Financial Foundations For Maximizing Practice Success

TUSK Practice Sales

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

Kevin Cumbus

Hey, this is Kevin Cumbus, President and Founder of TUSK. You know, we’ve all got CPAs. At least those of you who call TUSK hopefully have CPAs. I’ve had a lot of CPAs over the years in the businesses that I’ve built. Some have frankly felt like accountants or service providers; they perform a task that’s required by the federal government. Others actually serve as part of my decision-making, and I lean on them as members of my team. It’s rare to find people like that, but Mike White, our guest today, is one of those people. Mike is a principal at CLA. CLA is the eighth-largest CPA firm in the US, with a major, major focus on healthcare. To give you a sense of what major focus means, they have worked with over 10,000 practices nationwide. They really like to work in healthcare services, and that includes everything you can imagine: women’s health, senior living, med spa, dermatology, plastic surgery, dental, veterinary. The list goes on and on. These guys are in it not just from the beginning, helping you understand your business from an income statement, balance sheet, or cash flow perspective, but they also really, really shine when it comes time to sell. For those of you who may not be aware, when you decide it’s time to monetize your life’s work and go through a process, for example, a process we would run, you’re going to sign a letter of intent with a buyer, and then they’re going to perform diligence on you. The financial portion of that diligence is called a quality of earnings. This is kind of like a proctology exam, frankly, just on your financial statements. But these guys over at CLA, and we work with them all the time, are the ones who make this less painful and can actually create value through the process. It is a deep dive into your numbers, and these guys do 200 quality of earnings reports each year, exclusively in healthcare. I don’t know of anyone with the breadth and depth of experience on the CPA side that Mike has. So Mike, I am so happy to have you here. Man, this is awesome.

Mike White

Yeah. Well, thank you. Excited to have this conversation.

Kevin Cumbus

I am too. So Mike, I’ve known you for close to 10 years, and it’s been really interesting to learn from you and hear about your experience. Tell everybody how long you’ve been in this seat, how long you’ve been in this world, and a bit about how you got to where you are.

Mike White

Yeah, I love this. You and I have grown up together in these seats, which has been fun, watching and helping each other. I can picture so many of our conversations. But my story is like many of the entrepreneurs who are going to be listening today. I started a CPA firm when I was 24 years old. I had a passion for helping small business owners, and I had a belief that CPAs could be more than just tax preparers. That’s what led to this conversation. I believe that every entrepreneur, myself included, needs help 365 days a year, and that’s the premise we built on. We started serving healthcare specifically around 2009 or 2010. We continued to grow, serving outsourced accounting, tax advisory, a little bit of everything, but we had transaction support, QofE, and technology needs that we had to grow into. So we merged with CLA in 2018, and it’s been an amazing move. It added so much to the team and to the breadth of knowledge we can now bring. So it’s been an exciting journey.

Kevin Cumbus

That’s great. So let’s start here. What does the relationship between an accountant and an entrepreneur look like? What should it look like in your world?

Mike White

You know, I think we should be part of the advisory team. One of the things you and I talk about so frequently, and that some of the other folks who have been on this podcast with you have talked about, is that it’s a team. So many of us work together so well because we’re getting insights from each other. We’re getting insights from executive search. We’re talking to the lenders. I think the CPA should be at the table with everybody else, leaning in. And not all CPAs like to be in the room. They want to be behind a screen doing the tax prep, and that’s where we’ve blended the finance function and the accounting function with the very technical CPA knowledge we need, and we lean in as much as we can across the board. As you start thinking about the complexities of running these businesses, I always say you’ve got to start with the foundation. Something as simple and monotonous as bookkeeping drives millions of dollars of valuation, and if it’s not done right, even if doing it right costs a little more along the way, it becomes a huge problem when we get to quality of earnings, deal flow, and transaction work.

Kevin Cumbus

Yeah, I’ll just share a quick anecdote. We’ve got an analytics team here that I think is best in class. When we sign on a client, we’re quick to ask them who their CPA firm is. Sometimes we groan when we hear who it is, and sometimes we go, “Okay, this is great.” Because we come from a position of trust but verify when it comes to the bookkeeping, we actually pull all the general ledger reports. Look, there are humans involved, and mistakes happen. But like you, we recognize the value of making sure every “i” is dotted and every “t” is crossed, from a reporting perspective and then from a retroactive valuation perspective, because value is based on your trailing 12-month EBITDA. So we’ve got to make sure we get that number right.

Mike White

And when you think about the life cycle of that process, that trailing 12 months isn’t fixed at the point where, hey, it’s January 26 or whatever day it is, and we’re going off December. The process could run a few months, so that trailing 12 still has to hold its own. Oh yeah, the challenges we see. I look at the financial statements of 30 new practices a month, 30 new businesses a month. Many times, and I got one yesterday, the most recent month they had was July. We’re talking five or six months in arrears. How do you run a business that way? And I see it with multiple locations and large organizations, time and time again. I know you do too. “All right, here’s our due diligence list. Let’s go.” “Okay, well, I’ll get back to you when my CPA has it done.” That’s where the challenge is, and that’s where, again, you get back to the fundamentals of putting a good process in place from that moment. Beyond the numbers, the buyer partner, the individual who’s looking to work with you, wants to see how sophisticated you are in running your operations. So when all of those things are being met, it’s incredible to be a part of.

Kevin Cumbus

One thing we talk a lot about on this pod is valuation and what it’s a function of. Consistent cash flow that has less risk is worth more than the same amount of cash flow that has more risk. What buyers are doing is forming an opinion about the riskiness of your business through the diligence process, through every single conversation they have with you, your CPA, your leadership team, your injector, your office manager, you name it. One of the biggest hurdles we run into with clients, amazing entrepreneurs who have built incredible businesses, is this question. If you go through a process, you will get this question: “Hey, can you send us the most recent set of financials?” And we say, “No problem.” We go to our client and say, “Hey, it’s January 26. Can you send us your year-end?” And they say, “We have it done through September.” That’s not good. What the buyer sees is a lack of sophistication and an owner who isn’t even looking at the numbers for their business. So we want to see our clients, and every entrepreneur out there, get financials in a reasonable period of time so they can react to them and plan accordingly. In the long run, you need them to continue to instill confidence in any buyer that you know what you’re doing and you’re staying on top of your numbers.

Mike White

You know, that’s why these conversations are so important: educating the industry and bringing this forward. This isn’t a dental thing, a physician thing, or a med spa thing. This is across all verticals, no matter what business you’re in. You run a business, I run businesses. You have to have this level of sophistication. And you asked earlier in the conversation what has made us unique. It’s not only bridging the traditional financials, the P&L and balance sheet, making sure they’re timely, making sure they follow their trend line, and making sure they have a standardized chart of accounts. It’s also correlating that back to the practice management data and understanding the industry well enough to say, “That doesn’t look right,” or “If we’re going through a process, that’s going to be asked about.” And on average, and this has been true since you and I have known each other, I know we’ve talked about this stat, 30% of our new clients each year are people who say, “Oh my gosh, I’m ready to sell,” but they tried to run a process, or TUSK looked at their books and said, “This is a complete mess. Start with Mike, get going, and come back to us in a few months.” That is still consistently the case, which is why I love these conversations. As we continue to empower the industry with this knowledge, a little time spent now pays dividends.

Kevin Cumbus

Yeah. I don’t know if you’ve read Rich Dad Poor Dad. Have you read that book?

Mike White

Yeah.

Kevin Cumbus

It’s a great classic book. One of the things in that book I’ll never forget is that as you’re building a business, and as you’re growing as an individual or a family, get the best accountant and the best attorney you possibly can. It will pay you back in spades. In conversations with you or Brian Colao over at Dykema, and even in my own professional life, I’ve seen it happen. I believe it to be true.

Mike White

How many deals have fallen apart because they couldn’t pull the records? Or they were able to get their act together one time to pull all of it, and then every month the buyer was asking for more and more, and the buyer just got less and less comfortable with that relationship.

Kevin Cumbus

Yeah, it becomes pulling on a string. “Hey, can we get them next month?” And if they don’t materialize, the buyer asks again. Then they start asking more questions, not even related to financials. They start to doubt. And where there’s doubt is where they’re going to pivot.

Mike White

Yep. And when you think about a succession plan, when you think about this journey we’re all on as entrepreneurs and business owners across any vertical and industry, starting there makes it a little bit easier to make the decision to change today. Here we are at the beginning of the year. Let’s do something different. One of the questions you and I talked about is when you start this process. When do you want to think about it? I was unique. I was 24 or 25 when I started my firm, and I started with the end in mind. With entrepreneurs, I always ask the question, “What do you want to do when you grow up?” Whether you’re 25 or 55 or 75, I’m going to ask you that question. I love the question because it’s fun to see people’s journeys. And I know I’m not the only one asking it; I know you are as well. I also know that potential partner is asking, “Okay, what is this? Is this just a check for you, or is this something more? Are you trying to build something here and follow your passion?”

Kevin Cumbus

Yeah, we tell folks to start with the end in mind, for sure. The way we phrase it is, build a business that’s built to sell, regardless of whether you ever sell. There are fundamental truths in how you build a business that is built to sell. And unfortunately, a handful of groups come to us every year that have inadvertently baked poison pills into their business that are going to stand in the way of a seamless transaction. You see it in partnership arrangements. You see it sometimes in how folks have structured their leases, or this or that, and they’re just there, and we have to tackle them before going to market. That goes back to the conversation we had a little bit ago about having everybody at the table: your insurance, your banker, your advisors, even your real estate person, every so often asking, “Are these agreements good?” Or the real estate attorney who’s going to look at this and say, “Is this assignable?” You know, I’ve bought businesses, and one of the most unique things I could never get assigned to me was the watercooler, the $42-a-month watercooler. Thankfully, it was so immaterial it didn’t matter. But for seven years it was in the name of the old owner, and I couldn’t get an assignment. It was the funniest thing. They signed a 10-year contract on this $42-a-month watercooler. Anyway, it’s fine.

Mike, I wanted to speak with you a little about the evolution of healthcare services. We’ve seen some of these industries come into vogue with respect to private equity consolidation over the years. Some catch fire and some dwindle. Give us your unique perspective on what you’ve seen over the last decade and where you think we’re going.

Mike White

Yeah, it’s interesting. I think COVID had so many impacts on what private equity viewed as important and what it didn’t. You and I grew up in this industry when vet had already been doing its thing, a little bit of ophthalmology, and dental had started that groundwork. When you and I got into this, DSO wasn’t even the name. That was the ugly name. It was called a management company or something other than what it was. And we’ve evolved in that sense. But as you look at where we are today, healthcare has always evolved. Med spa, medical aesthetics, and plastic surgery were doing this all day during the COVID years, with people realizing, “Oh my gosh, I have to do something for myself.” It became so important, and these businesses have done so well. So many of us from the dental vertical and the veterinary vertical are asking, “Oh, what’s happening over here?” As we look at dental today, it’s sitting at 35 to 40% consolidated, somewhere along those lines. That’s a lot, right? A third. Then you look at a med spa or plastic surgery practice producing one and a half million in cash. There’s not really insurance involved. Their profits are 20%. They did well through COVID, a dramatic time, and people are willing to forgo a car payment to make sure they get their Botox. And you’re looking at an industry that’s maybe 2% consolidated, maybe 3%, with very few players. So there’s a lot of excitement and energy around that. But what I’m also seeing, and something we’re attacking, is the offshoot verticals. Behavioral health is coming back around. ASCs were huge when I got started, and we’re starting to see more of those transactions. Radiology, veterinary, ophthalmology, optometry: a lot of these are still out there. Maybe there’s not as much glory as in some of these other verticals. But what’s been unique, and you and I grew up in that conference scene, is that I feel like dental has done such a good job of bringing everybody together, and med spa, medical aesthetics, and plastic surgery seem to be doing the same thing, which is creating a frenzy we haven’t seen in some of the healthcare verticals we serve. That’s been interesting. And of course, as we talk valuations, a lot of folks are taking a wait-and-see approach. But man, 2024 is looking incredibly strong for the industry.

Kevin Cumbus

You brought up a couple of things there I want to go back to. One is collaboration and education. When I was an investment banker, there wasn’t a lot of collaboration. It was a sharp-elbow world: “This is mine. Stay away from it. I’m keeping it.” What I’ve so loved about the healthcare services space, in dental, medical aesthetics, behavioral health, and women’s health, is seeing like-minded individuals like you and me come together and say, “Listen, let us show you what happened in these other industries that are a lot further along than you are. Let us bring our wisdom to you so you don’t make the same mistakes.” And hopefully, just hopefully, the entrepreneurs running these businesses will collaborate with one another. I think that’s really coming from a position of abundance and saying, “Listen, there’s enough business out there for all of us. Let’s just do things the right way,” as opposed to this fear-based, sky-is-falling mindset of when the market is going to dry up. There’s a lot of that noise out there in the market, and it’s refreshing to talk with you from this position.

Mike White

Well, look at the life cycle of our physician brethren before us, before dental, before everything. How many times have we heard about the physician life cycle? Bought by a hospital system, did it for three to five years, got out, started their practice again, then got bought by or aligned with the hospitals again. There was a lot of that, and you see it over and over. Every day there’s another physician practice, another GP, another dental practice, another vet practice opening its doors for the first time. It’s so exciting to see that. But here we are at a generational inflection point. The boomers are retiring, and they’re looking for a succession plan. This asset, this dental practice, this GP practice, that traded for 62 to 82% of trailing 12 collections, or two to three times EBITDA, is now at five or six or perhaps seven times. There are these ranges, and it’s like, “Wow, that’s really attractive. I could sell to my associate, but he’s got $600,000 in student loans right now, and I just don’t know how he’s going to be able to get that loan.” That’s the interesting time we’re in, with the boomer generation retiring, programs not graduating as many associate doctors, and those who are graduating coming out with a huge debt load. It’s going to create a frenzy of private equity and people coming in to say, “Well, let us help support you. Let us align across multiple specialties and create this cross-service base.” I think it’s going to be an interesting time.

Kevin Cumbus

Yeah. When med spa owners call us and say, “I’m curious what my business is worth,” it’s kind of a loaded question. We can’t just tell you. Whether you’ve got $500,000 or $1 million, there’s no single answer. It always depends. But the next question I ask is: to whom? Who are you thinking about selling this to? Because if you’re thinking about selling it to your incredible injector, whom you love and who is the lifeblood of your business, I have a reasonable answer. It’s typically worth what the bank will lend her. Alternatively, there are great private equity groups that don’t have that artificial ceiling on valuation, because they have pools of liquidity that individuals don’t have access to, and they view your business differently than the injector who has expressed interest. They’re looking at it as cash flow in perpetuity that they can add additional businesses to and extract a higher value from the market from a deep-pocketed buyer. So it is the most exciting time to own a healthcare services business because of the options it gives you.

Mike White

And I think some people believe that if they partner with an equity group, a family office, or an institution, they aren’t taking care of their associate, their partner, their juniors. But a lot of these groups have come up with solutions, like, “Hey, we’re going to create a limited partner pool,” or “We’re going to create an ownership path for that individual, because we want them here for the long term. We want them to feel a part of the transaction.” So as you start going through that process, you run into those old stigmas, people saying, “Oh, you can’t do that,” whatever it may be. We just have to explore it. Well, maybe you can’t with that group, but there are 100 other groups that are more open to that conversation. And by having those conversations, you meet a new friend, if nothing else.

Kevin Cumbus

I could talk with you about the opportunities out there all day, but I want to get a little tactical. I want to go a little deeper than usual here, without scaring folks away. We’re going to talk a little bit of accounting. Sorry, but I think it’s critical that people hear this, because all too often you’re at the bar at AmSpa and you hear from your friend that they sold for eight or nine times their EBITDA. You could perceive that as, “Man, that’s awesome. All I’ve got to do is sign this contract and move on.” But there are a lot of steps in the process to get there. There’s signing on with the M&A advisor and the diligence they’re going to do, which TUSK would do in this case. There’s going to market and meeting all the buyers you could potentially partner with, both strategic buyers, meaning existing private equity-backed platforms, and new private equity companies. There’s a boatload of them that want to get into this industry. Then there’s executing the letter of intent and beginning diligence. And that’s really where I wanted to start with you, Mike: quality of earnings, QofE. I’d really love for you to explain what that is, what it’s like, and what it means for the client journey working with CLA, and go from there.

Mike White

Yeah, I love it. And you’re right, we could probably spend the rest of the afternoon having awesome conversations about what EBITDA is and what that multiple of EBITDA means. What’s so funny, and this is the anecdote, is that the seller thought they got a nine, and the buyer thinks they bought it at a seven. Everybody’s happy, right? And ultimately, that’s where you come in, making sure that value is maximized. We come in a little later. Early in the process, it’s, “Hey, we have this deal. We’ve done our internal analysis.” Your team, Alex and all the guys, have said, “Yep, this is what we believe it is, and here’s where things are that we need to dig into.” That’s where we come in with a quality of earnings. We do about 50/50 buy side and sell side. So we get in there and say, “Okay, if we don’t have enough time to clean up your books, let us put together a deck, dig into those areas, and make sure they tie out.” This isn’t an audit. I know some people really think of it as, “Oh, you’re auditing.” Well, no. There are really big areas we’re testing, meaning we’re going to do a proof of cash. Do the collections in your practice management system tie to QuickBooks and tie to your bank account? Does that make sense? Are these normalized add-backs and adjustments? “Hey, I run my car through. I run my golf club through.” All of this. We need to see that you’re actually running those expenses through. Where is that transaction? How is it happening? And more importantly, did you really move it out of the business?

Kevin Cumbus

Quick PSA: I don’t work for the IRS, and Mike doesn’t work for the IRS. We believe in the power of small business ownership, and you do what you want with your expenses. I just had to make that clear.

Mike White

Yeah, and it’s not getting reported to anybody but yourself and the investor. I’ve absolutely had that question, and I know you have too, so it’s a great point. So let’s say we’re on the sell side. Our goal is to maximize the value and get aggressive on those add-backs, adjustments, and normalization. Where you and I get in early, and I love this work, I think we can move the needle on the business during the cycle and start introducing some of our friends, our partners, and our industry alliances to say, “Hey, I think you can improve your supply bill,” or “I think this person may not be performing up to their standard.” We’re helping them along the way, and that’s such a great thing. But our goal on the sell side is to put a big EBITDA out there, add some additional adjustments, and make the buyer come back and prove it. Now, on the buy side, our goal is to beat that number down. “Oh wait, there’s more.” And that’s the fun part. I know you’ve been in the room when these conversations happen. “Well, Mike, your QofE is wrong.” “No, no, I was on a different side of the table. My goal was to beat that number down, and that’s what the other firm’s goal is to do to us.” It’s such a good negotiation and conversation, and that’s where you take those numbers, and you and your team step in and say, “All right, let’s battle this out.”

Kevin Cumbus

It’s so important, because you’ll ink a letter of intent, let’s say it’s an 8x deal on a million dollars of EBITDA, and if you read it closely, there’s a little fine print that says “subject to the quality of earnings.” That’s when the quality of earnings comes in. Mike, if you’re engaged on the buy side, you’re looking for ways the buyer could view that million as $800,000. And if we’re on the sell side, that million can look more like $1.2 million. So is there science involved in calculating EBITDA? All day long. There are absolutely pure accounting principles you use to derive the number. And then there’s the artistry with which you apply some pro forma changes and some add-backs. And both sides know how to play the game.

Mike White

Well, yeah. Take this one: “Oh, I lost an associate for three months, I lost that production, and then there was the ramp-up of the new one.” We’ll go in and calculate: okay, you had this production trend and this number of patients seen before that doctor left, and you had this after that doctor left. So yes, we can justify a stopgap of this much revenue loss. You subtract out the doctor’s comp, and we have a really good add-back adjustment to have that conversation around. The other one is, “I’m in the middle of opening my fourth location. Is now really the time?” Well, let’s see how you did opening your last three. That tells such a great story from your seat, saying this person has a proven record of opening three de novos, or doing three acquisitions. They have a model. This is how it’s going to go here. Let’s do a pro forma on this one and capture the cost back into it, or put an escrow fund out there that says, “If it performs as I say it’s going to, then I have the ability to get extra.” Those are the things we get asked to do in a quality of earnings, and that you, of course, have to battle out beforehand.

Kevin Cumbus

Yeah. I’m sure you meet these folks too. We meet people who say, “I did my own deal, and I got 10 times my EBITDA.” And then the question is, who calculated your EBITDA? I’ve written a couple of articles on this. Mike, I’ll pay you 25 times your EBITDA if you let me calculate the number. Then you can tell everybody you got 25 times. Man, this is so good. There’s so much more to cover, and I know we’ll have you back, but I’m sure everybody who’s had the pleasure of listening to this is thinking, “Okay, my head’s spinning a little bit. I’m starting to feel like I need to level up. I need to find a strategic partner in an accountant who can help me build a solid foundation, make sure I have it built for scale in preparation for what I’m about to do, and then, when I do transact, has my back all the way.” So for folks who are asking that question, how can they get in touch with you today?

Mike White

Yeah, that’s a great question. I appreciate that. We have a wonderful team with industry specialization. So if somebody comes in with a med spa or a plastic surgery conversation, I have a team that knows that industry really well and knows the things we should look at. You can get hold of me at [email protected]. It’s a long email, but we’ll definitely connect along the way. I’m also very hard to miss at the normal conferences at six foot eight. Our goal is to always do a courtesy assessment. We want to get to know you. The CPA relationship, as we said at the start of this conversation, should be your most trusted relationship, and we have to build that trust. That’s our goal: to have those conversations and really dig in. And whether we’re the right fit or not, we’re going to give you some sound advice.

Kevin Cumbus

That’s awesome. Thanks, Mike. It’s always good to see you. Thanks for all your time. I’ll see you out there on the road.

Mike White

I love it. Have a great day. Talk soon.

Kevin Cumbus

Sounds good. See you, man. Bye.

Mike was great. He always is. He’s like a lot of our guests: he’s seen this for decades. What I love from that conversation comes down to two big takeaways. One is that reporting can impact valuation. If you’re not able to get your reports, your accounting package, your income statement, with great regularity within 30 days of the close of the month, you’re not getting the numbers you need from your business. That’s the immediate impact. The long-term impact is that when you go through a process to sell, it’s a bad look. Buyers are going to see risk, and that’s going to show up in your value. So look, it’s never, ever, ever too early to start working on this. We work with Mike with great regularity, and what I love about working with him is that we do valuation work for everybody, so they can immediately know what their business is worth in today’s environment. Because if you don’t know that, you may know where you want to go, but it’s hard to get there if you don’t know where you’re starting. So here at TUSK, we work with entrepreneurs across all healthcare services to provide complimentary valuations, so they know exactly where they stand today. So when you’re working with Mike and plotting your pathway to where you want to go, he and I, and our team and his team, are on the same page. Great conversation. Who knew a CPA could be so entertaining? It’s always great to have friends on the pod. Y’all take care. Thanks.