Nathan Chitty's Playbook: Scaling Operation Dental to a 14-Locations

Unlock the secrets of exponential growth in healthcare as I, Austin Hare, sit down with the financial mastermind Nathan Chitty, CFO of Operation Dental. This episode promises to reveal the strategic maneuvers and real estate acumen that transformed a humble dental office into a 14-location success story. With Nathan's guidance, we navigate the intriguing journey of Operation Dental, from initial expansion hurdles to the unexpected benefits of AI in optimizing healthcare quality. Learn how a book like 'The Driven Dentist' can reshape your understanding of branding and why Nathan's own career shift is a tale worth hearing.

Prepare to be captivated by the wisdom of prioritizing long-term relationships over fleeting profits, a philosophy that has been a pillar of Operation Dental's enduring success. We dissect the dangers of shortsighted business tactics and illuminate how embracing stability and thoughtful site selection can lead to remarkable profitability, as evidenced by our standout semi-rural practice. As our conversation draws to a close, you'll find out just how accessible Operation Dental is for further exploration and professional connection. This episode isn't just a behind-the-scenes look—it’s a blueprint for thriving in the dynamic world of healthcare.

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Transcript

Speaker 1: 0:00

I joined in 2020. We've gone from nine and a half million to 30 million in revenue and we, with our track that we are on now, will hit 40 million.

Speaker 2: 0:14

The goal of this show is to help health care organizations scale by leveraging real estate strategies and interviewing high level health care executives 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. Hello everybody, welcome back to helping health care scale. I'm your host, austin Hare. Our guest today is Nathan Chitty, who's also become a good friend of ours. Being here in Orlando, he's the CFO of operations in all, they started their first office in 2013 and they now have 14 locations under management today, with three more under LOI. So, nathan, that's awesome man. Congrats and thanks for helping on the show.

Speaker 1: 1:01

It's good to be here. I've got a quick slide overview that kind of whirlwind takes to face you through the history. We have five executives on our leadership team. Dr Peter Kelly and Matt Robinson are the executive officer and the operating officer, and the rest of us have been around from three to six years. In terms of looking at a timeline, eddie, we started out as a single office in 2013 and along the way, have made acquisitions and had significant milestones. We are count right now as 14 practices, 200 employees.

Speaker 1: 1:39

These on the left are three of our pieces of real estate. One is leased to our own. We have seven of our locations, or 14 locations. We're located in Orlando and Jacksonville and, in terms of, if I could talk about leaders for us, we engaged leaders in September to demographically identify areas where we could add practices within our existing footprint. So these red circles are our existing offices in Orlando, got something like this for Jacksonville, but within these irregular shapes, green items, those are target areas. So what leaders has done for us is a turnkey process to be aware of the real estate locations for sale and for lease, and leaders real estate has negotiated our leases, done their real estate brokers. You guys are real estate brokers, among other things, and you do this nationwide. We just happen to be in Orlando with you.

Speaker 1: 2:48

I would say show our people 12 of these pictures. Here are partners. Generally, we have a partner at a practice that owns a percentage of the business and we take care of the details that allow them to focus on dentistry. We are branded by location so we don't there's no operation dental. They're all the names of the places where we are. We've had a nice revenue growth of I joined in 2020. We've gone from nine and a half million to 30 million in revenue and we, with our track that we're on now, will hit 40 million. That's allowed us to be on the 8500, which has really been a nice accomplishment for revenue growth. That's a world of operate dental.

Speaker 2: 3:38

I love it. No thanks for sharing that. Yeah, for everybody who's listening on audio. He shared a presentation that'll be available on YouTube, so sometimes you get a little bit more visuals when you watch on YouTube, but so I think, too, it'd be cool just to hear how. What did you do before operation? Dental was your track record and how did you get involved?

Speaker 1: 3:55

I've been a finance guy since college, went to the typical CPA route with back then it was called the big eight, now it's the big four and went migrated from that into commercial banking and then into what I'm doing now, which is CFO type of work. I've also had an active interest in business startups in several industries financial, biotech, real estate, the very technology startups. I've been involved in 12 startups graduated from college, 40 something years, but over the last three and a half years I've been associated with operation dental. I had previously worked with an operating officer at another venture.

Speaker 2: 4:39

Okay, so what drew you? Did you know that you wanted to go into dental, or was it just the group? Yeah, I'm just curious, as what track? What attracted you to make the pivot?

Speaker 1: 4:48

I had no idea that dental practice group ownership even existed, and so a friend of mine who's the operating officer, Matt Robinson, he did research it and he found that this was a great industry eight or nine years ago to be in. So he approached Dr Kelly and said I want to get in the business and Dr Kelly at the time owned one office and was really it was not his gift to manage and to grow.

Speaker 1: 5:18

And so the partnering of a growth mindset and a business mindset. Matt said to Peter I'll work for free for two months and if we like each other we'll work together, which they did. And, by the way, matt has published a book called the driven dentist, which is essentially a biography of our company. He published it at the beginning of January 2024. So regrets Underneath the hood, so to speak, is an explanation of how we've grown and the various ways that we have put the company together. It's really a, it's number one in dental practice management. On. It's really a. It's really a, it's really a nice book.

Speaker 2: 6:03

Oh, very cool. No, that's great. Congratulations on that. Yeah, it's not no easy task. Even with AI, it's still not easy.

Speaker 2: 6:10

The way that I look at AI. I just had a recent epiphany Like I used to look at it as always going to save me all. This time it's going to automate everything and blah, blah, blah. And it's not the end of the day If you can get to do that, but the quality suffers, and so now, instead of looking at it as a way to save time, I just look at it as a way to increase or improve my output, like the quality of my output, and having that paradigm shift. I think it's helpful, because it's like it's still going to take a lot of time, whether you're writing a book or posting social media or whatever if you want to do, but it's just now, you've got somebody to help. You think. But yeah, congrats on that, that's a big deal, Absolutely so. Yeah, when it comes to just operating a dental business, there's a lot of. There's always headwinds and tailwinds, and so we'd love to see what you guys are experiencing in terms of we'll start out with headwinds and then we'll also talk about tailwinds.

Speaker 1: 6:57

So the biggest, the biggest headwind for us, I think, is the economy. It's both a headwind and a tailwind. What I've got here is a picture of the interest rates today on the blue and two years ago on the red, and I'll put it in the framework of the change in the prime rate. The change in the prime rate over that period on this side has gone from under under four to over eight, and so it's caused a tremendous amount of contraction in the availability of money. We're working on a. We're working on some acquisitions now where our cost of funds will be over 10%, and on the big chunk of our present borrowings are at 5.5%. So it makes it makes a very challenging headwind. The others are what everybody else faces inflation, high competition for people with the pandemic. Many people hygienists, dental assistants they left the field during during the pandemic and they haven't all come back, so there's been a shortage of qualified people, which sharpens your pencils and your offering.

Speaker 2: 8:15

Yeah, so how do you? Labor is just hard. It doesn't matter what the job is, everywhere you go. I just have no idea what people are doing. It's like how can we have a labor shortage like all across the board, but we do every industry that we talk to you almost. So what are you guys doing to address that issue?

Speaker 1: 8:30

We really recruit by kind of word of mouth. We have a. We have a robust 401k program, health insurance. On the dentist recruitment side, We've gone from having one co-owner to 12.

Speaker 2: 8:47

Wow.

Speaker 1: 8:48

And so it's a matter of changing the philosophy and broadening the buy-in and ownership of our practices, and it's been, it's worked when you got something that you can talk about on camera. Yeah, sure, what yeah?

Speaker 2: 9:02

How does the ownership or the buy-in? What does that look like?

Speaker 1: 9:05

Typically what we do is we finance the purchase of 10 to 30% of a practice and the doc pays for it with the earnings of the business. So they don't have to go to get a bank loan, they don't have to pledge personal assets, there is a vesting period and there's also accountability for performance. So basically, if the office is not running well, they're not going to make a lot of money. If the office is running well over a, say, a 10-year period, it's very substantial and it's really quite comparable to individual ownership of a dental practice, because the scale our practices, our bigger practices, are four to five million in revenue. A good individual practice that you're down the corner dentist might be a million, eight hundred thousand and a million too. So the ability is there to. If you're, if you have an ownership in a smaller piece of a bigger pie is really what it amounts to.

Speaker 2: 10:10

Yeah, it makes sense to get more economies of scale as well when you're buying things and that sort of thing.

Speaker 1: 10:15

And there's diversification too. The life of the dentist, the solo dentist, everything's on them, and the stress and the pressure of staying healthy, maintaining your workforce it's a lot. It's a lot for a lot of people we offer. And the other thing we offer, eddie, is a long-term outlook. Our majority shareholder, founder of Peter, is 37 years old, comes from a family of seven dentists, matt Robinson's four. So we have we can legitimately say that we have a long-term outlook on how we work with the employees. We're not in it to, for instance, we are not private equity backed. We've done everything bootstrap with our own funds and with borrowed funds, and so it allows for a longer view of things.

Speaker 2: 11:06

Yeah, it seems like planned backfired right A little bit for a lot of these groups.

Speaker 2: 11:10

I don't want to say names, but not that I even could because it's like all kept so tight knit.

Speaker 2: 11:15

I don't even know, but in general, what it seems to be is that there's two types of groups and there's the operators, and the consolidators were like these guys that they had these big ideas and these theories from going to business schools and getting their MBAs and you could buy these practices at a six, roll them up together, sell them at a seven X of earnings, and it's just like the IBG, UBG mentality of I'll be gone, you'll be gone from the 2008 era and from the mortgage mortgage guys and when the interest rate hikes happen so quickly I think faster than anybody anticipated they were just stuck with their pants down right.

Speaker 2: 11:49

And it seems like the people who were really focused on like the operations, like so they weren't going to buy businesses or locations unless they had a really solid plan in place to significantly improve the operations, go in, do their value add, improve same store growth, Like. It seemed like the groups that were focused on that are the ones that are doing well or surviving, and then the ones that were just trying to get in and out are not looking so good?

Speaker 1: 12:14

So definitely, we were in an environment which was supercharged, with low interest rates, where leverage barred, money was very cheap. And because of the basic nature of the business, in that they are a collection of small business that can scale and be integrated, our offices don't associate with each other, they're their own unit, and that's true in the dental industry. And so when you have private equity groups looking for an investment, the underlying characteristics of the dental business diversified revenue, consistent recurring revenue, the dependability of health care it's a very attractive. And you talked about headwinds and tailwinds, a very attractive set of tailwinds. And when you put on top of that the low interest rates, that really brought the industry into focus for these big investment groups called private equity groups.

Speaker 2: 13:15

Yeah, so I guess, on that note, what makes Operation Dental unique. What do you think is going to keep you guys going and thriving when we're facing a lot of people failing the?

Speaker 1: 13:26

tagline of our company is people before profits, and that's really essential to this story. But the subtext is this that you must. If you are acclimated and sensitive to the goals of your people and you have long-term relationships, the profits follow. So the first time you hear you guys are people before profits, I think, well, does that mean you're not interested in making money? No, we have criteria and thresholds and markers to go after. But the competitive advantage that we have is that we are not private equity back. We're a termination date. There's an end date when people are rushing to cash in. Ours is a long term.

Speaker 1: 14:16

And the other thing is the broad ownership of having all those docs on a piece.

Speaker 1: 14:22

Yeah, private equity is usually operating on the five-year kind of turnaround get your money back thing, and so, yeah, you can sometimes be victim of making those short term benefit decisions rather than the long-term ones which can touch up with you Well their investment performance has been fantastic, but it's really been a collection of Goldilocks moments of the industry and the low cost of funds and the ability to leverage a small amount of equity and a large amount of borrowed debt, and it's the kind of chickens that come home to roost with the increased cost of funds for those groups, and so they're facing a lot of pressure, and a lot of people did not pay attention to the operating aspect. It was more adding numbers plus one is two, two plus two is four. They just add a multiplier in the number of offices. But it's really with the inflation, with the competition for talents there's more to it than that.

Speaker 2: 15:23

Yeah, yeah, no, totally. And look, not all private equity is bad, obviously. I think that it totally just depends. It does have a bad reputation, that's for sure, because there have been bad actors, but I know there's guys that I talk to itself like you sound, like you just want to do the right thing it does. It takes capital sometimes to help big people on dentists with the right heart and right vision take their dream to the next level. So it is what it is right. There's some good players and some bad players, just like every single thing in the entire world. That's cool. So let's, yeah, let's. What are your long term goals with operations at all?

Speaker 1: 15:53

Our long term goal is more of a public type of model. Publix is a grocery store chain in the Southeast United States that has broad ownership throughout the company. It's, they report as a public company, but they're not a public company.

Speaker 2: 16:07

that's traded Because they're at e-stop right Like the employees own all the shares.

Speaker 1: 16:11

They have an e-stop component but technically the stock is broadly held. They probably have an an e-stop trust, but generally we want to be self-funding and self-liquidating. So what that means is that when a dentist wants to retire, we want to sell their stock to the new dentist and over time we'll have some exits from our other ownership group that that'll be paid off through the earnings of the company. So we really have a long-term outlook and don't have any any exit plans because the age of our folks.

Speaker 2: 16:46

Yeah, no, that's smart. Yeah, I think it's cool. It's like a built to last type. You know, that's like us too. Like we like to buy a real estate and warm above.

Speaker 2: 16:54

It has a saying my favorite holding period is forever. Now I should like I think that recently I've learned if you prefer to hold something forever, it doesn't mean you have to, or even that you should, meaning if you get an above market offer for something, in our case like a real piece of real estate, like we should probably take that right. And there's other real estate that we can hold forever. But in general, like we're talking about earlier, when you have these fixed timelines, you can make short-term decision making, and then that doesn't always work in your favor because there's so much outside of your control just in terms of macro environments, macro conditions, the economy, broader economy, all that kind of stuff.

Speaker 2: 17:27

But yeah, in general, like we definitely like same as you, if we had the long-term approach. You know what it does, though it takes the stress off a lot right, like you can just make the right decision for the long-term outcome and not have to be as like I remember when I sold like I had three fitness centers in Orlando and when it came down to sell them, I got them under contract and we had certain EBITDA that we were hitting and I had to maintain that EBITDA while they're doing all the due diligence. And that was like the most stressful thing ever, cause it was like if you had one month that slipped, then it was like, oh my gosh, these next two months like I gotta get it. I can back up to get my average, but that was a result of having like a hard timeline.

Speaker 1: 17:59

I can understand that.

Speaker 2: 18:00

So let's talk about your real estate. I know you mentioned it earlier. Yeah, I'm curious. I know your site selection criteria, but for everybody listening, I would love to hear you explain what you guys are looking for and what your strategies are.

Speaker 1: 18:12

We're definitely aware of the demographics of the surrounding areas that we're not in and that's that, those green boxes that I showed earlier. So we want to fill in our footprint. Generally our offices are more than two miles apart. They could be four or five miles apart. We're looking to be geographically where we're not. That's why we brought in the leaders, you guys, because the negotiation of terms and the identification.

Speaker 1: 18:45

When I talk to your guys frequently they'll say, okay, we're gonna get in the car and we're gonna drive around that area, see what's happening on the ground. So it's really a sort of a multidisciplinary approach. It has a lot of numbers and we also have a market. Our most profitable office is in a rural area, deberry, florida. It's not that rural but it's not downtown Orlando and so you'd be surprised. It's not the highest income area, which we are also in winter part, which does well. But you try to find demographic areas that fit your most successful offices and there is a component of median income and growth and households and all that. But you wanna study that and we do with your help and with our internal marketing team.

Speaker 2: 19:37

Yeah, that's good. We harp on this a lot on the podcast. Rent is a factor of your marketing, right, and so sometimes it's really tempting to just take the absolute cheapest rent possible. But if you're recessed and people aren't seeing you, then how are you gonna get eyeballs? Yeah, sure, you can get recommendations and referrals. Those are all great. Maximize those to your ability.

Speaker 2: 19:55

But if you need patience and you have bad visibility, then you're gonna probably have to start doing mailers or digital marketing, which are auction platforms, which means that over time, they go up and doing the homework on the front end. Yeah, it's just so important of just figuring out where are the clients, where are they already going, where are they frequenting. So, yeah, tapping into the demographic and analytic services that are available and like different subscription models is not cheap, but it yields the best results. And, yeah, so that's definitely something that is like it has become more and more popular, but it's still sometimes it's surprisingly a novel concept to some people. What about? Would love for you guys just to share your preference on buying versus leasing the real estate too.

Speaker 1: 20:32

It's a function of availability of capital. Two years ago we were able to get long-term low interest rate loans, say 10 year term on a 20 year amortization, 10 year fix, and the majority of our real estate loans are under 5%, and we get those. Today we'd have to put in 20, 30% equity cash up front, and two years ago we were doing 100% financing because of the stability of our dental offices and so I'd say, for a long period of time, having an awareness that there's a season for everything, and the season two years ago was by as much real estate as you can.

Speaker 1: 21:18

There is distress in real estate, but it's not in owner occupied, it's in and it's in cities outside of the state of Fort San Francisco.

Speaker 2: 21:26

Well, retail didn't really get hit that hard and healthcare did not get hit that hard. Office did and multi-family did. But retail healthcare you said you mentioned that if owner occupied is not distressed, healthcare has not been distressed. It's proven to be recession resistant, pandemic resistant, inflation resistant. At the end of the day, you're occupying your business, or even you are listing your real estate for sale that has a healthcare tenant in there. They're paying the rent right, so you're not distressed. So, yeah, that's really helped. The prices stay elevated, which is great for all the assets that we own and or that you guys own, not great for assets that you're trying to buy. So it's a double-edged sword for sure.

Speaker 1: 22:02

So we're leasing more now, and it's okay because leasing as a percentage of our revenue is 5% to 7% of revenue and so fortunately, the dental business is a relatively high margin business. So the economics work well for us when we rent and over a long period of time. They work extremely well for us when we buy, because we're fixing the cost, particularly with Pages Interest Rates.

Speaker 2: 22:30

Yeah, that's good. Okay, To throw you on the spot a little bit. What do you think was the most surprising or unexpected thing that happened? What do you think was your biggest learning curve since joining Operation Dental?

Speaker 1: 22:41

For me because I have such a heavy finance background. I've stuck with banking relations, investment relations that I was well familiar with. I guess the biggest learning for me is the whole industry that I didn't really even know existed prior to I joined right after the start of COVID. The business that I was in the start of was feeling the effects of the economy. So the most surprising thing, I'd have to say part of it is the collegial nature of the industry. Dennis are very nice people and they are not. We're active in national organizations dental entrepreneur organization, deo and so I guess a surprise to me was how much fun and pleasant it was to work with people around the country to exchange ideas and to just solve problems together. So that was unexpected.

Speaker 2: 23:41

That's cool. Well, so, as we're getting close to our time to wrap up here, is there anything that we didn't talk about that you would like to talk about?

Speaker 1: 23:49

I guess the biggest advice that I would have kind of underscore things is to take advantage of what the market is giving. Two years ago it was low interest rate. Today it's less competitive to buy a good practice. So we're into a lot more of seller financing. We've raised for our size 5 million with a private capital from individuals generally and the related to the friends and family you've heard about, I would say you have to be accredited to invest with you guys.

Speaker 1: 24:28

Yes, yeah, Credit investors 200,000 for individual, 300,000 for joint or a million in liquidity. But Dennis checks that box and so we have. I think we only have two investors that I don't personally know that found us through the website and we want to be. We love the industry, but out of the 5 million that we've raised, less than 500,000 is from people we don't know.

Speaker 2: 24:52

Yeah, that's cool. Yeah, I really like that. It's a good model. So, thank you. I think that with seller financing especially, are you guys finding the interest rates to be a lot more competitive than, like, the banking rates. Is there a significant delta there?

Speaker 1: 25:06

We don't, really we don't. It's not a significant factor. Normally you have seller financing would be six, seven, but we really we're comfortable at the same interest rates of 10% for that. But it's mainly getting the cash and getting the structure, because our typical acquisition profile is to or to de novo, is to start with one dentist and then go to two dentists and when you do that your your earnings can triple rate. Basically, when you got an office, that 4 million, the profitability is quite strong and keeping in mind that you're starting from one to one and a half million as a single doc, so I wouldn't say that the cost of funds is is really significant for us.

Speaker 2: 25:55

Okay, yeah, it's interesting. So what then? Just curious what is the benefit of doing seller financing?

Speaker 1: 25:59

100% financing.

Speaker 2: 26:02

We okay, so no cash down. And then they want the business to keep running.

Speaker 1: 26:05

Yeah. And for instance, not to be down on the banks, but when we finance through a bank, we have to get a quality of earnings study, which takes $25,000. It could take two months. They're lending maybe half the purchase price. Yeah, just a lot easier, less friction so it's you strike while the iron's hot your the ability to be able to close within a month or six weeks is is a is a good thing and generally banks do not move that fast.

Speaker 2: 26:34

Yeah, yeah, very true, okay, perfect. So for anybody who wants to reach out and get in touch, learn more about what you guys are doing, what's a good resource?

Speaker 1: 26:41

Dot com. Gotta have all of our contact information there. Feel free to to reach out operation dental dot com and there's an about section that has our profiles and email addresses and that's all I love it, love it, okay.

Speaker 2: 26:54

Hey, this has been awesome. Yeah, thanks so much for your time and I appreciate it.

Speaker 1: 26:58

Very nice talking with you, austin.