Kevin Cumbus

Good evening. Welcome to the Tusk Practice Sales webinar. It has been a crazy couple of weeks here in the US economy. We have had a front row seat and so enjoyed watching really all this come to fruition. There was so much doubt and curiosity around what was going to happen in the election, who was going to be our president. And the markets really just stood still waiting with bated breath. We get we get a president elected, and boom, the markets automatically jump. There’s an arrow good feeling out there. That coupled with interest rate reductions, and we’re talking with the CEOs of these DSOs out there and private equity groups, and what I’m sensing is really two emotions. One is relief, right? Relief that we’re kind of through the election cycle. The second one is this feeling of positivity and energy and excitement to get back into the market. So, we wanted to share with you what we’ve learned and some other insights from the broader US economy. I’m joined tonight with Ryan Mingus, Managing Director here at Tusk. Ryan, good to see you again.

Ryan Mingus

Great to be here.

Kevin Cumbus

We’ve got a pretty packed agenda. We’re going to cover really four things. One is the US economy and what the outlook is based on current state of affairs. Two is a review of dental M&A, kind of how we got to where we are. Three is the outlook for dental, M&A for 2025, and beyond. And then we’re going to end with some sobering facts. We’ve spent some time with an economist here in town that we got to see speak, and what we learned from her was sobering about what the next 5 to 10 years of the US economy could look like. So absolutely stick around for that. So, before we get started, a little bit about us. Kevin Cumbus, president and founder of Tusk, for those of you who don’t know. Father’s a pediatric dentist, spent 10 years in Finance and Investment Banking before finding my way to dentistry. I have the great privilege and pleasure of working with dentists in helping them monetize their life’s work. I’m joined tonight by Ryan Mingus. Ryan.

Ryan Mingus

Yeah, great to be here. So spent the entirety of my professional career in the business side of healthcare, starting out more in the hospital space, before finally migrating over to dentistry three years before joining Tusk. I’ve spent the last five years here at Tusk helping each and every one of our clients experience great outcomes along the way. It’s been a great journey, and really excited to share a bit about our success in 2024 as well as the outlook on 2025 here today.

Kevin Cumbus

Thanks, Ryan. So, Tusk is really built around 14 key team members. We operate throughout the United States, have vast experience both in the dental industry and in investment banking, M&A and private equity. We’ve closed over a billion dollars deals and over 150 transactions. And I’ll tell you what, the team here, we have a saying here that this work is too hard not to love it. We have a team here that absolutely sacrifices a lot on behalf of our clients and really recognizes what an honor it is to get to work with folks like you. Finally on the company, when you think about Tusk relative to other brokers and Golly Pete, there’s a lot of brokers out there all of a sudden. It’s almost like everybody thinks they can do this, but what’s different about us is really we’re the nexus of these two worlds where investment banking, finance, private equity live on one side. And these are all logos of companies that our team has worked for over their career. And the right-hand side of this graph shows you the logos of dental businesses and healthcare businesses that we have worked for over the course of our career. Inside the organization, we have folks that worked in business development for DSOs, have been CEOs, COOs of these companies, but also have held esteemed position in investment banks. So really what you have is the nexus of the deep love and appreciation for health care and the analytical horsepower of investment banking. And really between those two things is where Tusk lives.

Ryan Mingus

So, let’s kick things off with the US economic outlook. Here we go. End of 2024, indecision. We’ve had this election looming for some time now, as all of you are very well aware, regardless of your political stance, markets really hate indecision, and for the last year, we haven’t known who was going to be in the White House. We knew it was going to be someone new, regardless of whether it was going to be a Democrat or Republican, it was going to be a new individual in the White House. As well, we also knew that there was an opportunity for a flip of the house and or the Senate. So now that that’s behind us, we have a Republican White House, a Republican Senate, and a Republican House, which certainly bodes well for a business-friendly environment. You know, we over here are excited to have this behind us. We’ve already been in communication with a number of CEOs of large DSOs, and they are all excited about their outlook for 2025. Kevin, I’m sure you’ve got a few things to add here, based on some conversations you have had that we haven’t had a chance to get caught up with.

Kevin Cumbus

Just like you said, right. Business-friendly party that’s going to be tax-favorable for business owners and individuals, and also recognizes that we have to have M&A activity to unlock value, not just in Silicon Valley, but throughout the US economy. That was the hallmark of something that you just kept hearing about over and over and over again, is we need M&A activity to move. And when you’re in the business we are in, this is music to our ears.

Ryan Mingus

Yeah, absolutely. We’ll dive in within our sector, specifically with respect to trends and outlook on that coming up next. So, interest rate environment, we’ve had two rate cuts behind us. 50 basis point rate cut a few months ago, and then, most recently, a 25-point basis cut, and potentially one more in December. So, to get 3 for the year would be really meaningful. Going back to the beginning of 2024 you know, our outlook was four cuts, right? We might get three, and they’re all coming in the, you know, kind of final quarter of the year. So, great trend line there. And recently talked to a CEO of a DSO, and they indicated that that first 50-point basis cut yielded a savings of a million dollars a month.

Kevin Cumbus

 A year.

Ryan Mingus

A year in interest rate payments. So, that environment, ultimately, you know, that’s a huge number for an organization, and ultimately allows them to get excited about investing in new businesses and acquiring new assets.

Kevin Cumbus

One thing is that’s a heck of a lot of leverage. That’s a lot of debt, where a 50-basis point cut gives you a million dollars in cash flow. But what I loved about that conversation was the CEO saw the cash flow and said, “Now let’s start buying businesses.”

Ryan Mingus

Yeah, and this particular DSO was, you know, probably a quarter of the size of some of the large, really large legacy groups that are out there. So, you know, hopefully that impact is even greater at the very top of the market with kind of the established groups. Really good news here from a tax policy perspective. You know, the proposed Democrat tax changes are off the table, so the risk of capital gains tax or personal income tax increases are gone for those of you, kind of bringing you back. They were proposing a 39% capital gains tax rate, virtually doubling the existing rate. So that’s great news for sellers out there. They’re not going to be in a quote ‘rush to sell’ by the end of this year in order to have a favorable tax environment. That was something we experienced in 2021 and ultimately created a really aggressive market, which was to our favor, but and a really exciting year, but ultimately, you know, nobody really needs to make decisions like that when they can avoid it.

Kevin Cumbus

Yeah, I think that two things here. One is the taxes are not a story right now, right? They’re going down. But the one thing that is a story, especially if you have $3 million of EBITDA or more, is the sun setting of this Tax Cuts and Jobs Act. And effectively, this is impacting how many dollars you can give to your dependents on a tax free basis. If this is not solved through an act of Congress by December 31 of 2025, the dollar amount that you can give each dependent is going to be cut in half, right? So, we’re not going to harp on this issue too much, but if you have over $3 million of EBITDA, there as an opportunity for you to avoid writing too big of a check to Uncle Sam upon the sale of your business. Reach out to us directly, and we can have those conversations with you on a 1:1 basis.

Ryan Mingus

Yep, and President elect Trump has not proposed specific tax changes, whether increases or decreases to either capital gains or personal income taxes changes. So, that’s where it’s kind of a non-issue at the moment. However, as he continues to round out the cabinet and all of his advisors, it’s possible that this will become crystallized and there might be more to report here in the future. So, looking at a US economic overview, two major focal points here are metrics, are inflation and the unemployment rate. The rate at which inflation was rising is now less. So that’s a favorable move. However, it’s not in line with where the Fed wants to be with respect to the rate that they’re pursuing. So, that means that they still reserve the right to continue to make meaningful monetary policy changes and ultimately get that in line, and hopefully they can do that through some rate cuts to be to our benefit and our space.

Kevin Cumbus

You look at the exit polls, it sounds like this is one of the biggest issues that voters were looking at, is the cost of bacon and eggs, right? And it is staggering, still what we pay for groceries, and this has to come down. And we’re just seeing the rate decline, which is the rate at which inflation is occurring is declining. And hopefully we’ll get a handle on this. The more troubling one to me, with respect to dental practices and owners of DSO, was this unemployment rate.

Ryan Mingus

Yeah, The Great Resignation.

Kevin Cumbus

The Great Resignation, right? So, The Great Resignation happens. Baby Boomers who were thinking about retiring decided to hang up the hand piece or call it quits and take off the scrubs for the last time, so that was something that accelerated some retirement. But another piece of this with respect to dental and healthcare, in particular is the fact that there are a lot of millennials who have friends that are now working in hybrid jobs, and they see that they have to come into the office each and every day, glove up, work with patients, and they cannot leave until five o’clock, until the last patient is seen. And there is some real FOMO going on.

Ryan Mingus

Absolutely.

Kevin Cumbus

And we are seeing it in real time with many of our clients, where folks are just saying, “I prefer to be home with my dog in front of a computer rather than at the dental office helping you, doctor.” And I don’t think this trend is over. And so, the market for dental assistants, hygienists, associate doctors, it’s just very, very thin. And what we’re seeing is culture is kin here, and if you’re able to maintain a great culture and hold on to team members, God bless you, because not a lot of people are that way.

Ryan Mingus

Yeah, we had a great opportunity to speak with a couple presidents of ADAs of various states, and you know, they’re trying to solve this issue, with respect to number of hygienists that are within their state. Georgia specifically comes to mind is a large one that has experienced a lot of problems. So, these are issues that are not easily solved, that are headwinds that are going to be impacting our industry for months, if not likely, years to come. So, being good stewards of your business, and constantly aware of this and really always looking to acquire top talent to make sure that the business continues to thrive is going to be more important than ever.

Kevin Cumbus

Yes, and there’s just one thing I want to touch on before we move on. We were reviewing this this morning and looking at some economic data, the household debt numbers are staggering to me, and at no time in the history of the United States has an individual household had more debt. That includes your housing debt, your automobile debt and your credit card debt, and we are seeing this actually appear in dental practices now where folks come in, they can’t afford the braces. They cannot get the financing. Now we’re looking to like sub, sub-prime financing opportunities with even higher interest rates than ever seen before. For big ticket items, this is going to continue to be an issue in dentistry.

Ryan Mingus

Yeah, yeah. The all on four businesses, the orthodontic businesses, the adult ortho, specifically. Less so in the child, but adult ortho, they called it the Zoom boom in 2021 that’s long over, so certainly cognizant of that, and certain businesses will be more impacted than others.

Kevin Cumbus

So, it sounds like good news, bad news, right? We’re in this reality, and we now have a president who came in and promised to solve it all. We have a Fed Chairman that’s getting relatively comfortable with cutting the rates, and I feel like we have a pathway to getting out of this and really achieving that soft landing that people have been like beating a drum over. Are we in the soft landing? Are we through the soft landing? And it feels like we got a pathway to following it.

Ryan Mingus

Yeah, 18 months of narrative around soft landing. Hopefully it actually comes to fruition. And signals right now are really positive for that. So, excited about the year to come, kind of looking at dental more specifically, again, still in the rear view mirror here. This is a graph that shows healthcare services, ultimately the transactions on a quarterly basis, going back to q3 of 2022. Very steady decline across all healthcare sector services. Dental followed this path very similarly. Us at Tusk here, fortunately, have had the great privilege of actually doing more deals than ever on a quantitative basis in 2024. I think this is largely attributed to the fact that there are kind of two distinct worlds in the private equity backed healthcare sector. Those businesses that are greater than $20 million of EBITDA, and those are the ones you know, those transactions just haven’t really been happening. The high interest rate environment just wasn’t affording private equity groups to get really excited about cutting very large checks. We operate with businesses that are less than $20 million of EBITDA. And as such, the activity at that level has continued to be there. Now, structures haven’t been the same, valuations haven’t been quite the same. A lot of changes and nuances there. However, there’s still a really great appetite for digestible businesses with a moderate to low integration risk profile.

Kevin Cumbus

Look, we’re friendly with some of the large investment banks like Houlihan Lokey and Bolus and those guys. And look, they have been slow. Those guys have not closed deals in 18 months. Now they’re working on deals with $50 million of EBITDA, right? So, you know, when we talk with them about our volume, the distinction is, yes, they are smaller transactions and can be viewed by strategics as tuck-ins, right? So, there’s less risk there than a private equity company purchasing a $50 million EBITDA business that’s isolated exclusively in that business. So, they’re just really two different worlds.

Ryan Mingus

And even within hours, you know, there just is less of an appetite for brand new platforms to be formed. The private equity groups, they’re being more judicious with their money. They’re putting more scrutiny to these deals. And there are less new DSOs being formed in 2024. So a lot of our work was, in fact, you know, tuck-in work as well. And might be the first year ever that we don’t have a transaction that forms a new DS0. So, this is more dental specific and a really important data point, so certainly follow along here. So, number of private equity backed healthcare platforms by holding time. So, we’re going to focus on dental here, which, essentially they’re 20-plus groups, 20 groups that have greater than five year hold periods. So, that means the private equity sponsor that acquired that business either formed it from scratch or acquired it from another private equity group has been holding on to that business for greater than five years, and there are 17 dental platforms that have a holding period of greater than 7 years. So ultimately, all private equity groups are looking to acquire a business, grow that business, you know, 2, 3, 4 times the size of what they acquired, and then ultimately sell that business to the next private equity group. And depending on the size of that asset, their goal is anywhere between 3-5 or 5-7 years to ultimately grow that business to a point where they’re ready to exit. And these are meaningful numbers. You know, there are a lot of investors. There are a lot of doctor partners in these businesses that have been expecting liquidity for some time now, and there might be some difficult conversations taking place within those platforms around, “Hey, when are we going to get some liquidity on this asset?” You know, there’s a lot of doctors that roll equity in these deals that are expecting that second bite of the apple that we reference all the time. Additionally, there are initial investors that are looking to get their money out. So, we’re aware, based on some other content we’ve consumed, specifically from Dykema and Brian Caleo, indicating that there are 50 plus groups, private equity back dental platforms that are looking to recapitalize in the next 3 years. A lot of them are right here. You know, there’s 37 of them right here that are greater than 5 years of hold period. So that means that they are going to have to write their ship and get themselves in market and get a deal done.

Kevin Cumbus

Yeah, I love this graph. I love it. I love it. It makes dental look like we have a problem there. But let’s just kind of put this in context. There 150 private equity backed DSOs, right. So, as a percentage of deals that kind of have some age on them, it might be less as a percentage than vision, for example, but the numbers are telling. In the last 18 months, we’ve had at least 20 failed deals where folks went to market and we’re not able to get that closed, either because of financing or some gap in the bid ask spread, where the number that they needed to hit, the return shareholder’s value was not met by the buyers.

Ryan Mingus

 Well, and there’s a substantial cooling off from private equity as soon as the rise of interest rates, starting in q3 of 2023 really cooled the market.

Kevin Cumbus

Well, so now you mentioned the impatience. We have, impatience in the shareholders that are shareholders inside this business, and dentists who took equity in lieu of cash at close. We also have impatience from the limited partners, the investors in the private equity companies. So, we believe this will begin to shrink that bid ask spread because you’re going to see the private equity group say, “We have to return capital to our LPs, and we’re willing to take a slightly lower valuation in order to get that liquidity so we can get that money back to them, and we can raise our next fund.”

Ryan Mingus

Yep. Yeah, we hope to see some really meaningful deals over the next 3 years that ultimately get folks excited about that second bite of the apple. And we’ve got great stories to tell. You know, there were two recapitalization events, you know, at the end of this year, that we’ll kind of touch on in a little bit. But, you know, starting to get some wind in the sails and some momentum on the very large deals from an M&A perspective.

Kevin Cumbus

Last thing I’ll say about the top 50 that you just mentioned, they are going to window dress these businesses in preparation for sale. They are going to spread towards adding additional locations, stacking additional EBITDA, integrating them nicely so they have a great growth story to tell, and our clients over the next year or in 2 will be the great beneficiaries of that.

Ryan Mingus

Yeah, absolutely. So, 2024 kind of a look back, you know, operational environment for each and every one of you on this call that own and operate businesses, it was tough. Employment, we talked about already, the inflationary environment, just overall, really difficult environment to grow EBITDA and experience same store sales. DSOs are being very heavy handed on the quality of earnings and rolling numbers forward when we’re trying to get a deal closed, needing to see one extra month of positive trend, because they’re really just sitting back waiting on that business to go backwards and try to re-trade the deal, which is where we really thrive in that environment to make sure that there’s no erosion of enterprise value through closing process. But there’s just more scrutiny on these deals, and as a result, they’re placing premiums on businesses that are growing. So, they’re having, they’re experiencing the same operational environment you are, right? They’re having a difficult time obtaining same store sales growth. So, if they can go out and acquire businesses that are growing, that’ll help bolster their numbers as they’re trying to go to market to your point about window dressing. So, the businesses that are growing have achieved much greater success in the market.

Kevin Cumbus

I think that’s fair. No one wants to buy a project right now. No one wants to buy a business that has 3 shooting stars, like 3 practices that are at 20% EBITDA margin and 1 that’s at 1% EBITDA margin or negative EBITDA.

Ryan Mingus

We’re seeing those carved out. And we never used to see that.

Kevin Cumbus

Correct. So, this is the first year we’re saying, “Hey, of this bouquet of five practices, I’m going to take these 3 and you’re going to have to sell these 2.

Ryan Mingus

Yeah. And these aren’t like, cobbled together businesses. This is 1 owner, 1 culture, 1 you know, but they’ve got 7 locations, but a DSO is only interested in 3 or 4 of the.

Kevin Cumbus

Yeah. So, good news on that is, you sell an individual practice to a dentist, it’s worth more to that dentist than it is to the DSO. So, it’s net additive over the life of the trade. But these are new philosophies that we’re seeing. I think, something else that happened over the last 18 months is you saw a lot of folks on the buy side lose their jobs in the last 18 months, and they became the scapegoats, and they became the ones who were to blame for some operational issues inside of the business. And now, because the word is out, business development folks who are working at DSOs recognize that it’s not just that their reputation is on the line, or that their internal political capital is on the line, but their job is on the line.

Ryan Mingus

Absolutely.

Kevin Cumbus

And this is like adding this additional layer of scrutiny, additional layer of diligence. Folks are moving a little bit more slowly than they have in the past. But you know, with our team just driving and pushing and pushing every day, we talk about being the squeaky wheel. We want to be the one that’s, if you’re the buyer, we want to be in your inbox, in your text string, because we have other options for that client. If they’re moving too slow, and we believe that they’re… we know that there are other options for them. We can pull that deal and take it to somebody else.

Ryan Mingus

Yep. So, in addition to kind of the trend that the businesses that we’re taking to market, additionally, fit matters. So good buyers are not just interested in EBITDA and EBITDA growth, but they need to have that strategic story where it’s a 1+1=3 scenario. I really like using the analogy that every DSO is a different puzzle, and our client’s business fits differently into each one of them. So, by going broadly to get 5, 6, 7 LOIs in front of our clients, we’re able to find the ones that ultimately benefit the most from adding this business to theirs, and get them to take that compelling story back to their investment committee to justify the premium valuation that they’re placing on this. And look, we’re trying to build businesses and create partnerships that are additive to the dental industry. As Kevin mentioned, you know, it’s in our DNA here at Tusk, and we’re not just trying to go out and get top dollar for the sake of getting top dollar. We really are trying to create 1+1=3 scenarios that ultimately put this industry on a trajectory that allows us to thrive for years.

Kevin Cumbus

Yeah, I just tell a story that happened just recently. We’re in market right now with a nice size, $3 million EBITDA healthcare deal, and Josh is running the trade, prepared the client for these meetings that he was about to take, and made sure that the client knew what this private equity group is looking for, what the strategic is looking for, how they think about his business as a part of the broader puzzle and was able to ensure success for that meeting. Coming out of those meetings this past week, talking with Josh, he said, “Well, I had two groups come back to me and say, I don’t want to lose this deal because of who he is”, right? So, the story you tell and how you answer the questions should depend on who the buyer is, who the audience is. I think that’s something that you and your team just do an excellent job at for our clients, preparing them for success in those meetings.

Ryan Mingus

Yep. Yeah, and try to create, you know, triple bottom line win scenarios, both for the buyer, the seller, and, quite frankly, the patient population that our clients are serving. So, deal structures are changing, with buyers offering more equity and less cash at close. That’s just, you know, ultimately, a byproduct of the higher interest rate environment. They can’t afford to put the same amount of leverage on these deals, from you know, a cash perspective, as they used to. So, as a result, you know, our job is to make sure that we negotiate a structure that’s favorable for our clients, you know, for the long-term success. And you know, that’s not easy, but there are a lot of levers in these deals that we’re out there trying to pull, and dials that we’re trying to turn, and it’s not uncommon for us to take elements of one offer and try to get it applied to another. So, that’s just sort of the gamesmanship that we’re always trying to make sure that we’re pushing on to get the best outcomes for our clients.

Kevin Cumbus

Yeah, look, I think the buyers are onto it, right? They understand that there’s a conversation going on among business owners around multiple, right? And they’re like, “Look, all I got to do is string together enough components to a trade to pull together what the seller is going to perceive as a 10x deal,” right? Because there’s an emotional attachment to a double-digit multiple. Like, can we get you a 10x deal? All day long, but you’re not going to like the structure. Can we get you a 15x deal? All day long, but you’re not going to like the structure. So, you know, we have folks call us and say, “Hey, I got this incredible offer. I got offered 10x would you take a look at it?” And you look at it, and you’re like, this is actually a 4.5x deal, when it’s all said and done with, because you have earnouts that are unattainable and never going to get there. So, if you’ve got an offer in hand that you believe is a 10x, give us a call. We’ll take a look at it and kind of give you our perspective on that.

Ryan Mingus

Yep, always happy to do that. Lucky for us, with as many legacy DSOs going pencils down in the last 18 months, we have been lucky enough to find new groups and new platforms that were formed. However, there are always challenges when working with a group that you’ve never worked with before, close a deal with a group that you’ve never closed a deal with before. They tend to take longer. They tend to take more handholding, more resources, being the squeaky wheel, because we just don’t know what their stomach is on the other side of the table, if things go sideways in a closing process?

Kevin Cumbus

Look, we’ve had to bang the table a couple times with new buyers and say, “We are not going to work with that quality of earnings. We’re not going to work with that law firm. They are not qualified to get the deal done. It’s going to end up costing you a lot of money and time, and us and our client a lot of money and time.” And because of the reputation we’ve earned in this business, the buyers say, “Okay, we’ll take a second look. Who do you recommend we use for quality of earnings?” So that, I mean, we have been able to really strong arm some of these deals into getting closed, thankfully, because the buyer was willing to take some constructive feedback, sure on who they partnered with to get the deal closed.

Ryan Mingus

Yeah, it’s no such thing as an easy deal, but when you’re working with a first-time group, our antennas are up the entire time. So, our personal experience here at Tusk in 2024 mentioned before. It’s the most deals we’ve closed, year to date, ever before, and we’ve got the largest pipeline of active deals in market, under LOI or coming to market. It’s been the most challenging deal environment in recent history, maybe ever in dental. You know, going back to the 90s, you know, dental has kind of always been the darling of the private equity world. However, just the multitude of the great resignation, the higher interest rate environment, the inflationary environment, it has just really put dental under a mic, all of these deals under a microscope, and has halted a lot of activity in the space. But we continue to be really excited about the future, specifically near-term outlook in 2025.

Kevin Cumbus

Yeah, I would describe the buy-side in the last this calendar year as skittish, right? They wanted to get a deal done, but then they kind of back away. And you know, the conversations we’re having now, they sound a lot more confident than they have compared to the first 3 quarters of this year. And you can just hear it in the tone of their voice. And I think we’re going to see that manifest itself in quicker LOIs, more Letters of Intent, richer valuations and more favors.

Ryan Mingus

Absolutely. So, with respect to our experience in creating these competitive environments, you know, we’ve been fortunate enough to do deals with 16 unique buyers in 2024 with 9 of them being first time groups to Tusk. So that’s what I referenced before, where we’ve had to find new blood to create a competitive environment. And, you know, we don’t always love working with that new buyer. We know that each time we say yes to it, you know, we’re taking on a much more difficult closing process. However, if that’s the direction that our client wants to go, and we’ve done our reverse diligence and feel good about where that’s ultimately going to end up, you know, we absolutely will take on that burden But it’s not easy, and I don’t think that there are too many groups out there that go as broadly as we do in order to achieve the buyer pools that we were able to get for each and every one of our clients.

Kevin Cumbus

This just speaks to the system that you and your team run, Ryan. It’s the same system. It’s the same process each and every time, about 80% of it’s the same, 20% is going to be varied, be customized. But that process that you run is invaluable. It’s time consuming. You got to spend a lot of time on the phone with folks. You’re turning over rocks and seeing if there’s a buyer there. But it’s the right way to do it. It’s the only way to do it in this environment. You were doing it when the buy side was flush, and you’re doing it now. And it’s that system that is enabling our clients to have great outcomes.

Ryan Mingus

Yeah, keeping people at the table is not easy these days, and getting buyers the resources they need to go back to their buyside to get, excuse me, their investment committees, to get things done. You know, it requires a lot of homework, but it’s exciting, it’s fun, and it’s, you know, for the best outcomes of our clients. Closing processes have taken a lot longer and required a lot more hand holding and us being the squeaky wheel, and who is on your deal team matters more than ever. So, we’ve got, it’s been a tough year, but we’ve got a lot to hang our hat on, and really excited to kind of put this up on the board and put it behind us.

Kevin Cumbus

Yeah, that seems to be the common sentiment is, I’m really excited to see this year end.

Ryan Mingus

Yeah. So, looking out into 2025, great lead in here. So, some of the tailwinds both from a macro and a dental specific perspective, you know, lowering interest rates, we’ve got some nice trend there. Slowing of inflation, it’s not going away, but it is slowing. The debt markets have been improving, and then ideally, we hope a better operating environment for all of you out there, on the call. Hopeful that some of these folks that perhaps came out of the workforce are willing to reenter when they realize that working from home when you have a dental hygienist license might not be the highest and best use of your time for you and your family. So, it’d be great to see some of those folks come back to the workforce.

Kevin Cumbus

Just general consumer sentiment is improved. You know, I talked to a lot of folks, friends and family about how they felt the day after the election? And some people are like, “I’m ready to invest in a business. I’m ready to buy a new car.” I mean that happened overnight and I have to believe that I’m not operating exclusively in a bubble here, and there’s a lot of business owners that feel the same.

Ryan Mingus

Yeah, yeah. From a dental perspective, we’ve got two meaningful recapitalization events in the second half of 2024.

Kevin Cumbus

Congratulations to MB2 and Riccobene Associates. Hopefully you’ve kind of opened the floodgates here. We talked a lot about, there was a funnel where all the deals kind of lived up top. And there was one big deal that was kind of choking the whole system. And to see MB2 trade this month was, I mean, we celebrated it. I think there’s a lot of relief. And we are certain there are 50 plus deals, well, 20 plus deals behind it that need to go within the next 12 months. And the real question in my mind is, are the investment bankers going to screw this up? Let me tell you what I mean by that. If they go, “Look the buy side is there. It’s active. Let’s go,” and they flood the zone with six deals at the same time, okay, that’d be a problem. So, for the investment bankers that are hopefully listening today, could you all just kind of stage your deals a little bit so we have a high demand for everyone that comes out, and we’re able to really see what these multiples are without flooding the supply side of the equation.

Ryan Mingus

Yeah, well, all those 17 failed deals, or whatever the number was, from late 2023 through 2024, hopeful that they can run some abbreviated processes, because they had some really excited buyers that just purely hit pause because of the interest rate environment. Hopefully they can run some abbreviated processes and start stacking these up. Legacy groups are coming back. You know, ultimately what we mean by legacy groups, so those groups that have been around for 10 plus years really have a large, substantial footprint. Those are the folks that you know had laid off some of their business development people, if not all of their business development people, and we’re starting to see those groups come back to the marketplace and be more inquisitive and start to rehire. They need to ramp up mergers and acquisitions. These businesses were not created to grow and achieve the kind of like exponential growth that they need to achieve in order to do a recapitalization. They cannot do it through organic growth. They cannot really even do it through a pure, de novo strategy. They have been built to grow through mergers and acquisitions at a rapid pace. You know, 15, 20% growth is what they’re expecting to put on the board every single year. And you can’t do that through same source sales.

Kevin Cumbus

No, they’re behind now. So they’re 12, 18, 24, months hitting pause. They have got to make up for lost time and begin to, as we talked about the story, show a story of growth through acquisition. Show a story of something that they can sell to the next investor. That’s why we’re heading into this boom time.

Ryan Mingus

Well, in addition to that, but also integrating them well, and then growing them post close is really how they’re going to become, you know, a darling in the eyes of the buy side, right? So, the maturation of the industries, all of these DSOs are recognizing that they have to integrate, well, they have to grow the businesses post-acquisition. And I think that that’s just, you know, indicative of a maturing industry. We’re about 30% consolidated. We’ve still got a long way to go. Groups have been rewarded by purely stacking EBITDA up until now. And you know, for the last two years, the feedback has been, you’ve got to grow these businesses, you have to operate these businesses, and you’ve got to show kind of a track record of that if you’re going to be rewarded with premium multiple.

Kevin Cumbus

Yeah. And that was the feedback we got from every CEO we spoke with who had a failed process was, this is what everyone is focused on. It is same store EBITDA growth.

Ryan Mingus

And I think it’s great in the long term, and ultimately just a point of growing pains that every industry has to go through. Additionally, DSOs have secured a boatload of credit facilities. So, going back from the second half of 2022, there have been over $1.8 billion worth of new credit facilities secured. This is good news, and we’ve blinded the names of the DSOs, but if you just go out there and do a quick Google search of press releases, you can get this information. But what you’ll see is a lot of these groups are the same groups that we are expecting to see a recapitalization event in the next 12 to 24 months, and this is something that they want to get in place prior to doing that deal, so that when they do recapitalize, they’re not handcuffed by their new private equity group in trying to get deals done. So, they’re securing this with the intent of going to market and then putting these dollars to work shortly thereafter, so that they can hit the ground running, so to speak.

Kevin Cumbus

Yeah, I think this gives them options when they’re in market, right? So, do they need to do a deal? Do they need to monetize the equity? Yeah, that would be good. But if they don’t get a deal done, they have this credit facility to use to go out to continue to grow the business.

Ryan Mingus

Yeah, it’s a great point of leverage with the buyside. So, some of the headwinds, you know, from a dental M&A perspective, deal structures have changed, hopefully not forever. And you know, hopefully we can get to see some structures that we used to see in 2021 eventually. But ultimately, what this saying is there’s just less cash at close, as stated before, as a percentage of the total enterprise value. The introduction of earnouts has kind of come back to deal structures, really, in an effort to keep multiples the same and still produce, you know, a large amount of the deal coming in the form of cash, but it has to be paid out over time. Essentially seller financing is kind of back in. I mean, we’re just starting to see it more and more, and hopefully we’ll start to see that come to cash at close. But for now, in this interest rate environment, you know, that’s an element of a deal that we saw go away in 2021 and is now kind of back in play.

Kevin Cumbus

Sometimes they camouflage it as preferred equity, right? They call it by a different name, but the short story is, it’s risk you’re taking on. It’s debt that they will pay you back for. But read the fine print on that. It is typically subjected to the lender’s approval, right? So, the one who has first lien position, the lender has first lien position, they’re getting paid first. And your payments might accrue over time, depending on how that document is drafted. So, pay close attention to the seller financing language in those documents.

Ryan Mingus

Yeah, certainly something that causes a lot of heartburn when those legal documents come out. Greater scrutiny from the buy side. Fit matters. You know, we’ve covered this. And then valuations settling, so the bid ask spread. What we’re really saying there is, “Hey, these limited partners, when they invested their money with this private equity fund, they were expecting, you know, X type of return on their investment.” Which ultimately was a math equation from the EBITDA that they were going to need to get to, and the multiple that they were going to be rewarded with in market to ultimately back into the number that they were expecting. So, if they were expecting an EBITDA of the business going from $20 million of EBITDA to $100 million of EBITDA, and them getting a 15x, and now they’re going to get to that EBITDA number, but they’re only going to get a 14x or 13x. Well, that’s a meaningful change in the expected return. And ultimately, there needs to be a settling out of that, because if that 15x is never going to be achievable, that’s ultimately, you know, a decision that these groups have to come to terms with, and you know, an uncomfortable position for them to be in. But the settling of that bid ask spread is kind of where we’re at right now. And I think we’ll start to see as these 50 plus deals or 20 plus deals that we’re expecting to see in the next 12 months, what they’re actually getting in the marketplace?

Kevin Cumbus

Yeah. I mean, I feel like the news is out, right? I feel like folks get it, it’s going to be really, really hard to get a 15, 16, 17x. Those days might be gone for a little while, but so long as I can get a return, I feel like is where LPs are now. They want liquidity. They would like a reasonable return and the opportunity to invest in something else. So again, I think this is really the LPs recalibrating their expectations around return as you shared, and ultimately they’ll be the voice that says, “Okay, we’re ready.”

Ryan Mingus

There are certainly some struggling large DSOs out there. They have not been active in the marketplace for a long time now. They haven’t done a single transaction in years, some of them. Some of them have actually started to come back to the table and want to be inquisitive. And that’s something to look out for, because if they’ve gone pencils down for 2 years, the likelihood of them fully recovering from that and ultimately going out, buying a new business and being able to produce a return on any rolled equity, there’s going to be a lot of reverse diligence that needs to be done on that group before we would ever advise a client to go forward with a group like that. That being said, we hope that they are able to right the ship and find ways to either offload some of their assets, you know, and ultimately slim down and start operating and acquiring businesses, or whatever it takes to turn these businesses around. We’re rooting for them. We’re rooting for the industry. But that being said, you know, we are very cautious whenever they are at the table if they have not, you know, been active in the last two years.

Kevin Cumbus

You brushed up against something that I think is worth double clicking on: their divesting of assets. We have been contacted by many of the top 50 DSOs about helping them sell a geography, sell a specialty, sell some underperforming assets. I mean, they’re taking a good, hard, long look at their business and saying, “Am I going to be able to eke out a return with this collection of practices, or strategically, does it make sense for me to be in this state any longer, knowing what I know about it, and the payers and the population and the migration of people, kind of where folks are going, or is this a specialty that I even want to entertain?” So, they’re doing the right thing by taking a good, hard look at their own business with fresh eyes and saying, “If I could rebuild it again, what would I do?” And then walking away from some of those decisions and having us sell those businesses.

Ryan Mingus

Yeah, it’s been interesting say the least. It’s difficult to get those deals done, but we’re happy to take on the mandate, and, you know, make a better outcome for all. So, keep in mind big picture, you know, more buyers, you know, seeking to partner with practices at higher valuations in q1 2025, it’s a little bit of a tale of, you know, have and have nots. If you’re a growing business with a good, same store sales, or same year over year, EBITDA growth, you’re going to be rewarded handsomely in the marketplace. If you’re declining, it’s going to be a more difficult environment to get a deal done. You might not be rewarded with the you know, kind of valuation at close. But groups are very creative in creating pathways forward that benefit our clients post close. Call it 12-24, months post close that if this business turns around, there’s meaningful upside in the structures that we’re able to negotiate for our clients.

Kevin Cumbus

Another thing you guys are really good at is, I’m thinking of a recent example. Well, there’s one down in Alabama, and there’s one in Texas, where y’all ran the evaluation of the business and said, “Hey, look, there’s some low-lying fruit here that you can focus on. We’re going to give you a punch list and let you go work on this for 60, 90, 120 days and come back to us, because if you don’t make these changes, they will. And they’re going to be the great beneficiaries of this.

Ryan Mingus

Yeah, exactly. And that’s, when we’re out there having conversations with buyers, we’re trying to find out who has the greatest capabilities to unlock these areas within your business. But to your point, they’re going to take the lion’s share of the economic benefit. So, if you think that you can do it and it can be done in a timely manner, we absolutely advise our folks to go out and do that, and we connect them with resources that can help them execute on that, but have seen incredibly meaningful benefits to our clients as a result of holding off 6 to 12 months and executing on a strategy of shoring things up. As we mentioned, buyers have stacked a lot of capital and are preparing for a buying spree and recapitalization events. That will be just great news for the industry if we could get a few of these large groups with getting their own deals done in the first quarter of 2025. Structure matters now more than ever, there are just more levers and dials in these deals, and certainly we’re having to go far and wide to bring as many groups to the table as possible to try to simplify these deals and get the highest floor valuation for our clients, while also negotiating great ceiling as well. But great deals do take time, as Kevin mentioned, we perform valuation studies on each and every one of our prospective clients before we ever even engage with them, in order to give them a good read on where their business sits today, and identify those areas and have some conversations around what can be improved, and what would be required of them to make those improvements, and what would that yield in the form of enterprise value. So not rushing to get your deal into market is probably the best thing that you can do. So, start a conversation early, allow us to get our hands around your business and dive into the numbers and roll around in them to come back to you with that punch list and where the opportunity lives in your business.

Kevin Cumbus

Something we saw this year was folks that we’ve known for a long time that have been working on growing their group, had a stated goal that they wanted to get to 10 locations. They wanted to get to $5 million of EBITDA. And then they suffer through this operating environment, and they begin to really understand and appreciate what operating risk is. You know, when everything’s going up and to the right, it feels like you can just go on forever and scale infinitely. But the last couple quarters have been challenging. And we saw really great entrepreneurs take a beat and say, “What am I doing? What am I really trying to solve for here?” Try to solve for financial independence and taking care of my family. That’s really what I’m trying to solve for. So, they talk to their financial planner, saying, “How much do I need to get there?” Because they’ve been good savers and judicious about spending, it was a lot less than they thought they needed. And the goal, although there’s always ego involved, and we always kind of want to hit our goals, it was more than they needed. So, they were able to come to us and say, “Listen, I thought I was going to get to 10 locations. I’m at seven, but I feel good about this. Let’s go ahead and move forward with this. I’m going to find a capital partner for growth. I’m going to maintain my position inside the business, but I got to get out of owning 100% of the operating risk.” Take some chips off the table, right? That’s really what we saw a lot of this year.

Ryan Mingus

Yeah, and just the fact that it’s not uncommon for 80%-95% of our clients total net worth to be tied up in the value of their practices and as such, you know you don’t want to sell in a bad environment. So, if you’re putting a great TTM forward, and you’re going to get a structure that allows you to participate in a lot of the upside if you partner with the right group, you know it can be a win, win for sure. Global economic pressures will certainly impact valuation and structure dramatically in the next 5 years. This is a good lead into the ITR economist, if we listen to just earlier in, I guess was October. Little bit sobering, but at the same time, it’s always great to have a good understanding. And if there is such thing as a crystal ball, to understand the outlook. You know, it’s always good to get above the fray and out of the echo chamber that we live in here in the dental world or healthcare, even specifically, and really start to listen to some people that have a good understanding of the global economic environment and what that ultimately means to folks that own businesses and operate businesses that ultimately intend to exit in the next 5 to 10 years.

Kevin Cumbus

Yeah, you know, we here at Tusk build 5-year plans. We have a 5-year plan, 3-year plan, 1-year plan that all feeds to try to get to that 5-year plan. But really inside of the business, thinking about our clients, a lot of our energy is looking 12 months in advance. Our deals take 6-9 months to close. We know when we bring on a new client, the expectation is that that deal is not going to close until 6-9 months from now. So, we’re always living on a time horizon 9-12 months from now. And rarely do I think longer time horizon than that, just because it feels like our world changes so rapidly, it would be rather foolish to try to opine on what it could look like 60 months from now. So, we had the privilege of going to this conference and spending time with an economist from ITR. I’d actually seen ITR speak at the DEO. Jake is in Vistage as well, and I guess he saw it with his Vistage group, and we got exposure to ITR just last month. It was an excellent presentation. Yep, there was a lot going on. And really just kind of gave us a summary of where the US economy stands, a lot of what we’ve done today. But she ended her conversation with us warning about a crisis that could be looming. And there are really 5 factors that are driving this. One is the demographics. This is the aging of the population, right? The baby boomers now are somewhere between 78 to 60 years old. Yes, we’re seeing them fall out of the workforce and falling out of being consumers, and in the US, we see it, but it’s most acute in Japan, Brazil and Europe. And this is where she claims is going to be the biggest issue, because they’re not going to be consuming goods and services at the rate at which they were, because their birth rates are so low, and the birth rates are not going to make up for the deaths. And that’s going to cause quite a quake with respect to the GDPs of these countries. Additionally, is the health care costs. Health care costs in the United States are the highest among any in the world. We’ve got a slide, if you’ll pop to the next slide for me for a quick minute. This shows the health care costs per capita for major countries throughout the world. You’ll see that we’re at $12,000 per person per capita and Canada’s the next closest, and they’re about half of what we are. Again, the aging of the population, the cost of care as this generation ages, is extremely expensive. Then there is the entitlements issue. You know that we are spending more than we are making. We have been at this pace for some time now. The last time our government had a surplus, they actually wrote checks to us, which was extremely foolish. With the new president in in place, he recently, last week, announced that both Ramaswamy and Elon Musk will be heading up the Department of Government Efficiency. Their goal is to get in there and gut the federal government spending. The economist we met with, we talked with at ITR did not see a way to solve this. She did not believe that there was any way that the House and the Senate and the President could ever come together and solve this. But here we are with the super majority. Here we are with a possibility of really making a dent inside of the debt, inside of the US debt, and the deficit that we’re running in. To kind of make this personal, I want to show you what it looks like on an individual basis. Today, the US federal government debt per capita, for every living, breathing human in the United States today, it is $104,000. If we all wrote a check for $104,000 today, it would be solved until the spending cranked up again. But on a personal level, this is what we’re talking about. This, coupled with all the entitlements that are out there and the inflation that we’re still seeing. And her claim is, the inflation never reset back to where we were pre-COVID, and the rate of…so it never reset. And now it’s at a higher level and is still not slowing down. Now the rate is getting smaller, but inflation is still here, and she believes inflation is here to stay. So, because of these five factors, ITR predicts that we’re going to run into a big D, capital D, Depression starting in 2030 to 2032. Her advice, get quickly to wealth preservation and forget about investment. You need to be focused on the safety and the security of your dollars, not trying to eke out returns. Additionally, she was encouraging you to move your money to Swiss banks. I mean, this was dire information she was sharing with us. I didn’t see this coming. I don’t think anybody else in the room saw this coming, but evidently, ITR has been banging this drum for months. I mean, when she was speaking on stage, she said, if you’ve seen me before, you’ve seen this presentation. ITR makes their money on really prognosticating about the future, and they have a really high success rate. Unfortunately, they’re really good at what they do, and they’re producing this type of content right now.

Ryan Mingus

Yeah, it was not anything that we were expecting walking into that. I think everybody had a great outlook for 2025, and she did too for 2025 and you know, the years between now and this potential Depression. So, not taking away from what our 2025 outlook is. This is 5 years and beyond. Yeah, for those that you know are interested in monetizing their business and achieving a second bite of the apple, you kind of have to factor in a 5-year post close timeline in order to get full credit or full value for the business and the deal that you ultimately strike.

Kevin Cumbus

Yeah. So

just think about the deal, right? Every one of these transactions, if you’re a provider in particular, or the CEO, they’re going to want you to sign a 5-year employment agreement, right? That de-risks these cash flows because you will be with the business on a go forward basis, the founder or the current owner, and that clock begins to tick the minute after you close your transaction. We are staring down the barrel of 2025 today. So, I’m not great at math, but 5+25 is 30, so we’re right around the corner from this. So, if you are within 2 or 3 years of thinking about selling your business and the sale will get you to financial independence, you don’t have to work anymore. You need to move sooner rather than later. I was talking to another entrepreneur last week about this very thing. He’s an investor in a $5 million EBITDA business. I shared this with him. He goes, “Oh, this is all we’re talking about.” He’s down in Miami. He said, “This is all we’re talking about. I’m looking at second passports. I’m getting heavy into crypto. This is not niche corner of the internet stuff.” This is, unfortunately, could be our reality in the years to come. And we just feel like we had to let our audience know we would love the opportunity to give you a valuation on your business today so you can begin that thought exercise of, “Hey, can I afford to sell? Is now the right time?” Because there’s a lot of wind in the sails right now on the buyside. There’s a lot of energy in the room from the buyers about sprinting for the next 36 months to get their deal closed and a monetized equity for these folks. And maybe they know the same thing we do.

Ryan Mingus

Yeah. Getting to market in the next 12 to 24 months is certainly going to be, if this ends up being true and to also reiterate that this is not a US specific issue. This is a global Depression, and there’s nothing that she indicated that the US debt situation was not enough to trigger a Depression. Rather, it was the aging population in Japan, Brazil and Europe that ultimately creates that first domino to fall. So, this is not something that somebody… getting that second passport, I don’t even know if that’s going to help you.

Kevin Cumbus

I don’t know if it is either, but he was very adamant. He was happy about it. Well, listen, it’s been great spending time with you all today, this evening. Thank you again for making time. If any of this conversation leads you to ask more questions and have some curiosity, do not hesitate to reach out to us. We’re here for you. We want to help you make an informed decision about the sale of your life’s work and ensure that you can exit without regret. Really at the end of the day, that’s what we want to accomplish with each and every one of our clients.

Ryan Mingus

Yep, thanks for everything tonight, Kevin.Thank you all for taking time out of your busy schedule to be here. Looking forward to some great conversations.

Kevin Cumbus

Me too. Thank you, Ryan, good to see you. Goodnight y’all!