Financial Foundations For Maximizing Practice Success
Kevin Cumbus, President of TUSK, is joined by Mike White, Principal at CLA, for a candid conversation on the importance of financial planning best practices to maximize practice value in a sale. Tune in for key insights from Kevin and Mike on the steps healthcare practice owners should take today in preparation for a transaction in the next 3 to 5 years including assembling the right team of advisors, maintaining current financial records, and more.
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 the encounters or service providers, they perform a task that’s required by the federal government, others actually provide me and they they serve as part of my decision, and I lean on them as a member of my team. It’s rare to find people like that. But Mike White, our guest today, is one of those people. Mike is 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 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, not just 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 is time for you to monetize your life’s work and go through a process, for example, we would take the process, you’re going to sign a letter from it with some buyer, and then they’re going to perform diligence on you. The Financial portion of that diligence called 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, they’re the ones who make this less painful, and actually can create value through the process. It is a it is a deep dive into your numbers. And these guys do 200 quality of earnings each year, exclusively in healthcare. I don’t know of anyone who has the breadth and depth of experience from the CPAC as Mike. So Mike, I am so happy to have you here. Man, this is awesome.
Mike White
Yeah. Well, thank you. Thank you. Welcome excited to have this conversation and excited to expand little education insight.
Kevin Cumbus
I am too. Man, so Mike, I’ve known you for close to 10 years, and it’s been really interesting to learn from you and to hear 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.
Yeah, no, I love this. And you and I have grown up together in these seats, which is fun to watch and help each other. I can, you know, picture so many of our conversations just sitting there . But my story to you know, one like many entrepreneurs that 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. I had a belief that CPAs could be more than just tax preparers. Issues led into this conversation, and I believe, just as every entrepreneur and myself, you need help 365 days a year. And that’s what we built a premise off of. We started serving healthcare, specifically in about 2009 / 2010. We continue to grow our path with serving outsourced accounting, tax advisory, a little bit of everything, but we need new we had some transaction support QEs technology that we need to grow into. So we merged in 2018 with CLA, and it’s been an amazing move. Added so much to the team and breadth of knowledge that we can now break. So it’s it’s been an exciting journey!
That’s great. And so let’s start here some everyone I know. I know everybody’s got a file attached. What is a relationship look like between an accountant and an entrepreneur? What should it look like in your world?
Mike White
You know, I think we should be part of the advisory team. You know, one of the things you and I talk about so frequently, and some of your other you know, folks that have been on these podcasts with you, it’s a team. It’s so many of us work together so well, because we’re having insights from people. We’re having insights from the executive search. We’re talking to the lenders. I think, you know, the CPA should be at the table with everybody else, I believe, you know, leaning in on that side. And all CPAs don’t like to be in the room. They want to be behind a group. Your screen they want to do that tax prep, and that’s where we’ve blended the finance function, accounting function, with that very technical CPA knowledge we need. And lean in as much as we can across the board. You know, as you start thinking about the complexities of running these businesses, I always say you gotta start with the foundation something as simple and monotonous as bookkeeping as you know, drives millions of dollars of valuation, and if it’s not done, right, even if it may cost a little bit more along the way, that becomes such a huge problem. We get quality, of earnings, deal flow, and transaction stuff.
Kevin Cumbus
yeah, I’ll just share a quick anecdote. We’ve got an analytics team here that that I think is best in class, right? And when we sign on the client, we’re quick to ask them, who’s your CPA firm? And sometimes they groan when they hear who it is. And sometimes they go, Okay, this, this, this is great, because we come from a position of trust but verify when it comes to the bookkeeping. So we actually pull all the general ledger reports — look there’s humans involved. Mistakes happen, but like you, we recognize the value, making sure that every i is dotted and T is crossed for you from a reporting perspective, and then from a kind of retroactive valuation perspective, because values based off your trailing 12 months EBITDA. So we gotta make sure we get that number right.
Mike White
And when you think about the life cycle of that process, that trailing 12 months, it’s not just up to the point like, hey, it’s January 26 or whatever day it is. We want to go on December. Well, 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 30 new practices a month, 30 new businesses a month, financial statements. Many times, I got one yesterday, It was July. Was the most recent month they saw we’re talking five, six months in a readers, how do you run a business that way? And with this, with multiple locations, large organization, and I see it time and time again, I know you do too. Alright, here’s our due diligence list. Let’s go, Yeah, okay, well, I’ll get back to you when my CPA has it done. And that’s where that 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, that individual that’s looking to work with you is wanting to see how sophisticated you’re running your operations. So all of those things are being met, which is incredible to be a part of.
Kevin Cumbus
One thing we talk a lot about on this pod is is, you know, valuation, what’s it a function of, right and consistent cash flow that has less risk than the same amount of cash flow that has more risk. And what they’re doing is they’re 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. And one of the biggest hurdles we can run into with with clients, amazing entrepreneurs built incredible businesses. But the question we get, if you go through a process, you will get this question, Hey, can you send us the most recent set of financials? And we go, no problem. And we go to our client and say, hey, it’s, you know, it’s January 26 Can you send us your year in and they go, we have it done through September. Yeah, so it’s like, that’s not good. And what it shows that what what the buyer sees is lack of sophistication and an owner that’s not even looking at their numbers to their business, right? So, so we want to see our clients and every entrepreneur out there get financials in a in a reasonable period of time, so they can then react to it and plan accordingly. But in the long run, you need them to to continue to instill confidence in any buyer that you know what you’re doing. You’re staying on top of your numbers.
Mike White
You know, and that’s why these conversations are so important, is educating the industry. Educating and bringing forth. This isn’t a dental thing, a physician thing, a med spa thing. This is across all verticals. No matter what business you’re in. You run a business, I run businesses, you you have to have this level of sophistication. And when you know you asked earlier in the conversation, what has made us unique, it’s not only bridging the traditional financials that BNL balance sheet, making sure they’re timely, making sure they follow their trend line, and make sure they’re standardized part of accounts. But it’s also then correlating that back to the practice management data, 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 that’s where when we look at on average, and this has been since we, you and I have known each other. I know we’ve talked this stat, 30% of our new clients a year, people who are like, Oh my gosh, I’m ready to sell. But I tried to run a process, or, you know, TUSK looked at this, and said, This is a complete mess, like, you know, start with Mike and get going and come back to us in a few months. And that is still consistently that deal, which is why I love these conversations. As we continue to empower the industry with this knowledge, we spend a little time now it pays dividends.
Kevin Cumbus
Yeah, I read, 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, right? And in that book, one of the things I’ll never forget is, as you’re building a business and as you’re growing as an individual or family, get the best accountant and the best attorney you possibly can. It will pay you back in spades. And when I have 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? Yeah, how many deals have fallen apart because of 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 they were 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, right? Hey, can we get them next month? And if you don’t materialize, they don’t materialize. They ask again. Then they start asking more questions, not even related to Financials. You then start a doubt. And where there’s doubt is where they’re going to pivot.
Mike White
Yep, yeah. And when you think about succession plan, when you think about this journey that we’re all on as entrepreneurs, as business owners, across any vertical and industry, starting there is a little bit easier starting to make that decision to change today. Here we are beginning the year. Let’s do something different, but it also, you know, one of the questions you and I talked about, when do you start this process? When do you want to think about it? And I was, you know, I was unique. I was unique. I was 24/25 when I started my firm, and I started with the end in mind. And I think as 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 the question. I love the question because it’s fun to see people’s journey. And I know, you know, not only am I asking that question, I know you are as well. I know that potential partner is saying, Okay, what is this? Is just a check for you, or is this something more? Are you trying to build something here to follow your passion?
Kevin Cumbus
Yeah, we I, we tell folks, start with the end in mind for sure. And the way we phrase it, is build a business that’s built to sell, irrespective of whether you never sell. And there’s fundamental truths in how you build a business that is built to sell. And so many times, unfortunately, a handful of groups will come to us each and every year, and they have inadvertently baked poison pills inside of their business that are going to stand in the way of a seamless transaction. You see it in partnership arrangements. You see it in sometimes how folks have structured their leases or this at the other like and they’re just there, and we had to tackle them before market. You start with that conversation a little bit ago, of saying, Look, having everybody at the table, having your insurance, having your banker, having your advisors, having your even your real estate person, every so often, like, Here are these agreements good, or the real estate attorney that’s going to look at this and say, Is this assignable? You know, I’ve bought businesses, and I’ll take one of the ones that’s so unique I could never get assigned to me was the watercooler, the $42 a month watercooler. Thankfully, it was so immaterial. Didn’t matter. But for seven years that was in the name of the old owner, couldn’t get an assignment. It was the funniest thing. They signed some 10 year contract on this $42 a month water hoop.Yeah, it’s fine. Well.
Kevin Cumbus
Mike, I wanted to speak a little bit with you about the evolution of healthcare services, and we’ve seen some of these industries come into vote with respect to consolidation by private equity over the years, and some catch fire and some some kind of dwindle. Give us your unique perspective on what you’ve seen over the last decade, and where, where you think we’re going?
Mike White
Yeah, you know, it’s interesting. I think covid, you know, in the midst of all of this, you know, covid had so many impacts of what private equity viewed as important, and what didn’t right was, you and I, growing up in this industry, you know, vet had already been doing their thing, a little bit of ophthalmology, dental had started that groundwork, and you and I got in homework where DSO wasn’t even the name that was the ugly name. Called it a management company or something other than what it was. And we’ve evolved in that sense. But you know, as you look at where we are today, healthcare has always evolved, right? Med spa, medical aesthetics, plastic surgery, doing this all day during covid years, realizing, oh my gosh, I I have something myself. It became so important. And these businesses have done so well. So there’s so many of us from this dental, dental vertical, veterinary vertical, like, oh, what’s happening over here? And as we look at Dental today, sitting 35-40% consolidated somewhere along those lines. You know, a lot, right? A third, you know, you look at a med smile, Plastic Surgery, they’re producing one and a half million cash. There’s not really insurance involved. Their profits are 20% they did well through like covid, dramatic time, sure, and people are willing to, you know, forego a car payments or really make sure they get their Botox, you know, and you’re looking at an industry that maybe is 2% consolidated, maybe three and very few players. So there’s a lot of excitement and energy as it relates to that. But what I’m also seeing, and, you know, something we’re attacking is the offshoot variables, you know, the behavioral health is coming back around ASCs. They were huge when I got started and starting to see more of those transactions, radiology, veterinary, ophthalmology, Optometry, a lot of these are still out there. Maybe it’s not as much big of a glory as it was in some of these other verticals. But what’s been unique, and you and I grew up in that conference scene is, I feel like dental has done it so well, to bring everybody together, bring those like minded Med Spa, medical aesthetics, and plastic seem to be doing that same thing, which is creating this frenzy that haven’t seen in some of the healthcare verticals we serve. That’s been an interesting thing, a lot of folks, and of course, as we talk, you know, valuations, a lot of folks kind of a wait and see. But man, 24 is tick tock, incredibly strong for for the industry.
Kevin Cumbus
You brought up a couple things there. I want to go back to. One is collaboration and education, right? So, one of the things that most…when I was an investment banker there wasn’t a lot of collaboration, right? It was, it was a sharp elbow world. This is mine. Stay away from it. I’m keeping it. And what I’ve so loved about this healthcare services space in dental, medical aesthetics, behavioral health, women’s like, what I see is like minded individuals like you and I come together and go 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 to you so you don’t make the same mistakes. And hopefully, just hopefully, the entrepreneurs that are running these businesses will collaborate together with one another. And I think that that’s that’s really just 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, the skies falling is, you know, is it? When is the market going to dry up? There’s a lot of that noise out there in the market, and it’s refreshing to talk with you. It kind of in this from this position.
Mike White
Well, look at the life cycle of a physician, brethren before us, right before Dental, before everything. How many times have we heard the physician lifecycle into a hospital system bought by the hospitals? Did it for three to five years? Got out? Did their practice again bought out of hospitals or aligned with the hospitals? There was a lot of that. We had a bunch of groups were like, alright, well, I’m not bought by the ones, but I have. And you see this over and over. Every day there’s another physician practice, another GP, another Dental, another vet practice, opening its doors for the first time, right? It’s so exciting to see that. But here we are this inflection pointed generation. The boomers are retiring. They are looking for a succession plan. What this asset, this dental practice, this GP practice, but traded for 62 to 82% of trailing 12 collections, or two to three times. EBITDA is now five or six or perhaps seven. You know, there’s these ranges like, wow, that’s really attractive. I could sell to my associate, but he’s got 600,000 student loans right now, and I just don’t know how he’s going to be able to afford to get that loan. That’s That’s this interesting time of this Boomer generation retiring, associate doctors, the programs aren’t graduating as many and those that they are coming out with this huge amount of debt load, and it’s going to create this, you know, 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 basis. And I think it’s gonna be an interesting time.
Kevin Cumbus
Yeah, when folks call us med spa owners call and say, and I’m curious what my business is worth, it’s kind of a loaded question. We can’t just tell you if you’ve got $500,000 million dollars, even there’s no answer, it’s always It depends. But the next question I ask is: To Who? Who are you thinking about selling this to? Because if you’re thinking about selling it to your incredible injector that you love and is a lifeblood of your business, I have a reasonable answer for it. It’s worth what the bank will lend her is typically going to be the answer there. Alternatively, there are great private equity groups and private equity companies that don’t have that artificial ceiling on valuation because they have pools of liquidity that individuals do not have access to, and they view your business differently than the injector that has expressed interest. They’re looking at it as a cash flow in perpetuity on which they can add additional businesses to and extract a higher value from the market, from a from a deep pocketed buyer. So it’s, it is, I’ve always it is the most exciting time to own a healthcare service business because of the options that it gets.
Mike White
And I think some people believe that just because they partner with an equity group or a family office or an institution, they don’t believe they’re taking care of their associate, their partner, their juniors, and a lot of these have been thrown or come up with a solution, like, Hey, we’re going to create this limited partner pool, or we’re going to create this ownership path for that individual, because we want them to be here for the long term. We want them to feel a part of that transaction. So, you know, as you start going through that process and those old stigmas, I would say, saying, oh, you can’t do that, you know, whatever it may be, you know, we just have to kind of explore like, Well, maybe you can’t with that group, but there’s 100 other groups that are more open to that conversation. And just, you know, having those conversations, you meet a new friend, if nothing else.
Kevin Cumbus
I could talk talk with you about opportunities out there all day, but I want to, I want to get a little tactical, right? I want to get a little deep here, in a little bit than us, without scaring folks away, we are going to talk a little bit of accounting. Sorry, but I think it’s critical that people hear this, yeah, because I think all too often you’re at the bar at AmSpa, and you hear from your friend that they sold for eight times, nine times their EBITDA. You you could perceive that as man, that’s awesome. All got to do is sign this contract and move on. But there’s a lot of steps in that process to get there. There’s the signing on with the m&a advisor, the diligence they’re going to do that, 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 platforms that are private equity backed, or new private equity companies. There’s a boatload of them that want to get inside of this industry, executing the letter of intent and then beginning diligence. And that’s really where I wanted to start with you. Mike, is here, quality of earnings, QofE, I don’t, I’d really love for you to explain what that is, what that is like, and what it is for the client journey and 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, like, what is EBITDA? And that multiple of EBITDA, what does that mean? For sure. What is so funny? And the antidote is, the seller thought they got a nine. The buyer thinks they bought it at a seven. Oh, yeah. You know, everybody’s happy, right? And that’s, that’s ultimately, that’s where you come in, is making sure that this value is maximized. But, you know, relative to where we come in, a little, I don’t see earlier in the process, but early in your process is, hey, we have this deal. We’ve done our internal analysis, you know, your team, Alex, and all the guys have say, Yep, this is what we believe it is. And here’s where things are we need to dig into. And that’s where we come in from a quality of earnings. And we say, we do, you know, 5050, buy side, sell side. So we are getting in there and saying, Okay, if we don’t have enough time to clean up your books and let us put together a deck, dig into those areas and make sure they take and tie out. This isn’t an audit. And I know some people really think of it as, oh, you’re auditing. Well, there’s no there’s really big areas we’re testing, meaning we’re going to do a cash group, does your collections for your practice management system, tie to QuickBooks, tie to your bank account. Does that make sense? Are these normalized Add backs, adjustments? Hey, I run my car through. I run my golf club through. All this. We need to go see that you’re actually running those expense through. But let where is that transaction? How is it happening? And more importantly, did you really move it out of the business?
Kevin Cumbus
Quick, quick. PSA, I don’t work for the IRS, and Mike for the IRS. And we are, we believe in the power of small, of business ownership, and you do what you want to 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. That is absolutely not had that question. I know you have too. So it’s great point. You know our goal, 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, normalization. You know, where you and I get in early, and I love the work is, I think we can move the needle on this business during the cycle and start introducing some of our friends, our partners, our industry, you know, alliances to say, Hey, I think you can go improve your your supply bill. Or I think this person may be not performing up to their standard and and we’re helping them. Along the way, and that’s such a great thing. But our goal of sell side is to throw a get a big event out there, throw 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. Oh yeah. And, you know, and that’s the fun part. And 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 is to beat that number down, and that’s what the other firm’s goal is to do for us. And 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, Alright, let’s battle this out.
Kevin Cumbus
It’s so important because you’ll ink a letter of intent, and it, let’s say it’s an 8x deal on a million dollars at EBITDA. And if you look at that, if you read it clearly, there’s a little fine print there that says, subject to the quality of earnings, right and that that’s when the quality of earnings comes in. And if you’re engaged Mike, on the on the buy side, you’re looking to find ways that that maybe the buyer could view that million as a 800,000, right? And if we’re on the sell side, that million can look more like 1,200,000 and so is is there science involved in calculating the EBITDA? All day long. There’s absolutely, absolutely pure accounting principles that you use to derive the number. And then there’s the artistry with which you apply, kind of some pro forma changes, some add backs. And both sides know how to play the game, yeah.
Mike White
Well, yeah. Take, Oh, I lost an associate with three months that lost production, and a ramp up of the new one, we will go in there and calculate, okay, you had this production trend and number of patients seen and all that before the stock grew up. You have this after that doctor left so, yeah, we can justify stop gap of this much revenue loss. You subtract out the doctor’s comp, and we have a really good add back adjustment that we can have that conversation. 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 and opening your last three. And that tells such a great story from your seat of saying this person has a proven record of opening three de novos. We’re doing three acquisitions. They have a model. This is how they’re going to do here. Let’s do a pro forma on this one, and these capture a cost back into it, or put an escrow fund out there to say, if it performs as I say it’s going to, then I have ability to get extra, right? Those are the, those are the things that quality of earnings we get asked to do, and you, of course, have to battle out before.
Kevin Cumbus
yeah, there, you know we, I’m sure you meet these folks too. We meet people who say, I did my own deal, so I got 10 times my EBITDA. And then the question is, who calculated your EBITDA? I’ve written a couple articles on this, like Mike, I’ll pay you 25 times your EBITDA, if you let me calculate your number. Yeah, you can tell everybody you made 25 times. Man, this it’s so good to see. There’s so much more to cover. I know we’ll have you back, but I’m sure everybody who’s had the pleasure of listening to this is going 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, and then also ensure that that I have it built for scale, in preparation, what about to do? And then when I do transact has my back all the way. So for folks that are having that question, how? How can they get in touch with you today?
Mike White
Yeah, well, yeah, no, it’s great question. I appreciate that, you know, we, we have a wonderful team of industry, you know, we really need an industry specialization. So, you know, if somebody comes in here with a med spa, or a plastic conversation, I have a team that knows that industry really well and the things that we should look at, you know, so getting a hold of me and [email protected], you know, long email, and we’ll definitely exchange along the way, very hard to miss it in near your normal conferences at six foot eight, but you know, we’ll, we’ll get the information. Our goal is we always do a courtesy assessment. We want to get to know you. The CPA relationship we started to call this way should be your most trusted relationship, and we have to build that trust. And we’re, you know, that’s what our goal is to do, and have those conversations really dig in, and whether we’re the right person or not, we’re going to give you some nice sound advice.
Kevin Cumbus
It’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 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, it’s really two big takeaways. One is, reporting can impact valuation, right? So if you’re not able to get your reports. Your accounting factor, income statement with great regular fees 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, when you go through a process to sell, it’s a bad look, and buyers are going to see risks, and that’s going to manifest itself no more. So look it’s never, ever, ever, too early start working on this, and we work with Mike with great regulatory and what I love about working with Mike is 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, I mean, you may have may know where you want to go, but it’s hard to get there if you don’t know where you start. So here at TUSK, we work with entrepreneurs across all healthcare services to provide them complimentary valuations so they know exactly where they stand today. So when you’re working with Mike and potting your pathway to where you want to go, he and I, our team and his team are on the same page. Great conversation. Who knew a CPA could be so entertaining? Always great to have friends on the pod. Y’all take care. Thanks.