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 from TUSK. Welcome back to our series here, where we’re exploring really what’s going on in healthcare services across all different service providers and experts inside of the field. Today, I’ve got a dear friend, Mr. Brian Colao. Brian is Partner and Managing Director of Dykema’s Healthcare Group. I’ve had the privilege and pleasure of knowing Brian for eight years. We’ve had the joy, and trials and tribulations, and worked on a lot of transactions together. There is no one who understands this space better from a legal perspective than Brian. Brian has worked on hundreds and hundreds of deals. He’s helped businesses and entrepreneurs build their legal structure, build for scale and growth, and aided them in finding private equity to help them scale, and aided them in a sale to a larger private equity backed group. I’m privileged to have you here, Brian. Thanks so much for making time for us today.

Brian Colao

Hey. Thanks, Kevin. I always love spending some time with you, particularly to chat about my favorite, you know, subject healthcare, healthcare services. So, it’s just a real treat to be here. And I’m looking forward to this discussion here.

Kevin Cumbus

Yeah, I am too. There’s so much happening at lightning speed, and I think what you and I both see is private equity always eyeing opportunities in the market, opportunities, specifically in healthcare, such a large portion of our GDP. They’re incredibly talented surgeons, plastic surgeons, dentists, med spa owners, dermatologists out there that have built really, really good businesses, but, but some of them lack business action. And that’s where private equity can really come in and put some and kind of shot steroids in the arm to help them grow and mature into really, really nice, attractive assets. I love your perspective on what you’ve seen private equity do in recent years, and what attracts private equity to businesses like these.

Brian Colao

Yeah, I mean, the healthcare sector, you know, at least certain portions of it have been really explosive. It’s outperformed the market. It’s been, you know, virtually recession proof, some of it, some of it, and has, you know, even pandemic proof, you know, it’s has come out of the pandemic, very, very strong. And obviously private equity groups are just looking for, you know, the best return on their investment they can get. And right now, health care is tremendous, is a tremendous return on investment. So, I mean, it’s simple as that, you know, private equity, a lot of it is agnostic. They’re just looking for the best opportunity and the best return on investment. And healthcare has been extremely strong. You know, we’ve seen sectors like dentistry just absolutely explode over the last 10 years. We’ve seen sectors like Med Spa getting poised to explode the same way dentistry has. I mean, I think dentistry is about 31-32% consolidation. It’s not going anywhere yet for the next 10 years, but Med Spa is 4% consolidation, and that’s poised for a really big explosion. And then you look at dermatology and the interrelationship between dermatology and Med Spa, and you can combine these things together. You can also combine them with plastic surgery and cosmetic surgery. So, this segment has really, even within healthcare, outperformed. Healthcare on the whole is strong, but when we look at dentistry, we look at Med spas, dermatology, it’s outperformed healthcare even within that segment. So, a lot of private equity groups are really interested in doing dental deals that they’ve been doing that for 10 years. They’re turning their attention now to med spa deals. They’re turning their attention plastic surgery deals, and even combining med spa with plastic surgery. We’re seeing it all over the United States and in Canada too.

Kevin Cumbus

Yeah, it’s interesting, Brian, here we get a lot of calls from all four of those sectors asking us to help. Help the entrepreneur, help the owner understand how to create value with questions around what their business is worth, what’s going on in the market. And one question I want to ask them is, what is your legal structure, right? Because they’re thinking about bringing in partners, and they’re thinking about bringing in non-doctor cash to this business, or maybe private equity. And I like to ask them, what’s your structure and who’s your attorney? Because in my mind, your legal structure actually is a huge part of your strategy. Could you talk a little bit about the importance of really organizing your business correctly from the beginning, from a legal perspective.

Brian Colao

Yeah, I mean, the only negative, I mean, it’s not really a negative, because there’s ways around all this stuff, and it’s been just, you know, incredible return on investment. But if you were to find, like, pros and cons, like, what’s the only negative? Like, you guys have said, you got dentistry, you got med spot, you’ve got, you know, dermatology, you’ve got plastic surgery, you know. But you know, what’s the catch? Well, if there is a catch, it’s, it’s heavily regulated. That’s the only catch you can’t like, you know. If you want to go to, you know, McDonald’s hamburgers, or you want to go to, you know, a car dealership or something, you just buy it. You like it and you are private equity, you just walk up and buy it. If you like a dental practice, it’s not that simple. You can’t just, typically walk up and buy it. If you like a dermatology practice or a med spa, it’s usually a couple states are more lenient, but in most of the country, you can’t just walk up and buy it. You have to create, you know, a regulatory compliant legal structure to do it. We know how to do it. We’ve done it for years, but you have to have the right counsel, and you have to have the right structure. And just to, you know, I guess, summarize quickly, most states will only let you know if it’s dentistry, a licensed dentist, owned dental practices, if it’s Med Spa, physician, you know, own the Med Spa, or own a dermatology practice or plastic surgery practice. There are some exceptions, but there’s a huge regulatory scheme across the United States, and you have to make sure, if you want to do a deal with private equity or a strategic or another investor that is not a physician or not a dentist, you have to make sure you’re structured in a regulatory compliant way, and you’re structured in a way where you can transact business and take on non-physician or non-dentist investors. So that’s why, in this environment, you know, of healthcare services, it’s absolutely critical you have the right legal representation, and it’s absolutely critical you have the right structure. And as soon as you can do it, I mean, I know a lot of entrepreneurs get started and they don’t have the funds, or they maybe they don’t understand the need for it at the beginning, and they move really, really fast. But eventually you got to get the right structure in place, and you got to do it as quick as you can before the equity event, because if you’re not in the right structure, and then you try to do the equity event, worst case, if you’ve just messed it up, no one will buy you. And they’re going to say, you know, you got to fix this for a couple years, and then we’ll then we’ll look at buying you. That’s sort of the worst case. Best case, you’re going to spend $10s of $1000s or even $100,000 correcting stuff pre closing, where they’re like, “Okay, we will buy you, but you got to do all this legal work now. And it would have been great if you did it when you had one or two offices, but now you’ve got 20 offices, so you’ve got to multiply the legal work times 20. And if you do this, we’ll buy you, but it’s going to cost, I don’t know, $150,000 to do it.” You know, whereas if you did it at the very beginning and set everything up, it just would have been so much more efficient. So that’s the best answer I can give you on the importance of proper legal counsel and having the proper structure, because that’s the only catch about this explosive health care, is it’s regulated and understandably. I mean, we’re not making pizza over here. This is health care. It’s people’s lives. You have to, you know, there’s got to be rules in place to make sure it’s done correctly.

Kevin Cumbus

Yeah, it’s such a good point. In our world we’re trained to identify risk, right? Because when buyers are looking at buying Med Spa practices or dental practices, what they’re really doing is looking at the riskiness of those cash flows continuing after they purchase the business. And that’s really how they’re factoring in their multiple. That’s how they’re building up the multiple that they’re going to apply to their EBITDA. And one thing that we’re asked is, what’s the legal structure? What’s the cap table? What’s the ownership? How firm are the operating agreements, the shareholder agreements, and is there clarity among all of those partners in how dollars are going to be received upon a change of control? And when we’ve got issues there, yeah, yeah, there are dollars that are attached to fixing it through working with Brian and his team, but really the bigger hit is from the valuation side. When they go, okay, we’ll put an LOI in. We would pay you eight times if it had clean legal structure. But because there’s risk, and it’s going to take a longer time to close, the risk is we may lose some providers. We may lose some revenue. And although we were going to pay you eight times, we’re now going to pay you six times, and hope we get to the finish line. And that that’s really challenging.

Brian Colao

You know, and sometimes they won’t do the deal. I mean, what you’re saying, you know, certainly can happen if you know, what you’ve done is, you know, a little non compliant, but subject to, you know, to correction. But we’ve learned our lesson. I mean, what I’m saying is, I’ve been here 29 years doing these type of deals, and what happens say we haven’t had a real bad event like this in the last 10 years, but say, if you went back 15 or 20 years, a couple aggressive investors, not a couple, several throughout various bases, dentistry, I don’t think Med Spa was big then, but dentistry and some of the other medical disciplines just said, Oh, heck, let’s just close over this thing. How bad could it be? And when the regulators come in, I mean, it could cost millions of dollars of fines. You could have your structure completely unwound. You could be told you got 30 days to completely redo this thing, and then the lawyers got to stay up till midnight every night for 30 days, and the bill you get is just eye popping. And I think the investors have learned their lesson from that, and they’ve said, No, absolutely not. We’re going to diligence this thing on the front end, and if it doesn’t look correctly, either it’s got to be fixed and you’re going to have to have to, on your nickel, correct all this stuff before we buy it. Or if it really concerns us, we just won’t do the deal, because we’ve learned our lessons from, you know, from what happened 15-20 years ago on some of those transactions. I think the days of people just saying, “Oh, what the heck, we’ll fix it later, just buy the thing that’s not going to happen.”

Kevin Cumbus

Yeah, yeah. Getting the right legal foundation is critical. I don’t want to dwell on the negative, but sometimes as attorneys, my wife’s an attorney, she told me to just look in law school, you’re trained to focus on, really that where the risk lives, the 1% likelihood, blowing it up to 100% probability, then contracting around, that’s really what we’re trying to do. If something does happen, we know where to look, and we have a process there, the methodology there, on how to fix it.

Brian Colao

Yeah, I mean, you know, virtually every, I mean almost every situation, if we get it early enough, you know, if you come to me and say, we’re closing next week. You got to fix that. I don’t know if I can do that, but if you give me at least a little bit of time, almost every situation, you know, as long as there’s not, like, serious laws being broken or something, almost any situation can be corrected. I mean, if the structure was, you know, not as it should be, and we see it, and we have a little reasonable amount of lag time when you want to do a deal, almost any situation you know can be corrected, but you don’t want to end up, you know, you’ve got the LOI of your dreams, and the price is wonderful, and then you find out your structure is completely messed up, and you know, it hurts the deal or hurts your value.

Kevin Cumbus

Hey, I want to shift gears with you here, Brian. Something I’m reading a lot about, hearing a lot from business owners is about the possibility of the non competes that they have in place going away. And I mean, we, you and I both know how important that non-compete is, especially if I’m buying a med spa business, I want to make sure that the team that the asset that I buy, the cash flows that that team creates, that there’s a high likelihood that those cash flows will continue. And how I do that is build a non-compete so that the person who I just partnered with can’t open up across the street and take all the patients. I’d love for our audience to hear your perspective on this and where this stands, right?

Brian Colao

Yeah, I’m not super concerned about it. I mean, I get the concern, oh, my god, we’re going to give these people millions of dollars, and we won’t have the ability to protect ourselves, and they’ll go across the street, take the money we gave them and open up a competing business. I mean, that’s the concern, and that is, you know, a legitimate, you know, concern to have. But I’m not concerned about it, okay? And I’ll tell you why. The Biden Administration, you know, gave some guidelines for eliminating non competes. First of all, they’re going to be tied up in litigation forever. The chambers of commerce and other people said they’re going to sue them. And so, I would say, you know, if you’re going to do a deal 10 years from now, you know, I don’t know, but if you’re trying to do a deal in the next couple years, those regulations are not I’ll tell you this, if the Biden administration loses the presidential election, those things are going to go away. Talk of that will just be completely eliminated, and you’ll never hear about it again, at least for the four years that Republicans are in office. If the Biden administration gets reelected, the regulation, as it’s been proposed, has an exception for sale of a business. So as long as I, you know, the only catch there, if I looked at is I think it had to be more than 20% so I think if you were an under 20% shareholder, you might not be subject to the non-compete. But there are options and things we could do pre closing to maneuver that. But basically, you know, for the sale of a business, the Federal proposed rule would be an exemption where you could have a non-compete for the sale of a business. The other thing that I heard about recently is New York tried to get through their legislature, you know, in a similar ban on non competes, and it did not have an exception for sale of a business, but Governor Hochul vetoed it. So now that thing’s dead, for a whole variety of reasons, she didn’t like that. She was open to the general idea for like working class people. I think there was a threshold of under, you know, under anomaly, a couple $100,000, you were deemed like a working-class person, and within the meaning of that statute. And she wanted to eliminate non competes for that. But what the legislature proposed was pretty much everything, and there was no exception for the sale of a business. So that got vetoed. So that’s dead right now. So, as we sit here right now, there is not any rules or legislation that’s going to eliminate non-competes for the sale of a business. Obviously, California eliminated non-competes a long time ago, but the exception is there for the sale of a business. So at least right now, when I look at everything, I think there certainly is a possibility some other states might follow California and say, “we’re eliminating non-competes.” But I feel like there’s going to be an exception, just like California for the sale of a business, because you just can’t have a situation where you pay somebody millions of dollars and they’re free immediately to go across the street, take your money and open a competing business. That’s just not acceptable. And I just think even whether you’re a Democrat or a Republican, nobody wants to see that for the most part.

Kevin Cumbus

Yeah. Yeah, it sounds to me like something to keep an eye on. No reason for panic. Let’s just, you know, kind of keep in touch on that over the months and years, as that continues to evolve. So, in this world that we operate in, there a lot of transactions. And I know that this past year was a little bit slower on the M&A activity globally, across the US. I know the top end of the market was a little soft. Down to the lower middle market, there was still a lot of activity. And here at Tusk, you know, we work diligently to take our clients through a marketed sales process, to bring a sea of buyers to present, to show to our clients who then present multiple letters of intent. So, we negotiate all those buyers, against one another, and then ultimately, we pick a letter of intent, and at that point is when we engage the attorneys. You know, could you speak a little bit about the right time to engage an attorney when you’re walking through the process. We are working on a deal right now, you and I, where we are premarket isn’t that. And we’re doing an analysis on that client to make sure that their legal documents, employment agreements, leases are all in order before we even start the process. So, when is the right time to engage the attorney to help someone navigate the space and ensure that they exit with high degree of confidence and the right way?

Brian Colao

Well, I have a little longer answer to this question, but I think you got to highlight a couple of things. You know, you guys over at Tusk, you know, run elaborate process, and that’s important for a couple of reasons. You know, obviously, I think a lot of folks that maybe aren’t experts in this space say, “oh, if we run a process, we’re going to get the best price, because we’re going to get more competition.” And, yeah, that’s true. But the other reason why it’s critical to be able to run a process is you got to pick the right partner in all these healthcare deals, none of them that I’m aware of. I mean, almost none of them, unless you’re, you know, the seller is 80 years old or 75 years old. Like none of these involve just an exit. You just sell it. You’re gone. And everybody you know is on their way. They all involve a continued relationship, through some type of rollover relationship. You know, you might get 60% cash or 70% cash at closing, and 30 or 40% rollover stock. But the point is, it contemplates a continued relationship, often 5 years or more post-closing. So, it’s critical, because you’re going to be in bed with the buyer for a long time, you have to pick the right partner. And the only way you really could know if you pick the right partner is by running a process. You know it is true that by running a process and you have competition, that also helps you understand or helps you get comfort, you’re going to get the highest price or the best what we say the best overall value Price is not necessarily the best overall value, but you know that gives you some comfort you’re going to get the best overall value. But you also, the more folks that are involved in the process, the more you can be comfortable you’re picking the right partner that you’re going to be with for the next five years. So, I just think it’s really, really important. And I agree with what you said earlier that it’s not just about price running a process. Now with respect to when the lawyers get involved, you know, we often, you know, and I like to, I understand it’s not practical in every case to get involved, you know, preprocess, where we can look, because we’ve been, I’ve been doing this for 29 years. My team’s been together for 15 years, you know. And we love to look at the organization and see, you know, from a regulatory standpoint, from a structure standpoint, leases other things, what can be buttoned up, you know, prior to going to sale. I’d love to do that. The reality is, sometimes people, you know, don’t call you Kevin, until sort of last minute, and then we get called, you know, when there’s an LOI. But you know, the latest I would like to be involved is when LOIs are being presented. So at least, at a minimum, we can look at the LOIs and make any necessary changes and make sure that you know you’re not agreeing to anything that’s not going to be in your best interest at the LOI stage. You know, sometimes we get called after the LOIs are signed. Look, yeah, it’s still very important. It is a tough position to be in, because what happens is, when we try to negotiate things after it’s signed, of course, the buyer, and the buyer has every right to say this stuff. Now it doesn’t mean I’m still not going to fight for you anyway. But the buyer has every right to say, Look, you put it in the LOI. Can’t help you. And you know, a lot of times if they want to get the deal done, you know, we can say, yeah, it’s in the LOI, but we weren’t involved, and now we are. So, you got to still talk to us a little bit. But it’s messier. I don’t like doing it. I like it when, you know, somebody comes, at least before the LOI is signed. So, we can put things in the LOI that we want to go in there. But, you know, anywhere, Kevin, my preference, of course, is like that other deal we’re working on where it’s waiting for the LOI, and we’re looking at everything. I’d love to get involved, you know, at that stage. But the reality of this situation is often, we don’t get involved until, you know, the LOIs have been presented, or, in the worst case, after they’ve been signed. But you know, you still need help, and we can help at any stage.

Kevin Cumbus

I like getting you involved early, because I don’t like surprises in transactions. So, the sooner the better. A lot of folks who are listening today have not done transactions, and I’ll just share with you, this is not the purchase of a home. This is not the purchase of a car. You don’t show up and just sign and it’s all done. If you were to print the documents, Brian, that are involved in a multi-location group, how many inches of paperwork are we talking about?

Brian Colao

You know, people want to get deals done, so sometimes the buyer will tell the seller, oh, let’s just send the documents over. And they make it sound like it’s a routine thing. It’s not a routine thing. No one should be afraid of it. You must get the right advisors, but it’s not really like a routine thing. You really have to, you know, look at your organization and tailor the documents to what you’re trying to do, because you’ve seen this Kevin, many times, people present in different structures. Sometimes they’re C corps, sometimes they’re LLCs, sometimes they’re professional associations. I mean, there’s other things, PLLCs. We must see the structure. We have to look at what you’ve done from a tax standpoint, and we have to sometimes encourage the buyer that, hey, your proposed structure for purchase won’t work for us. We have to change it to something different so it’s more tax advantageous to us. And most of the buyers will do that. If it doesn’t hurt them and it gets the deal done, they’ll change things around. But you really got to take your time and sort of look at this. It’s not sort of like, okay, the buyer told me what the price is. They sent over the LOI. I signed it. Now they’re going to send me an agreement, and you know, that’s going to take a couple days and we’re done. It’s not that kind of thing.

Kevin Cumbus

No, far from it. Brian, I love working with you and your team there. We’ve touched on a couple issues, right? There’s the transaction team, your M&A team if it helps. Then there’s what’s called the real estate team that works through leases in the event that the owner actually owns the building in which the practice is situated. Then you have an employment team that can help with any employment matters, a regulatory team that can help with any regulatory matters. I mean, it really takes, a tax team, of course, that, I mean, there’s, they’re the best in the business when it comes to tax.

Brian Colao

What I tried to do 15 years ago, when I set up my health services group, is I tried to have sort of like a one stop shop, or everything under one roof. Because when you start to look at these deals often, what you found was, you know, you would slow it down. Somebody would say, you know, the corporate lawyer would be at one firm. Then you’d have the regulatory, somewhere else, tax somewhere else, real estate, somewhere else. You might have one or two of those combined, but you still had a couple firms involved, and it became unwieldy. You know, our team, when we look at this, we’ll have the, you know, the M&A team will look at the LOI, will map out the structure. You’ll get a consultation with the tax folks, from the very beginning, they’re going to look at your structure. And I hope that’s sure. What I hope is they look at and say, Everything’s good. You got the green light. Sometimes they don’t. Sometimes they say, you know, we have to change some things around to save you hundreds of thousands of dollars, or even on huge deals, millions of dollars in taxes if you do it, you know correctly, so the tax team is going to look at it. Then when we get into the transaction, we’re not afraid of regulatory questions or other things come up. We have our own regulatory team, and they can handle federal, state regulations. Sometimes the buyer will get frightened. The buyer will come in and they’ll say, oh my god, we see this problem. I don’t know if we can do the deal. And our regulatory team will jump in and say, No, you absolutely can. We’ll sit down, we’ll hold your hand, we’ll walk you through this and get you comfortable that this is okay. Then when the time comes for leases and landlords, we have the real estate team. And it’s all under the same roof. And that really helps, because this team works together over and over again on different deals. You know, you’re not suddenly saying, you know, call this guy at this other firm that you never worked with and see what he thinks.

Kevin Cumbus

Yeah, all our experiences. It’s a cohesive team that works as one to support the doctor. And I, you know, I never look at good legal support as a service providers, it’s always been in the way you all have created value for our clients over the years, through the negotiation of working capital adjustments, through really, especially around the tax side of the equation, how we’re going to treat that equity or those dollars that you receive as a result of an earn in. That could be W2 wages or is that going to be part of the consideration at the sale. It all stacks up. And many, many times the investment in working with Dykema actually pays back the client. It’s remarkable to see. I know that must make you feel good. Uh, Brian, we’re running a little short on time. This has been a remarkable conversation. I feel like we just kind of scraped the very, very tip of the iceberg here. And my guess is a lot of people are going to have questions, how can they get in touch with you or someone at your firm to further the conversation, if they choose?

Brian Colao

Yeah, I mean, yeah, the easiest way is www.dykemadso.com I mean that’s the website we set up. We do hundreds of healthcare across, you know, all sectors. But I guess when they set it up, because dentistry was so explosive, we just picked DSO. But you could go to www.dykemadso.com, you could see me, my entire team, when you look at it, we’re not just limited to dentistry, we’re doing things in all disciplines, you know, dozens and dozens of transactions in dermatology and plastic surgery, and I think we’re up over 100 Med Spa transactions now. In dentistry, we’ve done like 1,600 because that’s led the way of this massive consolidation. But we’re doing them across all disciplines. So, if you go to www.dykemadso.com you can see me and my entire team, and I’d be delighted just to if anybody just wants to talk and answer some questions. Always happy to do that.

Kevin Cumbus

Brian, thank you again for your time. It’s great to see you. I look forward to seeing you out on the road this year. I know we’ll be in the same city at some point in the next weeks.

Brian Colao

All right, Kevin.

Kevin Cumbus

All right. Take care, Brian. I loved having Brian. He’s seen so much over his multi decade career. You know, what’s cool is he really was there at the forefront when dentistry started. So, he’s seen this, what’s happening in plastic surgery, in medical aesthetics, in dermatology. This is just the second chapter. The third chapter of the book he’s written many, many times. I love how he dug into the right way legally to start your business, scale your business with team members, and ultimately close. You know, I look at my attorney, as an extension of my business, and everyone who’s serious about building the business should as well. You know, I can’t wait to have you back. I learn every time I talk with him, and I hope you did, too. Thank you all for joining us on this podcast, and we look forward to delivering excellent leadership throughout this MSO, DSO community and future episodes, thanks and have a great day.