference between the practice of financials on a private practice scale and a group practice scale to make it incredibly profitable for some of these larger groups to acquire these smaller businesses. And it’s going to drive up the valuations on your dermatology practice across the board. And we’ve seen it in every other market segment, and we’re starting to see it now where valuations are going to start to exponentially increase. So that’s what I just think it’s really interesting to see that.

Elizabeth Macready 17:49

So, if we look at really kind of where, what the investor landscape looks like. So, we’re going to talk about next, the investor interest in the dermatology space, and so what that landscape looks like right now. You can see that what I mentioned previously on the previous slide is just that uptick and that dramatic uptake in aesthetic services and in general in the private equity space. What we’re seeing right now, what we’re being told by buyers who we interact with and interact with and in deals that we’ve represented in the market is a favor towards practices with a blend of services. So having a diversified mix of services between medical, cosmetic and aesthetic, are the things that investors are telling us right now that they’re most confident in and helps them feel comfortable with from an investment standpoint, it does open the door with to, you know, being able to, you know, really capture additional revenue streams A, but also to reducing some risk that could be relative to, you know, just cosmetic procedures, for instance, or just medical procedures, you know, as another example. And so having that diversification is something that there we’re seeing translate over into their level of interest and an acquisition. One thing to keep in mind is that as the market matures, that that Josh spoke to just in the previous slide, we do see that there is some steam that gets picked up, and we start to see that kind of acceleration of consolidation in the market. Dermatology, you know, in the past 15 years that private equity has been involved in dermatology has gone through a lot of this over that course of time. And one thing to keep in mind is that, you know, as that maturity takes place. That’s a great thing from the lens of being able to, you know, pick up value from, you know, being able to partner with a private equity group or a managed service organization as a solo practitioner. But also, you know, something to consider is that we, you may see valuations start to compress as the consolidation matures. And the reason for that is, you know, after the first couple of recapitalization events, and as that platform continues to grow, you know, there, there is a mentality shift, typically, that we see with these groups, where you know you’re not getting, you know, huge tailwind returns as a new partner in the group, and when you’re selling your business into a group as a late stage adopter. So right now, you’re probably still in that sweet spot where, you know, getting in right now you’re still in the kind of early to mid-phase of being able to take advantage of some of the financial upside of the consolidation in the market. And so, another thing that they look for and offer is the ability to centralize operations. So, you know, when we think about how, if you can see in the graph here this in Texas, right? We’ve got 10 plus platforms, lots of activity in Texas. What that does is creates an environment in that particular area where we have a lot of presence and a lot of infrastructure, where operations can begin to be centralized. You know, we can have singular call centers, for instance, or singular points of contact for different various things within the organization. And so, you know, those things provide some relief on a local level and also helps the organization to be able to scale up overhead. You know, it can be spread over larger revenue. So again, like I said, when you have a platform and you’ve got an infrastructure within a certain area of the country, you may be able to pull resources, again, from practice to practice, whereas otherwise you’re kind of flying as a solo practitioner, probably not able to utilize resources from another local doc that opens the floodgates and opens the door for that collaborative opportunity, which, which is another, you know, huge value add to the market and how that maturity takes place. And so, you know, all of that being said, what the great outcome looks like for a doctor when these conditions are right, which right now, you know, we do feel are still right in the dermatology space.

Josh Swearingen 22:29

Alright and just to kind of lend a little credence to what Elizabeth was just talking about, you know, when you when you’re out in the marketplace, and you’re talking to colleagues, things like that, a lot of times, you’ll hear people refer to the second bite of the apple. And essentially, in in most of your, most of the transactions that are occurring today, there’s an element, there’s a percentage of the deal that is cash that you receive at closing, and then there’s usually a percentage of the deal that is equity in the parent company, the larger consolidator. So, when they’re talking about that second bite of the apple, they’re talking about, you know, those consolidators ultimately grow to a certain level and they sell, and that’s how their investors make their money. So we’ve actually already had a couple of groups within the term dermatology space that started with a certain, you know, private equity group, and you can see those kind of listed on the left hand side there, and then sold, you know, five to seven years later to another private equity group, and any of those doctors that were a part of that platform initially with the with the original private equity group, likely we’re able to monetize a lot of that growth at the at the next sale. It’s called a recapitalization. So, we’ve seen, we’ve seen some of that. We’re seeing more activity on that front, and we have a very active market in the space. And I think one of the really nice things about dermatology is that there are actually a large number of groups. And if you look across the medical aesthetic space, in the med spa space, there aren’t really that many larger consolidating groups. And in plastic surgery there, there are a few, but not really that many. But in dermatology, it’s a little bit more established to market, so you have enough groups out there to create a competitive environment and provide you with the opportunity to really kind of find the group that will monetize your investment in the best manner possible that fits with the type of business that you run. So, and again, just to tag along with what Elizabeth was just saying, I think that really, we’re seeing a kind of a significant graying of the lines in the consolidation space. We’re seeing, you know, some of your dermatology platforms that were pure play dermatology, obviously, are now getting into more of those injectables and different types of services and things like that. So, they’re now incorporating med spas into their groups to some extent, and in some cases, med spas that don’t have a medical dermatology business attached to them. And there are some that are looking at incorporating plastic surgery so that they can hit all three of those verticals within medical aesthetics, within the medical aesthetic space. So, I think we’re going to continue. Continue to see those granular lines we’re seeing within plastic surgery. Plastic Surgery groups are now reaching out into dermatology and are now reaching out into med spas, and that continued back and forth is going to is going to be maintained over the next several years. We see groups that are merging with large scale groups and changing names, rebranding things like that, and private equity is, is really kind of behind all of this. And there’s, there’s, there are more and more groups. I always laugh about it, because, you know, for every, for every private equity group that has an investment in the dermatology space, there are 10 more behind them, looking for large scale dermatology businesses that they can invest in and grow around. So, there are no shortages of buyers out in the space right now.

Elizabeth Macready 25:53

So, what is, what are the future opportunities look like in dermatology? You know, we talk, we’re talking a lot about private equity and the opportunity as it relates to consolidation, and you know that pathway, obviously there’s, there’s continued opportunity there, with expansion in the mid-tier markets, hybrid care models, building integrated platforms for diversified services, which Josh was just touching on. But then operationally, you know, we have these minimally invasive treatments. We’ve got wellness centric offerings like hormone replacement therapy and weight loss therapy, which was a kind of a big addition to many practices, many businesses in general, in the last year or so, which is aided in quite a bit of growth and then enhanced patient experience through technologies and holistic care, all these things sort of blending together create, you know, this kind of perfect storm situation of elevating the industry to the next phase of growth. So next, we’re going to spend some time with unpacking the mergers and acquisitions overview for dermatology, and really, kind of just really reset on some of the fundamentals of private equity, what they’re looking for, etc., and glean some insights there to the M&A market overall. So private equity and dermatology, let’s talk about some key trends. A couple of things you know to note is, you know, dermatology and aesthetics has attracted significant private equity interest that Josh was has mentioned this, I’ll say probably every week we’re getting a call, if not two or more, from new investors, individuals who have raised capital, new groups who are forming that are looking to invest into this space. And so, it truly is a hot market. And from the lens of having despite some macroeconomic softening in the market and a lot of other areas of healthcare, the dermatology and aesthetic space, we still see that sort of entry point with many new investors looking to get in, which is a great trend to be aware of. There’s been over $3.1 billion invested into the dermatology space in the past five years, and it’s pretty incredible. And there’s this focus on plastic and med spas, due to the cash pay model advantages, which we touched on. There are opportunities driven by the high fragmentation and consolidation potential. You know, the mom-and-pop version of dermatology as it was 15 years ago, obviously, has shifted, will continue to shift. And hopefully what that presents is opportunities overall for, you know, more focused clinical outcomes, but then also this using of the business powers and of you know, investors and CEOs and C-suite level people to come in and really elevate the business strategy and ultimately, you know, the ability to attract more people and consumers into the market space. So that has been, you know, again, one of the other key trends for dermatology.

Josh Swearingen 29:18

All right, yeah, I think, I think we’ve probably touched on a lot of this over the last several slides. But I mean, there’s, there are obvious reasons why private equity is interested in the space from a from kind of an operational level. They will traditionally make an initial platform investment, which is a larger scale investment that’s usually either a really large existing practice or a group of practices that have some level of efficiency within them, and then they’ll build around those. And as they build around those, and add on additional businesses, eventually they get to the point where they’ve utilized all of their capital, and then they will sell the entire business off to a larger private equity group. And that kind of create that second sale. Kind of creates that second bite of the apple. And just you know, for reference purposes, most private equity groups are looking at investment time ranges from of anywhere from five to seven years. So, if they’re very aggressive. They may look at a three-year period, but most of them are on a five-to-seven-year cycle. So, if you are at the front end of a process with a private equity group, you will probably have that that same financing arm for five to seven years, and then you’ll get that second bite of the apple. You’ll be able to sell out a portion of your equity, and you either remain with the business or you can ride off into the sunset, and that’s entirely up to you. So, alright, so, you know, the question we always get is, you know, why is private equity looking at dermatology and the medical aesthetic space in general? And there, there are a lot of different reasons. Some of this is applicable. Some of it’s not. But, you know, they love provider driven businesses that have patients that are on some sort of a regular call cycle. So, for instance, within dentistry, you have your hygiene visits every year. Within primary care, you have an annual that you go to. So, they see that as a source of safety, and they see it as a good touch point with the patients long term. So, dermatology fits right into that model. Some things that dermatology has that that a lot of other markets don’t have, is you also have a reasonably significant amount of cash pay within the business. So, there’s obviously the medical side and the insurance side, but there are also cash pay portions of the business as well. And I’m talking about not just, you know, your neurotoxins and your, you know, Botox fillers, things like that, and your laser services, but also retail products and things like revenue drivers like that. So that all becomes very attractive to a prospective investor. In general, we see that dermatology is very resilient during economic downturns. That is also very attractive. And in general, and this is not, this is not, this is painting a very broad brush, brush. So please don’t be offended. But many doctors you’ll be shocked to know don’t make the best business owners. So you know, as the CEO of your own business, you have to handle human resources and marketing and patient care, and you know all these other pieces and parts, and in many cases, having a really good business arm that a private equity group can provide helps the businesses run more efficiently and ultimately provide as good or better patient care than many of the alternatives. So that’s really kind of what drives a lot of this, and you can see it historically in other spaces, and it will continue in dermatology and in other industries in the future.

Elizabeth Macready 33:21

So, there are a couple of key considerations for practice owners if you’re thinking about you know your options related to selling your business and considering the pathway of going towards a private equity route. Some critical factors include how to maximize economics of the deal. We work with clients every day to help them with this in real time. So don’t feel like this is something that you need to be, you know, a Harvard MBA to be able to understand. These are things that, you know, we specialize, and we can help you allocate a team to help you navigate when the time is right. But what’s really important is maximizing, you know, the economics of your deal from, you know, coming up with favorable deal terms, which is often overlooked, relative to the top line price that’s given on a deal offer. And then secondly, is credit for growth initiative. So, if you’re I have an example of a dermatologist who recently I was working with, who had an offer on the table from a from a buyer. There were, you know, multiple, you know, growth opportunities within the business that hadn’t been captured yet. So, these were things that we reviewed with her as part of our valuation. She had gotten this offer from a buyer prior to coming to us. So, when we were kind of lining up our valuation with the offer that she got, you know, we were able to help her recognize that, you know, there were, there was huge growth upside for her with some of the switching over of, you know, things like supplies and merchant services and pickups like that, that were really just like switch of a button type things in her profit and loss statement with the offer that she got. She wasn’t being given a credit on a go forward basis for the growth of the business beyond, beyond, really the closing date. And so those are really important factors when you’re thinking about, you know, having credit for the growth after the sale. Those are, those can be things that are often overlooked or not thought about until, you know, the deal is closed. And so, if you don’t have great representation, that’s an often a common trap, but also a very important part of making sure that you know you have an agreement in place with a buyer that makes sense for you, not only short term, but also long term. The second is clinical autonomy. So, one thing that the managed service organization, one thing that the private equity group can never do is clinical work. They’re not doctors. They don’t pride themselves on being doctors. That’s why they need you. You’re the glue that holds that together. And so, understanding that there will be clinical oversight, there will be clinical leaders oftentimes in these organizations. What’s really important to understand during these conversations is, what kind of local governance do I have after this this sale closes to maintain clinical autonomy with my patients. Is this going to be a situation where I’m expected to do things that maybe you know aren’t in alignment with my clinical practice. And, you know, we just don’t, maybe see eye to eye on what those things are, and that’s a really important consideration as well. The third, I’d say, is resources. So, access to capital, access to administrative support, is really important. You’re, you know, oftentimes paying these groups a management fee post close on a go forward basis. So, they have these built in costs relative to the deal that account for administrative support. And so, understanding what that administrative support actually is, is important to you know, understanding and feeling confident in the deal that you have in front of you. So, fourth is really the track record of the buyer. Has this buyer done this and shown operational success in the past? Has this buyer, you know, done this once before, you know? And this is this something that they’ve proven that they have the chops to handle. And those are things that when you’re going through, and you partnered with TUSK, and we have, you, you know, in market with potential buyers. We are fully vetting those we do have experience with understanding, you know, who are kind of the best players in the market, and what kind of value do they offer you and relative to their track record. But also, if there’s somebody that’s, you know, maybe a local, smaller group that you know is a little bit more of an unknown, that we do that diligence with you to help you understand that track record and their past successes and uncovering any opportunities or any skeletons that may be in the closet relative to that, that historical track record that they have. So, there’s a couple things in terms of post transaction value. So, I always say, you know, that are when you’re ready to sell your practice, it’s a very exciting opportunity. You only get one opportunity to do this and get it right. All of our focus goes towards, you know, what’s the valuation? You know, let’s talk about the economics. Let’s talk about the partnership and going through this process together, but there’s a there’s a tendency that we want to focus on that once that that deal is solidified, you know, we want to make sure that we’re not overlooking the reality that comes after that point. Because oftentimes a private equity group or a managed service organization, they’re going to look for you to stay on for a minimum of three to five years. Sometimes we have doctors that want to stay on longer than that. So, you know that that’s even better. You know, from a variety of different lenses, can be the right decision for many clinicians out there, but the value creation of the what the MSO can provide after the sale closes, is incredibly important. Some of those things to consider is the continuation of business as usual for clinical operations. I kind of touched on that a little bit before, but can’t emphasize this enough that you, you know, really want to make sure that you’re aligned ideologically, clinically, with the group, and they’re going to let you be, you know, treat patients the way that you need to treat them. I’m sure there’s probably nobody that would disagree with that. But it, you know, is something that from a when you think about what life’s going to be after the deal closes for that three-to-five-year period. Certainly, something that you’ll want to make sure is minimally disrupted. Second is integration in the platform system. So, there is this period of time of integration into EMR accounting systems. There’s HR teams, there’s, there’s a whole lot of things that take place during the transition that they will partner with you and help you with. But there’s, there’s this integration where there may be a requirement for change on your part, and due to the fact that your team will not likely be privy to any of this until after the deal closes, this is a big consideration and a big question that looms oftentimes with a provider throughout the sale process, and so understanding and being able to bring understanding from the buyer side what their expectations are is important as it relates to you know, how that translates and in the go forward of your team’s happiness, your happiness and the continued success of the business. Third is alignment with private equity partners through rollover equity so you know the how deals typically are structured is there’s going to be a percentage of your valuation overall that’s paid out cash at close, and there’s going to be a percentage of that that is ruled into either retained equity in the practice or equity into the parent company of your new partner, and so that creates an incentive structure there where your interests really should be aligned with this, with the group. How that sits, and how that is structured, and how you liquidate that role over equity, are all factors and considerations that our team helps you with navigating and you know, can either really make or break partnerships. It’s really kind of, I don’t say it’s like, it’s sad, but it’s disappointing when you hear stories about practitioners who, you know, everybody’s happy, you know, goes through the process, maybe they feel like they found the right partner, and then down the road, they feel like, hey, you know, maybe there was a better way to have structured this rollover equity component so that maybe it would have been more successful, or maybe I would have felt like I had a better deal overall. And so, we try to give you that foresight to be able to kind of do that up front and prevent any kind of headaches down the road relative to that rollover component. And then lastly, is really focused on shared growth goals, so that second bite of the apple. So, what’s the group’s expectation of growth from you post close? Let’s make sure that that is realistic. You know your business better than anybody else, if traditionally, you know you’re seeing 5% year over year growth, and they’re expecting 20% year over year growth probably should be a red flag, and certainly could set the partnership up for some turmoil, and set you up for a situation where you know you may not be super happy driving in work every day, which is not a situation that you know, certainly anybody wants to be in. So, all these things, although they can feel sort of not critical to the deal, because we’re so focused on getting, you know, the best price for you possible, long term, these are probably the most important things to your overall success and happiness as it relates to selling your business and partnering with a managed service organization.

Josh Swearingen 43:28

So, we’ve got some basic kind of industry data that’s specific to healthcare and dermatology, and we know that healthcare transactions have been down, and this is all leading into the conversation about what the market is going to look like in 2025 and probably 2026 as well. But we know healthcare transactions, as on the whole, have gradually been down quarter over quarter for the last, for the last two and a half years. That’s that same thing has been maintained in dermatology, where we’ve seen transactions go from 87 to 84 and in 2024 now mind you, this graph is the 2024 number is only through May 31^st, but we anticipate that that number is going to come in, probably in the 60 range. So, we saw a pretty significant drop off the cliff in 2024 to close things out, that sets us up. And something to understand with private equity is they have a certain amount of capital that they are kind of required to deploy, obviously, responsibly, but they are required to deploy as a part of their investment thesis and their commitment to their investors. So, there is a tremendous amount of capital that has been sitting on the sidelines over the last couple of years that’s just slowly built up during that time period. So, we really do anticipate seeing a really for the next 12 to 18 months, a rapid pace of acquisition activity in the dermatology space. Another thing to really kind of keep note of as you’re thinking about you know what this might mean for you, within dermatology, and I mentioned this earlier, and this graph is a little bit hard to read, just unless you really know you’re looking at. But as I mentioned, most private equity groups recapitalize every five to seven years, and we know that within dermatology, 16 of the largest consolidators are at greater than five years in their current with their current fund, and five right, greater than seven years with their current fund. So those are, you know, upwards of 20 or so large groups that are probably going to be recapitalizing in the next you know, 12 to 18 months at the most, which will always bring additional capital into those groups, which will provide them with what they need to continue growing. So, all of these things are starting to kind of come together right now, which is great. It’s fantastic for sellers, because you’re going to have a lot of groups that are going to be vying for a small pool of practices. And so just to step back really briefly, you know, I mentioned at the front end that we would talk a little bit about kind of how consolidation works. And I think there are three different phases. And the first phase is kind of that 0 to 10% that is when private equity groups are really kind of putting together their platform. So, they’re start, they’re putting together the building blocks of what they want to expand later on, and that that takes several years to even get that kind of off the ground, and then phase two, which is what we’re really heading into, and at 10 to 40% consolidated, this is where my dentistry is right now. It’s kind of where behavioral health is right now, and a lot of other segments of the industry, but that phase two is what we’re heading into in dermatology. And the groups that really benefit from that are those private practices and larger private practices that can drive value. And now that you know, we’ve been through that initial platform development phase, we have enough consolidators out there, enough groups out there, to provide a competitive environment, so it drives up the price of the acquisition, and it ultimately pays off in spades for you. And then, you know, once you get over that 40% consolidated, you’ve got a relatively consolidated market. And that’s when a lot of these groups start buying each other. So, they’re no longer looking at buying private practices. They’re actually looking at buying smaller groups. So again, similar to the front end of the phase, where they’re looking for large groups or large, really, really large individual practices with multiple providers, that, again, kind of comes into Vogue on the back end of this, where these larger consolidators, they need large acquisitions to move the needle for them with their investors. So that’s really what they focus on. And I think that this is where you start to see acceleration really speed up, because everybody is starting to everybody’s on the block at that point. Almost everybody is for sale at that point. So, I think that’s kind of gives you a little bit of insight. I would imagine that this phase two, it’s probably a 10-to-15-year phase. So, we’ve got, we are heading into the Golden Age, and the early adopters are the ones that are going to get the higher valuations in the market. And I think that it’s going to be really, really enjoyable for some of you that are in that in the process of, kind of considering going to market or selling your business or partnering with a larger group at some point over the next, you know, couple of years.

Elizabeth Macready 48:33

We get asked this question quite a bit and obviously we’re working with a lot of dermatology practices every day trying to really educate the market and give feedback on who the ideal or ideal seller profile is for a managed service organization or private equity group, and those two are two distinct different buyers and profiles in the market in terms of what they look for. Okay, so next we’re going to talk about what the ideal seller profile looks like from the lens of an MSO or a private equity group. First, you know, what are MSOs looking for a managed service organization, hat’s their ideal profile when I talk to clients, and now I’m working with clients that are that are calling in and in the early stages of considering selling their practice, we do get into these details quite often. It’s often questions that that I get from sellers and those that are planning for their sales. So, from an MSO lens, a couple of the things that they look for in terms of their ideal profile is first an owner that or owner seller who’s willing to stay on a minimum of five years. The longer that you’re able and willing to stay on, the more interested and safe they see that investment. Obviously replacing an owner doctor is something that can propose pose some risk to the business, as it’s going to be really tough as someone that’s run the business for X amount of time and really put their blood, sweat and tears into making the business what it is, and replacing that person. So, the longer you’re willing to commit, and oftentimes that’s about a five-year period, is the ideal kind of sweet spot for that, for a managed service organization, the better. The second is that you offer a broad mix of services and providers. So, one aspect of this, again, going back to, you know, diversifying your service mix, having, you know, cosmetic procedures, along with the medical procedures, etc., are things that, you know, they love to see. Having additional providers, having NPS, having mid-level providers, having, you know, there are other dermatologists in the business who are producing and kind of diversifying, you know, the production and how that’s allocated, is another, you know, really big plus in the eyes of a of an MSO investor. Third this is a an interesting one that we run into sometimes, but it’s this concept of key man risk which can feel almost counterintuitive. We run into some practitioners that are absolute superstars and that they’re able to out produce and outpace almost, you know, the top they’re at the top end of the market in terms of what they’re able to produce with their two hands. So, these people, maybe some of you on this call, are those people you’re very achievement oriented and able to drive more revenue than almost anybody else out there. Why that’s looked at as a risk, and why we want to see that minimized from the lens of a managed service organization is again that concept of when you leave, how do they replace you? So if you are an outlier and an absolute superstar, although that is fantastic as a small business owner, from the lens of managed service organization, they do like to see that minimize so being able to allocate some of that, that production to other providers in the business helps set you up to be able to show an investor that, you know, hey, there’s other people that can do this too. It’s not just me and my two hands. I can delegate this, and I can have other people be able to take this on, and the business can succeed outside of just my two hands. Very, very important. And then last is EBITDA at $500,000 and above. Those are things that, again, we help you understand in terms of the, you know, that just really the strictly the math behind that and where you come in. But as a, I’d say, as a minimum baseline, that $500,000 adjusted EBITDA is really kind of the sweet spot of, you know, where the managed service organizations like to play. Of course, if you’re above that, you know, that’s, that’s those are anything above and north of that number, you know, we tend to see more competitive processes come into play. But, you know, again, from a managed service organization lens, that’s kind of really the key profile from a private equity group. So, these are really the platforms that the private equity group is looking to invest in early in the consolidation wave. So maybe you have, you know, of some groups and the dermatology space that kind of fit this profile, maybe you are one, but this looks a little bit different, and in that it’s a little bit more of a long-term play. Private equity groups are going to want at least a seven-to-10-year timeline for the owner, especially if you’re a heavy producer, especially if you’re a key person in that business, which many times you know owners with businesses of this kind of scale are they do want to see that the infrastructure can be scaled with growth. They again, broad mix of services. We know that it’s in a healthy and growing geography. Where are you located? Is this an area where you know that the outlook is good? Are there people moving there? Is this the geography healthy? Etc. And then again, on the key man risk, probably want to highlight and underline that one. And then from an EBITDA lens, in terms of the economic size of your business and how attractive that looks to a private equity investor, they’re really looking for platforms that are two and a half million dollars in EBITDA and above. So, these are kind of, you know, our bigger platforms, multi-site, often multi provider. You’ve got quite an operation running, you know, successful growth opportunity and somebody where we can really bring some private equity groups that they’ll use. Your practice as almost a launching off point, to be able to then branch into other geographies, locally and add on to that in their acquisition strategy.

Josh Swearingen 55:11

Running a business is hard, I think it’s incredibly difficult. I have a tremendous amount of respect for all of you operators that are listening to this, you doctors that run your own businesses, as you’re looking at your business, and as you’re looking at kind of what potentially selling that business or partnering with one of these organizations might look like, you kind of need to turn it around and look at it from the buyer’s perspective. And they’re, you know, they’re getting more selective than ever, as many really good indicators and positive indicators as there are right now about there being a robust buying market. They’re very well versed in the financial side of things, and they are looking for good assets to purchase. So, they’re not going to be all that interested in a business that’s significantly declining year over year or has significant issues like high provider turnover or things of that nature. So, I think having some cognizance of that, it will be helpful as you plan to potentially go through this process, whether that’s now or down the road. Good buyers, as much as EBITDA is kind of an entry point, and kind of one of the first things that they tick off when they’re looking at a potential acquisition, having a good story around your business is really, really important. Why do you do what you do? What brought you to the area? What is your patient care look like? What is what makes you tick? I think understanding that story, it’s one of my favorite parts of my job is, is getting a feel for who you are and what your business is, and then being able to tell that story across the market so that they can get an understanding of how this might fit in with their existing owners and how it’s going to fit into their existing infrastructure. And really the only way to make sure that you have a really, really good, happy, cohesive fit between buyer and seller is having a good feel for really what makes you tick as an owner and what’s going to make you happy as a prospective seller in the market. Deal structures are changing I think, you know, many years ago when a when a practice would transition hands, it was usually a doctor selling to a doctor. It was usually, you know, there were different metrics that they tracked to determine what the valuation was, but it was largely an all-cash deal. So, you would have, you know, a bank involved, and the buyer would take out a loan, and you would at closing, you would get a check, and maybe there was another check that came a year down the road, or whatever the whatever the parameters were, but that’s kind of how all transactions occurred. And I think that one thing to be aware of is, you know, as other buying parties have gotten involved in the market, we have seen valuations tremendously increase. So, the valuation you can receive from a private equity group is significantly higher than what you would generally receive in a private practicing market. The flip side of that is that you’re there are going to be some things that come along with it that are a little bit different. And Elizabeth has already, you know, talked about this extensively, so I won’t go into any details, but you know, understanding how much equity you’re going to get, how to how to structure, how the equity is structured, what exiting those equity positions are like, all of that will be a part of the deal process that I think are critical, not just for your long term happiness, but really the long term value of the transaction, and ensuring that you get, you get what you deserve out of the business that you’ve built in every transaction. I think that, and this is, you know, a commercial for what we do. But transactions are difficult, and we drive a premium on the prices paid by the buyers. And because of that, the due diligence is pretty stringent, so we are very involved in that process, ensuring that, again, you receive the value that is laid out in the letter of intent, and receive, ultimately, the value that you deserve for the business that you’ve built. So, I think having a good feel for the market, understanding that there are new, buyers coming to market every day. And if you’ve seen one buyer, you’ve seen one buyer, and there are probably 20 more out there that might be a better fit, might value your business differently, and might run their businesses more in line with how you’d like to see it run. So, all those things are critical, critically important as a part of this process. And I think that I have a tremendous amount of respect for you as business operators, and I think that you deserve to see broadly what the market will, will provide. All right, so that gets us to the 2025, outlook, and there aren’t really going to be any shockers here. We’ve kind of touched on a lot of this stuff throughout the course of this evening, but I just kind of wanted to synopsize it a little bit so that everybody could see it. There are, there are more buyers in the market than there have ever been, and you’re going to see valuations continue to rise. Really, actually, I think, I think you’re going to see a couple of different tranches in this I think you’re going to see a lot of capital that gets dumped into the market very, very short term. So we’re going to see a lot of opportunity for sellers to receive premium valuations in the short term, because there are a lot of private equity groups that have capital that’s just been sitting there waiting to deploy so understanding that you need to go broadly and you need to bring multiple buyers to the table, will be critically important to ensuring that you are able to hit some of those valuations. And I think if you’re running a really nice business that’s profitable, that that could you know, continue running well whether you sell or not, those are the types of businesses that buyers are really, really going to be willing to roll the red carpet out for so just keep that in mind. Structure is going to matter more than ever. We see we have a lot of groups in the space. All of their structures are a little bit different, and all of them have pieces and parts of their deal structure that you may like or dislike and understanding that is critically important when you’re talking about essentially an asset that will set you up for the rest of your life, hopefully. Great deals take time. This is not a process that you can rush. Many of you have probably received an offer in the mail that a group hastily threw together, and you engage them on the phone, and now they want a few financials, and they’ll throw a number out there, and they’ll try to get you to sign relatively quickly. Running a full process takes several months. It takes several months of digging into your financials, understanding what your actual financials look like, pulling out all of the personal expenses that you’re in your that are in your business, so that you can get credit for those in the selling process. All of that stuff takes a measure of time. And it’s, it’s, it’s critically important that you understand short cutting that will ultimately cost you exponentially in the end. And I think global economic pressures, I think we’re going to see we’ve got a really interesting conversation coming ahead of us with where healthcare is going, and Elizabeth, you want to flip down to the next one. I’ll get into this in a little bit greater detail on the next slide. But for right now, I think we’ve covered all of this. I think we’ve discussed, you know, I think really ensuring alignment and culture is one of the most important things on this list, but all the rest are financial check marks that that certainly need to be covered for your benefit. And then the next slide, Elizabeth, so I think, I think this is, this is bears watching, and I don’t want to end this with a doom and gloom, but we have a healthcare issue in the United States, and it has gone relatively unaddressed by all political parties over the last 20, 30, 40, years, and that’s ultimately why we end up where we are right now. The amount of money that we spend is not commensurate with the quality of care that we provide relative to the rest of the world, and I think that we are going to eventually hit a tipping point. Now, why do I bring this up? Well, I bring this up because there are a couple of different things that are that are going to happen as we continue down this path. Number one, for those of you who are in medical dermatology, who do take a significant amount of insurance, you are going to see the insurance markets get squeezed, and they are going to continue getting squeezed year over year for a long time to come, and that heavily benefits the larger aggregators, those larger groups that can negotiate with insurance companies at scale, that savings for them, or that increase in reimbursements for them, will dramatically outweigh the cost savings that they might get from negotiating their Botox costs or whatever supply costs that you want to look at. So, I think that one of the reasons, and I touched on this very briefly at the front end, one of the reasons you see consolidation accelerate are these macroeconomic factors that hit and this is one that when you start seeing insurance companies really start hammering down on their providers on the private practice side, with lessening reimbursement rates, the reciprocal action of that is, that is, instantaneously you start to see significant upticks in consolidation, because it becomes harder and harder to compete on a practice by practice basis. So, I think we were in a really sweet window right now where we’ve got a lot of capital, we’ve got a lot of buyers, we can run a really competitive process. You’re still running a business that is profitable and running, you know, money through the doors with somewhat relative ease, but I think that at some point you’re going to, if that’s going to become more and more difficult. On top of the Human Resources issues of maintaining staff salaries and things like that, I think we’re going to hit a tipping point at some point in the next couple of years that is going to play into the hands of the aggregators, and it’s going to speed this up even more so.

Elizabeth Macready 1:05:13

Well, thank you. Thank you all for joining us this evening. Hope you’ve derived some value out of this, no matter where you are in your business journey, if you’re just starting to think about you know how you can align yourself with the best outcome of selling your business, or you’re really at a place where you’re ready to take next steps. We do offer a complimentary practice valuation. Oftentimes, we’ll use that opportunity to kind of really deep dive in your business with you and give you some additional insight to a lot of the factors that we touched on today. You know the market is dynamic, so these things can change. They can shift. So, we love to stay in touch, even if you’re not ready necessarily to sell tomorrow. Please feel free to reach out to us. If you are interested in taking advantage of our complimentary valuation, you can reach out to me at [email protected], or, you know, give me a phone call. Check out our website. We’d love to have a conversation with you and continue to update you on what we’re seeing out there. And you know, at the point in time where it makes sense for you, you know, hopefully be able to help you navigate this successfully. So, thank you so much for joining us this evening. We hope to talk to you very soon.