The Pacific Aesthetic Continuum's Podcast
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The Pacific Aesthetic Continuum's Podcast
Selling Your Practice Isn’t A Golden Ticket, It’s A Group Project
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Guests And Today’s Focus
SPEAKER_00I'm Dr. Michael Miyazaki, and thank you for joining us again for this uh YouTube recording that we're doing. And we have a really special guest today that I think you're really gonna get a lot of information from that could impact your future. So hang on. So we have Garrett Caldwell. Garrett Caldwell again is a CEO of Core Demolab and the Pacific Ascendant Continuum. And our special guest today is Dennis Michaels, who is an attorney. So we'll have to watch what we say today, but I think it'll be good. But Dennis works over at Booton Jones as an attorney there. They're a large law firm down in the downtown area of Sacramento. And what we want to do is, you know, again, when we do these recordings, we um are talking about the business of dentistry. And today, more than ever, in my almost 40 years, uh dentistry is uh being influenced by the corporate side. So we thought we'd bring in an expert. Dentist works with businesses, large and small, from startups to very mature businesses, helping to guide them through um all the twists and turns that businesses go through. And so we're gonna talk about I guess how uh the corporate world's impacting dentists today. So Dennis and Garrett, very uh warm welcome to both of you.
SPEAKER_02Thank you, Nick. Dennis, welcome. Nice to see you. Garrett, always a pleasure.
SPEAKER_00Yeah. So I'm gonna um uh why don't we jump in uh right away? Um, Garrett, I'm gonna let you kind of lead off with the question you had. You know, I think one of the first things is uh how dentists should look at maybe the corporate options they have. How's that sound?
SPEAKER_02Yeah, great. Yeah, Dennis and I uh talk quite a bit about um the dental business and the challenges that the docs have. And a lot of our conversations have been around business and business structure. So it's great to have Dennis here today and really talk a little bit about Dennis, about what's happening in the dental world right now. The big thing is DSO, and maybe more importantly, how you might consider whether that's a good option for you or not. And if it is a good option, maybe how to prepare or what's important to prepare for when you're getting ready to present to sell your business into an organization like that.
SPEAKER_03Well, uh you we see uh a lot of uh transactions uh that are uh in the offing with uh dental practices, not just dentists as well, but um, you know, all you know, regulated professions in California at least tend to follow a similar structure. So when we're talking about something like a DSO or some kind of a management service organization in other practice areas, you know, other physicians or accountants or even law firms theoretically, uh, we're talking about a professional organization that uh is where the licensed professionals uh reside, if you will, uh for regulatory purposes. And most of the management side and the other assets of
What A DSO Structure Really Is
SPEAKER_03the practice are owned by another business entity which can have non-licensed owners in it. And so the this sort of structure with two heads uh represents really the management structure. The management side of it allows unlicensed uh parties to participate in this. This is what we think of as the traditional DSO structure. And the professionals, the clinical professionals, basically all uh work for uh a regulated entity, a professional corporation, typically. And then they're related uh through really the core document that governs the entire relationship, which is essentially a management agreement that really covers just about everything, economics, governance, and everything else like that. And so that is a necessary structure in California because we have essentially the ban on the corporate practice of dentistry or the corporate practice of medicine, which prevents, you know, prohibits non-licensed parties from owning uh directly an interest in these practices. So we're stuck with this uh practice, uh, this the structure, and um it is, as you can imagine, pretty complicated. Uh, and uh there are some regulatory uh third rails that uh everybody needs to be aware of in order to help structure these things successfully. When we're talking about DSO structures, you know, the typical scenario is you know, a small practice of solo or a small group of practitioners are approached, or maybe they're approaching a DSO group. And the DSO has their structure in place for a variety of reasons, and the overall structural shape isn't going to change very much. And they're very seasoned, and their advisors tend to be very uh experienced with a lot of depth in the complexities of that particular structure. Know what you don't know, and there's a lot to know. Uh, start early and uh try to get smart. And if you it doesn't mean you have to become an expert in anything of all these things, everybody has a full professional load to deal with. And as you said, Mike, uh, you know, these are not areas where um the practitioners in the trenches uh have received extensive training. They're they're competent, you know, maybe excellent professionals at doing what they do. Oh, and by the way, they also have to be uh stellar business managers uh and you know, uh team leaders, uh, you know, good partners, marketers, all the rest of that stuff, right? Just you know, add all that up, and it it probably takes uh at least two or three full human beings to really be the most effective at that. So there's no way, and this is no different in my profession as well. You know, I work with a lot of law firms as well, and it's the same problem. You know, we're we're we're 100% professionals at what we do, and then we're uh also sort of pressed into involuntary servitude as managers to guide the ship, which is you know the most strategically uh important uh decisions that you're making for the livelihood of the practice and and your and your partners if you're practicing with others. So you know, get a team of advisors that have the expertise that you need. And the three that I think you need to plug in uh early on, you need to have uh, you know, a CPA or tax advisor with uh some degree of sophistication and depth. Okay. Particularly as you start looking toward um, you know, a potential exit in these DSO structures. You need somebody who's who's maybe seen them before and can help um do a little bit of the war gaming and the modeling uh to really uh understand um what the opportunity presents, pros, cons, and how that specifically impacts the dentist uh or the partners in the group, you know, what it is that it means to them. Not not the numbers that you're talking about, oh, 5x, 10x, this, you know, some large number that sounds great at a cocktail party, but what does it actually mean? There's there's what what's on offer, and then there's what you keep. Uh, and how does that translate through? Because everybody's situation is entirely unique. So CPA tax with some sophistication is key. I think um some point in that process, earlier rather than later, you really need to connect with someone who could be um the strategic advisor to advise as to sort of the market uh and kind of what the business landscape looks like. Uh, it's not just what's going on in DSOs, but it's also what's going on in all of the opportunities for transition that uh practitioners face, right? So it's a continuum of choices that you have. And it's always important to try to get the best advice to say, where's the opportunity right now? We don't have control over our the full length of our professional lives. We don't have control over the calendar necessarily or the markets. You know, if it's Monday, it's Friday, it could be something wildly different. And so again, uh to be best prepared for the opportunities that are in front of you, I think you need somebody to sort of bring that market and experience uh to bear. Uh your CPAs may be a partial source of that. Uh, your your lawyers may also be a partial sort of source of that, or other colleagues that you deal with or professional advisors. But you know, I would say try to find somebody who is uh you know plugged into that space to really provide meaningful sort of assessment and guidance. The third, I think, on the three legs of the stool of your advisory team, um, is you know, get plugged in with uh you know legal counsel that could handle some kind of a transaction like this. Um, that's really the third piece. We can be um, we can identify issues, we can uh share the wealth of our experience, but we're not gonna have as broad a view as, say, you know, somebody like yourself, Mike or Garrett, who are interacting more in the the broader business environment. You know, we may provide very um uh narrow but deep uh technical advice, you know, critical and essential. But again, we may also not be the ones that are providing the best, say, financial or uh tax advisory. That's why the CPA is plugged in. And neither one of those two really have the full landscape of, okay, here's what we're seeing out in the marketplace, here's how things are shifting, and here's the you know, tales from the front as to how these deals are working out and where movement is, you know, geographies or scale of practice or what the appropriate metrics are. So get that team plugged in early, and and then you can start um filling in those holes, or at least have them on speed dial
Build Your Three-Advisor Team
SPEAKER_03so that when you have those questions, when you have those uh issues that arise, or you get that uh phone call, email, or knock on the door, uh, you can react and help make sense of it.
SPEAKER_02Is there a way that a dentist or a veterinarian or whoever may be listening to this podcast can research a DSO and get information about it other than what they're delivering as their public uh enticement or their to adopt?
SPEAKER_03Great question, Garrett. Um, and this is this is this is a challenge. This is very much of a challenge. Um, you know, these structures uh by their very nature are are privately held. You know, they're um and so there's very limited information. This isn't uh, you know, your your Apple computer or you know your General Motors or something, and you can go read their 10K report and figure out what's going on with them. You know, these tend to be, you know, groups of high net worth uh individuals up the ownership tree, uh, other strategic partners that may be involved. Um, there could be lots of players as you go further up the ownership tree with various interests that are there. And and there's just really no common accessible um repository for you know who those folks are necessarily, et cetera. Um, you know, when you're and this is what I'm about to say is also the same advice I would I would give to really any uh any potential uh business transaction that a client's looking at. You know, the the initial getting to know you process, what we call due diligence, uh, really needs to be um a two-way street. Um we we think of you know a large group coming in and buying a small practice, but what the DSO type transactions really reflect are that the dentist is joining another structure. As much as they're taking out the practice, so to speak, um, this is the beginning of a relationship as much as it's the end of an old style of practice. And so, you know, dentists should be thinking a little bit about um I'm essentially investing my practice, my professional reputation, and you the limited hours that I have in the day uh into this structure. And so put your your investor hat on, be skeptical and say, okay, what information do I need or do I need to be able to provide to my advisors so that they can at least help me vet this thing? Is it real? And and you know, can I unpack it with their help, you know, and get some of that information, request some of that information that, you know, frankly, they're going to be requesting of you in your practice as they're looking at you, and try to understand really how that core economics works. So that's that's that's sort of the the the granular part where you might be able to get at some data. Um, the softer part is very difficult to get to know. And that is literally how has it worked out with with other docs that have sold into this structure, if they have? What's their reputation? Where do these folks come from? Do we know anything about that? That is all very, very soft stuff. Absolutely. I'm the worst person to ask about that stuff. But you know, your professional organizations, you know, the group of the other practicing uh, you know, professionals that you know, as well as you know, your advisor group, um, you know, may have more insight into that as to trends and and various reputations. But I mean, it it it is it is difficult. That is that is very difficult. Uh, but you know, the if you can get honest feedback uh from other folks that you know and trust uh that have successfully completed the transition into those groups in question, um, you know, they're probably the best source if they can be candid about it. You know, some folks haven't been down the road long enough yet. They oh, I did my deal six months ago, you should get on board, Garrett. You know, like, well, okay, maybe that's that's too soon to tell. So, you know, grain of salt with some of that feedback. Um, but you know, Mike, this is this is where somebody like you or somebody like Garrett can share a lot of um data with um, you know, feedback from you know what what the practitioners are actually experiencing on the other side. Well, we can talk about physicians since none of us are are are MDs here. Um, you know, they they can they can sometimes be the worst, right? So what often makes, you know, especially like a critical care MD highly effective at what they do is they have to make decisions in the moment, okay, uh with a wealth of experience that are literally like you know life-saving decisions that they have to make under time pressure, okay? And that makes them um extraordinarily effective at what they do. It makes them terrible, terrible business owners and managers, because that same approach is exactly not how you want to do how you want to run your business. Right. And and so, you know, to flip the script, you know, in the clinical world, you would never say, well, you know, I don't know, this guy's bleeding out on the floor. But you know, let me let me think about this for a little while. Maybe I'll call him on Tuesday. It's like, well, no, you you that's not a choice. You can't do that. Uh, but you know, it's equally quote unquote business malpractice to to sit there and say, like, oh, well, what did you say? Oh, I don't know, but you know, there, and there's there's almost this kind of that confidence, which is a feature on the one side of the practice, is a bug on the other side, uh, because it creates these vulnerabilities. And um, you know, and again, there's a there's a very human element, uh a very emotional element
Researching DSOs And Two-Way Diligence
SPEAKER_03here of uh if I spend my 18 waking hours a day uh exuding confidence and being in charge, because I have to be. That's what my my professional role needs to be, and my you know, the patients depend on that. It's very hard to put that down and say, gosh, I have no idea what I'm doing over here. This I way outside of my area of expertise. I have no idea what any of this means. It feels like a surrender. It feels like I'm I'm I'm weak, I'm ignorant, I'm not competent in some respect. And it's like, no, this is a totally different realm, and that's okay. But that is a dynamic, and I and I see it most acute with with some of the physicians, again, who have kind of that, like I said, that that you know critical care kind of physician mentality of like, I'm the decider, time to make a decision, decision made. And you're like, okay, except that you just decided something that has no relationship to reality, right? It's like we've decided the three of us want a 50-50 deal. You're like, how's that gonna work, doc? It's not weakness, it's actually empowerment. Um, because when you know what you don't know, then you know what you can do to go solve that deficit and to get smart or to get somebody who's smart uh to add to your your strength and be able to make the better decision.
SPEAKER_02That's a good thing to remind us. See, I learned something today, right there. It's just a good, always the good thing to remember is that you just you don't do it on purpose, but you know, we're leading, you're leading, Mike, I'm leading. We're making decisions all the time when we kind of don't know what we're doing. You know, Mike is remodeling a house, he sends me a picture, he's in there with a sledgehammer. I'm saying, Mike, what's your engineering experience? You just bought a house an hour ago, you're remodeling with your son, and you're already in there with a sledgehammer. Get me what you're doing.
SPEAKER_01Hey, Mike, that's load bearing. Now you tell me. Yeah, exactly. I can tell you what could possibly go wrong. I'm a dentist. I know I'm in control.
SPEAKER_00Now he has to write. All right, everybody. If you like this information that Dennis is giving to you, and it really is good information, maybe you have to listen to this twice just to extract all the good thoughts. But if you like this information and you want to make sure that you don't miss any of it, well, number one, hit the like button. And two, hit subscribe. And then when we put out a new episode, you won't miss all this all the information that uh these have packed into them. Um, if you want to learn more about the pack, go to the T H E packpac.org. And you can see when we do more courses, and some of them are live patient, some of them are live, some of them could be online, just like this. So if you want to stay in touch with the group, please um check it out at thepack.org. All right, let's go back to hear more from Dennis. Thank you. You know, what what how does the equation work out where private equity is making money and the dent and the dentists are making money, or in the long run, are the dentists making as much money as they think they are?
SPEAKER_03That is an excellent question. That is the million-dollar question that every dentist is gonna have to try to prospectively answer. Uh, you know, is this a better deal for me to do this than plan B? What's plan B? Right. Plan B is I hope maybe I can sell my entire practice off to somebody else who's willing to pay me what I want for it and gonna come good on paying that. Um, you know, when I uh advise some other groups, um, you know, you you you look at a solo or a you know ones or twos or threes, and you know, their transition strategy is essentially to get the younger practitioner into the practice to essentially fund the buyout of the uh the you know retiring partner. Uh well, and that's that's that's great. I mean, it feels good that you're kind of paying it forward in some respect, but you know, as a as a seller, a retiring practitioner, you know, they're that that junior professional is is it if they they don't they don't have a huge balance sheet upon which to draw, they're not gonna write you a cash uh check, you know, 100 you know percent of the purchase price there. And so you're gonna have that transactional risk of are they gonna be able to pay you off? They're paying for your retirement, you know, on time, so to speak. There's gonna be, you know, some amount of debt financing there that's either gonna come from the outside or it's gonna simply come from the selling partner. Um, you know, professional practices like yours and like mine. Uh despite having lovely furniture and aging computers, there's not a lot of hard assets in these kinds of practices. I mean, this is not, you know, oncology or radiology where we might have enormously expensive assets down the hall. Um, you know, it's basically the practitioners with, you know, uh a rapidly depreciating asset base and their goodwill uh in the marketplace. And so there's a lot of risk in that plan B. Okay, so is plan A, this DSO structure, look like it's gonna be something that would work out better? Well, this is where you need to do that kind of modeling and try to figure out, okay, how does this work out? And frankly, this is also where, you know, uh the advisor in the middle of this uh continuum of analysis really is gonna say, okay, we're looking at this potential deal. How does this DSO make money on this deal? And what does that leave for me? Because I talked about that management agreement um earlier in the in the podcast. And you know, that you know, sort of umbilical cord that connects these two otherwise unrelated entities, the practice and the ownership structure, that's the conduit. Uh, if I'm cynical, I'll say that's the conduit of value extraction, uh, where uh the the you know the DSO group is sucking out everything that they possibly can uh of value legally and and otherwise, because again, they're they're they're acquiring all the assets of the practice that the practice is not required to own. Uh they may be making commitments with respect to hard assets, machinery, equipment, you know, office space, leases, uh, managing all the HR, infrastructure necessary for practice management, software, you know, professionals, you know, again, all of that, you know, billing and collections, all that stuff is, you know, that takes assets and people, and that's a significant bet that those folks are bringing to the table. They're also bringing people who are professionalized at doing that, as opposed to part-time managers like yourself or myself when we we're we're talking about our own practices. So there's real value that that they are they are actually delivering, you know, scale, efficiency, all of that stuff. But that comes at a cost. And so really it's it's unpacking that algebra
Decision Bias And Knowing What You Don’t Know
SPEAKER_03to say, okay, for every dollar that I bring in on the professional side, you know, where does that go? And what is my individual compensation arrangement now that I've gone basically from an owner role to, you know, maybe a well-compensated employee role? Um, but how is how do I realize that value? What is are are there incentives here? And and what is the potential for me to get value out of an interest that I may also acquire in the DSO structure? You know, is that a is that a today uh return or is that uh you know, more by way of uh, you know, a lottery ticket that I hope uh comes good at some point in the future? And so running through that core analysis is, you know, again, it's part strategic and it's part financial. And it really flows out of that uh uh management agreement in terms of how they anticipate, you know, effectively charging the practice for all the things the practice now relies on the management company for. And so, you know, you've got to you can compare those, and and folks that have seen different uh management agreements with different groups can kind of provide a little bit more of what the market looks like. You know, and that's like I said, I think that's a little bit more in the advisory realm. Um, your CPAs may also be able to provide some of that role, maybe your lawyers as well, if they've seen some, a couple of these different deals. But you know, market shifts quickly. Um, and there is some competition uh up and down sort of the value chain here. So yesterday's information may not be as valuable as that from somebody who is in the mix daily, like you guys.
SPEAKER_02So, Mike, you can maybe uh help answer this question for Dennis with Dennis. So fundamentally, uh a DSO comes in and buys 60% of my million dollar practice stock. They leave me with 40%. And if I take on an employee agreement and I make 30% of collections, and I then share in the profitability of the practice, my practice as it grows, or does that 40% generally go that I get a little confused in this that 40% generally go? Uh is the balance sheet separated from the DSL, or is the balance sheet merged with the DSO? And then the poor performing practice eats up all my positive performance. And I guess the second part of that is am I billed? I don't think I'm billed separately normally for those management services. Those fall under the or could potentially fall under the management agreement in the stock purchase.
SPEAKER_00You know, the hard part about that is I I I would think it depends on the agreement that you're entering into. Like Dennis is saying, it's all kind of designed. And like I was saying earlier, when you just look at the straight numbers, that's what makes it so hard to compare apples to apples because all these agreements are like apples, oranges, grapes, all kinds of fruit, bananas, and everything all kind of mixed in there. And so that's why I think it's really important. So it's a it's a it's a value, valuable question. But the hard part is I would say Dennis had called Dennis up and say, Dennis, tell me what the answer to this. And he'd have to dig through everything to figure it out. Like he was saying, he'd have to probably sit down with the CPA to look at the numbers to see what you know where all the numbers are being um accounted for and then figure out according to the agreement what that final impact is going to be. But I'll let Dennis answer it. I I think that's just a hard question to answer, though.
SPEAKER_02It's a very hard question. And I know on our last interview with Terry Strain, who has strain management in Sacramento, who's a large DSO, he said, you know, if you've looked at one DSO, you can't look at one, they're all different. What's the statement, Mike? Is you look at one, you haven't seen any. Yeah. He said basically every one of them is different.
unknownYeah.
SPEAKER_02And I think it's so important for the dentist to understand that the general concept of I'm going to sell it,
Sponsor Message And Training Resources
SPEAKER_02I'm going to keep some stock, I'm going to get a big chunk of cash, I'm going to hopefully have a great second event, all the positive things. The question becomes all the little details and the stock that you keep, one would naturally assume that you're going to get that at the end of the month in terms of profit. That's my part of the profit. But does that profit, is that profit attached in some third way to some other need within the management agreement that allows that money to get siphoned out or forces that money to get siphoned out?
SPEAKER_03Right. I Mike already uh answered this, I think, in some respect, in that um, you know, I I think that saying is great. You know, if you've seen one, you haven't seen any. Uh they are they are unique unto themselves. Uh and the structure can vary significantly for a couple of different reasons. I think uh, you know, I think you'll see different structures as you kind of go up the tier of complexity
How DSOs Make Money And You Get Paid
SPEAKER_03uh in the market. So, you know, what works for you know, ones and twos in small groups uh probably looks um less like the ones that are 50s and hundreds and and you know, a thousand uh practitioners sort of under the common umbrella, so to speak. Um, you know, and that complexity, I think, just gets uh exponentially more. So, you know, again, what what tier you are at may uh impact kind of what you would expect to see. I I think that's that's one big piece of it. Um the uh the other piece of it, I I almost kind of think of this a little more horizontally. You know, if uh if you're the first into this DSO group, okay, your world may look different than the 10th. Um because I've seen a couple of these uh both in the dental space as well as in the medical space, where you know, um a group, uh a DSO group or an MSO group is looking really for um a leading light, an evangelist, somebody who uh is prominent, maybe they already have a strong branding presence in a particular city or a region or something like that, or an area of practice. And what they're really doing is looking to uh build off of that and bolt on subsequent practices. Well, the that first mover probably has uh a different deal or faces different sort of core opportunities and and maybe burdens as well than that tenth one who joined on. Uh so if you're if if you are one of those me toos who were jumping on board, um you know there may be a lot less flexibility. Um, you know, there are also additional straws in the milkshake at that point. So, you know, you're you're you're sharing with everybody else upstream, so to speak. Um, and that it's in my experience, those feel more like um, you know, essentially uh almost pure employment relationships. You know, you're you're cashing out your practice, you're exchanging that for some degree of of uh employment certainty, some future opportunity, uh maybe some incentive compensation. Uh, with respect to production and things like that in the near term. You're probably doing that with um essentially a soft commitment of some period of years, you know, so where you might um not realize as much if you chose to terminate that employment relationship early. Um, you know, so there's there's there's that. So there's some golden handcuffs involved with some of that. Um, and you're also, you know, you're not giving up necessarily control over the way that you practice. You know, you can't do that, or at least the the law says you can't do that. And of course, as we all know, economics doesn't affect how any practitioner actually practices their licensed profession. I roll for those of you not uh uh looking at us live. Um but uh that said, um, you know, those considerations, I think when you're giving up control over the rest of your practice in exchange for um, you know, essentially the the certain value, you know, that can be um pivoting a little bit here. That that kind of goes to where you started, Garrett, with the emotional practice, the emotional uh you notion of of these transactions. Um that um in addition to the change in economics, the change in the power structure, the pain, the change in the feeling of having control over your own destiny. If you're one of those 10th, 11th, 12th practices to join that group, I'll be blunt. You probably don't feel that special. Uh, you know, because you're somebody else. And the next guy is three blocks away. And we're gonna roll them all up. Everybody get on board, you know, get to the trenches, all hands to the pump, uh, and and now you feel like you're you're working in a factory. Um now it could be great, or it could be uh that now you are held to uh you know more production metrics than you were otherwise uh familiar with or comfortable with. Um maybe uh you know economic constraints placed on what you can do and how you do that. But all of those things I think um change depending on where you fit into the ecosystem, which again is why it makes it so very, very difficult to compare apples to apples, because you know, um you know, I I know of a couple of of dental DSOs, one from outside of California that has a little bit of a footprint here, and another one that is strictly within California. And you know, ostensibly they're doing the same thing, but they're doing it very, very, very differently. And I think the the vibe that the docs have inside each one, I think in one, there's definitely a feeling of like, ooh, what did I get myself into? Well, I'm gonna grip my teeth and get through this for the next X years and then hope um as I find my exit. The other one, I think uh, you know, people are tap dancing on their way into the office. Um there's it's a totally different vibe. Um, you know, and and again, they're they're all more or less in the same practice space. So they're the core economics of what drives their respective practices, the patients are paying what the patients are paying. You know, um the the the third-party payers are only paying what they're paying, right? So, I mean, the market is what it is. There isn't some untapped potential that these DSO groups are are accessing. I mean, essentially they're saying facing the same market economics. So where they make money to kind of bring this whole thing full circle is is, you know, frankly, they they've got to create efficiencies and that unlocks some value. Uh but they're doing that, you know, largely for themselves and letting you ride along, if you will. And so that sharing between those two things is really, I think, the the philosophy that you want to try to understand as you're looking at these groups. You know, as you're as you're approaching these potential opportunities, you have to view them as you know the beginning of a collaboration, uh, not as you know, the the exit off ramp. Um because uh, like you said, um, you know, there there's complexity, there's pros and cons with these. There's lots of opportunities for practitioners and and for the investors in these groups. So it's it's not all it's not all bad. Uh, you know, it's it's it's too easy to be cynical sometimes. Um, but that said, it is the beginning of a partnership. And you do want to be, I mean, I Garrett, you've heard me say this. There's nothing that I can put on a piece of paper that's going to prevent somebody across the table from doing something bad to you or your business. Okay. I might be able to give you some alternatives, some, some, some potential remedies or or or you know, help uh on in sort of the downside when people aren't doing what they say they're they're going to do. But uh the most significant defense that you have or the best uh tool that you have to realize what your goals are really are right up here on top of your on top of your shoulders. Um, you know, trust that business judgment that you have. You are getting involved with a group that you need to feel like your partners with, that you're sympathetical with, um, that you know, you're comfortable with the way that they make decisions. Um and if not, maybe you need to pass because there's nothing that is going to change that core uh feeling of trust and reliance as you build this partnership. And make no mistake about it, this is why they want, you know, they want you to commit for some period of time. This is why there are clawbacks and why there are vesting provisions, et cetera, with respect to some of these payoffs, you know, that you're you're hopefully gonna realize in the future. That's because they need people around for a period of time. They're making these investments in infrastructure and the organization that are going to take time to realize. You know, they're they're adding efficiencies uh to these practices, but all of this is not free. And so, you know, to drive that ROI that everybody can participate in, everybody's got to continue working together. That requires, you know, people uh to be aligned, you know, sort of, you know, from a from a business perspective, maybe from a moral perspective, maybe from a professional perspective, however you want to keep score, uh, that alignment is is you know, builds that,
Every DSO Deal Is Different
SPEAKER_03you know, fruitful working business relationship on top of the professional competence, which is, you know, like Mike said, that we take that as a given at this point. But but that's the part that it's like there are lots of potential partners out there, and maybe they're not all a great fit. Maybe some are fantastic. You know, those are the ones you want to try to find, not just well, you know, uh these guys called me back, so I guess they're the ones. That's that's that's a bad choice. Um if I if I could leave uh one sort of takeaway uh for for folks is is when you're thinking about all of these opportunities, start early. Start early. Uh not and early isn't three months, but uh, you know, if you can if you can be thinking about these things, the more time the better. You know, a year, two years, three years, if you're that kind of a planner, um, you get plugged in with the team that I had mentioned, you can fill in a lot of this um knowledge gap. You can acquire a lot of market information over that period of time when you're contemplating that. And while you're under the hood working with your CPA and maybe with your legal counsel or your advisor, you can start to tighten up the ship, okay, and say, okay, let's do some self-diligence here, some reflection on what our practice would look like if we were going to put it on the market tomorrow. What are the soft spots? How do our what do our financial uh you know controls and procedures look like? Are our financial statements uh even worth a darn? Garrett, you mentioned it's like sometimes, you know, the most value you can add with a small practice is simply to get a competent, uh, decent profit and loss statement out of them, you know, and build that uh infrastructure for them, you know, to look at those things. Do you have an off-market lease at a practice in location that is going to come up for renewal in a year? Well, if you're looking to sell this business in a year and your core economics changes because the rent's going to triple, uh, maybe that's something you need to be thinking about and kind of build that in. Um, you know, all the understanding start to understand all the drivers of your individual practice, you know, and kind of unpack that. There are there's lots of quote-unquote cleanup uh that can be done that um would present a cleaner, tidier, more thoughtful, well-put together package for a potential DSO suitor or peren for anybody else that might be knocking on the door. And Garrett, I think you and I've worked together on a couple of opportunities where you know one of the alternatives was you know what, if nobody ever knocks on the door, all of these practices have been made better. And that's going to go 100% to the practice owner's benefit because what they've done is is they've they've they've aligned, they've they've adopted better practices, they've they've uh increased their core economics, uh, and they've made themselves more valuable, whether that's for themselves or into a potential exit opportunity. That's that's 100% win. And you can see the process early.
SPEAKER_02Yeah, that's a great point, Dennis. I think what I'm hearing you say is that if you're as you're preparing, as you're investigating, preparing for the potential to exit through a DSO, all you're doing is improving your own business. And if you never make that leap, you all that work you've done doesn't go unrewarded. I think that's a very good point. I think that's a very, very good value.
SPEAKER_03There there is a certain amount of deferred maintenance uh in all of our practices. Um if you're serious about aligning yourself for opportunities in the near future, you know, one to three to five years, um, then it's time to roll up your sleeves a little bit, bite the bullet, and say, okay, let's go ahead and start pulling the weeds. Uh, let's, let's, let's start, you know, sweeping the corners a little bit. Um, let's take a look sort of top to bottom and kind of say, all right, what can we do to improve? Uh, what can we do at least to give ourselves and somebody else a clearer picture? And then that may give you some target areas where you can say, hey, okay, we can improve on this. Or, you know what? Um, maybe we want to shift uh some technology towards something that's more aligned with what um what the the market is, that would make for a tidier transition in the future. Maybe that creates some ROI intrinsically uh in our practice. And like I said, if if nobody ever knocks or you decide not to take the opportunity, you've still made yourself better.
SPEAKER_02What about human resources?
SPEAKER_03Understanding you and looking how these transactions transpire, where there may be redundancies that aren't obvious when you're first thinking about a DSO exit. I mean, this is intrinsic to any business acquisition uh process, right? So if you have an independent business, you know, presumably you've got uh, you know, a full tier, or whether these are full people or people who just happen to wear multiple hats, uh, you've got people in in functional roles, you know, across all bits of management, right? So we think, you know, marketing, you know, HR, IT, all of those kinds of things, finance, uh, et cetera. Um, even if that's, you know, again, maybe it's that practice manager who you've grown with and and and he or she wears 12 hats, depending on the on the day it is. Okay, and maybe you've grown to a point where you've got a couple of people dedicated in those roles. You have more people dedicated to billing, uh, you have uh a few people who are are more uh dealing with uh you know HR and scheduling and that kind of stuff. Um where are these people gonna go when you go through a DSO uh transition? How critical are they to the operation of the practice? And what is their role likely to be, if any, on the other side of a deal? So when we're thinking about combining businesses, um, you know, maybe you've got uh somebody who is uh a uh chief financial officer in your practice. Well, uh combine with another larger group, and uh you may have a need for a controller or a billing person uh or local office manager at a location, but you probably don't need a CFO at the DSO level and a CFO at the practice level anymore. So we'll see often that kind of tier of middle uh management in a group, um, you know, that slice goes away. Now, that could be an entire person who doesn't who who goes away in one of these transactions, and you've got to manage that. Um, and that may be that you need those people to stay around for three or six months post-deal in order to effect a smooth transition. You know, that comes at a cost too, because these people know that uh, you know, there's an end of the road and it's three or six months down the road. And so coming up with the you know a package that will incent them to retain them to provide for the smoothest transition, you know, that's that's a football that gets tossed back and forth in terms of how that economics gets gets born. You know, that also big surprise,
Culture, Fit, And Feeling Like A Partner
SPEAKER_03identified a strategic vulnerability to you in your practice and that you're very heavily reliant on this, on these people. Are these people essential? Will they be needed on the other side or are they disposable? And I I say that not in this the most cynical sense of the word, but from the the DSO's perspective, are they just simply redundant? That may be something that you're not fully thinking about. And these may be people that you've shared uh the practice with for many, many years. And so you you need to think about how you the choices that you're considering making are going to affect those if if that's something the way that you make decisions. And most of us are. We care very much about the team members that we have, um, especially ones that have been with us, you know, for many, many years. There, there's much of the practice part of the practice as as as you know, the professionals are. Um, and so that can be you know collateral damage if you don't start thinking about that. Um, you know, and and that's again, that's an another one of those things. Uh retention agreements and things like that. You know, these essentially are uh arrangements between um for non-clinical personnel. Those tend to be uh folks that end up end up uh being employed by uh one of the DSO-owned entities because they can be. Uh whereas, you know, the the clinical professionals typically have to be performed, you know, perform their service for as employees of the professional uh PC. Um so you know, that relationship can change. And also in any deal like uh MA deal, uh not just in the dental or medical space, you know, that creates a little bit of a late deal dynamic that is a bit difficult to manage sometimes because it's essentially a relationship between the buyer and your employees that you have an interest in, but it's not really your decision. It's not your relationship after the deal. They're basically going to be working for them. You don't control the your employees and you don't control the buyer. But everybody has an interest in trying to uh create that alignment for an outcome. You don't want the disruption for your longtime serving employees. Um, you want to get them the best deal you can, but you're not the one that's really writing the check. Uh, you know, and and they want from the organizational side, the DSO side or what I have, the buyer side, you know, they want everybody to have relatively common uh economics and benefits packages. They don't want practice A got a special deal and practice B got a different deal. You know, they kind of want one class of citizen across the organization. Um, you know, and so there can be tension in resolving those things. That very, very thorny uh uh issue to deal with. And we also, you know, people have two feet uh at the bottom of their legs, and change is hard. And when change is in the wind, some people will choose to say, I don't want to go on board with the big company. Uh I that's I I worked for for, you know, I worked for Dr. Miyazaki. And if he's not going to be the one making decisions, then I'm down the road.
SPEAKER_02Um, you know, I think, Dennis, I think the majority of the DSOs try to keep the practices intact and try to keep that synergy going. But I do think it's something that the doctors need to be aware of is that when you hear the word, we always we always talk about this, Dennis. When do you inform the team that you're thinking about selling? And my answer is always after you have to be signed. Because if you do it before, there's a high likelihood that the mental fears that crop up and people think it's going to change, it's going to be different. Um and then the team walks out the door. So I just I brought it up only because I think it's important for doctors to understand that they should understand from a they should seek professional advice before informing the team that this is their plan. Because you may never you may plan it but never do it, but end up losing a great team.
SPEAKER_03That's exactly right. I mean, and this is a difficult balance to strike between uh being fair uh and and transparent, you know, and and honoring the commitment that these uh longtime employees have given you, uh, but also not uh causing undue uh alarm uh or frankly jeopardizing the viability of your practice because you know, uh after the first phone call with the others, the potential other side, you said, hooray, this is what I'm gonna do. And then suddenly everybody uh everybody got the willies uh and it started brushing up their LinkedIn and went down the road and said, No, I don't want to do this. Uh and you know, you lose the good ones, uh, frankly, before you lose the bad ones.
SPEAKER_02Um, lawback provisions, Dennis, that you talked about, which is all of a sudden the doctor's blaming the DSO or the seller's blaming the DSO for causing all the fear, and the DSO says, sorry, you better figure out how to get your team put together because they're not really wanting to run your practice. They're really there, they're really there to try to keep that practice in as a whole. So I think again, I think the biggest thing that I learned in our last few interviews was thinking about transitioning your practice, not as a dexit strategy, but as a legacy practice, as a legacy strategy. I really like that word. We're gonna go from here and keep going as a group. We're not gonna end, we're not gonna stop. And how important it is for the team to understand that and and be on board. Right.
SPEAKER_03And and with the right team and the right uh, you know, buyer group on the other side, those can be uh really good, life-changing, positive uh transitional opportunities.
SPEAKER_00Um, no, I think um now we appreciate your time. This has been a lot of the minutiae, the insights that a lot of clinicians need. So, Dennis, I know we we appreciate you sharing all your thoughts. And if you have sat with us and listened to this or watched this, you've gotten at least a thousand to two thousand dollars worth of value right in this one program. So um, no, we really appreciate that, Dennis. So again, um thank you, Dennis, for being uh part of the program. Dennis is over at Booton Jones, uh a law firm that's in downtown Sacramento. And if um as Dennis was saying, if you need him or would like him to be part of that strategic team, uh your advisor, your attorney, and your tax reminisc, you know, he'd be glad to be part of that team. And I think uh you saw that he has the insights. It doesn't have just have to do with dentistry. So if you're a dentist watching this, but you're gonna roll up another type of business, give Dennis a call too. It's not he's just not limited to dentistry.
SPEAKER_01Dennis, thank you so much.
SPEAKER_00Thank you very much.
SPEAKER_01All right, thanks, guys. Okay then. Mike, thank you.
SPEAKER_00All right, thank you. You guys take care of it.
SPEAKER_01You too. Bye-bye. Bye-bye.
SPEAKER_00All right, well, I hope you enjoyed this episode with Dennis Michaels, and um, I got a lot of information. Every deal,
Start Early And Tighten Up The Practice
SPEAKER_00you should have your team, um, an attorney, uh CPA that understands the tax ramifications, and a strategic advisor. And just remember that when you look at uh a DSO, not saying that it could be that it's a bad thing, it could be a great thing for you, but just remember that each one is unique. Each one has its own kind of governing agreement. So just make sure you have those agreements reviewed and make sure it works for you. Um, they're like apples and oranges, they're hard to compare side by side, so you have to kind of find the fruit that's best for you. And remember that when you sign that agreement, you have signed and entered into an agreement of partnership and collaboration, um, not really of exit. So for most of these deals, you're gonna want to be sure that you have a team that you get along with and a team that will allow you to grow and enjoy the practice of dentistry. And I think that's the the part that makes it so important. There's always the money component. But if you're gonna work for another two or three years, make sure you enjoy that time. All right. So I'll see you during the next episode. Thank you very much.