Part 2: Understanding the Factors Influencing Business Multiples with Ryan Mingus
Dec 22, 2023
Austin Hair - Real Estate Developer
Unravel the impact of the Fed and interest rate changes on the healthcare industry in part two of our fascinating discussion with Ryan Mingus from Tusk Partners. Brace yourself as we demystify how market fluctuations affect deal size and multiples, along with the influence of employment contracts on business owners. Despite the market's unpredictability, we underscore the importance of persisting with opportunities and not falling into the trap of attempting to time it all.
Transitioning from the healthcare sector to the dental industry, we put the spotlight on how EBITDA and geography play a pivotal role in determining multiples. Depending on the size of your EBITDA, the range of multiples your business can expect is set. Be aware, though, that once you hit the $5 million mark, the returns start diminishing. Geographic location, too, impacts multiples, with states like Arizona, Texas, and Tennessee emerging as hotspots due to their attractive labor policies and population growth. Lastly, we shed light on the stark contrast in multiples between high-profile cities and mid-tier ones, highlighting the role of population growth in upping a business's value.
Unravel the impact of the Fed and interest rate changes on the healthcare industry in part two of our fascinating discussion with Ryan Mingus from Tusk Partners. Brace yourself as we demystify how market fluctuations affect deal size and multiples, along with the influence of employment contracts on business owners. Despite the market's unpredictability, we underscore the importance of persisting with opportunities and not falling into the trap of attempting to time it all.
Transitioning from the healthcare sector to the dental industry, we put the spotlight on how EBITDA and geography play a pivotal role in determining multiples. Depending on the size of your EBITDA, the range of multiples your business can expect is set. Be aware, though, that once you hit the $5 million mark, the returns start diminishing. Geographic location, too, impacts multiples, with states like Arizona, Texas, and Tennessee emerging as hotspots due to their attractive labor policies and population growth. Lastly, we shed light on the stark contrast in multiples between high-profile cities and mid-tier ones, highlighting the role of population growth in upping a business's value.
The goal of this show is to help healthcare organizations scale by leveraging real estate strategies and interviewing high-level healthcare executives who are actively in the trenches in order to pull out lessons learned along the way. If you'd like a free site selection analysis from our team, or you'd like to learn more about how we're acquiring real estate through our fund on the blockchain, visit us at wwwreuniversityorg and drop us a line that's RE as in real estate universityorg.
Speaker 2:
Hey guys, this is part two of our episode that we recorded with Ryan Mingus from Test Partners and just as a recap we are talking about how the industry and the M&A markets have been affected by all the recent changes from the Fed and interest rates and so forth.
Speaker 2:
And part two is very exciting and we hope you guys enjoy it. I want to talk about geographies as well, but I don't want to talk about how deal size, and even size, affects multiples. And before that, to your point about the employment contract. It's interesting when you think about the fact that somebody sells for a 5X and then they have a 5-year employment agreement, so in a sense it's offsetting a lot of that equity that they've retained when they have to stay on and work and not get any of the upside of the business. How do people, how do they feel about that? And are they like that, something that's negotiable, or is that just pretty much industry standard?
Speaker 3:
Yeah, I mean, everything's negotiable. Circumstances matter Like how difficult is it to replace you? What is it easy to attract doctors to your business? You already have doctors in the fold that can absorb some of your collection, so you can retire in two years instead of five years. There are just so many different things to consider there. But if you are a key person in that business from a revenue production standpoint, you need to be able to paint a picture for how you're going to be replaced if you want to sign something less than a 5-year employment agreement. But yeah, a do nothing scenario. Comparison or status quo is what we call it in our modeling is always something that we model out side by side to the offers that are coming in, because we have the privilege of working with some really great business owners that have the luxury of hey, maybe I'll just run this thing for 10 years and maybe I just have to give it away to my associates, but I'd rather do that than sell to a DSO and answer to somebody.
Speaker 2:
Yeah, yeah, that's like the interesting part. You're making a lot of money when you own a company because now, especially if you're a clinician, now you're taking the clinician side and you're taking all of the EBITDA and then if you sell it we had to stay on for five years and you're getting a 5X then all of a sudden, there goes, you're making the same thing as if you'd stayed on and not sold it.
Speaker 3:
Yeah.
Speaker 3:
Yeah, it's just when they created an asset that is worth that would comprise if they put their net worth into a pie chart and their business is comprised of 60% or greater of their net worth and it's in an illiquid asset that, if you got hit by a bus tomorrow, is worth half that or a quarter of that. That's when people are like it's a matter of risk mitigation at this point and it's not all about. I can't assume that the last year or the last five years are going to be indicative of the next five years and I'd rather de-risk myself of a good portion of this asset in a tax advantageous way, given where capital gains are today. Sock that away, stick around in the business and really we're helping them with that reverse planning to find the reverse timeline for when going to market is right for them relative to where their personal balance sheet looks, relative to what buyers are going to expect and relative to what valuation they should be expecting.
Speaker 2:
Yeah, it's so many people, myself included, had no idea how true this statement was, that a rising tide lifts all boats. It's of course in hindsight when you see that they switch from quantitative easing to quantitative tightening, they switch from rate lowering interest rates to hiking rates, interest rates. It comes very commutantical in hindsight that, yeah, that's going to create financial difficulties or difficulties in like the financial climate. But the other thing too is just that it's never easy. There's no normal Right.
Speaker 2:
I think we talked about this back at the DEO, but when COVID first was announced and the lockdown started happening, everybody was freaking out because it's oh man, this is terrible. Nobody's going to be going out for doing anything. The economy is going to crash as we know it and boom. The polar opposite happened and everything started skyrocketing and it's like what the heck? I can't buy real estate anymore. The prices are going up way too high. I can't buy these. Businesses like the multiples are crazy and you're chasing them up and up and then all of a sudden they started hiking interest rates and then it's good.
Speaker 2:
Now I wish I would have bought them back when prices were going up and back when it was a bit more, I wouldn't have made total sense, because now prices aren't coming down and interest rates are high, and so it's just like wherever you're at in a cycle, it doesn't matter where it is. You always are reflecting back on how you wish you could go back and how you but seems so much easier in the past than when you're actually going through it. And point being it's there's always going to be something. We talked about baseline or stabilization a second ago, and there's a war in Israel and there's a Russia-Ukraine conflict happening right now. It's just like it's never going to be totally normal and I think the takeaway is you got to continue to push forward and try and get deals done and you can't just sit on the sidelines and try and time the market because nobody's. It's just going to be impossible to get that accurate. Yeah.
Speaker 3:
And in our, if our prospective clients can sit around and enjoy the fruits of the cash flows, then there's even less pressure on them. To try to quote time the market. They're like, yeah, let's say interest, let's say multiples, don't go back up. But at least I got to enjoy a hundred percent of the proceeds of the profits of the business for two more years, or whatever their trade-off, it's not a bad trade-off.
Speaker 3:
So that's why I think in my world it's possible that the people that have the premium assets, that are on the younger side of things, will probably stay on the sideline a little bit longer than the folks that have already talked to us and or already have an idea of when they want to be done and they know what the market is going to expect of them from a commitment and they just backwards plan into that number. To where do I need to get my deal done? So I have this nice glide path into retirement and I maximize my valuation, I stick around, I make some money along the way and invest my money in a quote down market perhaps.
Speaker 2:
So yeah, the other thing that I wanted to ask about too, was just how, first of all, how EBITDA size affects multiple size, and then, second of all, how geographies affect multiples, and it's ironic that it seems like the revenue oftentimes coincides with the purchase price.
Speaker 2:
And what I mean is like when you are, let's just say, you're doing a million in revenue, you're probably gonna be close to a 20%, even a margin, and that could be potentially a 5x. So you're looking at five times 200 grand is still a million bucks, which is your annual revenue, right, and so as you get bigger and bigger you're in revenue, your even margins go down, just a lot of large numbers. So as you get to maybe a 10 million in EBITDA, you might get 10% margins, but you're looking at a 10x, right, and so now you're, and so you're doing a hundred million in revenue and your company's worth a hundred million. So have you noticed that too? I obviously doesn't always work out, but it seems like using revenue can actually be a pretty close indicator of what the value of the company is. And then, how much do you see that affecting multiples?
Speaker 3:
So the size of EBITDA I always say is like the, the starting point for a range of multiple that you could expect on your business. So if you're like under 500, five to six, x in your ceiling, if you're between call it 500 and a million, now you're creeping up a little bit. Another turn higher on the upside, if you're a specialist or in a really desirable geography, maybe you get like a little bit of a premium on top of that and you're like seven and change something. And then when you get to one to two million now you the range is even bigger. You could see an average of six and nine and then from two to three you see another big jump and now you're clurning with double digit multiples. And then you see this like diminishing return.
Speaker 3:
If you go from four million of EBITDA to 10 million of EBITDA, you're not going to see the same benefit as you would if you went from 500,000 to 1.5 million of EBITDA, which is crazy to think about, but there's just a diminishing return Once you get that that's why I say, once you're at $5 million of EBITDA, I would probably just try to clean up your business, polish it up, make it as low risk as possible, get all your house in order and try to take that thing to market as quickly as possible, because there's no, it's not worth the effort to take a business from 5 million to 7 million dollars of EBITDA if you're chasing a multiple Now, if you're just chasing a multiple, then you're fine.
Speaker 2:
Yeah, that's the counter. That though. Yeah, because it is a multiple revenue, it's still geometric, right? If you know that you're on a path of high growth, it doesn't matter if the multiple increases, because you're already looking at seven times what you're earning.
Speaker 3:
You're better off increasing the margin and if you go from 20% margin to 24% margin or something like that versus, I need to go out and continue this M&A machine and drive acquisitions or the risky growth. If you just focus on tightening things up, it would be better. But to answer your question, I think 20% margin is the magic number for GP EBITDA. I think inherently the multiples do coincide with getting you somewhere close to 100% of collections with respect to middle of the road average valuations, which is still a premium above a doctor to doctor transaction, which is 60% to 80% of collections. So for the solo docs out there, they like that. And for the groups that are out there at $10 million of EBITDA, like now, at that point they're really chasing a multiple to get above a 10x to make them attracted to doing a deal.
Speaker 2:
Yeah, and that makes sense. And so then the follow-up question is how do geographies affect multiples?
Speaker 3:
right now, If I put yourself in an investor's shoes private equity group that's backing a DSO and if I'm a, why wouldn't I want to invest in park money in places where the macro environment is a tailwind rather than a headwind? Why would I want to move into cities or states that are bleeding population when I could go to cities or states that are gaining population on a daily basis? If I'm a dentist, right, because I need butts in chairs. If that's one less headwind for me to fight, I'm going to prioritize.
Speaker 2:
What markets do you think are the least attractive and would cause the lowest multiples based on population? I don't know. Exodus, whatever you call it.
Speaker 3:
Okay, I would say I'm from one of these states, so it's okay and I love where I'm from, but I don't live there. Rust Belt states, call it the northern part of New York, on through the Pennsylvania, the Ohio, the Michigan's of the world into those for sure. Then you've got Illinois is not like super attractive to a lot of folks, but that's as much about the political environment that it is anything else. The labor policies California it's all about labor policies. It's less about people leaving the state as it is about nobody wants to be an employer in that state because, of the labor laws and you can't enforce it on compete and minimum wage is going up like every six months.
Speaker 3:
It's just not a place that you want to operate a business. Then states that are attractive Arizona, texas, tennessee, with the Nashville's growing and all that and Atlanta are shooting in Georgia, south Carolina, florida North Carolina not quite as much yet because there's not a lot of DSOs have the right to operate in that state yet yeah, it's restrictive for DSOs in particular.
Speaker 2:
right North Carolina has a high barrier to entry. It does.
Speaker 3:
Yeah.
Speaker 2:
Yeah, that's interesting, all right so.
Speaker 3:
I do a question that you had off camera to me or I wear a multiple. I've never seen a bigger disparity in multiples on any given deal. If I take a deal to market with $5 million of EBITDA to market in Manhattan or Chicago or some of these cities that are not where a lot of people have left, that's very different than if I took that deal to market even if it was rural, mid-tier city in South Carolina like Columbia, which isn't that well-known of a city but it's growing in population and the labor laws there are pretty friendly. You would have thought like, oh, a $5 million of a practice in a marquee city would fetch a premium multiple. That's just not the case anymore.
Speaker 2:
Yeah, no, it totally makes sense. Population growth is one of those things. Demographics have been behind all these massive shifts historically, which is one of those things we don't realize at the time, like when they were lowering interest rates, like you don't realize how much it was just going to increase. Things, like when the baby boomers are having a bunch of children, you don't realize how competitive that's going to make the job market. But the flip side, when they stopped having all the kids, now people are having less and less kids we don't realize how that creates labor shortages. You just don't think about those types of things.
Speaker 2:
And so, yeah, we're not in a situation where the US has intrinsically a growing population. We can't really rely on demographics to just boost, have a rising tide with all votes geographically everywhere, and instead it's what you're talking about, where people are leaving places that they don't like. They're voting with their feet, so to speak. And yeah, there are going to be real winners and losers, because population is relatively stagnant. So that means for every state that wins, there's a state that's losing.
Speaker 3:
Yeah, and people are less inclined to stick around like that familial nuke. People are, like few, more connected, being far away than they ever have before. No-transcript other countries on Europe where people tend to stay around the areas, the regions, at least that they grew up. But I'm from Ohio and I lived out on the West Coast for eight years. Didn't feel bad about it at all. I'm certainly not alone in that. When people are ready to leave a geography, it's easier more than ever from a job standpoint, and there's less pressure from social pressures to stay around your family as there used to be.
Speaker 2:
Ironically, now that we're talking about this, the only thing that is working against that is interest rates, like we referenced earlier, because when you've got it 2.9 percent interest rate in your house, that does make it a little bit sticky If you want to relocate and go across the country to where it's more economically advantageous or whatever, but you're going to have to get an eight or seven and a half percent interest rate like that makes it a lot harder, I wonder. I always just hypothesize that there would be a massive shift really quickly from all these highly regulated, high taxed states to the more open, business friendly states and then it would stop. But do you know, has the trend slowed down at all or do you feel like it's been just continuing at the same pace?
Speaker 3:
I don't know. That's a great question, Great to think about. Personally, I just rented my place and when I moved to Charlotte four years ago, I rented it and it's still rented to this day. I think about selling it all the time. But I'm like, and it's just a small condo, it's not special, it's fine, but I don't know, I feel like it'd be silly to sell it.
Speaker 3:
So imagine if I was living in that unit. So I'm trying to put myself in the shoes of the question. So if I was living there and I had it and I was fed up with it, like, would I want to sell it? No, I probably just try to do exactly what I did right now, which is rented, and then if I was unsuccessful, I would just hope that I had accumulated enough property value increase because I owned it in a good time period and I'm going to just take my lumps and apply that towards the down payment on something at a much higher interest rate. That's if I were to personalize that question.
Speaker 3:
But it's a really good question because I guess I don't also know as a percentage of the population of what people own in those cities like San Francisco. La, new York, Chicago where they homeowners to begin with.
Speaker 2:
I don't know, Right, yeah, good point. Yeah, if you're not, then absolutely no offense.
Speaker 3:
Most of the people that are moving down here to Charlotte, but you live here too. They're from New York and they've never owned a house before and this is their first opportunity to buy a house. Yeah, I guess it depends on and I know San Francisco. Not a lot of people owned out there either.
Speaker 2:
Yeah, that's a good question. Yeah, it sounds like the people that are really doing their market research, like private equity groups, are Saying that it's a trend that's gonna continue, based on the multiples that are willing to pay. All right, just yeah, I guess, in closing, is there anything that we didn't get to talk about that you'd like to talk about, or do you just have any advice for anybody on how to maybe negotiate a the best deal they can?
Speaker 3:
on a different side. Yeah, I would just say, because there's I've never seen just a higher disparity in Valuations on any given deal, like we are having to go broader than ever To bring a really attractive buyer pool to our clients. So that's our value proposition is we're gonna Turn over every single stone and bring a big pool of buyers to it in order to get the highest valuation possible. But I would say, just as an overarching theme, that Disguise not falling. We're not encouraging. Although we're off 2021 highs, I do think that we're settled in a new plateau, not necessarily like on a fall, even if we enter into a recession. I think that the dental market Continues to be just such an attractive place for private equity groups to come into. The new groups are being formed you know, every couple of months, it's not every month and that means more work for us to try to get deals done and, you know, more folks to get to know and more diligence to do. But we're not chicken little. We don't think that the sky is falling.
Speaker 3:
If you've got a great asset and you're enjoying the future, that the free cash flow from that business, you should absolutely hang on to it. If you don't want to do a deal Because you're not gonna be missing out and you're gonna get to reap the benefits of that along the way. But if you are interested, you need to give yourself as much time as humanly possible. One to prepare your business, to go to market and To fully explore the market, but also three, if some of those buyers want you to stick around for five years, you want to have that. You want to be comfortable with that. Maybe you don't take the deal where somebody requires you to work five years. You prefer to take lower Evaluation and less employment years. That's fine, but at least having the option to leverage that, that offer against the offer that you really want, just give yourself as much time as possible, and December 2 early to have a conversation. Yeah, no, I love that.
Speaker 2:
And what we're talking about too earlier. Where Public markets go, private markets follow. Right now, the time of this recording mid-November, the market has just been ripping and so we've seen it like just totally come around, and so if this trend continues, then yeah, there's something that maybe smart money is predicting, that which is like a recovery of all the financial assets. Then that would indicate, yeah, the we might be at the bottom or close to it. So that's what I'm. I think we're like pretty close to being stabilized, but it still makes it challenging when the cost of capital is higher. But, yeah, I feel like we could be getting close. Yeah, I hope we are.
Speaker 3:
I think that would bring some people back, some buyers back to the table that have been pencils down, but they're not going to come back at the same as they were when they went pencils down. They're. They're. They're going to come back with modified deal structures and probably Slightly lower multiples as well. Um, okay, on the average, what's a good resource for people to reach out and get in?
Speaker 2:
touch with you guys if they want to learn more. Yeah, there's tons of ways to book calls directly with us on our website.
Speaker 3:
So I think there's like book a meeting Buttons throughout it. So what's the website? I'll write it down in the show notes it's a wwwtusk-partnerscom. Perfect.
Speaker 2:
Great, all right, ma'am, thanks very much. All right, thanks, awesome. Thank you for having me. That concludes part two of our episode with Ryan Mingus, if you guys liked it we never have any assets on this show would definitely appreciate it if you could rate, review and share and until then, thank you.
Speaker 4:
If you need help finding the perfect location for your practice or you're ready to invest in commercial real estate, email us podcast at leaders readcom. That's podcast at leaders re re as in real estatecom, or go to leaders readcom and fill out our form. See you next time.
