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 everybody. This is Kevin Cumbus, president, founder of TUSK. I am pretty pumped. We are welcoming one of the premier lenders in the healthcare services space to our pod today. Today, we’re lucky enough to have Mike Montgomery. I’ve known Mike for well over a decade. He has been really the bleeding edge of all things, call it MSO/DSO related, and really helped build a lot of these great businesses through the use of his batch and really knowledge of where risk lives in these businesses, how to size up that risk, how to separate the good from the bad the ugly, and work with industry partners to lend money to great companies to ensure that they continue to grow and prosper in years to come. Mike is Senior Vice President and Director of Specialty Healthcare at Live Oak Bank. They’ve been super busy in the last four years alone. They have funded 25 healthcare platforms, 25. They’re the only group that I know of, the only lender I know of in the space that is one of these that works across all specialties, such as dentistry, plastic surgery, dermatology, medical esthetics, and actually understands the way these businesses work. They typically look to customers with what, like $40 to $60 million of EBITDA. That’s the businesses that he’s growing, and the current portfolio over at Live Oak has close to half a billion dollars. So look, he’s an expert, and I learned from him, and he knows really what’s going on inside the balance sheet for these businesses. So, Mike, I know you’re busy. Thank you so much for making time for us, man, it’s good to see you.

Mike Montgomery

Kevin, back at you. Appreciate you having me on, and as always a pleasure. As you mentioned, we’ve known each other for 10 years, both professionally and personally, and great to be on with you today.

Kevin Cumbus

Man, I’ve been excited. I’ve got a lot of questions. I want to start by kind of setting stage. Let’s talk about rates. Interest rates drive the economy. Interest rates drive dollars one place or another. In a low interest rate environment when money’s free, everybody spends like crazy. Everybody invests like crazy. But when the when the Federal Reserve raises interest rates, what they’re doing is saying, maybe we want to cool off the spending, and we should be saving more. We’ve seen the Fed raise rates in the most dramatic fashion in recent history, coming out of Covid. You’re a lender. You know all about rates. Give us the picture of where we were and where we are today. I mean, how has that impacted your business?

Mike Montgomery

Great, great question. I should preface too, if anybody on this hasn’t listened to Kevin’s webinar on the M&A trends in the market for this year, you guys hit it pretty well on interest rates and covered it pretty well, so I definitely recommend a listen to that, but you’re absolutely right. I mean, a little bit of background on me. I started in banking in 2006 when we thought rates were pretty high, but they dropped to historic lows in ’08, and here we are above what we saw in ‘06, and it’s definitely affected our consumers. You know, a lot of our borrowers, both on the private practice side as well as the multi-site space, have definitely seen, you know, rising interest rates that have affected their business greatly, and it definitely led to less M&A activity last year. It kind of put a pause on a couple of things, where people were more focused on organic growth and operations, which is a good thing. I feel like we’re going to start seeing some reductions in the next quarter or so. We’re going to have a really, really nice second half of this year where interest rates are lower. Our clients are going to see a lot of relief, and M&A is going to open up quite a bit.

Kevin Cumbus

Yeah, for those of you who are a little new to this world, the reason M&A activity was a little slower across the United States is because, traditionally, private equity bank groups and private equity companies rely on debt to get deals done. And many times the cash at closing you’re seeing in some of these transactions is funded almost 100% with debt. There’s leverage, meaning how many dollars per dollar of EBITDA is put in debt on these businesses. And that actually fluctuates depending on how the economy is doing, what the rate environment looks like. So the cost of debt really can drive M&A. Because look, it doesn’t impact EBITDA. By definition, it’s excluded because we’re adding back interest. But what it really impacts is cash flow, because you got to pay your bank, right? You got to pay back your principal, you got to pay back your interest. It all depends on your amortization schedule. But ultimately, it impacts cash flow. Mike, can you just give us an example of what that means to business owners mathematically. If my rate went from 3% to 8%. This is sizable seismic changes to operations, I would suspect.

Mike Montgomery

Absolutely. And I’ll give an example. You know, Live Oak started in ’08. We were kind of known as the doggie bank. So, we started in the vet space, then jumped into the dental space. Between those two groups in private practice, we’ve originated over $6 billion since 2008. And you look at these private practices, if they’re sitting at a 5% rate and they’re looking to expand, they can get a lot more money for their value, whereas at a 8%, 9%, 10%, that really does affect the cash flow now which, we’re limited on, is a cash flow business. And we’ve seen a lot of businesses are growing really well, but they can’t afford that capital to continue to grow, so they either have to take less money. And sometimes that doesn’t make sense, because that’s not going to help them obtain what their goals are in order to expand. And so, a lot of folks like I mentioned, have kind of taken a pause, focused on organic, focused on operations, and it’s definitely hurt especially the small business. But not just small business. You look at these larger platforms in healthcare, whether its private equity backed or not, the cost of capital changes so much with returns and ability to get more capital. So again, hopefully lights at the end of the tunnel, and we’re going to see a year where we start to see a little bit of relief with reduction in rates.

Kevin Cumbus

Yeah, I’m a firm believer that light at the end of the tunnel is not a train this time. It actually is saying, “I think we’re going to be okay.” So, you said something I want to go back to kind of the evolution of Oak Live. Started as a vet lender, super prolific in that space. Veterinary, as some of you may know, was pretty actively rolled up by private equity. That started before dental, then dental followed suit. You guys have been super prolific there. Now you’re active in medical esthetics, behavioral health, dermatology, plastic surgery. It feels like you’ve seen this playbook before, and you know where we’re going. What can you tell us about the learnings that you have from industries you’ve worked in previously, and where you think some of these industries that have just now needed the attention of private equity, where do you think they’re going?

Mike Montgomery

Yeah, that’s a great question. I mean, again, we’ve got so much data on the vet space and the dental space. We have a lot of experience in that. Our credit team really likes the space. I mean, if anything, it’s taught us in the past couple of years, those are very recession-resistant and Pandemic-resistant businesses. We want to continue to lend to groups like that. Yeah, you’re starting to see consolidation in the Med Spa and aesthetics space. You can actually kind of add in some of that Plastic Surgery and Dermatology into that Med Spa space. That’s an area that we’re really beginning to focus on. That feels like dental did about 10 years ago with consolidation. But it’s lessons learned, right? When we look at any healthcare platform, the common denominator for us is how it’s structured, and that’s really the doctor alignment and the autonomy that those providers have. So, these other industries have learned from that which leads to a greater culture, which leads to less retention, which is going to end up in a much better multiple for these groups, if their desire is to exit down the road.

Kevin Cumbus

Mike, it’s really fascinating to hear you bring that up so early in the conversation. We certainly know how structure can destroy value, but to hear how it can enhance value as well is really telling from the lending perspective.

Mike Montgomery

Adding on EBITDA doesn’t necessarily get you to where you’re going. It’s all about the same store growth and being able to operate efficiently. And again, culture is what I’ve heard from some groups that are looking at these larger groups selling right now. That’s a very important aspect of what they’re looking for.

Kevin Cumbus

We’ve been doing this for a while now, and you know, you go to these conferences, people would lead with, “Hi, I’m Dr. So-and-so and I’ve got six locations.” That used to be like a litmus test for…

Mike Montgomery

what’s your EBITDA?

Kevin Cumbus

Yeah, right. Well, hold on, hold on to it! “Hi, I’m Doctor So-and-so, I’m smart enough to not say I got this number of locations.” But it’s, “I’ve got 10 million in revenue.” It’s like, okay, well, that’s kind of a cocktail conversation, right? And then it, then it’s evolving now. I think the current world, where it is “this is how much EBITDA I have, right?” And then the buyers we talk with, he said, the real litmus test is staying store EBITDA growth is now the beginning of the conversation, quickly followed by, how’s your doctor retention? Or, how’s your provider retention? What they’re really asking there is what’s your culture really like, and what your structure?

Mike Montgomery

And that’s the exact way we should all be looking at it.

Kevin Cumbus

Yeah. I think this is what you see, right? We’ve seen it in veterinary, we’ve seen it in dental. We’re going to see the same evolution in plastic surgery and in medical aesthetics. Dermatology pretty far along. They’ve been at this for a period of time, but, but you’re certainly going to see this irrational exuberance early on, right? A massive land grab to go ahead and get out there and get moving. But slowly but surely, the evolution will take us back to same store EBITDA growth.

Mike Montgomery

I agree.

Kevin Cumbus

Mike, I’m an entrepreneur. I have built a really nice sized Med Spa practice down here in North Carolina, where I’m from. I’m doing $20 million of revenue. I’ve got $4 million of EBITDA, and I need a loan. I want to work with Live Oak. Walk me through the process. What is it like to work with you? What are you interested in? And then what I really want to get to is: How can I best prepare myself for that conversation so I fare well when talking with you.

Mike Montgomery

That’s a great question, Kevin. And I’ll go back to the genesis of Live Oak was where we were really doing SBA loans for private practice. And learning all that, seeing all the trends, we saw that there was kind of a gap in the lending environment for these emerging groups. And so, we took a lot of time. Worked with you, worked with Brian Colao, worked with a lot of folks in the industry to get a better handle on it and kind of learn what went right, what went wrong in the history of lending to healthcare companies. And you know, I think where we are today is there’s no easy way to get started, right. You can start with a loan with Bank of America or Live Oak, or whoever, and do your first couple practices. But to get to that $4 million EBITDA point, it takes a long time, and there’s a lot that goes into it. For Live Oak, where I operate, it’s more that lower middle market space. That $4 million hits that. Typically, if you’re at $4 million EBITDA in a med spa or a dental DSO or whatever it is, that’s going to tell me a couple things. Typically, you should have a number of locations at this point. So, you’ve got some history behind you. You’ve shown that you can integrate properly with previous acquisitions, and you’re going to have some trends with growth. So, we really want to look at that track record to see how you’ve done. With that becomes, you know, you’re in a next stage of lending, where we can come in and kind of be that point B to point C for you, C being the exit. So, we can take you to that 4 million EBITDA. If you want to get to $40 million or $60 million, we can get there for you, but you have to have that sophistication in place. And by sophistication, I mean, you know, you’ve got the right external team. You’ve got the right internal team. Do you have a CFO? You might not be big enough for a CFO yet, but do you have a controller? Are you on audited financials? Do you have the right CPA in place? Are you tracking the right KPIs? So having that sophistication is incredibly important. You know, as you know, there’s a lot of inflection points where, if you’re a provider as the CEO, at some point you’ve got to step away and either be the business owner or stay in the clinical side. But it’s hard to do both. So, do you have the right operations person? Do you have the right CEO? So, we like to look at all of that and determine if you’ve got the right setup for future growth. As we talked a little bit, structure is the number one thing we look at. Is there alignment and autonomy there? That’s got to be the common denominator.

Kevin Cumbus

When you say structure and alignment? Does that have to equate to ownership by individuals throughout the organization? So, does my injector need ownership? Does my Chief Clinical Officer need ownership? How legal structure is that? And ownership is that? How much of that is just general culture?

Mike Montgomery

Yeah, I would say, I mean, culture really comes from really having the autonomy and leaving the clinicians to have those decisions chair side. Alignment, to us, is important if it’s a key employee, if it’s a key provider. You don’t have to have all your injectors per se in Med Spa have rollover equity, but if you’re looking to buy additional Med Spas, you want that owner that you’re buying to have some alignment with you and have some that rollover equity, because they’re going to share that vision with you.

Kevin Cumbus

Got it, that’s really helpful.

Mike Montgomery

And I’d say that the most important thing, Kevin is really, how are you managing that leverage that we talked about? I think, you mentioned and correct me if I’ve got these incorrect. But I think you guys had mentioned in your previous webinar, single practices, we’re going for about 7.3 times EBITDA on average. We’re seeing that in dental. We’re seeing that in med spas. It’s pretty similar. Group practices, around 8.5x or so. You got to think banks typically, and especially after last year, when you saw the debacle with some of the concentration risk. Silicon Valley Bank and everywhere else, we saw a lot of banks close. We saw a lot of banks get out of the space. It caused a lot of banks to panic a little bit, and I’ll give you a crazy stat that I read yesterday. In the past two years, banks’ balance sheets have decreased about 7% of deposits, which equates to about a trillion dollars. And so that money’s been pulled out of banks, and so a lot of banks right now, we’re focused more on getting those deposits back in, getting that robust balance sheet so they can continue to lend. And until they do that, you’re going to see banks are kind of a little bit more skittish on the leverage points.

Kevin Cumbus

Let’s touch on that for a second. Mike just, just for our listeners. Can you define what leverage points are?

Mike Montgomery

Absolutely. So, when we say leverage, we’re looking at kind of the debt to EBITDA. And we look at two different leverage calculations. We look at a senior leverage, which would be, you know, your bank. Say you come to Live Oak. You got that $4 million EBITDA business. What can you lend us today? We’re probably going to lend 3x of senior leverage to you. So, we’ll give you up to $12 million based off that $4 million EBITDA. Now on total leverage, that would be encompassing both your senior leverage as well as any other debt you have that’s subordinate. say, it’s a seller note, equipment loan, something like that. So, we could go up to 4x on that. That’s in a traditional senior-only type of lending structure. But as you heard, I mean, we’re talking over 7x for purchases. Wait a second, the bank’s only lending 3x. Well, how do we make up the difference here? That’s where that rollover structure that helps with the alignment comes into play. We’re seeing more and more, even if it’s a non-private equity backed company, they’re starting to raise some private equity on the side, which is very important to kind of to hedge some of that.

Kevin Cumbus

Well, the right size of their balance sheet, right that equity. They’re inserting into their into their balance sheet, they’re going back to their lender and saying, “We got support from private capital. We’ve right sized it.”

Mike Montgomery

That’s right. And so, with the banks, there’s other solutions we have out there. We partner with a lot of different groups where we can do some different structures to get you a little bit more leverage. But just know that the banks probably aren’t going to be changing that leverage profile anytime soon. If they do, it’s considered more of a high leverage transaction. The auditors and FDIC don’t like that too much, but there’s ways of getting there, and we’ve seen plenty of our clients prove that time and time again. And so those are kind of the main things we look at to kind of evaluate risk when we have somebody come to us asking for capital.

Kevin Cumbus

Super helpful, super clear. I love it. You talked about when lenders started Silicon Valley Bank, you talked about that. You talked about when lenders kind of post Covid, so we don’t understand what’s going on. We’re having a hard time understanding really how far the businesses fall or how they’re going to recover. And you did see lenders go pencils down. Here in Charlotte, one of the largest financial capitals in the US, only behind New York, we saw whole webs in teams in investment banks get laid off, right? There was no lending, there was no work to be done. But the crazy thing is, capitalism finds a way, right? So, where there’s a void, someone will find a solution. And the solution that appeared over the last couple of years was direct lending. And I have seen more and more and more about direct lending and the fact that direct lending is here to stay. Could you speak a little bit about direct lending for our audience, so they know what it is, what it costs, and how it’s used?

Mike Montgomery

Yeah. I mean, there’s a lot more options out there today. Again, the senior only structure is going away, but you’re seeing more and more private equity. Private companies provide different solutions. Is it a little bit more expensive? Sure, but it beats not being able to, you know, continue to get growth capital. I will tell you, something that we’re seeing more and more now is, as companies are trying to raise money and leverage is going up a little bit, we’re seeing some scenarios where there’s a lot of senior mezz opportunities. And then something that we do really well is something called a unit tranche, which essentially is a senior mess, but instead of two separate notes, it’s all under one agreement. It’s actually a little bit cheaper than senior mezz, because it’s all one facility. Where I mentioned, you might be looking at a 3x senior leverage on a senior only. You might be looking at a 4.5 total on this type of structure. You know, you might be looking at a 10% rate with a senior only, you’re looking at maybe a 12% here. But there’s a lot more options now, as these companies grow larger and become more sophisticated, so there are plenty options out there. Don’t be afraid if you’re hearing and some of these banks are pulling back. There are other opportunities, and you’re going to see more banks come online. We’ve always, always seen that.

Kevin Cumbus

I feel like I’m in a fortunate position. I get to read the financial press. I get to reach out to folks like you, and spend a lot of time understanding all this, or at least attempting to understand it and get the vocabulary straight. But I’m sure our listeners, you’re going, “okay, I’ve got a lot to learn. There are more options than I’ve ever had.” So, I’m they’ll be reaching out to you to better understand what’s out there. I think my takeaway to this point is, “okay, I need an expert to help me, because there’s more pools of liquidity at different costs, a different risks, at different structures with different leverage ratios that I need to understand as I’m plotting the next 5 year sprint for my business.” Let’s go to build first buy, right? There are two distinct strategies out there. Sometimes they’re married together, right? I say that the economic engines of healthcare services businesses, there’s really three of them. One is buy. One is build. And the most powerful… EBITDA creation through actual utilization. That’s the most valuable one. But there’s some business models out there, med spot is really good job of this. It’s a build strategy, right? Let’s go ahead and get toehold in the community. And then let us capture brand and let’s spread it throughout the community, through the , whereas others are just delicious buy, buy, buy, stack all these businesses together, integrate them, certainly from a financial perspective, accounting perspective, hopefully in practice management software perspective, and maybe, just maybe a cultural perspective, right? And try to enjoy some synergies to come along with shacking businesses together, but as a lender, how do you look at buy strategy versus build strategy?

Mike Montgomery

That’s a great question. I’ll tell you, we don’t see very many build strategies by themselves. As you know, those take time. Some people don’t have that time. You know, every industry is a little bit different from a break-even standpoint. We’re seeing a lot in med spa. It takes less capital to build a new Med Spa than it does a dental. It doesn’t have all the equipment infrastructure, so it is cheaper to do, and you can ramp it up a lot quicker to break even and start to get EBITDA. But if you’re doing a build-only strategy from the start that you’re starting in the red, right? You don’t have any EBITDA. Now once you get it, it is all same sure growth. And you’re not going to overpay for something that you potentially could when you’re buying something. But I would say, you know, if somebody’s getting started at least, I think it’s important to probably buy first and create those legacy practices that are tried and true that have the right team, and then identify those opportunities around those, where there’s some opportunity where you can build around those. And at that point, you do have some EBITDA that you can take on a little bit more debt and take a little bit shorter pause to go ahead and build these out. Some of our best models, we kind of call that hub and spoke. You know, hub is what you bought, and then you’re branching out like a spoke of a wheel, building practices around that from what we’ve seen has been a very, very good strategy for groups. There’s nothing wrong with doing build-only. It just takes a lot longer.

Kevin Cumbus

Yeah, I wish you would have asked me that question before I built my dental practice. It was a slog. It was the hardest I’d ever worked, the least I’d ever made. We didn’t have EBITDA early on, but we did have a whole heck of a lot of his cash flow. Because the end of the day, the bank gets paid. I think the landlord got paid because we needed a place to operate. Then the team got paid because I needed them to come in so we can see the patients. And the marketing department got paid because I needed the patients to show up. Then the lender got paid. And after all that was done, there wasn’t a whole heck of a lot leftover.

Mike Montgomery

You could have your own whole podcast on that, Kevin.

Kevin Cumbus

Well look, I don’t know if I did it the right way, but the experience was worth its weight in gold. If I had it to do all over again, I certainly would have bought a business. I would have bought a preexisting business with cash flows, with a seasoned leader, clinical leader inside of it, learn from them, maintain the cash flow, serviced a little bit, maybe pay myself a nickel or two. Who knows what would happen if I would’ve done it. Well, Mike, it’s always a pleasure to see you, talk with you. I get to see Mike five to six times out there on the road. We’re at all these conferences, and it’s great to swap notes for our listeners. We want to inform people, right? So, this is kind of the world I live in. I got to gather information, gather information, synthesize information, and then provide it to our clients who are thinking about selling their life’s work and so they can make informed decisions. That’s really what this podcast is all about. So, Mike, I know they’re going to be folks that have questions about Unit trance, Live Oak Bank, build verse buy. How can they get a hold of you if they’ve got more questions and want to pick your brain a little bit further?

Mike Montgomery

Yeah, that’s a great question. And to your point, we’re here to be a partner, right? Even if it’s something we can’t help you with today, it might be a “Not right now, but let’s build that blueprint to get you there.” So, happy to have those conversations with you. Feel free to go to our website, LiveOakbank.com. Mike Montgomery, you can look me up on LinkedIn. [email protected]. So, feel free to send me an email and love to have a conversation with you.

Kevin Cumbus

That’s great. Thanks, Mike. I will see you out there this year.

Mike Montgomery

Thanks, Kevin, appreciate you. Man.

Kevin Cumbus

Take care. Bye. Nice to see Mike. Love his career and talking with him about where rates go, where they’ve been, most importantly, where they’re going. It is clear to me, private equity is going to be fast, they’re going to be inquisitive, and they’re going to pay a really nice price for great assets. This is great time to be thinking about selling your business. It’s great to hear from somebody who makes his living off of watching the rates go up and down. Super conversation with them. As always, if you’re interested in letting us take a look at your business, helping you understand what it could be worth, don’t hesitate. See on the next one, you’