Josh Swearingen

Good evening, and welcome to the TUSK Practice Sales webinar. I am your host, Joshua Swearingen, and this evening, we’re going to be digging into some legal conversation with Brian Colao from Dykema Legal Group. Brian, thanks for joining us. We really appreciate having you here.

Brian Colao

Yeah, Josh, really a pleasure to be here. Always enjoy getting together with my friends at TUSK to talk about healthcare consolidation.

Josh Swearingen

Well, as organizations, we have a long and storied history together, and it usually ends up with a lot of laughter and a lot of good times. So, we love having you on, appreciate it. As a little bit of housekeeping, again, my name is Joshua Swearingen. I have about 20-25 years total in healthcare, I’ve had the opportunity to own and operate and sell a couple of large, mid-sized Dental Service Organizations into the private equity space. I’ve worked with a couple of larger groups, national groups, as a buyer of practices, and I now currently represent sellers in the space with TUSK Practice Sales. In my free time, I am the founder and co-owner of Reverse Aesthetics, which is a anti-aging Med Spa in the Central Ohio marketplace, and I am thrilled to have you join us this evening. Brian, do you want to tell us a little bit about Dykema and yourself?

Brian Colao

Yeah, I’m the director of our MSO, DSO healthcare group, and I have 72 professionals that work for me, and we focus on representing sellers, in particular, that want to do a transaction in the healthcare space, whether it’s dental, whether it’s aesthetics, which is what we’re here now, whether it’s, you know, veterinarian, orthopedic surgery, ophthalmology, optometry, just about any type of medical or dental discipline. Our group, you know, does a lot of different things, but in particular, we focus on representing sellers that want to, you know, partner on a platform.

Josh Swearingen

Fantastic. When you talk a lot about sellers in the transaction space, do you work with a lot of groups that are at the base formation stage?

Brian Colao

Yeah, I mean, we do a lot of things, Josh, from really often the very inception of the organization, like incorporating it before it even does business. Or if the founders are either incorporating their entity and beginning their aesthetic practice, or purchase an aesthetic practice, just like at the very beginning. And you know, we’ll represent that organization right up until the point when they want to do some type of equity event with a partner.

Josh Swearingen

Great. That’s great. It’s funny, I was having a conversation. I was at a trade show over the weekend, and I was having a conversation with, actually, several different owners, a couple of different PE groups. And I think one of the interesting conversations was how widely varied all of these organizations are set up from a regulatory and legal standpoint, and ownership ranges the full gamut of having a nurse practitioner owner, all the way to a private citizen, kind of like myself, which is allowed in the state of Ohio. And it seems like the regulatory environments is either incredibly loose or there’s very minimal oversight, at least at this stage in the game. Would you agree with that?

Brian Colao

Well, it depends on where you are, Josh. I mean, that’s true and not true. I think the thing I would say is the regulatory scheme varies widely from state to state. There’s no like federal regulation that governs everything. There are some federal regulations like HIPAA or not even really in this context, but there are some federal regulations that cover things, but by and large, aesthetics practices are governed by state law, and state law varies widely. Some states, like Ohio and other places, will let non-healthcare professionals, like non-physicians, non-nurses, own these aesthetic practices directly, and those are the easiest states to do business in. Some on the other extreme, require a physician owner. They won’t let a nurse practitioner, or a registered nurse do it. It’s got to be a physician. Then there are other states that will let a registered nurse do it under collaboration or supervision of a physician. So, you know, it can get quite intricate and complicated, and it really depends on what state you’re in. So, before you create an organization or acquire an organization, you need to understand what state you’re in, what regulatory scheme applies, and make sure you’re abiding by that.

Josh Swearingen

Sure, sure. And I would imagine that for those organizations that have goals to expand into multiple states, that gets even more complex and more fun for you guys to handle.

Brian Colao

Yeah, I mean, it’s not going to be one size fits all right. Some states are going to be easy. If they want to do business in Ohio, I’m like, ‘don’t worry about it, you can own the thing yourself.’ But if you want to do business someplace like, just for example, California or Texas or something, you know, you may have to have a physician owner. Like, it’s not even good enough to have a nurse practitioner. And then there’s a lot of states that will let you have a nurse practitioner or registered nurse under collaboration or supervision. So, this is why, you know, it’s sort of like, ‘don’t try this at home.’ It’s really important that you set this up the right way and make sure you understand what the regulations are in the state where you want to open the practice and make sure you’re able to follow them.

Josh Swearingen

Right, yeah, completely agree. So, let’s jump into this a little bit, we’re getting a little ahead of ourselves here. I’m just going to spend a minute kind of talking about the current state of healthcare consolidation as a whole and then how that translates into the medical aesthetics space. And as we kind of track medical consolidation over the last 40 or 50 years, it’s widely understood that your traditional medical offices are roughly 85% to 90% consolidated. And that’s taken a long time to get there, and it’s largely happened underneath either the university healthcare system or large hospital systems. You don’t see a lot of private practices in the pure medical space any longer, unless they’re concierge practices or in incredibly bougie markets where they can afford to operate on a fee-for-service basis. If you move forward and you look at dental consolidation, and you know, we’ve operated for a long time within the dental space, as well as several other healthcare verticals, it’s a little bit hard to nail down exactly where the consolidation percentage is, but it’s largely believed it’s in between 30% and 35% which places you about 25 years behind medical and roughly 25 years ahead of where medical aesthetics consolidation is, which is depending upon the discipline within medical aesthetics, probably in the 7% to 10% range. Brian, would these be consistent with the numbers that you’re hearing when you’re talking to clients and doing your industry functions?

Brian Colao

Yeah, I mean the medical consolidation, that’s certainly in the ballpark of the numbers as I understand it. The dental consolidation, same thing. It might be a little less than that, but same thing. You know, medical aesthetics, it’s interesting. I’ve heard it’s as low as 4%. I’ve heard it’s as high as 7%. You know, it’s so new, the consolidation of the aesthetics industry that we’re not even capturing good statistics yet. You know, after we’ve done this for four or five years, you know, there’ll be some really good, if it follows dentistry and medical you know, there’ll be some folks that emerge that track this, that have publications, that start studying this. But it’s so new right now, in aesthetics, it’s just the best guesstimate we have, and I would say 4% to 7% something like that. So not consistent in the ballpark of your number. But the important thing is, there’s lots and lots of runway. This is a brand new, you know, trend here in aesthetics that there’s going to be this consolidation, and sellers stand to get a nice return on their, you know, investment by monetizing the organization that they created. This has been going on for decades in medical. It’s been going on in dental for at least 10-12 years. Medical aesthetics, it’s been going on. I mean, best guess, like, two years or so. I mean, it’s relatively new, and there’s lots and lots of runway.

Josh Swearingen

Yeah, it’s funny, as I mentioned, I was at the trade show this past weekend. And you know, if you go to any dental trade show these days, large scale or national or anything like that, there are large aggregators all over the place. They all have booths there. There are private equity groups all over the place, and then going to the medical aesthetics meeting this past weekend, even within that space, there were very, very few prospective buyers there. Very, very few aggregators there. Just, it feels like we’re on the verge of that taking off, but it still hasn’t quite caught on yet with the broader community. So, I think it’s going to be really interesting to kind of follow this thing from the very beginning all the way up through the next 10-15, years of private equity moving into the space.

Brian Colao

I feel like, in the next day, you know, there’s going to be 30, 40, 50, 60 buyers, just like in dentistry, maybe a lot more than that, you know. But right now, it’s the early stages. So, you know, there’s a handful of them, and they’re doing a lot of deal activities. It’s interesting to watch, but it’s not dozens and dozens and dozens of buyers. But like you said, I feel like we’re on the verge of, before too long, you know, if we do this show again next year, at this time, you’re going to start to see an exponential increase in the amount of buyers that are going to be out there.

Josh Swearingen

Yep, couldn’t agree more. I think, most of my conversations over the weekend were with private equity groups who were desperately seeking their first, their initial platform investment. And I probably had 15 or 20 meetings with groups that were in the same boat, just trying to find a well-formed platform.

Brian Colao

Yeah, and that’s the thing, if we can learn anything from dentistry, one thing we’ve learned is you got to pick the right partner, and it’s a little bit new. And you know, we don’t know everything about every partner that’s out there yet. We’re gathering lots and lots of information. And with each passing day, we’re getting a little bit, you know, more informed about all the buyers out there, but you know, for the next couple years, you’re going to have a whole bunch of new buyers enter the marketplace. And I think the key for sellers, and I know we’re going to talk about a lot of this stuff today, is you got to pick the right partner. So, that means doing your diligence and understanding the buyers in the marketplace and what they represent.

Josh Swearingen

Yeah, I think one of the nice, one of the luxuries that we have, because both of our organizations have been so active in the dentistry space. A lot of the private equity backers are consistent from vertical to vertical. So, you know, we’ve had a lot of experience with these private equity-driven groups in dentistry that are now moving into the aesthetics space. So, we have a pretty good understanding of how they treat those investments, how they treat their people, and how they build out those groups, which I think will help defray some of the risk, certainly for the clients that we represent, but it will also allow us to funnel deals to those groups that we know are very, very well represented and have a good backer behind them.

Brian Colao

Well, I mean, that’s true. I mean, what’s happened, just like people that had a lot of success in medical went into dental, and then we knew their track record from medical when they were in dental, now we know at least some, a few of the buyers you know, started out in dental, and now they’re in aesthetics. So certainly, with those buyers, we do know their track record, we have a lot of information, and can really make well-informed decisions on behalf of sellers. But there’s going to be here dozens and dozens of people that enter the marketplace in the next year or two, and some of them, probably a lot of them, Josh, were not going to know anything about dentistry. I mean, maybe they were in dentistry, maybe they weren’t. But, you know, there’s going to be a bottom line is, there’s going to be a lot of buyers that we don’t have direct experience with on the you know that, ‘hey, we did a bunch of deals with them in dentistry, we know who they are.” So, it’s going to take some time to get to know them and understand what they’re about. The good news, though, is, with all of our experience in dentistry and the rapidly growing experience in aesthetics, I mean, we’ve done dozens of deals here. Even in the last couple years, is we’re learning about what the most beneficial deals look like to the sellers. So, even if we don’t know the buyers, we know what works best for the sellers and can really assist them.

Josh Swearingen

Sure, sure, that’s great. So, I want to touch really briefly on kind of the consolidation life cycle, and we talked about it a little bit in the last slide. But as we’re working through consolidation in an industry, you have three distinct phases of consolidation. And we’re certainly in phase one of medical aesthetic space, which would be your platform development phase. And we kind of touched on it briefly earlier, but that’s really where those private equity groups are looking for something substantive, either multi-sites or significantly larger practices with a little bit of infrastructure in place that they can build around. And I’d say that we are definitively in that stage right now, just given the number of buyers that are trying to enter the market and don’t yet have that platform development, or that platform currently built. Once you tip that 10% range, and you start moving into phase two, we see a lot of infrastructure and growth. At that point you now have enough platforms out in the space that you can present a reasonably competitive marketplace. And that’s what I would consider kind of the golden age of private practice valuations. That’s where you’re really going to see a large number of practices sell at a premium as these platforms build out mass nationally. And then finally, once we get into that 40% plus, you know, range consolidated, and all of these percentages are, you know, constantly evolving, that’s kind of the phase where you start to see a lot of these larger groups feed off of each other. They can’t really move the needle enough with a private practice acquisition, so they start buying other platforms and other larger groups. And I think that once we start tipping over that 40% and 50% consolidation range, you really start to see some of those private practices get a little bit devalued or sell at a little bit of off of a premium, and the larger groups are now the primary focus of these Managed Services Organizations. So, that’s really how it’s progressed in most other industries, and it’s really how we see the medical aesthetics space proceeding. The good thing is that that phase two section can last 20 plus years. We’ve been in that stage in dentistry, gosh, Brian, I don’t know, 20-25 years at this point. You’d say that’s accurate?

Brian Colao

Yeah. I mean, you know, we’re a long way away from what you’re describing, you know, in aesthetics. I mean, a decade or more, 15, probably maybe 20 years away from that. I mean, the consolidation in dentistry has been going on in earnest for 10 years, and we’re just now getting to 30%, 31%, 32%, and we’re getting to the point where there are groups out there that have 1,000 dental offices, you know, 800, 1,500, and they’ve got to do big acquisitions to really move the needle. But right now with aesthetics, there’s all opportunities are on the table. You know, there’s a platform opportunity. You can be the very first in the platform. After that, there are lots and lots of opportunities for bolt-ons, you know, add-ons to the practice. So, if you have nothing more than, I think, like you, for example, Josh, you know, a solo office in Ohio, there’s tons of opportunities for you right now.

Josh Swearingen

Yeah, yeah. I couldn’t agree more. Well, that kind of leads us into some of those formation type conversations. Do you want to work us through how a properly structured management company model would work?

Brian Colao

Well, I mean, it’s the blue there, right? If you look, if everybody can see the screen, and I’m sure it’s in front of everybody now, it’s on mine. The green is what happens before you do an equity event. You know, you’ve got sort of your entity there that’s providing services to patients. And you’re employing the green, your providers or injectors. You know this is if you’re either a healthcare professional. I get calls all the time from nurse practitioners and registered nurses and people that are owning these, or if you’re in a state like Ohio, and you’re directly owning it, you know this is what it might look like. You might have possibly if you’ve created your own organization as a nonprofessional, you might have just that first management company, and you might just be managing it. But what happens after you do a deal is, there ends up being a holding company. The buyer comes, they buy the non-clinical assets, you know, they’ll buy the equipment, they’ll acquire the lease, they’ll acquire any trade names or intellectual property, and they’ll acquire your non-clinical employees, and that’ll go into, you know, their management company. There’ll be a holding company over that. You know, a very common structure is they might give you 60% or 70% cash at closing, and 30% gets rolled over into equity in the holding company. And basically, post-closing, that’s how the organization will operate. The patients will pay their money into the practice entity, and after payment of all of expenses, all of the profits will flow up to the MSO or the management company, and that’ll be sort of the structure. If you’re an owner and you sell, you’ll more than likely have an employment agreement post-closing, where you’ll get paid some sum of money to continue to operate in the organization and that’s what it’ll look and we didn’t cover this, but they’ll pay you a multiple of EBITDA. What they’re going to do is they’re going to calculate your EBITDA, if you don’t know that, on the call, it’s earnings before interest, taxes, depreciation, amortization. It’s the gold standard for valuing organizations. So, they’re going to calculate your EBITDA, and they’re going to pay you a multiple, like, if your EBITDA is say, $500,000, and you get paid a six multiple, 6×5 equals basically $3 million. That’s what you would get paid, for those listening. And the reason we use EBITDA, one other thing before we move on, is it’s the gold standard. For example, we often have somebody that has a $2 million operation, and it costs $1.8 million to operate. So, their EBITDA is $200,000. Then you can have a $1 million operation, Josh, that costs $600,000 to operate. Their EBITDA is $400,000. What have we learned? The $1 million operation is twice as profitable as the $2 million operation. So, whenever I get these questions from sellers, why do we use EBITDA? What does it mean? That’s why we use it, because it’s the gold standard for cutting through everything and getting down to the profitability of the organization.

Josh Swearingen

Yeah, absolutely. We run into that all the time. It’s funny, we’ll regularly talk to prospective sellers who, they have one location, and they’re trying to decide if they want to sell now or open a couple of other locations, theoretically, and sell at a later date. And what we’ve found is, many of these operators, they’ll have one really, really great, profitable business, and then they’ll get a little bit distracted by this side project, and ultimately, the EBITDA of both locations together ends up being less than their primary location prior to starting the second one. So, I think understanding where your profitability lies and making sure that you’re protecting it at all costs is critically important.

Brian Colao

Yeah. I mean, it’s like the old saying, Josh, sometimes less is more, right? People sometimes think, I’ve got one aesthetics practice. I’m going to open up two, and it’s going to be more valuable. And unfortunately, that’s not always the way it is. I mean, in a perfect world, it is. You know, you have one practice that has, you know, $250,000 or $300,000 of EBITDA, and you open up a second one, and that’s $300,000 and you’re like, ‘yay, I’ve got $600,000 of EBITDA. I’ve doubled my performance.” That would be wonderful. And that does happen sometimes, but what happens a lot of times also is, you’ve got one office, maybe the EBITDA is $500,000, and then you open up a second office, and it’s running like negative $100,000, so the EBITDA of the whole organization is now $400,000 instead of $500,000. So, what have you done by expanding? You’ve lowered the value of the organization.

Josh Swearingen

Yeah, and increased your headaches twofold.

Brian Colao

Yeah. Now you got to go two places. You could have just went to one place with a $500,000. Now you’re going to two places with $400,000. So, yeah.

Josh Swearingen

Sounds like a terrible deal. So, Brian, I’m looking at this management company’s structure. If you’re either a prospective owner, or you’re thinking of selling and or even potentially expanding, at what point do you go through the process of actually building out a proper management company structure?

Brian Colao

The only reason I would do that, I mean, obviously, if you’re an entrepreneur and you want to do a deal someday, but you’ve got 10 offices, or 11 offices, I do see it sometimes, you know, a management company might make sense. But if you’re really just operating one office, the only reason you would need the management company model would be if you’re not a physician or a nurse or a professional, and you’re in a state that requires that type of model, and you want to, basically, you know, participate financially in the operation, but you can’t directly own it, you’ve got to have a management company model. So, sometimes we will see it with just a single office in the case of somebody that’s a non-healthcare professional that wants to participate, you know, in the profits of the aesthetics practice. Then even if you’re only one office, you would have to do a management company. But if you’re a healthcare professional or you’re in a state, or you’re allowed to own it directly, and you only have one office, you know, I wouldn’t recommend doing the management model.

Josh Swearingen

Got it, makes perfect sense. So, moving on working through kind of the transaction process. And I don’t know how much detail you want to get into here, but I will leave that up to you.

Brian Colao

Yeah, I mean, look, this slide is, if you’re interested in exploring an equity event or exploring partnering with somebody, this is what you can expect. You’re going to have pre-letter of intent. I could have called that coffee. I should have put a coffee cup. The next time I do it, it’s like coffee or dinner. I mean, what it means is, you know, you’re going to meet the buyer. You’re going to have coffee, maybe you’re going to have dinner, maybe you’re going to chat a little bit on the phone, maybe you have a meeting or two. You’re just figuring out each other. You know, you don’t know if you’re interested. They don’t know if they’re interested. You got to get to know each other a little bit. Assuming, you know, if that meeting doesn’t go well, then that’s the end of it. You know, if you meet them and you’re like, ‘hey, these don’t seem like the type of people I want to partner with,’ well, that’s the end. If they meet you and they’re like, ‘this is not the type of practice we want to affiliate,’ then it probably ends. But if everybody likes everybody, then you go to sort of step two, where you’ll sign, usually, a non-disclosure agreement, and you’ll exchange financial information and other information so they can sort of learn about your practice and figure out, you know what your EBITDA is. Do a preliminary calculation of your EBITDA, and sort of get a sense for the value of your organization. And again, sometimes in diligence, you know, they may see something they don’t like. You may see something you don’t like, and that may end it. But assuming that that continues to go, everybody looks at everybody’s information and everybody still likes everybody, then you go to step three, and there’ll be a non-binding letter of intent. And what it basically means is they’re going to say, “hey, thank you. We’ve enjoyed meeting you. You enjoyed our conversations. This will confirm that, you know, we want to do business with you. And we’ve made a preliminary calculation of your EBITDA of X dollars.” I’ll just say a $500,000, that’s the example I seem to be using so far. “We’ve calculated your EBITDA at $500,000. Assuming we verify that and that checks out, we’re going to pay you, let’s just say, a six multiple, and you’re going to get $3 million for your practice.” And there’ll be other things in there, non competes and other requirements. And you’ll sign that, if you’re interested. You know, sometimes you’ll negotiate back and forth a little bit on the LOI. There’s a lot of discretion and a lot of opportunities to negotiate a lot of things. And then you’ll sign it. And basically, the reason we say it’s non-binding is it contains the parameters of a deal, how much money you’re going to get paid, what the non-compete is going to look like, what your employment agreement is going to look like, what the distribution of cash is going to be. Is it going to be 60% cash, 40% rollover? 70% cash, 30% rollover? You know, what the terms are basically, you know, going to be. It might be $3 million but it might be $2 million at closing, $1 million rolled over, or, you know, any combination of that. And then, um, they’re going to verify the numbers, because remember, right now, you’ve just exchanged preliminary information. Now they’re going to conduct formal, what’s called quality of earnings. They’re going to have accounting firms look at your numbers and verify this. And this is, as you know, Josh sometimes, where you can run into problems where the practice has voluntarily provided information, but maybe you’re not, you know, certainly, none of these organizations that are just one or two offices are audited or anything like that. You know, you’ve done the best you can to compile your financials. But sometimes, when they have their accounting firm, the buyer, look at them, they note some issues. So, maybe they thought the EBITDA was $500,000 but it’s really $450,000 or $400,000 or maybe it’s $550,000 maybe it’s higher than we thought. Well anyway, after that process, everybody has an opportunity to either say the numbers checked out, we’re going to proceed with the deal, or the numbers didn’t check out, and we’re going to renegotiate downward or upward. And you don’t have to take it, like if you thought your EBITDA was $500,000 and they say it’s $400,000, you don’t have to do the deal with them. You’re not required to. But at that point in time, they have an opportunity, because it’s non-binding to renegotiate the purchase price based on the actual numbers that have been verified. Assuming that everybody can, you know, reach an agreement on what the numbers are, and the numbers have held, then you’ll proceed to definitive agreements. And that’ll be non-clinical asset purchase agreement, and a whole host of other documents you’ll have to sign for your rollover interest in your shares. And then that’ll be, once those agreements are finalized and you sign, that’ll be the closing. I mean, that’s it.

Josh Swearingen

So, what I’m getting from that is, if the pre-letter of intent is coffee, the quality of earnings is like a proctology appointment. That’d be correct?

Brian Colao

You know, it’s funny you say that. Some people have compared it to a colonoscopy. I mean, really, some sellers that I’ve represented that… I don’t think it’s that bad on an objective basis. But if you’ve created your aesthetics organization, and you know, you’re not, maybe as sophisticated an organization, because you’re just one office and you’ve run it like a mom and pop operation that 1,000s and 1,000s of people do, and there’s not a thing wrong with it, the only thing I would say is it’s not a super, super sophisticated organization, and then all of a sudden, the accountants come in to do their quality of earnings. It can definitely feel like a colonoscopy of sorts. But, you know, you’ll get through it. I mean, that shouldn’t frighten anybody. I mean, you just you suck it up, you produce the information, you answer the questions, and as long as you’ve got a solid organization that is profitable and your numbers check out, you know, there’s usually a pretty good deal to be had.

Josh Swearingen

Yeah, yeah, I agree. We, as an organization, we’re very, very involved in the quality of earnings process, our analytics team, so we do everything we can to mediate the lift on the sellers. But even so it can still be somewhat exhausting.

Brian Colao

No, but that’s where a firm like TUSK can really add value. Just to be clear, you know, for anybody listening to this, I’m not, you know, being paid a promotional fee to promote these guys or anything like that, but this is where they can really add value. If you look at this chart, when you get to the letter of intent, you know, you’ve got to rely on your sell side representatives to be able to understand what the market is, what the fair market value of your organization is, and what the market terms are, so nothing gets into the letter of intent that shouldn’t be there. And then when the time comes to do the quality of earnings, you know, you need somebody that’s able to defend your EBITDA amount. Let’s say you thought your EBITDA was $500,000, and the buyer comes in and says, it’s $300,000. If you’re by yourself doing the process, you might not know what to do. But if you have representation like TUSK or somebody like that, you know, they’re going to fight for you, they’re going to say, you know, maybe a buyer, you missed these things. You know, we disagree with your analysis, and they’re going to push back. And I’ve often seen situations where, you know, we thought the EBITDA was $500,000. The buyer said it was $300,000 but through the efforts of Josh and his team and others over there, we’ve gotten the number up to something that ends up being, you know, in the end of the day, a pretty fair deal.

Josh Swearingen

Yeah, yeah. We are all advocating on behalf of the client. And then post transaction, do you want to dig into this at this point?

Brian Colao

Well, this is what’s required of you. You know, I don’t think we got to go through this too much. You know, usually there’s not flat out exits. You know, it’s not like you sold your McDonald’s franchise and the new buyer came in and you’re done, and that’s the end of it. No, this is sort of, you’re going to work there for three to five years post-closing, maybe longer. You’re obviously expected to be a good corporate citizen, even though you sold and got some money. You’ve got to continue to grow the organization and work there, because remember, you’re going to be, more often than not, have a rollover interest and get to participate in the second equity event. And often the participation in the second equity event is a lot more lucrative than the cash you got at closing. So, you want to be a good corporate citizen. You want to help grow the organization and get to the second liquidity event. Now earn, often there’s an earn out in this marketplace, because it’s a little tricky out there today. If the buyer and seller can’t quite agree on the EBITDA, another way to deal with it is if we, as the seller, swear that the EBITDA is $500,000, but the buyer thinks it’s $300,000, sometimes we’ll say, Look, we don’t need to argue about this. Let’s set an earn out. If the EBITDA ends up being $300,000 then, you know, a year or two years from now, if the EBITDA ends up being $300,000 then you don’t get any more money. You know, we were right, and that’s it. But if it ends up being $400,000, we’ll pay you additional money. And if it ends up being $500,000 we’ll pay you additional money on top of that, you know, often the equivalent of if ‘you were right and we were wrong.’ So, you know, an earn out is a nice tool between buyer and seller. If there’s just a good faith disagreement as to what the EBITDA is, it’s a way of resolving that.

Josh Swearingen

Yeah, that’s great. Well, as we talk about preparing for a sale, I think that we’ve discussed a little bit of what’s going on in the marketplace. I think there’s a lot of opportunity now, and especially over the next, probably 7 to 10 years, for some of these sellers. And I think getting properly prepared for that is critically important. I put together a small list here that I think will be helpful to prospective sellers out there. Brian, feel free to chime in whenever you want. But I think one of the things that I’m always a little bit surprised by are the lack of a really true understanding of what a person’s individual wealth planning or retirement planning looks like. So, you know, when we have prospective clients come to us, and I’m sure you guys do as well, one of the first questions we ask is, you know what? What is your number? What are you looking for to get out of this transaction? And you know that number is based largely around what your wealth planner or financial advisor should be telling you. So, having a really good idea of what you need to move on to the next stage of your career is critically important. And then on top of that, based upon what your number is, understanding the present market value of your business is very, very important. One of the things that we do at TUSK is we provide a free market analysis for anybody that requests one or that anyone is of interested, and we can give you a good idea of how we believe a deal would come through for your practice and how it would likely be structured, so you can begin to make decisions, whether that’s immediately now or, you know, planning well into the future around some business modifications that will help you maximize value at some point. I think, on top of that, if you’re considering a transaction, and you’re kind of looking into what that’s going to be like over the next, you know, 12 to 18 months, working on optimizing your business and ensuring that you have the right team built around you to protect you throughout the process. I think that there’s no shortage of buyers out there who would happily come in and control the entire process and provide you with a number that may look very nice at the front end but may fall apart upon closer inspection.

Brian Colao

You know, Josh, I was talking at an aesthetics conference recently, about a week back, and I was talking to a panel of specialists on sell side. And one of the things that we said, there were some TUSK people involved and we were having a conversation, is this should be complicated. Okay? What I mean is, I don’t want to, you know, over complicate it, or deliver bad news to anybody listening here, but you can make this real easy. Just sign whatever the buyer puts in front of you. That takes like 30 seconds. But if you do that, you’ll never know if you’ve gotten fair market value for your organization. I mean, what you have to look at is, what is your EBITDA, and make sure it’s correct. What is the multiple? Is that multiple consistent with market? How have they calculated the EBITDA? How have they calculated the multiple? Because sometimes you’ll get a low multiple, and it’s the best value because they’ve been very generous with the EBITDA. Other times you’ll get a high multiple, but it’s not a good deal because they’ve really sold the EBITDA short. And you really got to look at that very, very carefully. And then you’ve got to look at the other provisions you’re talking about. You know, is what they’re asking for consistent with market? If the quality of earnings comes back wrong, is there somebody that’s going to go back and forth and argue over it and get that number up higher? You know, this stuff takes time and gets complicated, and that’s the value, because I’m often asked again why should you go with a representation like TUSK, or a firm like TUSK, or should you just go it alone? And this is what we’re talking about. I mean, if you feel like you know exactly what the market is on every one of these provisions, and funny, Josh, if you sell your office in Ohio because you’ve been doing this forever, maybe you don’t need a representative, because you understand all this stuff. But unless you can tell me that you’ve been in this industry and you understand what the multiples of EBITDA are that are paying, how they calculate EBITDA, how to defend your EBITDA, all the other terms, like non-competes, and post-closing obligations. If you don’t have an understanding of this stuff, then that’s the value that advisors will bring to the table for you.

Josh Swearingen

Yeah, I couldn’t agree more. And I think, quite frankly, if I tried to sell it without the help of TUSK, Kevin would be very hurt. So, I don’t think I’ll do that.

Brian Colao

Yeah, I know, but I’m just saying you almost have to be somebody like you. I mean, it’s just interesting. Normally, when I’m doing this, I’m not in the presence of somebody that owns a med spa that might be qualified to sell it themselves, but you have to kind of be in that situation. And there are people out there like that, by the way, I don’t mean to sell anybody short. I’m sure there’s somebody listening to this that’s been in the business many, many years, understands all this, and maybe is competent and qualified to do it themselves. But it’s just not the majority. Most people will really, really benefit from having an advisor.

Josh Swearingen

Yeah, I agree. And I also think there’s also a time element of it that if you did want to try to handle this yourself, it would be absolutely time exhaustive, so you need someone there that can help alleviate some of that workload and make sure that you have checks and balances on the back end. But from both a deal structure standpoint and a legal representation standpoint, you would never want to sign your business over without having a very, very qualified health care attorney reviewing every single dot and dash of that contract. And I think finding the right advisors is critically important.

Brian Colao

You get one chance, Josh, to sell your life’s work. You know, that’d be the final thing I would say here. It’s really, really important. It amazes me. Sometimes, you know, sometimes a lot of people take it really, really seriously, and that’s what I like. And you know, they’ll hire us or you, and they’ll have 1,000 phone calls with 1,000 questions, and I like that. I mean, that’s important because this is their life work, and they deeply care about what the outcome is going to be. But then, every now and then you get somebody that’s like, you know, ‘no, I got this offer. I’m just going to sign it and I’m done.’ And it just astonishes me, you only get one chance to sell your life’s work.

Josh Swearingen

Yeah. Couldn’t agree more. And kind of heading into the last slide here. I just wanted to, do you want to let the cat out of the bag on the conference next year? Or would you like me to introduce it?

Brian Colao

Well, yeah, I’m really excited. We’re having, and we’ll get your input too, but I’m really excited we’re having a sort of, one of a kind, aesthetics industry conference. It’s going to be in May of 2025. So if you’re listening, you’ll probably hear this in May, not right now, but one year, you know, May of 2025 is when we’re going to do it. And it’s a business conference. Okay? I’ve been to a number of aesthetics conferences, and like everybody else, I love walking around and seeing some of the latest products and things out there. But this is not the focus of that. So, if you thought, hey, we’re going to come to this and check out some new products, or, you know, new industry tools and things, no, that’s not what we’re doing. What we’re doing is it’s focused on people that either want to maximize the value of your organization, meaning you’ve got an aesthetic spa right now, and maybe you don’t want to sell it, but you want to maximize the value. That’s one thing. Two, people that want to do deals, buyers and sellers that want to come and say, ‘I’m interested in partnering with somebody, and I want to learn what’s my best path to partnership. Perhaps I can even be introduced to a partner at the meeting. You know, that would be wonderful. But even if that doesn’t happen, you know, what are all the steps to a transaction, and how do I maximize the value?’ And it’s going to be a business conference, and we’re really, really excited about it. Josh,

Josh Swearingen

I think it’s awesome. For those of you that don’t know, Dykema has been putting on a conference similar to this in the dental vertical for gosh, I know 8-10, years now. Has it been that long now?

Brian Colao

This is our 11th year, this year.

Josh Swearingen

11^th year, wow gosh. I actually remember being at one of the first or second Dykema events, you know, 10-11, years ago, and have seen it grow throughout the years. And it is consistently the most informative, best gathering of industry professionals in the dental space, year after year after year, and the fact that we’re getting this kicked off in the aesthetic space is going to be nothing but good for the industry. It’s an incredible education. This is the event during the year you don’t want to miss. So, we look forward to seeing many of you there. So that is it for our time this evening. Thank you so much for joining us, we were thrilled to have you. Brian, always appreciate your time. Appreciate partnership with your organization and all that we get to do together. If you have any questions, feel free. You can see the QR code on the screen. You have Brian’s contact information on the screen as well. We’d love to talk to you if you’re a prospective seller or potentially looking to start up an organization and properly build out the legal infrastructure of an entity, but thanks so much for joining us tonight. Have a great evening.

Brian Colao

Thanks, Josh.