DSOs & Transition Services Webinar: Part 2

foreign my name is Blake and I will be your moderator tonight we&#39;re joined by senior director of transition Services Dr Thomas Snyder and two we owned legal and financial experts Scott Crow and Mike White for part two of this three-part series before we get started I&#39;d like to note that Henry shine is not offering CE credit for viewing or attending this presentation live or on demand welcome and thank you for being with us tonight I will pass it over to you now hello everyone I&#39;m Tom Snyder senior director with Henry Schein Dental practice Transitions and uh we&#39;re glad to be with you again for our second webinar in the three webinar series about dsos some of you may have joined us uh back in November for our first program and tonight we&#39;re going to cover some new ground and get a little more in depth about dsos what is a DSO and do I need to establish one so before we get started I&#39;d like to introduce my colleagues for today&#39;s program uh Mr Scott Crowell Mr Mike so Scott let people know who you are uh good afternoon everyone my name is Scott Crowe I am a attorney at the law firm uh Dickinson rights I&#39;ve been practicing north of 20 years now and have been doing Dental transactions for about that length of time as well um it&#39;s a pleasure here to be here with everyone and hopefully we share some thoughts with you today that you find valuable Mike yeah I know I appreciate it and it&#39;s hard to believe that we did the first webinar two and a half three months ago now it&#39;s almost February um but yes my name is Mike White I&#39;m a principal at CLA I excited to do this educational broadcast again uh one of the leaders here at you know the CLA I&#39;ve been in the dental industry about 14 15 years now I&#39;ve been practicing public accounting about 19. uh and you know really try to build a team around uh CFOs and Consultants that have ranged from three to 400 locations of knowledge base and helping the industry continue to grow and what what&#39;s going on so this should be a good discussion today oh thank you very much okay let&#39;s get started well consolidation in dentistry is nothing new uh we have other health care professions that have preceded us and they&#39;re pretty much complete however Dentistry even though we&#39;ve been consolidating for probably 20 years Scott or Mikey could confirm whether that&#39;s uh about right but we&#39;re still I guess you could say in the relatively early stages because some of the statistics I&#39;m going to share with you will kind of attest to the fact that they&#39;re still a lot more mileage to go in this highway of consolidation so a couple of points I wanted to talk to you about briefly uh Still Believe It or Not that even though we continue to grow with large group practices most of Dentistry is still performed in single practice locations and however we&#39;ve seen a lot of changes for example as of 2021 the Ada&#39;s Health policy Institute reported that only 46.2 percent of dentists were considered solo practitioners that ratio has decreased greatly uh when about 15 years ago 67 percent were considered solos in 2019 only one in four dentists under the age of 35 were in Solo practice so we&#39;re seeing a big sea change with younger practitioners and of course uh as those of you who are now in the multiple uh location uh space you&#39;re finding that you&#39;re having a hard time uh recruiting and retaining Dental staff for example uh the whole profession since covet has experienced shortages and difficulty in hiring dental hygienists and dental assistants and in some cases associate dentists if we look at U.S locations uh United States look at group practices large group practices of over 50 Plus locations about 5.9 percent uh that represents about 9.5 percent of dentists if we look at the small multi-location groups which we characterize between 2 and 49 locations that&#39;s about 25.7 or about 26 percent of all dentists so I would assume that many of you on this program tonight probably fall into that category of 2 to 49 or maybe you&#39;re still a single entity and you&#39;re thinking of going to the next level but you can see 68.4 percent are still unaffiliated single location practices which is about 65 percent of dentists so as I said earlier consolidation is still going on and there&#39;s a lot of room to grow if we look at small group practices by location by meaning number of locations and this data came from Dental Market IQ with the webinar they presented recently this data is current as of October 2022. so we see for the 20 to 49 locations there&#39;s 76 Dental groups but when we look at the 5 to 19 locations we have over 1100 Dental groups four locations 783 three locations 1988 and two locations close to fourteen thousand Dental groups so you can see there&#39;s a lot of variation and a lot of questions that many of you may uh be uh considering and hopefully we&#39;re going to answer some of those today there&#39;s a new generation of dental graduates now and they look at things differently than when folks like me entered the profession where the majority of us wanted to be business owners but that&#39;s been changing and changing radically we see that ownership rates in private practice have been declining in 2005 roughly 85 percent were Dental business owners in 2021 that number decreased to 73 percent and it continues to drop and one in five dentists under the age of 35 are affiliated with the DSO so going into the future with less dentists aspiring to be business owners there&#39;s going to be an a pretty ample supply of doctors who can work in this group practice environment okay so uh now we&#39;ll get started with some questions we have a number of questions we put together that hopefully we&#39;re going to address tonight uh that give you some insight into what&#39;s going on uh and so uh the first question I&#39;m going to direct to Scott so what makes a DSO a DSO uh it&#39;s an interesting question um it&#39;s really two different facets one is in the in the legal sense the dental service organization is a bifurcated structure where you have the management company sits outside the PC so you have the practitioner the professional corporations that are owned by the doctors enter into agreements with the Management Group um that then draws the profitability outside out of the professional Corporation exchange for the provision of services but in its true a sense dsos come in all sizes and shapes and there&#39;s no single set um example of what exists if you canvassed all the larger players in the country they all have new nuances with inside of their DSO structures and how they partner with their doctors and that&#39;s really where the differences lies how are they actually partnering with the doctors that are providing and producing the revenue on a daily basis but what it really means is you&#39;ve got a centralized management team the DSO is is where you create a centralized Management Group that as in you know your management level employees meaning all of your non-clinical uh individuals are are centralized in providing Services across the board to all the professional corporations that exist as part of their Network that doesn&#39;t mean it has to be legally set up as a DSO you could have a single practice that has a large Management Group that is providing Management Services to other practices so um again it comes in all shapes and sizes but what it really means is a centralized management because if you set up a DSO structure uh and you&#39;re aggregating professional corporations together so say two or three local groups come together and they decide they want to form a DSO without centralized management you may Garner a bigger multiple just because you&#39;re putting and posting a bigger Revenue number and more importantly a bigger profit number on the scoreboard but really if you&#39;re looking for premium pricing dsos or private Equity groups that are looking to acquire are really looking for a management group that is able to take on additional professional corporations so there&#39;s one thing to call yourself a DSO but really it&#39;s not the legal structure that makes you a diasto it&#39;s decentralized management function that really creates that that DSS structure that&#39;s often referenced great and I think that&#39;s so just uh I don&#39;t know I think that&#39;s so critical because I know Scott&#39;s met folks I&#39;ve met folks and Tony probably have as well that you know I say oh I have my DSO set up and so I asked for the legal documents they may or may not be there but then I go look into Financial records and they&#39;ve done nothing to follow the path of what the DSO laid out to stay in compliance to manage the service agreements and do all that stuff so it&#39;s as important of setting up the structure and getting the least right as it is is implementing that DSO to get that valuation that Scott was referencing you know in his conversation great thanks so uh I&#39;m not going to direct this to you and I know we touched this in November&#39;s webinar but I&#39;m sure there&#39;s a lot of people on tonight&#39;s uh program that did not attend so we&#39;re going to be a little redundant with a couple of things and the first thing it is is uh why and how is ebitda calculated during acquisitions yeah well hopefully this conversation gets them to go back and watch the uh the first one so you know this is such a great conversation right the uh short answer is what is Evita you know earnings before interest taxes depreciation amortization right the simplest form what does that mean in the hands of a buyer and what does that mean in the hands of a seller what the buyer is looking for is truly what is the net earnings that they&#39;re going to leave behind um what are they acquiring so in the simplest sense using big numbers and simple numbers if I&#39;m the producer of my net profit&#39;s a million dollars but that includes me you know doctor production um so I&#39;m going to take four hundred thousand dollars out to continue to practice then you&#39;re selling six hundred thousand of ebitda right not the full million which is what I&#39;ve heard so many times before um you know from that conversation but I have a million in profit but you have to still get paid to do production as a provider and all that stuff so what&#39;s critical and how we summarize it is it truly is what what is being left behind for the buyer to acquire the other fun part of this and we all know this is the perception of a seller&#39;s ebitdon the perception of the buyer&#39;s ebitda is often different you try to get there as closely as possible but it becomes a negotiation of what truly centralized Services they already have in place as a buyer what do you have on your team that may be redundant or may gain efficiencies in the you know hands of the buyer so those are all things you&#39;re trying to understand from that buyer&#39;s perspective as a seller and all things you want to know to maximize your valuation as a seller to that buyer hopefully I didn&#39;t say all those words too many times so no you did so he&#39;s got a would you say with all you know all the years you&#39;ve been in this space do most of the DSU dsos calculate ebitda uh pretty much the same or are there variations to that well the the answer is yes I mean it&#39;s it&#39;s a gap-based calculation so there&#39;s not a lot of variation in the methodology that goes into what is Eve it up but there is uh the concept of adjustments or add backs so what truly falls into reoccurring expenses versus on-time expenses parties can have very different viewpoints on what that means or whether it should apply or not that&#39;s often part of the negotiation um sometimes you get to see the sellers or the buyers calculation of ebitda and how they got to there oftentimes they will not share their their full quality of earnings report or review with the potential seller because there&#39;s often other things in that report that they&#39;re not wanting to or willing to share in other words the synergies that they&#39;re expecting to pick up an additional value which offsets some of those items the the thing that really varies on a on a DSO to DSO basis from evaluating standpoint is you know you see this a lot in an auction process where buyers come in and they&#39;re bidding often have very different viewpoints on the multiple that should apply to that ebitda and ebitda and malt or just uh Common Sense ways of portraying to a seller what really is a present valuation of cash flow analysis that they are then converting into an even bit of calculation so having a conversation on the LA on the first would be very difficult for a seller to understand but in even at times a multiple is something that they can get their arms around can be customary in the marketplace so that&#39;s where you get the variations but in general yes even as is pretty much calculated generally in the same fashion by all parties not just in healthcare sector but really across the entire financial industry to provide and selling businesses great so I&#39;m going to Tom one thing we&#39;re starting to see oh real quick sorry one thing we&#39;re starting to see more and Scott kind of references the buyer is going to be doing due diligence through a quality of earnings depending on size quality Bernie&#39;s light or a full scope um we&#39;re starting to see more and more sellers be diligence ready by going through their own sell side quality of earnings through the process to find those skeletons have the discussions look for those ad back adjustments that the buyer may or may not give them credit for but they&#39;re ready to have the discussion especially when we get those opportunities and we&#39;re seeing the financials may not be in as good of a shape as they should be in that diligence process which is a driving factor in in telling the story for your financials so it&#39;s a very good point Mike that we anytime I have a new client that comes and they&#39;re looking to either get an investment bank or engage or they&#39;re talking about selling their company it doesn&#39;t matter what the industry is that they&#39;re in my speech to them is always the same I have your lawyers come in and do your legal diligence and have your accountants come in and do a quality of earnings analysis and if they&#39;re not capable of doing it find someone that is because the the I don&#39;t want to call them games because they&#39;re not necessarily games that are being played by private Equity when they&#39;re making an offer to acquire your practice they&#39;re doing it based off the financials that you have produced so they&#39;re unadjusted untested they&#39;re taking them at face value and you have an Loi that you sign and there&#39;s usually a purchase price adjustment in there either upwards or downwards for the quality of earnings analysis when you go out and get your own Q of e and your financials are based off of that you have a less likelihood of getting an adjustment because you&#39;ve had someone of the skill that&#39;s able to produce that that earnings analysis that should come back relatively comparable they often don&#39;t come back apples to capitals but they&#39;re much closer and it and it also gives you the ability to bring in your accountants that they come back and say your earnings are X when you portrayed y and you start to dig into how did you get there you&#39;ve done your homework so you&#39;re not caught with your you know so to speak pants down where you&#39;re unprepared to have those conversations so if you&#39;re really looking to protect your purchase price which is why you&#39;re entering into this transaction to begin with you should be doing the legal diligence and you should be doing the financial diligence because those are the two things that don&#39;t always kill a deal um but they will certainly affect price so gentlemen so in quality of earnings for those folks who haven&#39;t gone through it is it similar to an audit and is it what&#39;s involved it sounds like it&#39;s I know it&#39;s a pretty big deal so maybe just give our viewers yeah yeah quality of earnings it&#39;s it&#39;s actually quite different than an audit we&#39;re actually seeing more and more Bankers uh utilize it in lieu of an audit as they start going through their own underwriting process as well we are testing some things right we are doing you know it depends on the scope of the engagement but we are testing Revenue procedures so cash proof so the deposits you said you hit the bank actually hit the bank hit the Quant accounting file and and uh hit the practice management system so we&#39;re making sure all those things tie out we&#39;re understanding what the payroll procedures are what the rent schedule is any of those you know add back items saying hey I ran my boat through my car through and all my Vacations so we&#39;re going to take all those adjustments have you justify them to us as those advisors and say yep there is support for this this will not be recurring in the hands of the buyer and trying to you know if they plead the case for the seller uh to be able to represent those ad boxes and adjustments so it it truly is it is justifying the earnings or qualifying the earnings of that organization and when we do the buy side as Scott just mentioned as a buyer we&#39;re going through and trying to pick apart and tell the story but if we&#39;re getting bad financial data if we&#39;re not getting you know data if you can&#39;t tell us the ad backs or adjustments we&#39;re just going to assume they&#39;re not there and we&#39;re going to give you a less than valuable ebitda because we can&#39;t figure it out ourselves so you have to be able to work with your advisors on the sell side you have to be able to know your financials intimately enough you know we can&#39;t stress it enough and transactions you know miscoding something not doing your accounting properly when we&#39;re talking about a multiple if a thousand dollar miscoding it&#39;s now maybe seven thousand dollar valuation impact we take that to a hundred thousand now it&#39;s a 700 000 valuation impact so those numbers really add up fairly quickly and so so many times when we were talking about it&#39;s like look invest in your financials invest in your legal structure you&#39;re going to get the return on that investment right okay so let&#39;s uh switch gears now and talk a little bit about our economy and of course we&#39;ve heard lots of people say we&#39;re gonna have a recession we may have a recession it&#39;s a light a hardware is it 23 is it 24 when and if it does occur uh will that have an impact on consolidation activity and and if so to what degree I think whoever wants to go first you want to take a shot at it Mike yeah I&#39;m I&#39;m happy to and I know Scott we&#39;re going to have a similar you know what we&#39;re seeing we haven&#39;t seen the impact on the valuations thus far that&#39;s not saying we won&#39;t right A lot of these deals are debt financed on the back end so you have Rising interest rate costs valuation costs that&#39;s going to impact that valuation what we&#39;re still getting is a little bit of carryover from covid where all these private Equity investors had money and had balance sheet cash to burn and get deployed so they too could get their return on investment from that structure when that runs out when that tips over q1 Q2 I don&#39;t know depends on what does happen with these recessionary indicators you know one day it&#39;s bad news Doom and Gloom one day it&#39;s great news and things are still looking up so you know we&#39;re still seeing transactions getting done and for those buyers that we&#39;ve been working with and same with Scott for years and years they&#39;re still buying they&#39;re just looking at things harder they may be saying okay we&#39;ll give you a little bit of credit here but maybe it&#39;s in a deferred term structure because you&#39;ve got to prove those ad backs maybe it&#39;s you know something along those times from a term structure maybe we won&#39;t give you as much role of equity value as we would have before so things are going to change that way but there&#39;s still activity happening today great yeah I I agree with that it&#39;s interesting um after covid I&#39;ve actually been like maybe you&#39;ve seen this maybe you haven&#39;t is especially for the one and two location practices multiples is actually crept up a little bit that they were getting a higher purchase price which means there&#39;s if you&#39;re reading the tea leaves it means it&#39;s a relatively competitive environment out there for well-run practices and that likely will be continued to be the to be the case regardless of recession or not um I mean this industry the one thing about it if you look back over the history of it it is relatively recession particularly if you&#39;re operating on a group basis because you can diversify away from particular Geographic or owner instances where you have a stress donor or stress geographic region um so I think there will continue to be acquisitive I think PE is you know still Gathering funds still packed with cash they have fuses on that money so it has to be spent at some point and deployed um so yes I I agree with Mike I think you&#39;ll continue to see consolidation what you do see differently though that&#39;s developed over the last five to ten years is this hedge against we paid X for the practice based on this level production and at that production dips or profitability dips post-closing then we&#39;re going to take it out on the seller so you sold us excellent amount of Revenue in exchange for that we expect you to enter into a contract to work for us for X number of years and fulfill that contract and to the extent you don&#39;t we will claw back some of the purchase price usually in the form of equity that&#39;s taken away from you and also if you come on board with us and you don&#39;t hit the profitability numbers we&#39;ll also claw back that Equity so usually that Equity was only risk if there was some sort of damage claim an Indemnity claim that something told them about the business was untrue but now there&#39;s this peak under the into the future of if you don&#39;t then we&#39;ve overpaid for the practice and and we&#39;re not willing to pay that price so that is definitely something I think that&#39;s here to stay I see it in the other medical sectors outside of dental um and and I just don&#39;t see that Trend uh going going by the wayside anytime soon great okay Mike we hear the terms DPO hso and SPO are being bantered about are there any differences in these terms uh is it just nomenclature yeah yeah for DMO I&#39;ve heard yeah I&#39;ve heard all sorts of nomenclature and I and I&#39;m not saying there may not be some variations to the model you know ultimately when you&#39;re meeting with somebody you know you know some people say the DSO term has gotten a negative connotation so they&#39;re trying to you know Market against that and make sure that people are comfortable they try to make some slight variations into their model and how you&#39;re buying in and running alongside maybe you have a little more equity on the roll and so they give that a different name so they can change themselves when the conversation say we&#39;re not like dsoa we&#39;re a DPO but you really have to from a mathematical standpoint and a legal standpoint really walk through what does my life look like what are they taking over administratively what are they taking off my plate what&#39;s their vision for the future what&#39;s the next turn life like are they planning on taking another private Equity event here in 12 months are they three to five years are we early in the phase so maybe I get more Equity there&#39;s a lot of things for you to think about other than the nomenclature of what you&#39;re are they&#39;re marketing to you really what is it that you&#39;re buying into or selling to within your practice makes a lot of sense cool love to hear Scott&#39;s take if he uh he writes his documents any differently uh well not that differently to the beginning who acts like a duck and acts like a duck it&#39;s a duck yeah there you go so Scott uh when is the right time to organize as a formal DSO uh is it based on practice size number of practices already in place or other factors uh it I get asked that question a lot um particularly with new clients that are looking to grow um and the answer I give them is is the one I&#39;ll give here which is it really depends on your intent um because I like to start with any structure uh whether it&#39;s even if you land on the DSO structure there&#39;s even nuances within that so if they say they want a DSO it&#39;s really what&#39;s your end goal what are you looking to accomplish and then you kind of work your way backwards from there and when you work your way backwards you can figure out as a group does this make sense to make the investment to convert to a formal DSO today um and if you want to what are the hurdles oftentimes these practices someone will come in with four practices all been individually financed well you can&#39;t necessarily create a DSO structure without bank consent or without refinancing all those assets and oftentimes they don&#39;t want to do that or you have groups that come together and say hey we want to form our own DSO in the city of Columbus and again debt will restrict them from doing so and they&#39;re not really to well they talk about formula DSL once you explain to them what the realities of what it will mean on a go forward basis and there&#39;s different variations sometimes they they lose appetite sometimes they&#39;ll pivot to doing what I call a DSO light which is not moving their assets not co-mingling but really entering in and forming a management company and moving the employees over which is unwindable um type of structure so you move your employees over they act as centralized management and then if a group decides to break away they could and they could take their employees back it&#39;s a way to test and see and get used to what a DSO is as opposed to jumping in and as Mike said if left to their own means you go back a year later you typically will find a mess is what you&#39;ll find that they didn&#39;t fully understood understand what it really meant to be a DSO so the legal on accounting can always be ahead of really the practicalities of building a team and who are the key persons that you need to run the organization so it&#39;s always with the end goal in mind as to whether a DSO is right for you now or or in the future great okay uh Mike uh what&#39;s the best investment a small group can make when preparing for a transition to the next level of operational size yeah no it&#39;s I&#39;m going to say financials right I I of course being a CPA kind of guy but I think I&#39;m going to build off what Scott said earlier you know whether you&#39;re forming a DSO again depending on what your Lifeline if you&#39;re performing a DSO to sell and transact now most likely the buyer has a DSL route already so don&#39;t spend that money invest so then just revert back but spending the money and making sure your financials are in good working order you&#39;re telling the right Story You&#39;ve added back and gotten some of the noise of the personal expenses out you understand the semantics of your business and you&#39;ve looked for those opportunities and savings and supplies and staff and marketing and lab and all those areas that we all talk about from that standpoint but the most important thing I don&#39;t say the most important thing Scott said but one of the most important things Scott said it truly is how are you acting as an organization whether you&#39;re formerly a DSO you&#39;re a management company a DSO light or just multiple practices working together how are you interacting what are those service this agreement saying how does your business flow are you you know allocating the expenses across practices are you tracking Revenue do you have the bank accounts do you understand what services you are offering centralized billing scheduling accounting a thr any of those functions and what does that mean to your organization to truly have somebody be interested in taking you to the next level or even if you&#39;re in that stage where you&#39;re growing your DSO yourself or your multi-group location the banker is your investor what are they looking at you for from a lending perspective do they want to give you money and Bank on you to be successful as you grow your group okay uh you know maybe along along with what you just said if it&#39;s a small group when do you maybe consider going to a centralized building and use of a call center is it is it based on size of the patient Base number of locations staff is it or is there no is there not a straightforward answer from the financial perspective you know there&#39;s a lot of things you can centralize a lot of things that you can Outsource from the function whether it be revenue cycle management uh whether it does accounting or I.T or you know legal I know Scott access as a fractional lawyer as we act as a fractional CFO to many of his clients those functions as you&#39;re looking at the inflection point of your your growing organization if your three four five locations I see so many people go to a conference and say oh my gosh I heard about somebody built their call center out I need to go do that well maybe a million plus dollar investment you really wanting to do that and do you have somebody truly to run it um and are you going to add value for it you know truly you have to look at what your goal is if your goal is to get to 10 locations and transact try to do it as lean as possible if your goal is to get to 1015 locations go get lending and get the 2025 locations and keep building the story then we start talking about when&#39;s that inflection point what&#39;s the first thing you bring in-house when you bring on that first regional manager director of operation CFO CEO things along those lines to help you continue on that mistake it really becomes each BSO or DMO or DPO they have a story to tell and you have to kind of work with them on when do they interject those those pieces great cool um Scott if a small group has various lending sources should they be Consolidated prior to going to the next level typically if you it&#39;s one of the it&#39;s kind of an interesting thing and I&#39;ve had some new funds that have popped up in this sector with this General concept is oftentimes groups will take on private equity and they&#39;re just not ready for it they don&#39;t have a sophisticated enough CFO which is really the if I were to pick all the people in the organization this is probably the most valuable to getting to the next level is having a CFO that understands kpis uh understands the financials of the business because if you&#39;re looking to go to the next level you want to kind of make sure that that structure is sound and efficient and clear and you know unchallengeable for the most part your audits are going to come back clean so if you&#39;re getting ready to transition up yes I think it is a good idea to consolidate your debt get a good debt package in place and if possible get an accordion feature and with a good CFO comes the elimination of personal guarantees because when a bank can trust that your numbers are there and you have indicators in place that you can track and understand and you actually react to um it&#39;ll make them feel more comfortable with their lending packages so um it is a good idea to consolidate the debt get yourself cleaned up and kind of the pre-private equity is a group that would come in and take a minority position but they&#39;re often very Hands-On uh and I don&#39;t mean Hands-On necessarily from the day-to-day standpoint they&#39;re just more accessible and they can help you find people to help round out that team so that when you do go to market you&#39;re going to protect your value as much as possible from a dilution standpoint and this comes from a number of CEOs that rush to do deals and while they saw the value of the company explode into you know and often cases close to a billion dollars their net take at the time of retirement was nowhere should it was nowhere where it could have been had they been patient taking time to put those systems in place and gotten a better valuation when they first went to Market and those that don&#39;t you end up suffering that you know that accretion and value it goes to the bank and not to the founder under the company so it&#39;s a super important thing to to be cautious of um before you you approach actual private equities making sure that you&#39;ve perfected your model very good um Mike uh how important is having a combined or integrated software program when contemplating an acquisition by a larger DSO no it&#39;s you know there&#39;s a lot of ways to aggregate data so if you&#39;ve been acquiring practice and you have disparate systems you&#39;re working with Henry shine version you know 10.2 and 16.4 then you went to shine Ascend for the new practices then you overlay the Jarvis analytics you know as long as you can get the data out of the various systems and you have a process around it the biggest challenge we see when doing quality of earnings and from a diligence standpoint is these systems if we don&#39;t put procedures in place to close the procedures and close those days then we have post period adjustments happening we have the front desk making changes to something that happened two three four months ago so we&#39;re providing reports that are changing on a day-to-day basis week-to-week basis so you know getting that consistency and Reporting um is so key now as analytic systems and data and all that kind of stuff that is act there out there today what&#39;s critical is what are you doing with it I have so many people that have oh I have the latest and greatest Analytics tool UCLA we have our own tools well but it&#39;s like well who&#39;s looking at the data on a daily weekly monthly basis and what actions are they taking with that data there&#39;s a lot of great data to run a business which is Scott&#39;s Point that&#39;s CFO that Finance team to be able to deploy actions work with the operations work the front desk work with the provider and really understand how to move the needle in that practice and maximize the scheduling utilization maximize the patients and the P reimbursements it&#39;s so critical to be able to deploy all that the last thing I&#39;ve seen on that is make sure when you&#39;re looking at your practice management data you know your doctor day&#39;s work production per patient number of patients seen make sure you&#39;re correlating that back to your p l so my collections for my practice management say 100 000 and my Quickbooks file says 80 000 what happened is there a timing difference this could get back to your billing procedures you know how are we depositing money how you know when does it happen how are we receiving it things along those lines so make sure all those systems are really talking and interacting and somebody&#39;s measuring them against each other you you really shouldn&#39;t regardless of the software platform I think the more important thing is having access to real-time information if you&#39;re waiting a month to see your financials you have no way of really being able to manage or impact your big your your company or the profitability on a weekly basis you&#39;re coming a month in behind um so it&#39;s really important that you have that piece of the puzzle and still to this day Tom the side thing is most people I see when the financials are 90 days behind 110 days behind wow you know still to this day so getting a monthly is the first goal you know but I absolutely agree with Scott you know when you get to that next level they&#39;re looking at you know first drafts five ten days after a month then 15 days or the meeting boards and regional managers and all that stuff to make changes for that existing next month your year-end results should not be a surprise to you that&#39;s right for sure so we&#39;ve heard the term regional administrator uh what is that person and when&#39;s the right time to recruit for this position Mike you want to take a crack at it first yeah you know what&#39;s interesting I mean you will take not only the regional regional manager and operations manager director of Ops you know and building off of the conversation I mean this there&#39;s no school for regional managers right these are folks that have been internally grown within an organization they used to be a really great office manager a really good operations or really good you know scheduler you know um any of those functions that you can do within a single practice and they&#39;ve just been elevated over time to say oh you&#39;re really good at this will you come help me at this next location will you come help me at this location oh by the way don&#39;t forget to look after the other two locations you you uh used to be at as well and before you know it each regional manager is managing six seven locations I&#39;ve heard from one regional manager to 20 locations at some of the bigger groups but you really have to have that structure in place to be able to do that and and make sure the key to this is you know Talent not just hygienist assistance Regional CFOs CEOs it&#39;s all hard Talent defined you know we&#39;re training from other other Healthcare verticals we&#39;re training from other retail verticals to teach them this industry to bring them over there and help continue to grow this because there&#39;s not a lot of talent out there that just has grown up doing this for the last 15 20 years um so it&#39;s really a specialized thing but if you have good people invest in them help them continue to grow and find out what their career paths are and what they want to do when they grow up and make sure you&#39;re keeping them because it&#39;s so hard to find new ones for sure so uh Scott I have another question winding down now you mentioned a few minutes ago how critical it is to have a CFO uh and a good one what about having a CEO place and a CEO and those positions if they&#39;re if they&#39;re in place does that enhance the value of a group if you&#39;re going to be acquired I think the the answer for whether you need it might kind of alluded to this earlier like I can go out and acquire 10 practices get them Consolidated probably with 10 or fewer centralized management people you have your CFO maybe rev cycle accounts payable clerks and bookkeepers mostly that are on the financial side because you&#39;re tracking and and running these practices so I&#39;ll go back to it really depends on intent if you&#39;re looking to grow and formalize into a DSO and you&#39;re going to go out and do this pre-private equity and you&#39;re a group of doctors that are doing share site income who&#39;s going to do that chair side if you&#39;re out trying to Aggregate and buy practices so what you end up doing and I literally just gave a speech yesterday is if you don&#39;t have someone that&#39;s helping you buy those businesses and even if you do you are going to spend a lot of evenings shaking a lot of hands and talking to a lot of people because you&#39;re doing your chair side during the week so that leaves limited time to do the management side of your practice and then also in addition to that go out and try to acquire structure meet with your lawyers it can be a drag so if you&#39;re really aggressive about wanting to go out and get into a growth model you definitely should think about bringing in a COO or a COO that can help Drive um those business initiatives forward otherwise I don&#39;t know that it&#39;s from a value is it more valuable or not it&#39;s overall the look at a centralized management team and really the question is without putting more capital or investing in human capital in this business how many practices can they take on so we can buy another 50 practice with this Management Group that&#39;s a more valuable platform with the exact same ebitda where the compete the comparables well we can only buy another five practices and they&#39;ve meet they&#39;ve reached maximum bandwidth well I&#39;m a buyer and I believe in both choices I&#39;m going to pay more for the one that can take on 50 additional practices without having to invest in the infrastructure of the business so it&#39;s I know I&#39;m hedging the question Tom not really answering it but again it goes back to what&#39;s your angle of mind and then you kind of work back from there and sometimes goals change and you get to a standpoint you fall in love with your company and say I don&#39;t want to sell it well then you&#39;re at a crossroad and you got to start to figure out do I need a management team and where are my gaps in my blind spots um because you know in the short run you can burn the candle at both ends for a few years but after time you know it&#39;s taking life off your your years off your lifespan by doing that and you know enjoyment and all the other things of balance that you typically want in your life are going to disappear so it&#39;s a very personal question um that gets answered great good well I think the folks that are joined us today are beginning to appreciate that this is not a cookie cutter business there&#39;s no recipe that&#39;s strictly ABCD there&#39;s a lot of variables uh and that&#39;s why we wanted to address as many things tonight as we could obviously we touched a lot of points tonight and I&#39;m sure there are a ton of questions and we don&#39;t want those questions unanswered so we really encourage you to reach out to us there&#39;s various ways you can do that you can go to our website henryshyneddpt.com or email it DPT at stenile practice transitions at henryshine.com or call our toll-free number at 800-988-5674 and both myself or more importantly Scott and Mike would be very happy to chat with you uh they&#39;re extremely knowledgeable as you can you can see and they really are here to help so we encourage you to to to reach out and try to get some of your questions answered in addition uh if there are other areas you&#39;d like us to cover in our next program we would appreciate that we want to thank you for taking the time to join us and Circle this date on your calendar April 18th we&#39;re going to try to drill down a little bit more more deeply in some of the things that we covered because it&#39;s this program Series has been like a building block so we look forward to uh having you join us again on April 18th and I want to thank Mike and Scott for their time and their expertise and really enjoy tonight&#39;s program so thank you very much thanks so much thank you so much for that wonderful presentation and thank you all for joining us tonight we did record the webinar and we&#39;ll email out the recording sometime in the next week we would appreciate your feedback via our survey that will pop up on your screen shortly thanks again for joining us and we look forward to seeing you on future webinars good night [Music]

foreign my name is Blake and I will be your moderator tonight we&amp;#39;re joined by senior director of transition Services Dr Thomas Snyder and two we owned legal and financial experts Scott Crow and Mike White for part two of this three-part series before we get started I&amp;#39;d like to note that Henry shine is not offering CE credit for viewing or attending this presentation live or on demand welcome and thank you for being with us tonight I will pass it over to you now hello everyone I&amp;#39;m Tom Snyder senior director with Henry Schein Dental practice Transitions and uh we&amp;#39;re glad to be with you again for our second webinar in the three webinar series about dsos some of you may have joined us uh back in November for our first program and tonight we&amp;#39;re going to cover some new ground and get a little more in depth about dsos what is a DSO and do I need to establish one so before we get started I&amp;#39;d like to introduce my colleagues for today&amp;#39;s program uh Mr Scott Crowell Mr Mike so Scott let people know who you are uh good afternoon everyone my name is Scott Crowe I am a attorney at the law firm uh Dickinson rights I&amp;#39;ve been practicing north of 20 years now and have been doing Dental transactions for about that length of time as well um it&amp;#39;s a pleasure here to be here with everyone and hopefully we share some thoughts with you today that you find valuable Mike yeah I know I appreciate it and it&amp;#39;s hard to believe that we did the first webinar two and a half three months ago now it&amp;#39;s almost February um but yes my name is Mike White I&amp;#39;m a principal at CLA I excited to do this educational broadcast again uh one of the leaders here at you know the CLA I&amp;#39;ve been in the dental industry about 14 15 years now I&amp;#39;ve been practicing public accounting about 19. uh and you know really try to build a team around uh CFOs and Consultants that have ranged from three to 400 locations of knowledge base and helping the industry continue to grow and what what&amp;#39;s going on so this should be a good discussion today oh thank you very much okay let&amp;#39;s get started well consolidation in dentistry is nothing new uh we have other health care professions that have preceded us and they&amp;#39;re pretty much complete however Dentistry even though we&amp;#39;ve been consolidating for probably 20 years Scott or Mikey could confirm whether that&amp;#39;s uh about right but we&amp;#39;re still I guess you could say in the relatively early stages because some of the statistics I&amp;#39;m going to share with you will kind of attest to the fact that they&amp;#39;re still a lot more mileage to go in this highway of consolidation so a couple of points I wanted to talk to you about briefly uh Still Believe It or Not that even though we continue to grow with large group practices most of Dentistry is still performed in single practice locations and however we&amp;#39;ve seen a lot of changes for example as of 2021 the Ada&amp;#39;s Health policy Institute reported that only 46.2 percent of dentists were considered solo practitioners that ratio has decreased greatly uh when about 15 years ago 67 percent were considered solos in 2019 only one in four dentists under the age of 35 were in Solo practice so we&amp;#39;re seeing a big sea change with younger practitioners and of course uh as those of you who are now in the multiple uh location uh space you&amp;#39;re finding that you&amp;#39;re having a hard time uh recruiting and retaining Dental staff for example uh the whole profession since covet has experienced shortages and difficulty in hiring dental hygienists and dental assistants and in some cases associate dentists if we look at U.S locations uh United States look at group practices large group practices of over 50 Plus locations about 5.9 percent uh that represents about 9.5 percent of dentists if we look at the small multi-location groups which we characterize between 2 and 49 locations that&amp;#39;s about 25.7 or about 26 percent of all dentists so I would assume that many of you on this program tonight probably fall into that category of 2 to 49 or maybe you&amp;#39;re still a single entity and you&amp;#39;re thinking of going to the next level but you can see 68.4 percent are still unaffiliated single location practices which is about 65 percent of dentists so as I said earlier consolidation is still going on and there&amp;#39;s a lot of room to grow if we look at small group practices by location by meaning number of locations and this data came from Dental Market IQ with the webinar they presented recently this data is current as of October 2022. so we see for the 20 to 49 locations there&amp;#39;s 76 Dental groups but when we look at the 5 to 19 locations we have over 1100 Dental groups four locations 783 three locations 1988 and two locations close to fourteen thousand Dental groups so you can see there&amp;#39;s a lot of variation and a lot of questions that many of you may uh be uh considering and hopefully we&amp;#39;re going to answer some of those today there&amp;#39;s a new generation of dental graduates now and they look at things differently than when folks like me entered the profession where the majority of us wanted to be business owners but that&amp;#39;s been changing and changing radically we see that ownership rates in private practice have been declining in 2005 roughly 85 percent were Dental business owners in 2021 that number decreased to 73 percent and it continues to drop and one in five dentists under the age of 35 are affiliated with the DSO so going into the future with less dentists aspiring to be business owners there&amp;#39;s going to be an a pretty ample supply of doctors who can work in this group practice environment okay so uh now we&amp;#39;ll get started with some questions we have a number of questions we put together that hopefully we&amp;#39;re going to address tonight uh that give you some insight into what&amp;#39;s going on uh and so uh the first question I&amp;#39;m going to direct to Scott so what makes a DSO a DSO uh it&amp;#39;s an interesting question um it&amp;#39;s really two different facets one is in the in the legal sense the dental service organization is a bifurcated structure where you have the management company sits outside the PC so you have the practitioner the professional corporations that are owned by the doctors enter into agreements with the Management Group um that then draws the profitability outside out of the professional Corporation exchange for the provision of services but in its true a sense dsos come in all sizes and shapes and there&amp;#39;s no single set um example of what exists if you canvassed all the larger players in the country they all have new nuances with inside of their DSO structures and how they partner with their doctors and that&amp;#39;s really where the differences lies how are they actually partnering with the doctors that are providing and producing the revenue on a daily basis but what it really means is you&amp;#39;ve got a centralized management team the DSO is is where you create a centralized Management Group that as in you know your management level employees meaning all of your non-clinical uh individuals are are centralized in providing Services across the board to all the professional corporations that exist as part of their Network that doesn&amp;#39;t mean it has to be legally set up as a DSO you could have a single practice that has a large Management Group that is providing Management Services to other practices so um again it comes in all shapes and sizes but what it really means is a centralized management because if you set up a DSO structure uh and you&amp;#39;re aggregating professional corporations together so say two or three local groups come together and they decide they want to form a DSO without centralized management you may Garner a bigger multiple just because you&amp;#39;re putting and posting a bigger Revenue number and more importantly a bigger profit number on the scoreboard but really if you&amp;#39;re looking for premium pricing dsos or private Equity groups that are looking to acquire are really looking for a management group that is able to take on additional professional corporations so there&amp;#39;s one thing to call yourself a DSO but really it&amp;#39;s not the legal structure that makes you a diasto it&amp;#39;s decentralized management function that really creates that that DSS structure that&amp;#39;s often referenced great and I think that&amp;#39;s so just uh I don&amp;#39;t know I think that&amp;#39;s so critical because I know Scott&amp;#39;s met folks I&amp;#39;ve met folks and Tony probably have as well that you know I say oh I have my DSO set up and so I asked for the legal documents they may or may not be there but then I go look into Financial records and they&amp;#39;ve done nothing to follow the path of what the DSO laid out to stay in compliance to manage the service agreements and do all that stuff so it&amp;#39;s as important of setting up the structure and getting the least right as it is is implementing that DSO to get that valuation that Scott was referencing you know in his conversation great thanks so uh I&amp;#39;m not going to direct this to you and I know we touched this in November&amp;#39;s webinar but I&amp;#39;m sure there&amp;#39;s a lot of people on tonight&amp;#39;s uh program that did not attend so we&amp;#39;re going to be a little redundant with a couple of things and the first thing it is is uh why and how is ebitda calculated during acquisitions yeah well hopefully this conversation gets them to go back and watch the uh the first one so you know this is such a great conversation right the uh short answer is what is Evita you know earnings before interest taxes depreciation amortization right the simplest form what does that mean in the hands of a buyer and what does that mean in the hands of a seller what the buyer is looking for is truly what is the net earnings that they&amp;#39;re going to leave behind um what are they acquiring so in the simplest sense using big numbers and simple numbers if I&amp;#39;m the producer of my net profit&amp;#39;s a million dollars but that includes me you know doctor production um so I&amp;#39;m going to take four hundred thousand dollars out to continue to practice then you&amp;#39;re selling six hundred thousand of ebitda right not the full million which is what I&amp;#39;ve heard so many times before um you know from that conversation but I have a million in profit but you have to still get paid to do production as a provider and all that stuff so what&amp;#39;s critical and how we summarize it is it truly is what what is being left behind for the buyer to acquire the other fun part of this and we all know this is the perception of a seller&amp;#39;s ebitdon the perception of the buyer&amp;#39;s ebitda is often different you try to get there as closely as possible but it becomes a negotiation of what truly centralized Services they already have in place as a buyer what do you have on your team that may be redundant or may gain efficiencies in the you know hands of the buyer so those are all things you&amp;#39;re trying to understand from that buyer&amp;#39;s perspective as a seller and all things you want to know to maximize your valuation as a seller to that buyer hopefully I didn&amp;#39;t say all those words too many times so no you did so he&amp;#39;s got a would you say with all you know all the years you&amp;#39;ve been in this space do most of the DSU dsos calculate ebitda uh pretty much the same or are there variations to that well the the answer is yes I mean it&amp;#39;s it&amp;#39;s a gap-based calculation so there&amp;#39;s not a lot of variation in the methodology that goes into what is Eve it up but there is uh the concept of adjustments or add backs so what truly falls into reoccurring expenses versus on-time expenses parties can have very different viewpoints on what that means or whether it should apply or not that&amp;#39;s often part of the negotiation um sometimes you get to see the sellers or the buyers calculation of ebitda and how they got to there oftentimes they will not share their their full quality of earnings report or review with the potential seller because there&amp;#39;s often other things in that report that they&amp;#39;re not wanting to or willing to share in other words the synergies that they&amp;#39;re expecting to pick up an additional value which offsets some of those items the the thing that really varies on a on a DSO to DSO basis from evaluating standpoint is you know you see this a lot in an auction process where buyers come in and they&amp;#39;re bidding often have very different viewpoints on the multiple that should apply to that ebitda and ebitda and malt or just uh Common Sense ways of portraying to a seller what really is a present valuation of cash flow analysis that they are then converting into an even bit of calculation so having a conversation on the LA on the first would be very difficult for a seller to understand but in even at times a multiple is something that they can get their arms around can be customary in the marketplace so that&amp;#39;s where you get the variations but in general yes even as is pretty much calculated generally in the same fashion by all parties not just in healthcare sector but really across the entire financial industry to provide and selling businesses great so I&amp;#39;m going to Tom one thing we&amp;#39;re starting to see oh real quick sorry one thing we&amp;#39;re starting to see more and Scott kind of references the buyer is going to be doing due diligence through a quality of earnings depending on size quality Bernie&amp;#39;s light or a full scope um we&amp;#39;re starting to see more and more sellers be diligence ready by going through their own sell side quality of earnings through the process to find those skeletons have the discussions look for those ad back adjustments that the buyer may or may not give them credit for but they&amp;#39;re ready to have the discussion especially when we get those opportunities and we&amp;#39;re seeing the financials may not be in as good of a shape as they should be in that diligence process which is a driving factor in in telling the story for your financials so it&amp;#39;s a very good point Mike that we anytime I have a new client that comes and they&amp;#39;re looking to either get an investment bank or engage or they&amp;#39;re talking about selling their company it doesn&amp;#39;t matter what the industry is that they&amp;#39;re in my speech to them is always the same I have your lawyers come in and do your legal diligence and have your accountants come in and do a quality of earnings analysis and if they&amp;#39;re not capable of doing it find someone that is because the the I don&amp;#39;t want to call them games because they&amp;#39;re not necessarily games that are being played by private Equity when they&amp;#39;re making an offer to acquire your practice they&amp;#39;re doing it based off the financials that you have produced so they&amp;#39;re unadjusted untested they&amp;#39;re taking them at face value and you have an Loi that you sign and there&amp;#39;s usually a purchase price adjustment in there either upwards or downwards for the quality of earnings analysis when you go out and get your own Q of e and your financials are based off of that you have a less likelihood of getting an adjustment because you&amp;#39;ve had someone of the skill that&amp;#39;s able to produce that that earnings analysis that should come back relatively comparable they often don&amp;#39;t come back apples to capitals but they&amp;#39;re much closer and it and it also gives you the ability to bring in your accountants that they come back and say your earnings are X when you portrayed y and you start to dig into how did you get there you&amp;#39;ve done your homework so you&amp;#39;re not caught with your you know so to speak pants down where you&amp;#39;re unprepared to have those conversations so if you&amp;#39;re really looking to protect your purchase price which is why you&amp;#39;re entering into this transaction to begin with you should be doing the legal diligence and you should be doing the financial diligence because those are the two things that don&amp;#39;t always kill a deal um but they will certainly affect price so gentlemen so in quality of earnings for those folks who haven&amp;#39;t gone through it is it similar to an audit and is it what&amp;#39;s involved it sounds like it&amp;#39;s I know it&amp;#39;s a pretty big deal so maybe just give our viewers yeah yeah quality of earnings it&amp;#39;s it&amp;#39;s actually quite different than an audit we&amp;#39;re actually seeing more and more Bankers uh utilize it in lieu of an audit as they start going through their own underwriting process as well we are testing some things right we are doing you know it depends on the scope of the engagement but we are testing Revenue procedures so cash proof so the deposits you said you hit the bank actually hit the bank hit the Quant accounting file and and uh hit the practice management system so we&amp;#39;re making sure all those things tie out we&amp;#39;re understanding what the payroll procedures are what the rent schedule is any of those you know add back items saying hey I ran my boat through my car through and all my Vacations so we&amp;#39;re going to take all those adjustments have you justify them to us as those advisors and say yep there is support for this this will not be recurring in the hands of the buyer and trying to you know if they plead the case for the seller uh to be able to represent those ad boxes and adjustments so it it truly is it is justifying the earnings or qualifying the earnings of that organization and when we do the buy side as Scott just mentioned as a buyer we&amp;#39;re going through and trying to pick apart and tell the story but if we&amp;#39;re getting bad financial data if we&amp;#39;re not getting you know data if you can&amp;#39;t tell us the ad backs or adjustments we&amp;#39;re just going to assume they&amp;#39;re not there and we&amp;#39;re going to give you a less than valuable ebitda because we can&amp;#39;t figure it out ourselves so you have to be able to work with your advisors on the sell side you have to be able to know your financials intimately enough you know we can&amp;#39;t stress it enough and transactions you know miscoding something not doing your accounting properly when we&amp;#39;re talking about a multiple if a thousand dollar miscoding it&amp;#39;s now maybe seven thousand dollar valuation impact we take that to a hundred thousand now it&amp;#39;s a 700 000 valuation impact so those numbers really add up fairly quickly and so so many times when we were talking about it&amp;#39;s like look invest in your financials invest in your legal structure you&amp;#39;re going to get the return on that investment right okay so let&amp;#39;s uh switch gears now and talk a little bit about our economy and of course we&amp;#39;ve heard lots of people say we&amp;#39;re gonna have a recession we may have a recession it&amp;#39;s a light a hardware is it 23 is it 24 when and if it does occur uh will that have an impact on consolidation activity and and if so to what degree I think whoever wants to go first you want to take a shot at it Mike yeah I&amp;#39;m I&amp;#39;m happy to and I know Scott we&amp;#39;re going to have a similar you know what we&amp;#39;re seeing we haven&amp;#39;t seen the impact on the valuations thus far that&amp;#39;s not saying we won&amp;#39;t right A lot of these deals are debt financed on the back end so you have Rising interest rate costs valuation costs that&amp;#39;s going to impact that valuation what we&amp;#39;re still getting is a little bit of carryover from covid where all these private Equity investors had money and had balance sheet cash to burn and get deployed so they too could get their return on investment from that structure when that runs out when that tips over q1 Q2 I don&amp;#39;t know depends on what does happen with these recessionary indicators you know one day it&amp;#39;s bad news Doom and Gloom one day it&amp;#39;s great news and things are still looking up so you know we&amp;#39;re still seeing transactions getting done and for those buyers that we&amp;#39;ve been working with and same with Scott for years and years they&amp;#39;re still buying they&amp;#39;re just looking at things harder they may be saying okay we&amp;#39;ll give you a little bit of credit here but maybe it&amp;#39;s in a deferred term structure because you&amp;#39;ve got to prove those ad backs maybe it&amp;#39;s you know something along those times from a term structure maybe we won&amp;#39;t give you as much role of equity value as we would have before so things are going to change that way but there&amp;#39;s still activity happening today great yeah I I agree with that it&amp;#39;s interesting um after covid I&amp;#39;ve actually been like maybe you&amp;#39;ve seen this maybe you haven&amp;#39;t is especially for the one and two location practices multiples is actually crept up a little bit that they were getting a higher purchase price which means there&amp;#39;s if you&amp;#39;re reading the tea leaves it means it&amp;#39;s a relatively competitive environment out there for well-run practices and that likely will be continued to be the to be the case regardless of recession or not um I mean this industry the one thing about it if you look back over the history of it it is relatively recession particularly if you&amp;#39;re operating on a group basis because you can diversify away from particular Geographic or owner instances where you have a stress donor or stress geographic region um so I think there will continue to be acquisitive I think PE is you know still Gathering funds still packed with cash they have fuses on that money so it has to be spent at some point and deployed um so yes I I agree with Mike I think you&amp;#39;ll continue to see consolidation what you do see differently though that&amp;#39;s developed over the last five to ten years is this hedge against we paid X for the practice based on this level production and at that production dips or profitability dips post-closing then we&amp;#39;re going to take it out on the seller so you sold us excellent amount of Revenue in exchange for that we expect you to enter into a contract to work for us for X number of years and fulfill that contract and to the extent you don&amp;#39;t we will claw back some of the purchase price usually in the form of equity that&amp;#39;s taken away from you and also if you come on board with us and you don&amp;#39;t hit the profitability numbers we&amp;#39;ll also claw back that Equity so usually that Equity was only risk if there was some sort of damage claim an Indemnity claim that something told them about the business was untrue but now there&amp;#39;s this peak under the into the future of if you don&amp;#39;t then we&amp;#39;ve overpaid for the practice and and we&amp;#39;re not willing to pay that price so that is definitely something I think that&amp;#39;s here to stay I see it in the other medical sectors outside of dental um and and I just don&amp;#39;t see that Trend uh going going by the wayside anytime soon great okay Mike we hear the terms DPO hso and SPO are being bantered about are there any differences in these terms uh is it just nomenclature yeah yeah for DMO I&amp;#39;ve heard yeah I&amp;#39;ve heard all sorts of nomenclature and I and I&amp;#39;m not saying there may not be some variations to the model you know ultimately when you&amp;#39;re meeting with somebody you know you know some people say the DSO term has gotten a negative connotation so they&amp;#39;re trying to you know Market against that and make sure that people are comfortable they try to make some slight variations into their model and how you&amp;#39;re buying in and running alongside maybe you have a little more equity on the roll and so they give that a different name so they can change themselves when the conversation say we&amp;#39;re not like dsoa we&amp;#39;re a DPO but you really have to from a mathematical standpoint and a legal standpoint really walk through what does my life look like what are they taking over administratively what are they taking off my plate what&amp;#39;s their vision for the future what&amp;#39;s the next turn life like are they planning on taking another private Equity event here in 12 months are they three to five years are we early in the phase so maybe I get more Equity there&amp;#39;s a lot of things for you to think about other than the nomenclature of what you&amp;#39;re are they&amp;#39;re marketing to you really what is it that you&amp;#39;re buying into or selling to within your practice makes a lot of sense cool love to hear Scott&amp;#39;s take if he uh he writes his documents any differently uh well not that differently to the beginning who acts like a duck and acts like a duck it&amp;#39;s a duck yeah there you go so Scott uh when is the right time to organize as a formal DSO uh is it based on practice size number of practices already in place or other factors uh it I get asked that question a lot um particularly with new clients that are looking to grow um and the answer I give them is is the one I&amp;#39;ll give here which is it really depends on your intent um because I like to start with any structure uh whether it&amp;#39;s even if you land on the DSO structure there&amp;#39;s even nuances within that so if they say they want a DSO it&amp;#39;s really what&amp;#39;s your end goal what are you looking to accomplish and then you kind of work your way backwards from there and when you work your way backwards you can figure out as a group does this make sense to make the investment to convert to a formal DSO today um and if you want to what are the hurdles oftentimes these practices someone will come in with four practices all been individually financed well you can&amp;#39;t necessarily create a DSO structure without bank consent or without refinancing all those assets and oftentimes they don&amp;#39;t want to do that or you have groups that come together and say hey we want to form our own DSO in the city of Columbus and again debt will restrict them from doing so and they&amp;#39;re not really to well they talk about formula DSL once you explain to them what the realities of what it will mean on a go forward basis and there&amp;#39;s different variations sometimes they they lose appetite sometimes they&amp;#39;ll pivot to doing what I call a DSO light which is not moving their assets not co-mingling but really entering in and forming a management company and moving the employees over which is unwindable um type of structure so you move your employees over they act as centralized management and then if a group decides to break away they could and they could take their employees back it&amp;#39;s a way to test and see and get used to what a DSO is as opposed to jumping in and as Mike said if left to their own means you go back a year later you typically will find a mess is what you&amp;#39;ll find that they didn&amp;#39;t fully understood understand what it really meant to be a DSO so the legal on accounting can always be ahead of really the practicalities of building a team and who are the key persons that you need to run the organization so it&amp;#39;s always with the end goal in mind as to whether a DSO is right for you now or or in the future great okay uh Mike uh what&amp;#39;s the best investment a small group can make when preparing for a transition to the next level of operational size yeah no it&amp;#39;s I&amp;#39;m going to say financials right I I of course being a CPA kind of guy but I think I&amp;#39;m going to build off what Scott said earlier you know whether you&amp;#39;re forming a DSO again depending on what your Lifeline if you&amp;#39;re performing a DSO to sell and transact now most likely the buyer has a DSL route already so don&amp;#39;t spend that money invest so then just revert back but spending the money and making sure your financials are in good working order you&amp;#39;re telling the right Story You&amp;#39;ve added back and gotten some of the noise of the personal expenses out you understand the semantics of your business and you&amp;#39;ve looked for those opportunities and savings and supplies and staff and marketing and lab and all those areas that we all talk about from that standpoint but the most important thing I don&amp;#39;t say the most important thing Scott said but one of the most important things Scott said it truly is how are you acting as an organization whether you&amp;#39;re formerly a DSO you&amp;#39;re a management company a DSO light or just multiple practices working together how are you interacting what are those service this agreement saying how does your business flow are you you know allocating the expenses across practices are you tracking Revenue do you have the bank accounts do you understand what services you are offering centralized billing scheduling accounting a thr any of those functions and what does that mean to your organization to truly have somebody be interested in taking you to the next level or even if you&amp;#39;re in that stage where you&amp;#39;re growing your DSO yourself or your multi-group location the banker is your investor what are they looking at you for from a lending perspective do they want to give you money and Bank on you to be successful as you grow your group okay uh you know maybe along along with what you just said if it&amp;#39;s a small group when do you maybe consider going to a centralized building and use of a call center is it is it based on size of the patient Base number of locations staff is it or is there no is there not a straightforward answer from the financial perspective you know there&amp;#39;s a lot of things you can centralize a lot of things that you can Outsource from the function whether it be revenue cycle management uh whether it does accounting or I.T or you know legal I know Scott access as a fractional lawyer as we act as a fractional CFO to many of his clients those functions as you&amp;#39;re looking at the inflection point of your your growing organization if your three four five locations I see so many people go to a conference and say oh my gosh I heard about somebody built their call center out I need to go do that well maybe a million plus dollar investment you really wanting to do that and do you have somebody truly to run it um and are you going to add value for it you know truly you have to look at what your goal is if your goal is to get to 10 locations and transact try to do it as lean as possible if your goal is to get to 1015 locations go get lending and get the 2025 locations and keep building the story then we start talking about when&amp;#39;s that inflection point what&amp;#39;s the first thing you bring in-house when you bring on that first regional manager director of operation CFO CEO things along those lines to help you continue on that mistake it really becomes each BSO or DMO or DPO they have a story to tell and you have to kind of work with them on when do they interject those those pieces great cool um Scott if a small group has various lending sources should they be Consolidated prior to going to the next level typically if you it&amp;#39;s one of the it&amp;#39;s kind of an interesting thing and I&amp;#39;ve had some new funds that have popped up in this sector with this General concept is oftentimes groups will take on private equity and they&amp;#39;re just not ready for it they don&amp;#39;t have a sophisticated enough CFO which is really the if I were to pick all the people in the organization this is probably the most valuable to getting to the next level is having a CFO that understands kpis uh understands the financials of the business because if you&amp;#39;re looking to go to the next level you want to kind of make sure that that structure is sound and efficient and clear and you know unchallengeable for the most part your audits are going to come back clean so if you&amp;#39;re getting ready to transition up yes I think it is a good idea to consolidate your debt get a good debt package in place and if possible get an accordion feature and with a good CFO comes the elimination of personal guarantees because when a bank can trust that your numbers are there and you have indicators in place that you can track and understand and you actually react to um it&amp;#39;ll make them feel more comfortable with their lending packages so um it is a good idea to consolidate the debt get yourself cleaned up and kind of the pre-private equity is a group that would come in and take a minority position but they&amp;#39;re often very Hands-On uh and I don&amp;#39;t mean Hands-On necessarily from the day-to-day standpoint they&amp;#39;re just more accessible and they can help you find people to help round out that team so that when you do go to market you&amp;#39;re going to protect your value as much as possible from a dilution standpoint and this comes from a number of CEOs that rush to do deals and while they saw the value of the company explode into you know and often cases close to a billion dollars their net take at the time of retirement was nowhere should it was nowhere where it could have been had they been patient taking time to put those systems in place and gotten a better valuation when they first went to Market and those that don&amp;#39;t you end up suffering that you know that accretion and value it goes to the bank and not to the founder under the company so it&amp;#39;s a super important thing to to be cautious of um before you you approach actual private equities making sure that you&amp;#39;ve perfected your model very good um Mike uh how important is having a combined or integrated software program when contemplating an acquisition by a larger DSO no it&amp;#39;s you know there&amp;#39;s a lot of ways to aggregate data so if you&amp;#39;ve been acquiring practice and you have disparate systems you&amp;#39;re working with Henry shine version you know 10.2 and 16.4 then you went to shine Ascend for the new practices then you overlay the Jarvis analytics you know as long as you can get the data out of the various systems and you have a process around it the biggest challenge we see when doing quality of earnings and from a diligence standpoint is these systems if we don&amp;#39;t put procedures in place to close the procedures and close those days then we have post period adjustments happening we have the front desk making changes to something that happened two three four months ago so we&amp;#39;re providing reports that are changing on a day-to-day basis week-to-week basis so you know getting that consistency and Reporting um is so key now as analytic systems and data and all that kind of stuff that is act there out there today what&amp;#39;s critical is what are you doing with it I have so many people that have oh I have the latest and greatest Analytics tool UCLA we have our own tools well but it&amp;#39;s like well who&amp;#39;s looking at the data on a daily weekly monthly basis and what actions are they taking with that data there&amp;#39;s a lot of great data to run a business which is Scott&amp;#39;s Point that&amp;#39;s CFO that Finance team to be able to deploy actions work with the operations work the front desk work with the provider and really understand how to move the needle in that practice and maximize the scheduling utilization maximize the patients and the P reimbursements it&amp;#39;s so critical to be able to deploy all that the last thing I&amp;#39;ve seen on that is make sure when you&amp;#39;re looking at your practice management data you know your doctor day&amp;#39;s work production per patient number of patients seen make sure you&amp;#39;re correlating that back to your p l so my collections for my practice management say 100 000 and my Quickbooks file says 80 000 what happened is there a timing difference this could get back to your billing procedures you know how are we depositing money how you know when does it happen how are we receiving it things along those lines so make sure all those systems are really talking and interacting and somebody&amp;#39;s measuring them against each other you you really shouldn&amp;#39;t regardless of the software platform I think the more important thing is having access to real-time information if you&amp;#39;re waiting a month to see your financials you have no way of really being able to manage or impact your big your your company or the profitability on a weekly basis you&amp;#39;re coming a month in behind um so it&amp;#39;s really important that you have that piece of the puzzle and still to this day Tom the side thing is most people I see when the financials are 90 days behind 110 days behind wow you know still to this day so getting a monthly is the first goal you know but I absolutely agree with Scott you know when you get to that next level they&amp;#39;re looking at you know first drafts five ten days after a month then 15 days or the meeting boards and regional managers and all that stuff to make changes for that existing next month your year-end results should not be a surprise to you that&amp;#39;s right for sure so we&amp;#39;ve heard the term regional administrator uh what is that person and when&amp;#39;s the right time to recruit for this position Mike you want to take a crack at it first yeah you know what&amp;#39;s interesting I mean you will take not only the regional regional manager and operations manager director of Ops you know and building off of the conversation I mean this there&amp;#39;s no school for regional managers right these are folks that have been internally grown within an organization they used to be a really great office manager a really good operations or really good you know scheduler you know um any of those functions that you can do within a single practice and they&amp;#39;ve just been elevated over time to say oh you&amp;#39;re really good at this will you come help me at this next location will you come help me at this location oh by the way don&amp;#39;t forget to look after the other two locations you you uh used to be at as well and before you know it each regional manager is managing six seven locations I&amp;#39;ve heard from one regional manager to 20 locations at some of the bigger groups but you really have to have that structure in place to be able to do that and and make sure the key to this is you know Talent not just hygienist assistance Regional CFOs CEOs it&amp;#39;s all hard Talent defined you know we&amp;#39;re training from other other Healthcare verticals we&amp;#39;re training from other retail verticals to teach them this industry to bring them over there and help continue to grow this because there&amp;#39;s not a lot of talent out there that just has grown up doing this for the last 15 20 years um so it&amp;#39;s really a specialized thing but if you have good people invest in them help them continue to grow and find out what their career paths are and what they want to do when they grow up and make sure you&amp;#39;re keeping them because it&amp;#39;s so hard to find new ones for sure so uh Scott I have another question winding down now you mentioned a few minutes ago how critical it is to have a CFO uh and a good one what about having a CEO place and a CEO and those positions if they&amp;#39;re if they&amp;#39;re in place does that enhance the value of a group if you&amp;#39;re going to be acquired I think the the answer for whether you need it might kind of alluded to this earlier like I can go out and acquire 10 practices get them Consolidated probably with 10 or fewer centralized management people you have your CFO maybe rev cycle accounts payable clerks and bookkeepers mostly that are on the financial side because you&amp;#39;re tracking and and running these practices so I&amp;#39;ll go back to it really depends on intent if you&amp;#39;re looking to grow and formalize into a DSO and you&amp;#39;re going to go out and do this pre-private equity and you&amp;#39;re a group of doctors that are doing share site income who&amp;#39;s going to do that chair side if you&amp;#39;re out trying to Aggregate and buy practices so what you end up doing and I literally just gave a speech yesterday is if you don&amp;#39;t have someone that&amp;#39;s helping you buy those businesses and even if you do you are going to spend a lot of evenings shaking a lot of hands and talking to a lot of people because you&amp;#39;re doing your chair side during the week so that leaves limited time to do the management side of your practice and then also in addition to that go out and try to acquire structure meet with your lawyers it can be a drag so if you&amp;#39;re really aggressive about wanting to go out and get into a growth model you definitely should think about bringing in a COO or a COO that can help Drive um those business initiatives forward otherwise I don&amp;#39;t know that it&amp;#39;s from a value is it more valuable or not it&amp;#39;s overall the look at a centralized management team and really the question is without putting more capital or investing in human capital in this business how many practices can they take on so we can buy another 50 practice with this Management Group that&amp;#39;s a more valuable platform with the exact same ebitda where the compete the comparables well we can only buy another five practices and they&amp;#39;ve meet they&amp;#39;ve reached maximum bandwidth well I&amp;#39;m a buyer and I believe in both choices I&amp;#39;m going to pay more for the one that can take on 50 additional practices without having to invest in the infrastructure of the business so it&amp;#39;s I know I&amp;#39;m hedging the question Tom not really answering it but again it goes back to what&amp;#39;s your angle of mind and then you kind of work back from there and sometimes goals change and you get to a standpoint you fall in love with your company and say I don&amp;#39;t want to sell it well then you&amp;#39;re at a crossroad and you got to start to figure out do I need a management team and where are my gaps in my blind spots um because you know in the short run you can burn the candle at both ends for a few years but after time you know it&amp;#39;s taking life off your your years off your lifespan by doing that and you know enjoyment and all the other things of balance that you typically want in your life are going to disappear so it&amp;#39;s a very personal question um that gets answered great good well I think the folks that are joined us today are beginning to appreciate that this is not a cookie cutter business there&amp;#39;s no recipe that&amp;#39;s strictly ABCD there&amp;#39;s a lot of variables uh and that&amp;#39;s why we wanted to address as many things tonight as we could obviously we touched a lot of points tonight and I&amp;#39;m sure there are a ton of questions and we don&amp;#39;t want those questions unanswered so we really encourage you to reach out to us there&amp;#39;s various ways you can do that you can go to our website henryshyneddpt.com or email it DPT at stenile practice transitions at henryshine.com or call our toll-free number at 800-988-5674 and both myself or more importantly Scott and Mike would be very happy to chat with you uh they&amp;#39;re extremely knowledgeable as you can you can see and they really are here to help so we encourage you to to to reach out and try to get some of your questions answered in addition uh if there are other areas you&amp;#39;d like us to cover in our next program we would appreciate that we want to thank you for taking the time to join us and Circle this date on your calendar April 18th we&amp;#39;re going to try to drill down a little bit more more deeply in some of the things that we covered because it&amp;#39;s this program Series has been like a building block so we look forward to uh having you join us again on April 18th and I want to thank Mike and Scott for their time and their expertise and really enjoy tonight&amp;#39;s program so thank you very much thanks so much thank you so much for that wonderful presentation and thank you all for joining us tonight we did record the webinar and we&amp;#39;ll email out the recording sometime in the next week we would appreciate your feedback via our survey that will pop up on your screen shortly thanks again for joining us and we look forward to seeing you on future webinars good night [Music]

Transcript for:DSOs & Transition Services Webinar: Part 2

Transcript for:
DSOs & Transition Services Webinar: Part 2