December 12, 2022

The Sale of Dental Practices, Raising Capital and More with Logan Growth Advisors

Point by Point

In this episode of Point by Point, Morgan Ribeiro is joined by Healthcare Industry Team Co-Chair Eric Scalzo and the President of Logan Growth Advisors, Bob Winder. Eric and Bob draw from their collective industry experience and knowledge to discuss what dental practices should consider when contemplating a sale or capital raise.

This episode of Point By Point was produced prior to the combination of Waller and Holland & Knight.

Morgan: [00:00:00] Welcome to PointByPoint. This is Morgan Ribeiro Waller's chief Business Development Officer, and the host of the podcast. On today's episode, I am joined by Eric Scalzo, a partner in the firm's corporate group and the co-chair of the firm's healthcare industry team and Bob Winder, President at Logan Growth Partners.

Bob helps founders, particularly dentists and physicians sell their businesses or raise capital. And today we've asked Bob to join us for our discussion where we will look at dental practices considering a sale or a capital raise. We'll talk about best practices and considerations for dentist and what they should make in consideration of their future options.

What are some of the case studies of those who've done it well and those who might have done it better, in hindsight. We will also provide a practical guide and answer the pressing questions on the minds of those considering what's next for their practice. Eric and Bob, let's get started. before we jump into the specifics, I know we've got a lot of things to cover today and what all happens in the sale process, but I'd love if each of you could just take a quick minute and give our listeners more background on yourselves.

Eric, I'll start with you.

Eric: Thanks, Morgan. As you said, my name's Eric Scalzo. I'm a partner in the corporate group here at Waller. And before joining Waller, I hired Waller as outside counsel to the DSO where I was working as in-house counsel to provide some regulatory consultation and services for us.

Got to know the folks here at Waller really well and then join the team seven years ago. My practice focuses primarily on physician practice management transactions and regulatory advice. And my focus is really in the dental space, given my background and my connections. So I represent DSOs as they're buying DSOs, as they're being formed and DSOs as they're selling.

And I also represent large groups in the sale process to DSOs. Thanks Bob for making the time today. I'm looking forward to the conversation.

Bob: Thanks. Morgan. Great to be here with you, Eric. I'm Bob Winder, president of Logan Growth Advisors. I worked in private equity during the last recession and really loved dental investments, healthcare, recession resistant assets.

Felt like I would rather be on the receiving end of one of those a hundred million dollar checks. So I decided to raise some capital on my own and buy a group of dental practices with a dental partner. And, the short story is we exited in two years, sold to another DSO and did well financially.

The long story is it was an incredibly difficult road, and I probably lost 10 years of my life during those two years, but ultimately learned a lot with that experience. Kept getting inquiries from business owners, dentists looking to partner with private equity, transact raise capital, so started this boutique M&A shop where we really focus on helping dentists and doctors monetize the value of their practices, their business.

Prepare for an M&A event. And see that through to completion. I also am a professor of finance 4 25 private equity venture capital at Brigham Young University and Utah State. So I love to educate and really love this industry. So thank you Morgan and Eric. I look forward to this conversation.


Morgan: You both bring a lot of unique expertise to this space. So it makes sense that I've got you both on the line of data, really do a deep dive into what makes the sale process for dentists and dental practices unique and some of the things that you've seen come up in your experience.

I think it's easy for us to see that you spend a lot of time and working with innocent physicians who are considering their next. Maybe there's someone who's more junior in their career who's looking to get out of the operational and financial aspects of running a business.

They just wanna practice. Maybe there's someone who's more senior in their career and they're looking at retirement and what those options might look like. But regardless, I think wherever they are in their career and whatever their motive is this is a transformative moment for them. And this is likely a once in a lifetime event.

And so with that said, what are typically the reasons that you see that practice donors are considering a sale? Bob Achievers,

Bob: as you mentioned, folks looking to alleviate themselves from administrative burdens. I feel like that was the big story 10 or 12 years ago when I was in private equity, that hey dentists, they're so busy, they just wanna practice.

They don't wanna run a business. But as I'm a lot closer to the industry working with entrepreneurs, I find that's less and less the case. And more and more of these transactions are driven by three main reasons. The first is aging retirement. So folks are saying, All right, I'm in my fifties, I can see that gonna retire sometime in the [00:04:00] next 10 years.

And they realize that if they monetize their practice now and then continue to work in that practice with a DSO, for example, that they can get a much higher valuation on their practice. So we're getting a lot of those folks talking to us early, well before they're ready to retire, but in preparation for retirement.

The second bucket I'd say are folks looking to grow. So folks that are younger, more entrepreneurial have maybe five practices or hitting, bumping up against these roadblocks with their banks that view them as risk. When you say growth, the bank hears risk and so you want to grow to 5, 6, 10 locations and it's really difficult for them to get financing for that.

And so a lot of folks are reaching out or we're hearing their stories, trying to find ways to grow, trying to access capital. So that's another bucket that we hear a lot of folks, a lot more entrepreneurial dentists. The third is the category of folks that have already built up , a sizeable group of practices.

They have a lot of net worth. Maybe earlier in their career, they were more this growth oriented and they were more risk tolerant. But now that they've built up some real [00:05:00] net worth that's tied up in this illiquid asset, they become more risk averse. And so they're looking to monetize or diversify their net worth from that illiquid asset, but still continue to have skin in the game, continue to have the upside.

They're not really looking to retire or exit, but they do wanna de-risk and they wanna alleviate some of that stress. So those are the three main buckets that we're seeing today, and getting approached and having those conversations. Eric, is that similar to what you're seeing?

Eric: Yeah, that's a great summary of the folks that are looking to transact on the sell side.

I think the great thing about being sell side advisors and I get to play on both sides, not on the same transaction of course, but in my career and over the course of my day, I get to be both on the buy side for clients and on the sell side. And I really enjoy the sell side because it allows me to be the advisor for somebody who's either never done this before or is never gonna do it again, not because it's such a terrible process, but because this is truly a kind of life changing, transformative transaction for them and their family.

And so folks that don't live and breathe M&A on a daily basis don't understand, haven't experienced before, [00:06:00] what a transaction looks like, what the flow of a transaction looks like, and so I, very much enjoy being kinda the trusted advisor through that process. But Bob hit the nail on the head.

It, it used to be as you said, the idea of folks want to just focus on the practice and we're seeing more and more folks want to grow the business that they've been building as a kind of, offensive move, right? Need additional resources, additional capital et cetera. And some folks are making the move in a defensive manner because they see the practices around them being swallowed up by DSOs.

And so instead of being squeezed out, once referrals start to go in house or otherwise get gobbled up by other DSOs the fear is their practice may suffer because of that. And so in response to that they're looking to also transact and also align with some of the bigger players that are moving in.

Are you at

Morgan: all seeing an uptick in that activity or that shift towards proactively positioning your practice since COVID and the Lockdowns had happened?

Eric: I dunno about you, Bob, but I feel like at the outset of COVID the feeling was, this is gonna shake a [00:07:00] lot of practices loose.

The folks that, were either never DSOs or not now DSOs it would shake them loose because of economic issues with lockdowns and not being able to generate, et cetera. And as COVID continued, it was pretty clear that. Most of the practices were gonna be fine.

And most people, I think it almost steeled them against needing to affiliate, right? Because I made it through COVID. I can make it through whatever comes next. We saw, I think, an uptake of people rushing for the exit in connection with threatened tax changes. So the past couple of years, December 31st was a big date for those of us to do M&A, because everyone wanted to squeeze it in for the what if so far hasn't happened and doesn't look like this year.

We've got that threat or that squeeze. But who knows about next year? But I do think that COVID was pivotal point in the industry. And certainly provided a lot of the independent folks the confidence to stay independent for some period of time here and really build out their business to be in the position to make the decision when they want to affiliate or transact for the reasons Bob mentioned a moment ago,

Bob: I've seen a couple big impacts from COVID.

One is, as you alluded to, some folks [00:08:00] did just feel like, Hey, there's so much risk I'm taking on by going alone. Why don't I join with someone else and then I can alleviate some of that risk? I'm certainly seeing that. I don't think it's been nearly as prominent as some folks expected.

I am seeing quite a few folks that probably would be eligible and likely to transact right. Delaying their transaction because of an effective COVID, which is wage inflation. So your revenue hasn't increased as fast as your expenses have, and so your margins are getting squeezed. Therefore, it's just not a good time to sell.

I'm seeing a lot of folks hold back on selling this year or right now, because to them it's just not a good year. And it's not necessarily because the buyers aren't buying or the buyers aren't still paying really good multiples. It's more driven by sellers saying, Hey, I'm getting squeezed this year.

I gotta fix this and then I'll be ready to sell.

Eric: And in terms of kind of the timing, mean, this is a good time to talk about what buyers look at in terms of financials. Does that mean that next year, if next year's a good year, next year automatically means they should go to market?

Or will buyers look beyond trailing 12?

Bob: That's a good question. . I [00:09:00] generally don't like to advise folks to try to time the market based on, when they think multiples are gonna be the best or whatever, taxes or whatever. Market timing. I generally advise when you feel like you're ready.

That's when you go, and usually it's when you feel like you are having strong momentum and it doesn't take that much momentum to get credit for current results. Buyers are very myopically focused on near term recent results. Of course, they're gonna look at the past two, three years, and so there may be a story to tell if there's a dip in performance, but as long as you've come back and you can prove that this is recurring and sustainable, then overcoming the historical dip is usually not very difficult.

Morgan: Awesome. I think that's helpful to know just what's going on out in the marketplace. So once a practice decides, hey, I think we're looking at going down this path not maybe making a decision for sure whether or not they wanna do that. But let's say that they pick up the phone and they give one of you a call.

I'm curious what that initial call usually looks like and the types of questions that you're getting from practice owners. Eric, why don't you go first?

Eric: Yeah. I get a lot of the questions that I'm sure [00:10:00] Bob gets too, right? What multiple am I gonna get and how much money can I put in my pocket? And the answer is always I don't know.

And the, I don't know, is not because we haven't done this poorly, I don't know, is. It depends on a lot of factors, right? What's your payer mix? What's the quality of your team both on the, non-clinical administrative side and then also on your associates. How bought in are the associates, right?

Are they gonna hear the word transaction and flee to a competitor? Are they sticking around? And how have you incentivized them to stick around? What's the marketplace look like? And so the questions we're getting are around the short term monetary.

Bob: Bob?

It's the same thing as Eric. Absolutely. Hey what multiple am I gonna a lot of these sellers have gone to some of the conferences and they hear, the crazy multiple stories from their friends and colleagues, and everyone's so fixated on this multiple concept.

And what I try to do is help educate them that the multiple is only one leg of the stool. Multiple is very important, but in isolation, it's meaningless, right? First of all, what is that multiple applied to? What is your EBITDA? EBITDA unfortunately is a very subjective number that can be heavily manipulated.

And so if you're not really focused on making [00:11:00] sure you get the right representation to put forth a very aggressive and defensive EBITDA, then of course, sure you can get a 14 x multiple. But if it's on your tax return, garbage EBITDA, then the buyer's looking at that as a proforma, eight times multiple, even though you might think it's 14.

So you have your multiple, you have your EBITDA, and then you have your terms, the terms make or break the deal, the allocation of risk, how the economics are divided, when those economics are received. And these are huge issues. And so looking at just a multiple in isolation is absolutely not the right way to look at it.

But this is a very complicated event. And of course, folks going through it for the first time, they don't know the right questions to ask, and they don't know the timing of when to come and get involved with folks that do know the right questions to ask. So it's always a fun conversation when you're talking to a doctor.

They're eager to transact, they're super interested in their multiple, they've heard, crazy stories trying to educate them on, All right, let's look at the big picture here and let's help you understand that there's a lot of factors involved and there's a lot of things we can do to make or break the deal outside of just the multiple concept.

So what


Morgan: they, [00:12:00] more importantly, it sounds like not asking about in those initial conversations. You have touched on a few of those, but Bob, maybe you can continue talking through, especially just on the front end, right? Things they need to know about in order to make this decision, if they even wanna go down this path looking for an acquirer or a partner.

Bob: It's really helpful to understand from the buyer's perspective, let's look at your business through the lens of an investor. What do they see and how are they going to attribute value to the various aspects of your business? And therefore, what can you do to make improvements? So for example, if it is a payer mix issue, potentially there's some things we can do to improve the payer mix, or if we think you can get, an increase in multiple, if you're multi-state or we had a deal where, The collective collection ratio was 95%.

But then when we dug in and started doing some of our initial upfront due diligence, one of the practices was 82%. Actually it was two of the practices was 82%, and the others were 97%. But collectively, it looked fine. So when we dug in deep, wow, there's a huge issue here. We worked with the team to fix it.

One of their billers had gone out on a maternity and [00:13:00] had some issues in the handoff. And so we were able to work to fix it and push pause. We didn't go to market for a little while until we could see it was fixed. And then you could perform the fix, it's extra $400,000 of EBITDA annualized.

So just doing that initial assessment, really understanding your business through the lens of investors. And then you can make some improvements along the way cuz you only get one shot at going to market. You only get one first impression. So take a little bit of upfront time, make that investment, understand your business through the lens of private equity or investors, and then make those improvements upfront even before going.

Eric: Yeah, I think the question I like to ask when somebody calls and says, Hey, I'm ready to go to market wanna transact my question back to them is, why? What are you gonna gain from a transaction? Their answers typically fall within one of the buckets that Bob referenced earlier.

Listen I'm I'm tired of doing it all. I need some help on the professional side of the administrative side, on whatever, I'm hitting walls with my bank in terms of lending for new locations. So I need resources on that front. I think I've got a real good thing going here.

And while the momentum is in my favor, I'd like to transact and keep that momentum going with the next partner. But I can't tell you how many times I've had that conversation [00:14:00] and people have said it's just, it's what the guy down the street did, or it's what my buddy from dental school did, and, I just, I wanna do it too.

And as you peel that apart and find out what their long term goals are where do they wanna be in five years and 10 years? Sometimes the answer is transaction's not Right now. And sometimes the answer is, Yeah let's go ahead and do this right and get the team together.

And as Bob referenced, start the reverse due diligence or the introspective due diligence to make sure that your house is in order. And we'll get into that in a little bit. But I think ask the question of why am I doing this and have a good answer. I think is key to make sure that you're gonna be able to justify what's gonna be lengthy process, a trying process regardless of the partner you pick and the team that you have, your drilling and fill, during office hours and then every night or every, couple nights a week, you're hopping on calls to talk about legal issues and about diligence issues and various things.

And if you don't have that, why it's gonna be that much harder to get to the finish line. That's an

Morgan: excellent way of thinking about it, Eric, what should practice owners be looking for and an advisor? And some of that, isn't that initial phone call, but I imagine there's [00:15:00] subsequent phone calls and discussions as they go about looking for advisors and what should their key selection criteria be?

Eric: Yep. I think somebody that's done it before and can help show you the road path to get to closing. Somebody that you get along with, because like I said, you're gonna have probably at points in the day when you're. Tired or in between patients or otherwise, wanting to do anything else.

Having to get on phone calls and kinda living with the person or the team that you pick. And then somebody that's, I think professional and has a good reputation for helping to be a deal maker bridge the gap between buyers and sellers. As the sell side advisor I think it's really important on the legal documents to make sure that the docs know what they're signing what the documents say, make sure that they accurately reflect the business deal that Bob has helped

to get signed up in the LOI and negotiated. And then the third thing, we'll talk about this more in a little bit, but make sure that the money that you put in your pocket stays in your pocket. Because there are ways in transactions through indemnification or other mechanics where some money you, get in your pocket or some deferred compensation is at risk for some period of time.

And so making sure that the money [00:16:00] continues to flow in the right direction. So I think if you're looking for an advisor, it's somebody who can have answers to all the questions around, have you done this before? Give us some examples of how you've done it before, and how do you make sure that my interests are adequately protected in this transaction?

At the same time getting the transaction, across the finish line.

Bob: That was great, Eric. I like to reverse engineer it based on what we're trying to accomplish. So if I think about, again, going back to the three pillars of the deal, from an economic standpoint, EBITDA, multiple in terms, I want an advisor that can really help optimize each of those categories.

So if I think about EBITDA, we're gonna recast the financials, do quality of earnings, and do it in such a way that we establish an EBITDA  that's very aggressive, but still defensible. So do they have experience in that? Do they need to bring in a third party to do that? Do they have relationships with third parties?

 What's that gonna cost? Or can they do it in house? Do they have expertise to do in house? And then are they fully integrated to help me through the rest of the process? So that first kind of deal prep, establishing the EBITDA, I wanna understand how they do that, how they've done it before, what's their track record, the second on the multiple.

So going to market, creating that competitive [00:17:00] tension, that's where the magic happens. Creating that competitive tension. Looking at, what has been their track record with improving multiples? Do they have any. Quid pro quo when they're on the buy side and the sell side relationships, Are they truly incentivized to go to war on my behalf?

What has been their track record to improve multiples? And then the third is the terms. Do they get involved in the third phase of the deal to negotiate terms? I've had plenty of experiences where I've been on the buy side, a broker signs up a deal and they're gone. I even had one broker specifically say, As a rule of thumb, I don't get involved after an LOI is signed.

I couldn't believe it. What are you hired to do? What is your job? Why? What are you doing here? So this is not uncommon. What do they do in that third phase, the closing phase, when all the third party due diligence providers come in to beat everything up and to find issues? Do they help facilitate that?

Do they help manage that? Do they work with the attorneys who are really in charge of a lot of that? Do they help negotiate? Do they stay involved? Just what's their experience, their track record, their team that works on all three of those aspects. So that's the main piece that I'd look at. The other is [00:18:00] just understanding incentives.

So a lot of times I think there is an incentive to sign up the big name. For example, I'm gonna sign up Goldman Sachs because they are a big name and therefore I'm gonna get a great deal. But if you look at it from their perspective, from the opposite perspective, are you gonna be important to them?

Are you gonna be an important client to them? Are you big enough for them to really care and put their best resources? Maybe not. And are you an important client to them? This isn't a widget that they're selling. This is service. This is expertise and time. So you want an advisor to be on your team, to be your partner that really values your.

That truly is gonna put their best effort and go to war on your behalf versus just treat you like, any other kind of be or c team client because they have bigger fish to fry or bigger things to worry about. I'm less interested in finding the big name. I'm more interested in, I wanna find the deal team that I know can execute and that I'm really important to them and our incentives are aligned, so they're really incentivized to do their very best work on my deal.

That's awesome.

Morgan: Yeah, and I would imagine that there are often, I think the broker and the attorney [00:19:00] are the first advisors that get hired and certainly play a key role in this. I imagine there are others though, or they're other advisors that you maybe coach your clients to hire as part of this process.

Bob: For me, it's the biggest one is the attorney. I know that you reference that, but oftentimes, the deals that we're working on, two, three, 5 million of EBITDA. They don't have a relationship with an M&A attorney. Maybe they have an estate planning attorney and they even, toy with the idea of bringing that person in.

And of course, we throw the flag and say, No, you need a real deal attorney that has experience that knows what they're doing that can work with us. They can help manage this process. And far too often that attorney's brought in way too late and maybe isn't even doesn't have the right experience or the right team.

And so that's the big one that we are just, clamoring, Hey, we need a good deal attorney. You really need to invest. You know you get what you pay for. Get somebody that knows, has experience, has a team, can really help us craft the right deal for you. In addition to that, there's not that many that come to mind.

A tax, whether it's an attorney or an accountant is someone top of the list [00:20:00] thinking through tax planning. That's someone that they probably need to get involved with pretty early. And then to the extent we want to. Reverse engineer some of the closing due diligence and do some of that upfront, that can be really helpful.

Like a chart audit is almost always done on the back end, so we do some of that in the front. That can be really helpful. I'm sure Eric can speak to that. Among other things, getting the house in order, bringing other advisors. But for me, most of the time it's just clamoring, Get a good deal attorney, please let me be involved in helping you find somebody because we need someone with really good experience because you don't know what you don't know.

We're gonna go to war on your behalf and it's gonna get ugly, and you need the right people on your team to get this through to completion.

Eric: Yeah. The flip side of that, I get calls all the time from folks that I've, known from being in the industry for some time and they say, Listen I finally got the offer, so and so called, and I've got an LOI. Or I've already signed an LOI. Hopefully not that right.

Come talk to me before you sign anything. But I wanna do it, I wanna transact with this group, and my response is, have you shopped this? Why don't you talk to an investment banker? Why don't you talk to someone like a Bob who knows the industry and even [00:21:00] if you're dead set on partnering.

That group, right? The group that called you running a process, even if it's a truncated process and feeling out interest from a couple others getting some soft indications of interest or even LOIs from some others is gonna create a little bit of a competitive process where that original offer is gonna get better.

Maybe not monetarily, but on certain terms that you otherwise wouldn't get in an uns process. And so I can't tell you how many times clients have declined to hire a banker because they think they're saving money when in reality that's like putting a for sale by owner sign out in front of your house and thinking you're gonna get the best deal there is.

I mean, You are just not. And so I would. Banker is key there, just as Bob was saying about the lawyer. Tax planning, of course if we can have that conversation a year in advance in case we have to do any structuring and then let it age for a while, that's fantastic.

If we can't, we can usually come up with some sort of work around or some sort of way to reduce taxes, but maybe not ideal if we can't get there. The holding period. Estate planning, of course. And then the chart audit. Some of these [00:22:00] folks we like to engage through counsel the law firms so that we can maintain privilege, right?

The chart audits, if they come back with big red flags, I'd much rather have that be done under privilege than not. That gives us some time to. Figure out game plan to fix it for when we do go to market, but also, preserves , the results so that we can protect the enterprise, protect the company.

And then the last thing is a sell side qv which can be expensive but getting an advisor who, it's often a CPA firm or another financial firm that can do a q of so that you've got an idea of what your EBITDA looks like and you've got an idea of what your ad backs are gonna look like, and you've got some ideas of where you're gonna push back when the buyer does their q of and says that you're, several million of EBITDA less than you thought you were.

And Bob, I know that your firm does that kinda in-house as an added service. You wanna talk about that? Yeah,

Bob: it's such a pivotal part of the. Everything's based on ebitda. So we have partners that we brought in. My main partner, Daniel Stark, worked at KPMG for 10 years in their transaction services healthcare division.

So he's done hundreds and hundreds of big time [00:23:00] healthcare qvs and he is done hundreds with us over the past, seven years since he's been with us. And just having that expertise in house, it's hard to do a deal when, the finance people and the deal folks are separate cuz it's really one and the same.

So having that in house and being fully integrated is so helpful because not only does it give us a really good perspective on ebit. The add backs, knowing where we can push, where we can't push, but also just understanding the business so much better. Finance and accounting, that's the language of business.

And so having that expertise in house helps us pitch the deal and understand the deal so much better. So I agree. You absolutely have to get a QV done, , whether you're broker, rem, an advisor has that expertise in house or you bring in a third party just establishing a defensible and aggressive EBITDA upfront anchors the buyer to that number.

And then if they wanna go to war with us, by all means feel free. We love that. But as opposed to just waiting and letting them bring in their folks to establish an EBITDA number, that's crazy. They have no incentive to give you any ad backs. They have no incentive to find any of those golden nuggets. No, they know who pays their bills, the.

So even though [00:24:00] they're third party and their objective, we all know what they're looking for. So if you can establish a defensible and aggressive EBITDA front, and then they have to fight off that number, off that baseline, it just gives you so much more leverage. So a hundred percent Eric, absolutely do that up front.

You only get one first impression. Do it right. Go to market with a solid, defensible number. The problem I see far too often is a broker will take something to market, do his or her own ad backs that are not defensible at all, say, Hey, this is an implant center. Even though the. Supply cost is 15%. The industry average , is 5% supplies.

So we're just gonna add back 10% as an EBITDA add back, because that's what the industry norm is. I had this happen, it killed the deal. We were hired to do the buy side due diligence. Of course, we dig in and three minutes we can see this is complete bogus. This is an implant center. Of course they have higher supply costs and EBITDA goes down by hundreds of thousands of dollars.

Apply that to a big multiple. Now there's no transaction. We just wasted months and months of everybody's time on just something very elementary that should never have made it through going to market. , you have to get it right up [00:25:00] front. Sure. Be aggressive, but also defensible.


Morgan: as we think about this, I it sounds like, we're looking at this like a step by step process. Step one is deciding, yes, we're ready to sell our practice. We wanna start this process. Talk to advisors, particularly a broker and an attorney. Get that advice. Learn the questions that you need to be asking and the considerations you need to make.

All right, you're ready to move forward. So then, what happens after that first step of making that decision to move forward with the sale process.

Bob: I love this. So this is first phase, prepare to go to market. We put on our private equity goggles, our investor goggles.

Let's do some due diligence up front so that we can not only tell you what we see. But also help prepare and position the business to get ready for prime time, cuz we only have one first impression. So the first thing we do is that deep dive quality of earnings, financial assessment, understanding your financials very well.

Recasting them cuz they're usually, cash bases with a ton of personal expenses going through. We're not the irs, you can tell us like, yeah my yacht captain is on my p and l and that's great, we're gonna add that back cuz that's probably not [00:26:00] ongoing, that's more of a seller discretionary expense.

So we're not the irs, tell us everything and we're gonna add as much back as we can defend. But also find other adjustments, let's say a cash to accrual, revenue adjustment. So if you're growing, if you're on cash basis, you recognize revenue when you receive the cash. But if you're growing, you know that you have a delay between production and collections.

So if we accelerate our revenue recognition to recognize revenue when the services performed, we're gonna give you that increase in revenue because we're essentially accelerating forward to, , two months or one month, whatever your kind of DSO day sales outstanding looks like, and give you revenue adjustment, which almost all that falls to the bottom line.

So there's a lot of things we can do that are defensible, that can really improve your EBITDA. But it's not just EBITDA, that's the main focus, but it's also understanding your business, the operations, the metrics, and then of course looking at the business through the lens of risk.

So you think about a deal, there's the economics. And then there's the risk. So when a buyer looks at your deal, they're gonna think, All right, what are the economics? How do I grow? What's gonna be my return? But also, is there a path to zero? What are the risks associated with this [00:27:00] business?

And those are usually the main buckets that people look at it in. Now, as an M&A advisor, as a broker, we're more focused on the economics. The attorneys are typically more focused on the risk, but we still get involved in that. So I'll let Eric talk a little bit more about getting your house in order from a risk standpoint and properly

Eric: documented.

Yeah. So When we approach a sell side engagement and love to do this even before an LOI is signed or even talked about, right? Because the more time we have to identify red flags, the more time we have to fix them and get the story straight for when we go to market collectively. But regardless of when it comes up I like to do a due diligence.

Call myself as the sell side advisor and uncover, pick up the rocks, look underneath them, try to figure out, try to look at it as if I was on buy side to see where I would be putting my red flag, check marks in my diligence memo to my buy side client to say, Listen, here are the risks, right?

When you're credentialing a new associate maybe you bill under the owner's npi, number okay? It happens. But that goes in my list as a potential red flag. On these [00:28:00] calls, I've had folks tell me, Yeah, listen, sometimes the cash pay doesn't always make it into my reports.

Okay. That goes into a tax red flag, right? Kinda all these things to build up my repository of, okay when the buyers dig in, they're gonna find these same things. And so how do we either fix it today, right? Make sure that you've got appropriate, HIPAA training and training logs.

Buyer's gonna know that they're only six months old, but, okay, so what you've done it right? We talked about the chart audit. Make sure that appropriate documentation is being made. Make sure that people are classified appropriately or at least we've got good answers for why.

Maybe you have some independent contractors on your books and of all of the things from an operational and regulatory perspective that the buyers are gonna pick up on. We flag those in advance to clean up those that we can and get the story and the answer for those that we can't, and be prepared for those that we can't.

And so if we can do all of that again in advance of even going to market, it makes Bob's job so much easier. Cuz the story's a lot cleaner. But regardless if we're doing it in connection with going to market or even after LOIs are signed, that's fine. Just time is your friend in transactions.

And the more time [00:29:00] that we have to help clean things up,

Bob: better we'll be. add a little on that too. That's a really good point. It is difficult someone that hasn't gone through an M&A transaction before to really understand how. Difficult and involved. It's gonna be, this isn't a static asset, this isn't a vehicle or a piece of real estate, that it is what it is.

 The market's very liquid. Those transact very easily and quickly. A business is like a living, breathing organism. It changes every day. And the buyers are becoming extremely sophisticated and their due diligence is extremely involved. And as Eric said, here's some red flags.

They're gonna find them, they're gonna find every red flag. And so we're not gonna hide them. We're gonna identify them up front, and then let's figure out what we can do to either fix them. Or at least acknowledge them. We never want it to be some negative surprise during the closing phase. So that's why it's so essential to get someone like Eric involved in the front end to help do some of that initial due diligence.

He's looking at it through the lens of a buyer from a risk standpoint. Let's find all those issues, those red flags, those yellow flags. What can we do to confront them, acknowledge them, fix them up front [00:30:00] so that we're not blindsided left on our heels during the closing phase, after we've lost all of our leverage.

Now before we go to market, we can do whatever we want. And even when we're in market, we have so much leverage cuz we have dozens and dozens, if not hundreds of buyers competing for your deal. So if someone doesn't like something, fine, go to the next. We have so much leverage pre LOI after the LOI signed.

We lose a lot of that leverage. And if we haven't done enough initial work up front and we're left vulnerable to them finding issues during that phase, when they have the leverage, then they can easily change terms and they can feel justified to retrain. These are horrible things that happen and we lose years of our lives thinking about ' em.

So more we can invest up front, it pays huge dividends down the road.

Morgan: So you almost really have to slow down to speed up and taking that time on the front end will really pay off on the back end .

Eric: And to that point, Morgan, we will oftentimes create a virtual data room as part of that process.

So it's not like it's wasted time. Let's pretend you're the cleanest company ever and we find no red flags. That's great. And in the interim, we have created the virtual data room that any buyer is gonna be [00:31:00] asking for. So we're not populating that later on. It's there wrapped up with a bow and ready to be accessed by the diligence team .So they can dive in and probably cut some time off the transaction on that end.

That's an excellent point.

Morgan: Assuming that there are no skeletons in your closet or if there are that those issues have been resolved and now you're ready to go to market, what does that look like? And now what specifics take place at

Bob: this point? This is the funnest time ever.

Oh my goodness. I love this first two weeks to go into market. Everyone's so excited to get a deal. All the investors that have been blowing up our phones to get another good deal are so excited to see it. So after we create the sim, the confidential information memorandum, the pitch book, 50, 80 pages, all about the business, the operations, the growth strategy, performance, history, competitive landscape, et cetera, gives the investors exactly what they need.

We've been in their shoes. I teach the class. We know exactly what they. So we give them the package in addition to the financials, now they have what they need. A lot of their questions have already been answered. We're answering their softball questions at first. It's so fun. We go out to 500 different groups, a hundred of them might sign the nda.

So those are the guys that really, get the pitch [00:32:00] book and start digging in. Then we require folks to submit a term sheet, and we make 'em show their cards up front. We wanna know who we should focus on. Who's really excited about this deal. And so instead of being on Shark Tank where you're getting interrogated and trying to pitch your deal, and hopefully somebody accepts your deal, no.

Now you're bachelorette, right? You have 20 suitors. Like, All right, who do I choose? Goodness, this is great. So that is so fun. That is so much fun during that process when we're comparing term sheets and it's not just the terms and the term sheet. Of course, we love that. I'm an economics guy. We love that.

But it's also the relationship. So this isn't, Hey, I'm selling out, I'm gone. No, these are doctors, right? You're gonna continue to work. This is a relationship, this is a partnership. So let's review the terms and the term sheet for what they are. But let's also do our due diligence on the buyer. Who are these people?

Do you like them? Do you wanna work with them? Do you believe in them? Is your investment that you're gonna make in their company as part of your co-invest, world equity? Do you believe that's gonna grow? Do you believe in what you're signing up into? So doing your own due diligence, turning the tables on them, asking them some tough [00:33:00] questions.

That's huge. So we whittle it down. Finally, we get to just a core few groups. They duke it out with each other. They don't know who the others are. It's a blind auction. That's the beauty. I've been on their side. It's horrible. Absolutely horrible. Not knowing who you're competing against to win this deal, you gotta put your best foot forward, sharpen your pencil in order to win, especially if it's a really good asset, a really good company.

And then final LOI s are delivered letter of intent, very specific terms blueprint for the purchase agreement. Hopefully Eric is involved to help us negotiate that, make sure all the legal terms are in there, make sure that when we still have the leverage, we can negotiate exactly what we need to set that blueprint for the purchase agreement.

And then based on not only the terms in the LOI, but also the relationship that you've established with these parties, you sign an LOI and that ends what we call that kind of middle marketing go to market phase. And then we enter the closing phase, which is a horrible experience and I'm sure we'll go into that more in a minute.

And that's really where Eric and his team shine. And that's a lot of the fun has ended and now it's all right, let's get down to business and get this deal. Eric, anything to say

Eric: About the fun part? I think the next part's the [00:34:00] fun part. So Bob, I get everything you do and your team does and agree understand why that would be fun for you.

But once the LOI is signed and the horrible part as Bob just said begins that's where I get to roll up my sleeves and provide value. Again, my job is make sure that the documents reflect the LOI, the business deal. Make sure that you as the seller understand the risks, what the documents say and the risks inherent there in and make sure that money flows one way or reduce the risk of it flowing the wrong way.

Post close. I will say that Bob's right, you never have more leverage than you have before you sign the LOI. And so there's some decision points to be had in the LOI process, whether or not. You get into granular detail about indemnification packages and non-compete radius and restricted periods and all that stuff where if you kick it to the definitive documents the closing period the horrible time.

And there's pros and cons to both. And I think working with folks that understand the pros and cons and understand the ebb and flow of your specific transactions really key to getting that but yeah, so then we turn to the documentation, the actual transaction.

At that point, you're gonna have a purchase [00:35:00] agreement, as Bob said. You got the money and mechanics side of it. How do you get paid for this and roll over equity and all that. And then you got the allocation of risk side who bears what risk post-closing with respect to the transaction and post-closing and pre-closing operations that sort of thing.

And how do you mitigate that risk on the sell? You've also got employment agreement, rollover agreement, right? All go forward operational agreements. And it's key at this point, I think, to keep in mind that the end of the transaction, the other side, the folks that you're going to war with are gonna be your partners.

And so it's really important to. Walk the fine line between being firm in your stance and firm in your opinions and, and desires and demands at some points. But doing so in a kind professional and collaborative manner. And in some sense, allowing your advisors the lawyers and the bankers to be the bad guys.

And really get the sharp elbows start poking and picking at things that are really important to you. And be your in the trenches. Because at that point, the last thing we want is to close the transaction. I've had it all right. You close the transaction and my sell side [00:36:00] client calls me the next day and says I woke up with just the weight of the world off my shoulders.

And this is fantastic and I'm really looking forward to going into work today. And thank you to literal tears. And I've made the biggest mistake in my life. And can we unwind this? You never want the latter. And and hopefully throughout the process you determine you've picked the right partner.

Again, it's not all economics. As Bob said, you picked the right partner cuz you're gonna live with them for five years or sometimes longer. Post close and making sure that throughout the process you understand everything that's going on.

Morgan: Eric, when you talk about the negotiating of specific terms, and we're going from the letter of intent to close, you've mentioned risk.

Are there other aspects? I Obviously there's regulatory review depending on the state that you're in. There's certain state specific regulations. I What are the types of things that you're really digging deep into and what are the types of things that maybe at this stage in the game could beyond just deciding this is not someone that I would wanna be in business in, and of more of the emotional relationship aspects.

What really technical pieces could ultimately make the deal fall apart at this stage?

Eric: Yeah, I think there's a couple of ways to [00:37:00] answer that. And certainly there could be a whole separate podcast on the mechanics of a, purchase agreement and the transaction process.

But I do think that in the DSO space, there's a different answer. If you're tagged to be the platform, right? A new private equity group is coming in and they're gonna build off of what you've built with you as the go forward main friendly dentist, if you will.

And there's different answer if you are a tuck in bolt on. And that doesn't mean that you've got necessarily one location and you're being swallowed by a much larger, It just means that there's already a platform that you're tagging into. And if it's the former, if you are the platform then we're gonna be.

A lot more focused on the buyer's regulatory structure. Have they thought about the corporate practice of dentistry prohibition that's present in 45 states? If they're buying or setting up a DSO platform, I sure hope they have. And do their service agreements, do they pass regulatory muster?

And, we've got real concerns about you as the go forward friendly doc and what that looks like from your risk and risk to your license and all that. If you are selling into an established [00:38:00] DSO and you're not necessarily a go forward owner of a practice, we still have some of those same concerns, but it's a little bit removed from you personally.

Depending on the structure of the transaction and where you reside , on the deal and the deal post closing we're gonna look at those things and make sure that you as the seller are protected and make sure that the buyers are thinking about the right things and are structured in an appropriate and compliant way.

Bob: I just love how Eric said that's when he has fun. Cause as I said, that is a horrible couple months of everybody's lives. And if that's when Eric jumps in with a big smile on his face and goes to work, he's the right guy to have on your team.

And it is true. It is a very difficult. Often horrible time because you as a doctor, you're managing the business often, you're still somewhat chairside, and now you have this huge gorilla of, thousands and thousands of data requests and due diligence requests and questions and negotiations.

And also just thinking through your future. Does this all fit? Does this make sense? What am I signing up for? mean, All that spinning around at the same time is extremely difficult. And so having you know the right folks around you to help navigate through that and [00:39:00] negotiate through that, I really like how Eric said, let your advisors be the bad guys.

Let yourself have a degree of separation from your future partner and you, because if you're the one with sharp elbows, creating all the issues, that's gonna come back to haunt you after the transaction and your partners. Use your advisors as the tip of the sword.

Make sure that they're the ones, fighting on your behalf and you can maintain that degree of separation. I've had a lot of different experiences with different attorneys, and this is really where they shine. We do a ton of work in this phase. We manage a lot of the due diligence.

We do a lot of the negotiation, but having a really good attorney team beside us and we can collaborate just makes all the sense in the world, and it makes a huge difference. Not too long ago, we had a deal almost die because, this is a 30 plus million deal and our client hired an attorney that didn't have a whole lot of experience, but more importantly, didn't have a.

And so it was just him and I think he had a paralegal that he outsourced too. And we're in a heated rush. Time wounds, all deals. So we try to go as fast as we can, to not give the buyers more time to uncover more dirt and more issues. Cuz the more time they have, they're gonna keep working, [00:40:00] they're gonna keep uncovering things that they view as issues.

And of course at that time they have leverage. So let's push as fast and hard as we can to maintain the terms, to get their due diligence done. Defend against everything, all their attacks. And this particular attorney, great guy, really enjoyed him personally, but just didn't have the bandwidth to get stuff done.

The documents kept getting delayed. Delayed. We had to jump in. We're assisting in the red lines. This is craziness. We did end up closing, , at, 4 55 PM right before the deadline. But it was not, without losing, months if not years of our life expectancy in the process.

And I think we probably could have done a little bit better on some of the terms had we had a team, with resources and with a lot more experience to help out. That, that particular phase of the deal is just so stressful and difficult. You really feel like you're in a war zone and you just have to have the right folks to have your back and to have the right experience and you totally trust and know that they are working on your behalf, have the expertise and have your best interests in mind.

Morgan: Great. summary, it sounds like we've really talked about five key areas or five key steps in the process. So one is the decision to sell. The second is getting your house in [00:41:00] order. Then the third step you go to market, you're negotiating with suitors to determine which deal or which partner is the best fit for your practice.

Four is that push from LOI to close. And then lastly, I would say, which we really haven't talked about, and this could be an entirely separate podcast episode is integration. I think that going from LOI to close is a lot of hard work within the integration and really starting that relationship is the hard work.

And I know oftentimes the broker is not involved in that step and legal typically continues on with either day to day compliance or serving as an outside general counsel or even, we hope this doesn't happen, but when things maybe go wrong in the partnership. And I think just appreciating that component of a deal process is important as well.

 I think, we've just seen it all. And these practices and how things can work. And I think having, as you both have pointed to advisors like yourself as well as accountants and other consultants and counselors on these deals, just having that expertise and really having lived this, I think is just such an important thing for any seller to ask about whether or not it's in the dental space or whatever space you may be really having someone that's lived it [00:42:00] and breeds it and really can speak to that experience and expertise.

 Any final pieces of advice or any wisdom that you'd like to share with our listeners on this topic?

Eric: Bob said it right earlier. He said You only have one shot to go to market the first time. I think it's a lot like Finding the right life partner. You gotta date, you gotta figure out who you get along with. And I think that's true in advisors too. And I always ask folks when I'm talking to them, who else are they talking to?

Not because I wanna find out who my competition is, but I wanna make sure that they're talking to other folks. I feel pretty confident that if we have the opportunity to chat we're probably gonna get along and my experience is probably gonna get your deal closed. But I wanna make sure that you're talking to other folks and realize that and pick the right person for you.

And if it's not me, great. Happy to be a sounding board or a resource as your deal progresses with whoever you choose. think you need to find the right partner to help bring you to market. You need to find the right partner to help get your deal closed. And most importantly, you need to find the right partner for after the deal is closed.

And that's the buyer. And if you go in with a mindset of this is gonna be a lengthy process. But it's an important process [00:43:00] and keep that in the back of your mind as you have the late nights and the frustrations and the various things that go along with the transaction.

I think that will serve you well.

Bob: I echo that Eric, be very deliberate and careful in the selection of your advisors, specifically the broker and your attorney. I don't worry about my competitor brokers very often. There's a lot of brokers out there. I mostly worry that a lot of the folks that we could be working with decide not to use a broker at all, and they think they can go it alone and they can, do just fine on their own cuz they don't want to pay a broker fee.

And I've been on the other side, I've been a buyer. And there's so many levers that can be pulled from a buyer perspective to extract economics that a seller would never even know how to ask. We had a deal couple years ago on page 57 of the purchase agreement, they slid in, in the fourth paragraph, this little sentence that said something to the effect of any upside any value accretion of the equity of the seller that's rolled over into the new company will be subject to a 30% carried interest by the buyer.

So effectively sweeping 30% of any additional profit [00:44:00] that the seller would generate off that investment, which was totally ludicrous. I had a huge sense of humor failure when I saw that, and we obviously got it fixed, but oftentimes, folks might not find that, or if you're doing it yourself, how would you even know to read that sentence?

And so just. Being very deliberate as Eric said, interviewing a bunch of folks, finding folks that you not only trust, have the right amount of experience that are gonna really feel like your deal is important to them, but also folks that you get along with that you enjoy working with. Cuz it's a long, arduous, difficult process and it sure is nice to work with folks that you just intrinsically enjoy.

And so I would say, really focus on finding that type of relationship and expertise in your broker as well as your attorney.

Morgan: I think that's an excellent point. Life's too short to work with people you don't like. Particularly on something like this that is so important to the future of your business and really your livelihood.

So appreciate all of your insight today and look forward to chatting again soon.

Bob: Thanks Morgan.

Eric: Thanks Eric. Yeah, thanks Bob. Thanks Morgan.

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