First Time Buyer Secrets from a Dental Practice Broker

This episode of "Dentist to DeNovo" features host Jonathan Miller has an in studio discussion with Stephen Au, a seasoned expert from McLaren & Associates, a leading dental transition group. With nearly 20 years in the dental industry, including clinical and practice brokerage roles, Stephen shares insights on navigating dental practice transactions. The conversation debunks the myth of an adversarial relationship between buyers' and sellers' brokers, emphasizing aligned interests when brokers prioritize success for all parties. They explore challenges in un-brokered deals, the importance of realistic expectations, and the critical role of thorough financials and team dynamics in acquisitions. Key topics include the pitfalls of desperation buys, the value of investing in staff, and the emotional versus logical aspects of purchasing a practice. The episode also touches on market trends, such as tight dental talent and the impact of leases, offering practical advice for buyers and sellers alike.

Transcript

SPEAKER_00 0:00

Welcome to the podcast from Dentist to DeNovo. This week, we are in studio. It might look a little different than what you've seen in the past, and I have the pleasure of having Mr. Stephen Au with me. Now, before we get to Stephen, I will tell you a bit about him. I've known him for years. He's actually been in the business now for almost two decades, and I don't want to age him, but I'm aging him. Almost 20 years now, he's been on the clinical side. He worked with one of the largest accounting firms, top 20, if I'm not mistaken, and now he's on the practice broker side one of the largest dental-specific transition groups in the country. You guys do more than dental? We only

SPEAKER_02 0:36

do dental and mainly work with private equity, but we also do premier private practices as well.

SPEAKER_00 0:40

And that group is McLaren& Associates, right? Yes. I've gotten to know those guys well. I knew them before you got in the game. And honestly, man, the biggest reason why I wanted you here is because so often when I work with doctors as a buyer advocate, they assume that it's going to be an adversarial relationship with the seller's broker. And so I thought, what a great opportunity. I've known you. I trust you. And I thought, oh, great. Excited to have you here so we can have a chat about why it shouldn't be adversarial.

SPEAKER_02 1:08

You know, I think the... If they're a good broker, I genuinely think that the interests are in line with the buyer's representative, buyer's consultants. And it's simply because, look, at the end of the day, you want people to succeed. And you have to do that by surrounding the buyer with a good group. And to be clear, we represent sellers. And so we try to surround buyers with their own team. that are just not us because there's obviously a conflict of interest there. And so it makes sense for a consultant like you to step in and help them because a lot of these people have to be guided. A lot of them need the help and the hard part is they don't know what they don't know.

SPEAKER_00 1:57

Right, yeah. So it's funny because I find that the toughest part we'll call them deals or transactions or acquisitions, are when there is no broker on the other end. And a lot of doctors will look at me and go, well, why would you say that? Wouldn't it be easy for me and you to, you can help me and we go to a doctor, no broker, and kind of get whatever we want? And I laugh and go, well, the biggest challenge is we don't have anybody corralling the seller. We don't have anybody kind of giving the seller, hey, this is what is expected. This is what's required. Banks are going to ask for financials. CPAs are going to ask for financials. Buyers are going to ask questions. And it also allows us when I typically say, well, doctor, when there's nobody helping the selling doctor, when there's no broker involved, the seller gets to make up the rules. Right. If they say, hey, you know what? The sky's green today. And you go, well, it looks blue to me. They go, no, it's green because I

SPEAKER_02 2:48

said so. I have that going on right now. And a lot of times there are cases where as someone who sells practices, I will be very honest with doctors and just let them know, hey, you don't need a broker because it's your associate of 20 years or whatever. At that point, get some attorneys, go to town, it's fine. Even with that, I've had doctors come to me specifically wanting to preserve the goodwill just in case the transaction doesn't go through. And so I think that To your point, I have this now where a friend is buying from their owner and they've been an associate there for five years. And every other day, the price changes. You know, the doctor wants more and then the rent's going to double. And you're like, look, there are rules of engagement. There's things that are customary. And just because you want something or you feel like your practice is all of a sudden on the uptrend for the last two months, doesn't mean you get to demand more money. And I think... part of my job as someone that sells offices is to really set realistic expectations, right? And we also want to give the seller the feedback that, look, maybe this person isn't the right buyer, right? Because that does happen sometimes. There's a lot of people out there who, you know, like the idea of ownership, but don't want to fully dive in. You know what I mean? They're kind of one foot in. They want to dip their toe in. And our job is to kind of ferret that out a little bit and be like, look, maybe like i know that they're here and they're available um it's like dating you you don't you don't marry the first person you see all the time right maybe you get lucky right maybe i know lindsey's the only person you ever dated right yeah yeah yeah but but maybe you get lucky and that happens but sometimes you just have to you know pull them in a little bit reign them in and and set expectations and i think the other part of it to your point i've seen a lot of doctor doctor transactions and It's very tumultuous. They don't have P&Ls. They don't have balance sheets. And you get to this point where every single part is a stumbling block. Probably the best way for you to lose interest from a buyer.

SPEAKER_00 5:00

Totally agree. And you had said, being honest with them, I tell most buyers, hey, I'm here to tell you what you need to know, even if it's not what you want to hear. You might need to know that it's... X, Y, Z on how they make money or what their profitability is or what have you. And you may have thought, oh, well, they're doing a million five. Why aren't they making a half million? They're only making 350 or four. Well, that's what you need to know. It may not be what you want to hear. And on top of that, I wish more buyers that were working in their associate offices. They don't have to use someone like me, but I kind of wish they would use someone like me or a CPA or someone to vet that out. Because, again, you have owner-doctor, and I find this a lot, soapbox, if you will, older male doctor, young female associate. There's going to be a mansplained situation. I mean, so that's

SPEAKER_02 5:47

actually what's going on right now in that transaction. It's literally what's happening.

UNKNOWN 5:51

Right.

SPEAKER_02 5:52

And they're trying to justify what they're doing. You're like, you can't just change the price. You can't just change the rent. Your profitability is predicated on your existing lease situation, on your existing rent situation, your existing numbers. But I'm right there with you. And people ask me oftentimes, is a CPA enough? That's probably a good question to get asked. And I tell them, listen, the numbers tell you one part of the story. The other part of the story is what's not represented, possibly in the numbers, right? It could show you profitability of 30, 40%. The other side of that is, well, how about the practice management reports? Most brokers, ourselves included, will provide you practice reports, but you have to understand them and those are way less straightforward. And so it's about understanding are you a good fit for the practice, right? I've had people who buy practices that don't do ortho and then they're like, oh, I didn't know the practice was 50% ortho. And you're like, yeah. And that's a silly probably example because that's so easy to ferret out, but they just miss that point. And that's why it's important to have advocates and someone to kind of guide you along the way simply because you could be making a million dollar mistake.

SPEAKER_00 7:05

Right. It happens. I think there's something I wish more buyers knew, which is CPAs are great, but the numbers tell, I say, about a third of the story. I say the other two-thirds comes from practice management reports, and then inside there also what's going on with the team dynamic. So you know how you guys give that, like, hey, here's who's there, so many dental assistants, hygienists, et cetera. I look at that as well as, okay, well, how long have they been there? Is anybody going to retire when Seller retires? They've been there 25, 30 years as well. We might lose those folks. So that tells us a bit about the story. And then we have, obviously, the practice management reports that tell us about the patients and how did those numbers end up on the tax return. Now, that's something I wish more buyers knew. To put you on the spot for a second, what do you think... something you wish more sellers knew? Because I'm going to tell you that I bet you most sellers think, well, Steven, you just tell me whatever we can sell it for, and then we'll just make up the price. Come on,

SPEAKER_02 7:57

man. I wish they knew that, one, there's always a cap. I just got off the phone with one guy, and he's like, how about 110%? I'm like, listen, banks don't loan to that. I wish they knew that leading up until they retire it's okay to take deductions but within reason right because we see it all the time where they're trying to justify the fact that they wrote off their yacht or whatever it is or they bought you know a lambo and they want to write it off or i mean those are extreme examples but i've had people write off planes i've had people and you just you're like listen trying to explain that to a bank to say well this is his the reason is he's paying for a hangar in jet fuel like So difficult to explain. So I think leading up into that, it's really it's important to have a good CPA, good financials. I'll tell you, my struggle has been probably the hardest struggles have been with CPAs that are non-responsive, that don't get financials in time, that you're going to sell. and they still need to do three years of tax returns. And it's super common, unfortunately. You'd be shocked at how many people don't even follow a tax return for three years. And you're like, how does that work?

SPEAKER_00 9:14

I would be shocked because I think there's also it's funny when I know when they're kind of disorganized on their side when you know we get to this point now we're shooting this episode it's June halfway through the year pretty soon a lot of banks are going to start saying let me see a six month P&L and when they're like why do you need to see that you're right oh yeah your CPA is not too organized

SPEAKER_02 9:34

yeah and you know the hard part about this is it all falls back on us meaning we try to set the expectations and I've told people like you need to make sure as you're going through this that you're you're up to date on your books all the time. Because at any point, they could ask you to pull a report. And if you don't have that and you don't produce it for 30 days, it holds up the transaction for 30 days. And again, as we say, time kills all deals. People lose interest. And it also says something about your practice if you are highly disorganized.

SPEAKER_00 10:06

Very true. It gives a buyer cold feet. Makes the buyer look around. Right. And sees something

SPEAKER_02 10:10

else. Something else might come on market. They might get pregnant and move.

SPEAKER_00 10:15

Who knows? Who knows?

SPEAKER_02 10:16

Who

SPEAKER_00 10:16

knows? Who knows? I would say something else I think I wish more buyers knew as well. And that is when a buyer gets a CPA, I'm not anti-CPAs on the buyer side, but I will tell you that if your CPA loves the deal, but the bank doesn't, then it's not going to happen. So your CPA as a buyer could go do all the numbers and say, this is a Killer deal, great deal. Bank says, eh, we don't like it. Not going to approve it. Doesn't mean you can't go to another bank. Plenty of banks out there. But if the bank doesn't love it, it's not going to happen. And on the flip side, if the bank loves it and your CPA is going, eh, I don't really love it, there's some things that more often than not, I see buyers do the deal anyway.

SPEAKER_02 10:52

Yeah, yeah. And there's so many people that don't necessarily understand dental, and you know what I mean, and they don't understand certain equipment, ad backs, and things like that, where you have a doctor that's investing in their business over time. And ultimately, it's a good thing because it means whoever steps into it should have some technology or some kind of continuity with the investment piece of the practice. But the CPAs say, oh, they spend way too much. It's not a good practice. They're over leveraged or whatever the fact might be. To me, you have to get someone that's dental specific, that understands when a seller is investing in their business. And to me, that's a good sign. What you don't want to see is someone who never invests in their business, right? Because that's what you're buying. Right. Totally true.

SPEAKER_00 11:36

Totally true. I also will see, so if the CPAs on the buyer side can be a little bit what have you, as far as maybe they're a little strict or they're a little loose or all that, I find that in the lending side, the banks vary so much lately. Somebody loves it, somebody hates it, and that really throws the buyers off.

SPEAKER_02 11:58

It does. I mean, there's been quite a few deals where one bank will approve it, one bank's kind of on the fence, and one bank will decline it, and it gives someone cold feet. Probably a good example of this is I was doing a deal up north and the issue was Delta Premier. And two banks approved it, one declined it. Ultimately, the doctor got cold feet, walked from the deal, eventually came back because it was a universal problem, meaning everyone in that area was Delta Premier. So if you're going to buy a practice, this is going to be a universal problem. It's not specific to the practice I was selling. They ultimately bought the practice. And I talked to the underwriters of these banks. I won't name who they were. And one of them said, we don't like it because here's what we see in our portfolio where these doctors might underperform. Then I talked to another bank who was like, well, from what we've seen on our data points with 1,000 offices, they just replaced the income with some other stream of another clinical aspect, a different modality. They place implants. They'll do more Invisalign to make up for the kind of delta shortfall, right?

SPEAKER_00 13:04

So you find them replacing it, and then you're basically getting this conflicting bank thing. Did that buyer come back? He did, and he ultimately transacted,

SPEAKER_02 13:10

and it's crushing it, right? Probably crushed it, right. Crushing it. And ultimately, listen, I mean, let's just call it what it is. I think... doing well, and we've discussed this a lot in the past, it's a mental framework. If you want to do well in life as a doctor or any business, you have to mentally be prepared for it. And that's it. And my favorite quote is, if you want to be a successful business owner, you only have to work half a day. You just have to pick the 12 hours you want to work every day. And that's what you have to be in it for, because this stuff does not exist in a vacuum. You're not going to you know put something an x from your house and then all of a sudden you're just going to get a line out the door yeah um you know and we always say listen the numbers are logical but the buy is always emotional right really it's like what's the draw are you drawn because of the location is it because of the patient pool i think number one the numbers have to make sense just as a starting point right that's just a very basic level starting point second part is Does your treatment modality line up with the seller? Very good point. If they're aggressive and everything's a crown, as the saying goes, if you're a hammer, everything's a nail. And if that's not you, you probably shouldn't buy that practice. Or you take issue with that. You probably shouldn't buy that practice. To your third point, you have to know the staff. What's that look like? How do they treat their staff? How do they run the office? There's got to be a kind of continuity of personality there, too. And so, yeah, you're probably right. It's probably a third numbers and probably 70% other, right? And the hard part about what you do is that that other, it varies so widely. It depends who you're talking to. Some people are like, I can manage people no problem. Some people are really, probably overtly interested in the clinical aspect, right? When the reality is patients don't know any better. Right? So it depends. But yeah, the buy is very emotional. The numbers are logical.

SPEAKER_00 15:21

You've probably seen both though, you know, a doctor transitions, And the patients go, I didn't even know, oh, Dr. So-and-so left. Because they're so in line with the team and with the office and what's going on. And then other scenarios, it's like, oh, Dr. So-and-so left. And then I will tell you, the biggest thing for me with helping a buyer is the transition of the team. If the team doesn't want to go in the direction you want to go, then you're not going. And on top of that, you find that With that team dynamic, I tell doctors, get the team's trust first, then the patients will follow. If you do not get the team's trust first, and I've seen it where, let's face it, You're a doc. You're selling. It's a four-day-a-week practice. Maybe it's a three-day-a-week practice. Sounds great. Buyer says, I can have a fourth day, a fifth day. This thing's going to crush. And then you tell the team this great idea you have. And they're like, we kind of like this three-day-a-week game. For the last

SPEAKER_02 16:18

30 years of their life, yeah. Well, we like this four-day-a-week game. 100%. You know, it's funny, right? Because one of the things that I always recommend to buyers, I'm like, look, you're going to go into this. You don't know these people. But just start by giving them something, whatever that looks like. Great plan. Love that. Yeah. I'm like, go give everyone a$2 an hour raise. Yes, it's not probably the best way to spend your money, but invest in your people, invest in their continuity, show them you care, start from a good foot. The amount of people that I've seen walk into office, start cutting hours, they start nickel and diming their staff members, and then they're like, well, they left, and you're like, You wonder why? Who wants to work for that? I mean, they can go get nickel and a dime somewhere else and probably get a$5 raise down the street. That's just a fact. This market's tight. The talent is tough in a dental practice. And you and I know the number one phone call we get from everyone and anyone who are friends is, do you have a treatment coordinator? Do you have a hygienist? Do you have an assistant? Do you have an RDA? Market's tight.

SPEAKER_00 17:20

Take care of people. Always true. I will tell you that I usually, when I'm talking to buyers and we always get to a point where like, all right, well, is it a good deal or not? You know, I tell most doctors, anytime I see somebody slightly, we'll call it overpay with air quotes, they end up in a better position. Anybody that took some deal, some I'm just giving it away, or I ground somebody down on purchase price to get whatever deal was in my mind, usually they struggle.

SPEAKER_02 17:48

You know, it's funny. I... It's one of those things where it's hard to convey because we've been in the industry so long and we see it, meaning I tell all buyers, I'm like, look, one, your mindset has to be in the right place. As a baseline, if you're a buyer, let's start with your clinical. You have to be good. It can't be you're sort of good, right? It's like being a pilot. You can't land the plane sometimes. You have to land the plane all the time, right? And that's number one. And I've had people who just They thought they were great clinically, and they step in, and it's not a practice builder. In fact, patients start leaving because everyone has post-op sensitivity. Not a good position to be in. The second part is just the mental framework behind being a business owner. I'm a big believer that if you can take$1 and make$1.20, it's a great skill, impressive. If you can take a dollar and save 80 cents, that's not a skill. Listen, the abacus is the oldest invention ever. It predates us by hundreds of thousands of years. Saving money is not a skill. And I wish more... business owners understood that, just in general. Because you can never cut your way to prosperity. It just doesn't work that way.

SPEAKER_00 19:07

I will tell you the challenge that I hear about from young doctors or young and career doctors is that I think there's still folks out there kind of getting this advice on I know what my father gave to me, right? As a military guy, Midwest guy, he said, hey, you know, take$10,000 and put it in a savings account with a high interest rate and it'll be a million dollars when you're 55 or 60. And today that's not true. And you cannot save your way to wealth. You absolutely have to find ways to invest your way to wealth. And I also think that buyers should appreciate that with what they're buying. We're buying somebody's practice. We're making an investment into our future, but this is also somebody else's version of, hey, this is my investment into my retirement, my wealth, my strategy. 100%.

SPEAKER_02 19:48

And so I've said this a lot, and this is not tax advice. Consult your CPA. It's not wealth advice. Consult your CFP. Disclaimer alert. The reality is making$150,000 as a business owner is probably better than making$250,000 as a W-2. Just hands down, right? Just the ability to write things off. And for those of you watching, again, I'll give you a very easy example. If you were to buy a$50,000 car as a W-2, California yeah you have to make a hundred grand you have to pay your taxes you have to pay sales tax you buy the car after you make the hundred grand if you're a business owner you just got to produce 50 grand you buy the freaking car yeah right at the end of the day and that's your entire life meaning yeah again not CPA advice your Costco runs your meals out your your continuing education your travel all of that right and so you're using cash flow to live your life meanwhile you have this the ability to tax shelter that's huge i mean that that's that's really what is like 57 of all the revenue united states comes from small businesses yep right like that's why you want to be a business owner because It is really difficult to get ahead if you are a W-2 employee. Let's just put it out there. It is what it is.

SPEAKER_00 21:09

Agreed. I find that whenever I'm talking to buyers about these deals, good, bad, invest a little more, et cetera, some of the stuff I've mentioned, I also say, look, there's really kind of three versions of buying a practice. There may be three reasons. There's one of them you never want to be in, and then there's the other two that are acceptable. The two that are acceptable, you want to buy one for opportunity. I can see the future on this thing. Maybe, doctor, to your point, a little conservative. Yeah. A little bit. Not everything's a crown. And maybe I don't have the technology. And I can add to this practice pretty quickly. Opportunity. The other one is, I say, just kind of tried and true. Historically, while we know if we were financial advisors, historical performance is no indication of future success. Right. However, we can see that, hey, this thing is continuously done X. Right. And the team has helped it get there. And the team's going to stay with you and be strong. And those are all very good indicators. Right. The third one that you never want to be is desperation. Yes. I just... gotta buy something, man. I'm sick of being an associate and there's nothing around and this guy's down the street from my house, I'll figure it

SPEAKER_02 22:04

out. I mean, you know, dating is probably the easiest kind of comparison. Like, you just don't want to be desperate when you're dating. Marry the wrong person, date the wrong person, you know? It's, you know, you kids watching, do not swipe right on everything. Yes, please. Yeah. It goes with the practices as well. Yes, yes. I'm there, you know, the amount of friends that I've advised, I mean, I get calls because everyone knows I sell practices and so they'll call me for my two cents. And if it's not a great practice, I tell them, look, I'm not trying to step on the other broker's toes, but this is not a great practice. But if you were to buy this, here's what you would have to do to either grow it or turn it around. Are you comfortable with that? It's much like fixing up a house. Sometimes you do want the ugliest house on the block. And I'll give you a good example. You find a practice in Venice, California. You should buy it. I don't care what the condition, because you cannot build. And if you want to be in that market, Even if it's garbage, you've got to find a way to make it work because you want to be in that city. Again, I'm not telling you to overpay. I'm not telling you to be desperate. But what I'm telling you is that's your only way into that market. Very true. Very true.

SPEAKER_00 23:10

Good point. And there's definitely a lot of pockets in the U.S.

SPEAKER_02 23:13

Yeah, I mean, the Palisades, unfortunately, was one of them, right? Yes, very true. It was one that if you... They didn't allow permitting for medical buildings. And so you couldn't build a dental practice. La Cunada Flint Ridge is probably another area. You cannot really build a dental practice in La Cunada. It's near impossible at this point. And

SPEAKER_00 23:30

I mention this to docs because I get some doctors Almost all my business comes via word of mouth, doctor to doctor, as you know. And so one doctor will do a startup and say, well, I have a buddy that wants to buy. They think I'm crazy for doing a startup, but can you help them? So years ago I got into that version because I'm like, yeah, I can help, and here's a process and a path. And so then I'll get doctors that kind of are looking at both because I do both. So they'll say, well, can I maybe look at the startup, but I have a few practices I'm interested

SPEAKER_02 23:56

in.

SPEAKER_00 23:56

And in some cases I'm like, look, there's no inventory to do a startup. These practices that you're interested in might be all that's here. Correct. And this is it. Yeah. We've got to figure one of these out or we can sit around and wait. 100%.

SPEAKER_02 24:06

Opportunity cost that comes with that. You know, it's funny because that's probably the million dollar question we get asked every day, right? Like, should I do a startup or should I buy? And it's funny because I sell practices, but I'm also, I think there's not a lot of inventory in general out there, right? Very true. The number one thing that Number one thing doctors are always worried about, right? It's what if I fail? And you and I are the opposite. We're like, what if you're a massive freaking success? There's that, right? Like you could be a massive success. And I remind everyone, I'm like, listen, 100% of practices that exist today were once a scratch practice. Like this is irrefutable. You cannot argue this. And so what's the upside of, let's say, starting up? The upside of starting up is exactly where you want to be. It's new. It's the location you want to be in. It's in the building you want to be in. It's a culture you want to present. There's upsides to all that. And financially, it's structured very differently than an acquisition loan. And so it gives you a little bit more runway. You can maintain associateship. You can start. I say that because we've talked to enough doctors that have been on the fence for five years. And at a certain point, time is money. You just got to make a decision. And the reality is you're probably not going to go wrong going either direction. The trouble I see is a lot of times there's too many opinions from too many people. And I'm not saying that's a bad thing. I'm saying you should listen to people's opinions, but you should take it with a grain of salt. Everyone has rose colored glasses for what they did. If you talk to a guy that started up, he's gonna tell you should only start. You talk to a guy who bought five offices, he's gonna tell you should only buy offices, right? You and I know people who are very successful in both arenas.

SPEAKER_00 25:55

Yep, yep. And I know people that are successful at their HMO Medicaid practices. I know folks that are fee-for-service folks. And the fee-for-service guys would say, oh, those guys are nuts. And the Medicaid HMO guys are going, I have zero cash flow issues whatsoever. I've got two houses. I think if you want to be a fee-for-service guy, go for

SPEAKER_02 26:14

it. You know, I have a friend who, they're brothers. Let's hope they don't watch this podcast. But one jokes with me, the the premier cosmetic dentist in a city that will remain nameless, tells me that their brother is exactly an HMO and just crushes him in volume. At the end of the day, A business is what you make it. It's predicated on the individual. It's predicated on the person that's in the driver's seat. It's not about the existing business itself. It's not about the elections. It's not about what's happening in the economy. It's not about war. And you and I have been in this long enough. When I lecture, I'll go and I remember, I'll ask people, how many people here went through 9-11? Most of the hands go up. How many people went through the Great Recession of hands go up. How many people went through COVID,

SPEAKER_00 27:12

right?

SPEAKER_02 27:12

Look, they're still here and they're still thriving. That's the message at the end of the day. It's what you make it. And the reality is fortunes are made during a recession. So stop being scared of it. It's probably your time to acquire, to expand, to buy a building, right? But everyone just wants to hold tight and pull back. And I get that. Like, dentists by nature are conservative. They're taught to be conservative, right? You ever read the book, The Happiness Advantage? Who's that? Sean Acor. Maybe. It's a great book. And so the notion of the book is it posits positive psychology. Not like frou-frou positive psychology. It's very interesting. It basically says that If you are neutral, you get almost the same outcome as being negative in your mental thought process. And so one of the studies in this book is very interesting. They took two groups of doctors and they replicated the study over and over again. And they gave two groups of doctors the same pathology. They gave one group a cookie. They called that psychological priming. They were not allowed to eat the cookie for sugar control. The group of doctors that got the cookie arrived at the pathology, the right diagnosis, much faster than the other group and were 20% more accurate. And there was less of a phenomenon called anchoring. Anchoring is when you're an endocrinologist, you think it's a gland issue. You're an oncologist, you think it's cancer. You're a cardiac doctor, you think it's a heart issue. There was less of that in the group that got the cookie. And so the premise was, if you are happier and you move in a direction where you're more positive, it helps you in your career. And consequently, one of the studies they did was they did a study on auditors who work for KPMG, which is one of the largest accounting groups in the world, right? And they found that these people in their private lives, all they could see were flaws and issues because their job was to look for errors in books. And I feel like dentistry is the same way. Listen, you're taught to seek disease. You're taught to look for flaws. And so when you buy a practice, The number one thing people always say, which baffles my mind, is what if I fail? How many times have you heard that in your career? Plenty. And you're like, doctors don't fail. It's not a thing.

SPEAKER_00 29:35

So I'll say this, and then I'll ask you something. So the only other thing that I really wish more buyers knew was that, well, I think it's maybe 1A, 1B, or two parts. You had said there are a lot of people out there that are giving advice, giving counsel, giving guidance, what have you. Take it with a grain of salt. So I wish more folks actually sought out information over affirmation. It's very, very easy to go down the path of like I'm right and I'm going to go down this path of telling me I'm right. And I think that comes a little bit from what team is around you. Having some people on the team that may not say every idea you have is a good idea. And then on the flip side, though, I will tell you there are some folks out there that– I try my darndest to stay in my lane. Sure. That's what I do. That's what I tell doctors. I'm not giving you legal advice. I'm not giving you CPA advice. Here's where I focus on and here's where I can help you. And if that's not good, then go seek out one of those folks that does that. If you're looking to save a couple of bucks and you don't want to hire an attorney, God bless you. Probably don't want to work with you anyway because you're going to make mistakes and you're probably going to blame me.

SPEAKER_02 30:34

Yeah. I'm a big believer that you have to surround yourself with a group of people, no matter what the cost, because the opposite of making a mistake is way more costly. It's like skipping a home inspection to save two grand. I get it. It's not cheap. But at the same time, if it prevents you from making a multi-million dollar mistake, there's something to be said about that.

SPEAKER_00 30:57

Car insurance is expensive, but... One of you didn't have it. 100%. Heaven forbid something really serious happens, you have zero insurance whatsoever. Right, right. And I think there's some folks out there that don't do a very good job of staying in their lane. So as buyers, the only other challenge I see out there in the marketplace is they've got a tougher job figuring out, well, who's doing what and do I need them on the team? You know, a CPA that says, I also do consulting or attorneys that also venture into the CPA world. Or I think for someone like you, you know, grinds my gears when I have somebody who, I don't want to say parades, but I'm going to say parades as a CPA and then says, oh, but I really make my money selling practices.

SPEAKER_02 31:38

That's cool, dude. 100%. I'll tell you, we had one where the quote unquote CPA, and again, I love CPAs. There's not a knock on CPAs to be absolutely clear. But one, they were out of state. They didn't know the market. They valued the practice at 130%, which any buyer listening is going to be like, roll their eyes immediately, right?

SPEAKER_00 32:02

Sellers, though, might go, this is my guy. Yeah, yeah. So the seller was like, this sounds great until it sat

SPEAKER_02 32:05

in the market for two years, right?

UNKNOWN 32:07

Right.

SPEAKER_02 32:08

I got on a contract in two weeks. But again, I had that come to Jesus moment with the doctor where I was like, listen, there's no shot of you even getting remotely close to this number. Let's be realistic here. And if you don't want to be realistic, I'm not your guy. Go sell with someone else or list it yourself. It's just not happening. But yeah, I think that One, there's a conflict of interest when you try to do too much. And to be clear, I've had people come to me and ask consult. I'm like, it's not what I do. I don't want to mislead you. I know a lot. It's not what I do.

SPEAKER_00 32:41

I will say how I found McLaren, I found them years ago because they do great reporting. And I was impressed when I had a doc bring me a McLaren report. He was the associate in the office and he said, hey, these guys have someone that represents them, et cetera. And I said, cool. And he's like, they got a report. They have this whole thing. Sent it to me and I was like, it's actually really good. And I'm like, this is actually very well thought out. They've got you know, kind of plenty of reports, data, stuff to back up where their numbers are at. And I said, look, I can try and poke holes in it if you want to, but this is a really good report. They've taken in a lot of considerations in the report. So outside of verifying said data, because obviously they just had the report, we can go through and verify the data and look at the numbers and stuff. And having like maybe a second set of eyes or a second opinion.

UNKNOWN 33:24

Yep.

SPEAKER_00 33:24

This is a really good report. And then I actually went back to them a couple other times when I would have a doctor who wanted to sell to their associate. And they were like, but I need a number. And I was like, well, I'm not going to give you a number. We need somebody to help you with this. Let's reach out to these guys. And then the reports they give with the numbers they provide, I'm still impressed today. And there are other companies that have come along and they bring these reports and things. Half the time, they're third-party vendors that they've just pulled in, slapped their letterhead on and said, here's our report. And I'm like, but I could– I could technically go get the same information on the internet from the same companies that you put on this report.

SPEAKER_02 33:55

Right. And it's funny you say that because, again, a lot of my friends will ask me to look at things. I'm like, how did you even arrive at this number? Yeah, yeah. And it was like, you just threw something at the wall to see if it's going to stick. And I've had plenty where it's over 100% or right at 100%. And you're like, look, no one's going to loan to this. It's not even remotely reasonable. And this happens quite frequently on really small practices for whatever reason, sub 500s. So many of these guys just value stuff at 100%, 110%. The most difficult to do. The most difficult to do. Sub 500, yep. Sub 500, most difficult to do. And really, just unreasonably. reasonable as a number, right? There's not enough cash flow to even support the debt at that point, typically. Yes. Typically, right? But yeah, I'm right there with you. I see a lot of that. And I'll tell you, as someone who's worked on these valuations, it takes us a long time. I did one last week. It probably took me a solid 10 hours to work through the numbers. But the point of that is to own the information and to really get a deep, thorough understanding of the practice. And you should see some of the questions we ask the sellers. I mean, sometimes it overwhelms them, but it's all in the, we do it for the sake of being as thorough as possible and making the transition as smooth as possible on the backend. So if we're thorough upfront, then the backend's way easier.

SPEAKER_00 35:20

There was something you said in there on the numbers and the data. and some of these third-party evaluations to see what sticks. And I find that there are– so– Let me take a step back. Those sub-500s, for anybody listening or watching, what we're talking about, and you can correct me if I'm wrong, what we're talking about is a practice that's in a revenue stage of less than half a million dollars, trying to sell for a half million, or even 450 or 400, pretty high up there. Those are the toughest to do for a lot of reasons. But realistically, for anyone listening or watching, it comes down to the bank lending the money. And they look at it and go, well, gosh. I tell a lot of doctors, the biggest challenge with those offices is, the bank's startup projection is usually more often than not higher than the revenue that this office is doing. So then the bank is automatically going, well, I'm going to lend you money. You say, this guy's been here for 20 years. He's got a great reputation. It's doing less than a startup is or what we projected to do. So that's kind of like saying, hey, that person who just got their driver's license is as good of a driver as you've been for the last 20 years on these Southern California roads. Shouldn't be that case. And then in addition to, you know, a lot of times the cash flow doesn't support. You're making less money doing that than as an associate. And while better, to your point, being in that version than being a W-2 associate, when it comes to the bank, it's like, well, in the end, you're not going to make enough.

SPEAKER_02 36:40

Yeah, I mean, let's just put numbers to this. I mean, if you ever practice a student half a mil, usually the overhead, especially in Southern California, overhead's going to be insanely high. So you might be walking with 25% of that. So you're talking about$125,000 before debt service. And then... You know, the broader issue now is student loans as well, right? So there's student, the student loan component personally for the buyers. If they want a house, if they have cars, if they have their own personal debt, that practice needs to support that personal lifestyle. And more often than not, a lot of these practices don't. That's not to say, I've sold some 500s to be clear. That's not to say they're not worthwhile, but it needs to make sense. And It's

SPEAKER_00 37:25

got to be the right buyer.

SPEAKER_02 37:26

It's got to be the right buyer. It needs to be open the right number of days. What you can't have is a practice open six days doing$400,000 a year. You're never going to survive, right? And you can't cut days because now the patients are so used to it. Again, all practices sell at a certain point. It's doable, but it's probably not ideal.

SPEAKER_00 37:46

I think you have to have the right buyer and you also have to have the seller who's in the right mindset. If they're trying to sell half a million dollar practice to say, well, I have to sell for half a million, maybe I have debt on it or this is my retirement plan or whatever, you're really at a kind of a lose-lose.

SPEAKER_02 37:57

Yeah, yeah. Especially, I mean, it's funny, the amount of EIDL loans that exist today. Like if you guys are listening and you're a seller, please deal with your EIDL loan. Yes, yes. Good point. It needs to go away. It doesn't magically disappear. True story. I got up right until the day before close once. Yeah. And I asked the seller, been in practice for 50 years, no reason for me to think the guy had any debt. Paid off practice. And then the bank runs a lien search like, hey, did you know he has an EIDL loan? And the doctor comes back to me and goes, I thought it was a personal loan. Like the Small Business Administration does

SPEAKER_00 38:34

not do personal loans. You have to pay this off. And there's a group of folks that think they just go away. There's a group of folks that just thinks, oh, well, no one said or done anything, and they just vanish.

SPEAKER_02 38:44

If you are listening, and you do want to sell in the next five years, please address that. Good point. It is an issue. Good point. If you are an owner and you're selling to your associate, please address that. You have to subordinate it. or do something with it because it's a non-serve

SPEAKER_00 38:59

for most banks. So let's rapid fire here because we're coming to the end. And so rapid fire, what things make a great buyer?

SPEAKER_02 39:08

Right mindset, clinically competent, not just confident, but clinically competent, right mindset, growth mentality. I mean, it's everything you would think of when you think about what a good business owner, and just not scared to fail, like failures and illusion. Everyone does well. You just have to put in the effort to figure it out. Okay. What makes a great seller? Someone who genuinely wants the best for the patients and their staff. What I've learned is that bestsellers, Continuity of care is number one. Okay. Continuity of staff is number two. Okay. And money is third. Okay. And it's usually always in that order. And even the ones who tell me that money is number one and they're a good seller, it always flips to the other side. I've seen it enough times where they tell me they care about money because it's their baby. And then when it comes down to brass tacks, they find someone that they know is going to take care of the patients and staff. They don't care about the

SPEAKER_00 39:58

money. Okay. Anything you hear in the marketplace that you're like, oh, that's nonsense. That doesn't really matter that much.

SPEAKER_02 40:04

You know... Getting more on the private equity side, I will say that there's this illusion that DSOs are evil. And I think that that's not true because it's compromise of the doctor's peers, right? The doctors still run these. They're still doctors. And the reality is some of these practices are so large that no bank will loan to a private buyer. If you have a$7 million office... one which private buyer wants to buy that or is not scared to take that debt on right even if it's two or three doctors the banks can have a very hard time lending and so i've learned over the years that there's a lot of good people who work for these dsos and The reality is, again, I'm not necessarily advocating for this, but they serve a population based on 99% of doctors just will never see in private practice, don't want to see, right? It's kind of like the HMO doctors. They serve a patient base that no one else wants to touch. Fair.

SPEAKER_00 41:01

Do you guys lean one way more towards EBITDA, seller discretionary earnings? Obviously, some folks say, well, I should sell for 95% of my previous year's collection. It's

SPEAKER_02 41:11

typically EBITDA on the private equity side, I would say. On the On the private practice side, it's purely cash flow, right? Yeah. Buyer's discretionary cash flow,

SPEAKER_00 41:22

customary cash flow. Okay. Okay. Good. I always like to talk to them in terms of seller discretionary earnings or, to your point, buyer's discretionary, what they expect to take home. Right. And I think that when folks start comparing EBITDA, especially in buyers, and this is As somebody who's on a podcast now talking, there are too many folks out there on podcasts talking in terms that don't apply to the single doctor buyer, the private buyer, if you will, not the private equity folks. And understanding that EBITDA conversation and the multiple love and blah, blah, blah. Look, at the end of the day, the dentistry that we're talking about is still an owner-occupier business. Correct. It only is as good as your hands.

SPEAKER_02 42:01

100%. Tony Robbins said if... If you have to be present to make money, you're a sole proprietor. If you can create value in your absence, you have a good business. And I think that's really the difference between someone talking EBITDA and someone talking cash flow. Usually someone who can create value in their absence, they usually have a very healthy business. I will say the thing, EBITDA is... slightly overused at this point. Everyone talks about it. Thank you. I mean, if you're on the clinical side, it's like when people talk about the 3, 4, 5 Y's zirconia, it's like no one cares. It's all the same. It's all the same stuff at this point. You know, it's overused. And the only thing that matters is how much you're going to take home as a private buyer. That's the only number that matters. The one thing that just popped in my head that does bother me that I hear a lot is these podcasts that tell people you have to have six, seven, eight, nine, 10 ops. It's like you can make a great living on four, three, four, five. I've seen it. I have people crushing in three, four, five ops. Me too. You don't need 20

SPEAKER_00 43:09

ops. My personal dentist, I happened to help him years ago close to my house. Four ops. I honestly was in disbelief. Doing two million bucks. out of four ops and I was like, there's no, what? He told me this and I'm like, here, I'm full of it. I got a chance to peek behind the curtain a bit before he was my personal dentist. He runs three hygienists most days a week. He works out of his op. Every once in a while he works out of two ops so he doesn't run three hygienists every day. But he runs three hygienists four days a week. 12 days of hygiene. Crushing. Crushing. Modern day practice, so he's got CAD CAM unit in there, he's got cone beam in there, but he's not slapping implants on everybody. He's got a well-built, well-oiled, I should say, hygiene department going, and he's just seeing his patients at his op doing his thing. He's got an easy name to find online. He's in a medical office building, so he doesn't have some grandiose thing. You don't have to pay to park, but you do gotta take an elevator, go up a couple floors.

SPEAKER_02 43:56

People are trained. They're used to that.

SPEAKER_00 43:58

It's easy. It's simple. It's streamlined.

SPEAKER_02 44:00

That's probably the other thing you probably heard as much as I have is like, you don't have to be in retail space. It's not a thing. Like if Starbucks is willing to pay$12 a square foot, like why would they charge you three to be a dental practice? Like it makes no sense for the owners. But yeah, the amount of people crushing the two, three, four. I mean, we have a friend who's crushing in two ops. And you're like, you cannot make this stuff up. And you're like doing more than 99% of dentists in

SPEAKER_00 44:26

the country. in two ops. Yeah. And all the money that goes into their pocket. Because the person that I'm talking about, 50%, Profitability. Yeah. Because it's a smaller footprint. Yeah. Not nearly the same rent. Right. Plus his rent's not as high as retail, et cetera. Staff's smaller. I mean, he's got, everything is just kind of the perfect size, if you will. It's efficient. Yep, for efficiencies. Yeah, it's efficient. And so I think that that matters. The only other thing I would say that I want more buyers to pay attention to that I think even some sellers don't appreciate. I know you guys are good at covering this. Not all brokers are. In fact, I think that just gets missed is the lease. Understanding that asset purchase agreement is a very big part of it. But the next most important document you're going to sign is a lease. And most folks come to that ill-prepared. They may not want to bring an attorney on board. They may not want to bring a commercial real estate person in the fray to understand what kind of what those economics are. And then on the flip side, you've got another party to deal with. You know, as a buyer, you've got now landlord who might just go, oh, well, you know what? Here's a new rental rate.

SPEAKER_02 45:24

Right. I mean, post-COVID, I mean, it's been so much more difficult to deal with these landlords. The amount of Doctors I know who needed a personal guarantor, needed their parents to co-sign. And a lot of landlords don't necessarily understand the debt and the half a million dollars that these guys are in debt. And that's usually a point of contention. And so to your point, I think, one, it would help to have an advocate help negotiate the lease. And you don't know, be it someone like you, a real estate broker, an attorney, someone needs to be in your corner and tell you kind of what's customary Because how would you know? You have to pull comps. You have to know what's customary. And quite frankly, you should read the lease of the previous seller to see if it's assignable. Because if it is, it would just save you a lot of headache. The downside sometimes of assignability is that it makes the previous owner stay on as a guarantor for a long period. So that part is... can be an issue at

SPEAKER_00 46:31

times. Sure. And any other maybe things they signed up for years ago, you're kind of now on the hook for, whether they be good or bad. But, no, I agree with you for sure. Final thoughts?

SPEAKER_02 46:45

Read. Read often. Yeah. Yeah. Be careful who you listen to, though. You know, there's just so much. We live in an information age. You just got to take it in. Yeah. Overload, I think one, you have to have the right mindset. That's my starting point. Look, it's normal to be scared. It's normal to be nervous. That's how you know you're pursuing something worthwhile. It's like parenthood, right? It's like pop out a kid, like you're nervous. Everyone is. And I think you just... You have to have the right mentality. The people with the right mindset are the ones that crush it. That's what I see day to day.

SPEAKER_00 47:20

You made some dating analogies, but I find so much of practice ownership and heading down the path of startup or acquisition there's a lot of parent analogies that I end up using. So for those folks that I talk to when they're parents, they get them right away. And anybody I talk to, I make a having a child analogy, and they're like, no, I don't have kids. I'm like, well, this is going to go over your head then.

SPEAKER_02 47:36

Shoot. You know, that's the hard part. You know, I tell people, like, you have to have the right disposition. And if you have a pleasant disposition, it usually works in your favor. There are so many people that are kind of always skeptical, slightly negative. Like, it doesn't bode in your favor, and your team feeds off that energy. It's not good. Yeah.

SPEAKER_00 47:57

Where can social handles, all that stuff, where can people find you? Social handles? Well, McLaren

SPEAKER_02 48:03

and Associates. McLaren and Associates.

SPEAKER_00 48:05

What, just website, your

SPEAKER_02 48:05

profiles on there? Yeah, and Instagram, yeah. Okay. For me, I'm mainly on Instagram and LinkedIn. It's just my name, Stephen Au, so S-T-E-V-E-N-A-U underscore.

SPEAKER_00 48:17

Yep.

SPEAKER_02 48:17

And then McLaren and Associates, I believe, is our handle on Instagram. Easy enough. Same on my LinkedIn.

SPEAKER_00 48:23

You're all entire West Coast? Entire West

SPEAKER_02 48:25

Coast. Our West Coast. But I have friends over here. McLaren goes all over, too. McLaren's all over the US. We have people all over the United States, East Coast, Midwest.

SPEAKER_00 48:35

My final thought is, to buyers or to sellers, make sure you're working with somebody that's not doing dual representation. We could do a whole episode on that, but it just shouldn't be a thing. I almost wish it was illegal.

SPEAKER_02 48:47

It shouldn't be a thing. And realistically, that's when people feel like they get burned. Again, not calling anyone out, but it's just if you are listening and you are buying a practice yes have a good relationship with the broker that matters have a good relationship with the seller that matters right you want you want a good transition but you have to surround yourself with a good team period like it's just to your point you start off the conversation about you know does it have to be adversarial no i think that you and i have always wanted the same thing for the same people exactly there's no look, if they're not a good fit and they fall out as buyer, cool. That's probably what should have happened to begin with. That's the best thing that could have happened. What would be worse if someone bought a practice and they weren't it? They weren't the person. That would be way worse.

UNKNOWN 49:39

Totally true.

SPEAKER_00 49:40

Well, thank you, man. I appreciate you being here. Thank you. Good seeing you. Awesome. Thanks.