Growing Your Dental Practice to Multiple Locations: Tips for Success

Diwakar Sinha, Chief Development Officer TUSK Partners www.tusk-partners.com diwakar@tusk-partners.com 704.302.1043 x 405

 

The Transcript

Art Wiederman, CPA And hello, everyone, and welcome to another edition of the Art of Dental Finance and Management with Art Wiederman, CPA. I'm Art Wiederman. Welcome to my podcast. I am a dental director at the CPA firm of Eide Bailly, and I'm located in Southern California in the city of Tustin.

And today we've got a really interesting and pertinent topic, a timely topic as a matter of fact. We work with a lot of doctors who are entrepreneurial and they are looking at growing their empire, expanding their base, and owning multiple practices. And my guest today, Diwakar Sinha of Tusk Partners out of Charlotte, North Carolina, is one of the nation's experts in how to help doctors do that. We're going to talk about what do you have to do? What do you want to do if you want to start owning your first, second, third, fifth, tenth, 50th practice? How do you grow your empire? What's the exit strategy? How to get financed? And how do you manage it?

Because that's the biggest challenge that I see in multiple group practices, is doctors that they want to own a lot of practices. They see opportunity, but that they just don't know how to build the infrastructure to make it work. So we're going to talk about that with Diwakar today. He's, I've known Diwakar for years when he was in banking. And he's one of the smartest guys I know, which is a prerequisite to being on my podcast, being a really smart guy. So we'll get to him in a moment. I want to give you a little information.

First of all, talk about our wonderful partners, Decisions in Dentistry magazine. They just support us every single week and they have great clinical content and their CE courses are unbelievable. 140 courses you have available to you at one very reasonable price. Courses like Role of Maternal Oral Health on Fetal Development. Healing Progression of the Free Gingival Graft and Optimal Panorex Imaging. These are the types of courses you get very, very reasonably priced. Go to the website www.DecisionsinDentistry.com. And if you do that, you'll click on the podcast link also and you can get a complimentary consultation with a member of the Academy of Dental CPAs, of which I am a proud member. 24 CPA firms across the United States that represent over nine. I keep saying 9,000. We're up over 10,000 dentists now. We're in the five figures, folks. Big numbers. And this is the time that you need a dental specific CPA www.ADCPA.org.

And I have a great exciting announcement. I've been telling you guys for weeks that I have a special podcast coming. Not that talking to Diwakar is not special, it's going to be very special and very informative, but my 100th podcast is coming up on November, is gonna be published on November 11th. And I've been telling you, I've got a special guest. I've got a special guest. I didn't want to jinx that. Well, we finally recorded that podcast yesterday. And my guest for my 100th episode of November 11th is Dr. Kathleen O'Loughlin, who's the Executive Director of the American Dental Association. And what a wonderful lady. What a great conversation we had. I learned a lot about A.D.A. that I didn't know when I was listening to her. And, you know, we're gonna talk about her challenges and the A.D.A.'s challenges, not just starting on March 16th, but all the way back to January. I mean, the stories she's going to tell is very fascinating. So put it on your calendar. It's going to come out on Wednesday, November the 11th.

One more thing is if you guys are interested in saving taxes, Research and Development tax credits are becoming more prevalent for dentists all over the country. And we've got you covered at Eide Bailly. So go on to our website www.eidebailly.com. Go to the go to the link. It's www.eidebailly.com/dentalrd You'll be able to read some articles about the research and development tax credit. You can go back and amend three years and you can fill out a quick ten-minute application, not an application, and basically information about your practice.

And one of our folks from our R&D group will give you a call and see if we can save you some money. One of my long-term clients, I understand, just a couple days ago, they told me he's going to be able to get about 44,000 dollars in credits. So that's all really, really good.

So let's get to our guest today. Again, I've known Diwakar Sinha from his days East West Bank, and he's a really, really smart guy with a company called Tusk Partners out of Charlotte, North Carolina. And, you know, Tusk is one of the leading dental merger and acquisition firms in the country. They work with entrepreneurs. I see their names in deals and working with groups and all this stuff and one of the great things about working with a company like Tusk is that it's just so complex to build a group and to own multiple businesses, multiple locations.

I have conversations with doctors all the time about this. It's like, well, okay, so I want to buy 50 practices this year. Okay. Do you know what you're getting yourself into? So we're going to talk about that. So Diwakar Sinha welcome to the Art of Dental Finance and Management.

Diwakar Sinha Art, thank you for having us. And I look forward to the podcast today.

Art Wiederman, CPA Appreciate it too. Now, I was watching your video on the Tusk website, and I understand you are an avid cycler. Is that correct?

Diwakar Sinha That is correct. Yes. Well, avid, I do about 40 to 80 miles a week, that is as avid as I get. My partner Kevin actually does a lot more than me.

Art Wiederman, CPA That's pretty avid. I'm a Peloton guy. I'm at 150 rides. I love my Peloton. And as long as they keep putting up classic rock and good stuff from the 80s because I'm an old guy, I'll be very happy. But it's a great workout. Great exercise. And we need that during this time. Right?

Diwakar Sinha It is. Peloton's a great machine, I have that, too, in the winter months. I get on the Peloton and its focus on the wattage, focus for yourself. And that's a great workout.

Art Wiederman, CPA Yeah, but you probably push it a lot harder than I do. But that's the way it goes. It's all good. So let's get started. Tell us a little bit about your journey. And again, you and I met when you were at East West Bank doing lending for dentists. But tell us about your journey and how you got involved with Tusk and some of your experience.

Diwakar Sinha Sure. Again, thanks for having us Art, and hopefully your listeners will get a lot of good content about the group practice space. So, you know, we've known each other for the banking days. I was in solo private practice financing early in my career, which is now known as Bank of America Practice Solutions. Last five years of my career was with East West Bank. I was in group practice lending. Dental practices anywhere from three locations, about three to four million in revenue. All the way to 50 to 100 million dollars in revenue as far as doctoral groups. There were all doctoral, there were not equity backed.

We had a different group that was doing equity-backed deals. So when we were at East West, you know, we started hosting a multi-practice summit that you may have heard of in banking and I was on the banking side. And what we did was we created this seminar series from a banker's perspective of how to educate our potential clients or current clients in the banking side and how to build a good practice. And what we found out and that really wasn't, there's a lot of seminars out there, but there wasn't a granular of content and guidance for group practices.

So, I was looking at my career after East West, we looked at the demand in this space and what we found out was there an amazing amount of talent in the private practice transaction services space, people doing a really good job representing the private practices. And then you had the bigger investment banks that were looking at transaction sizes of a 100 million dollars or greater. There really was a vacuum on the M&A space between what I would say at that point in 2016, 17 when we started our company in December of 16. When I was getting along with the Perrin DesPortes who is one of my partners. And then Kevin Cumbus who was one of my partners. We looked at different industries. Where can we impact the market the most and where can we provide the biggest value to people that are going to engage our services? And this three million dollars of transactional services and a hundred million dollars transaction services was one of them.

And Kevin Cumbus, who is has a substantial M&A investment banking background. You know, we felt and he felt comfortable that's a market that we could educate, provide the most amount of value and structure those deals correctly. So we kind of entered that space in the M&A side. And then in addition to that, as we're sitting around a cup of coffee, we said, okay, well, you know, how do we get those guys that are at three million dollars or two million dollars in revenue or enterprise value to ten million dollars, you know, get them to that position. And who does that in the marketplace today? And we surveyed the marketplace at that point in '17, we really didn't find somebody that was able to take and provide good C-level executive coaching to drive group practices from one, three, five or to 20 locations.

And again, in the consulting space, there's a lot of great operational consultants that talk about scheduling, they talk about systems, talk about, you know, a new patient attraction, things like that, but we needed to find somebody that was developing the doctor, the owner, from being the dentist to an operator, to a CEO and how to look at, these Art these are things that you talk to clients all the time, which is how do you read a financial statement and then how do you translate that financial statement into operational execution?

So, you know, we saw this vacuum in the space, we felt that, hey, you know, my experience at East West Bank and just kind of looking through what did work for a doctor, what did not work for a doctor from a banker's perspective, operational perspective in working in corporate America. Perrin's experience. Kevin Cumbus he had worked for affordable dentures in an operational executive role and investment banking role. And we said this is a market we can provide value in. And so from there, you know, came out this idea of Tusk partners, you know, the strategic consulting and M&A firm for the group practices.

Art Wiederman, CPA I mean, you've got someone who was going to go from being a dentist and running one office and maybe managing five to 10 people to running 50 offices and managing 100s of people and HR and IT and legal compliance. I mean, so we're going to talk about all that. But let's start. I want to kind of tell this story kind of one step at a time from the beginning.

Okay, so you're a dentist and, you know, you see what's going on. You see what the large national group practices have done. I mean, you know, it's not a secret what their names are. You got Pacific Dental Services, Heartland, Aspen, all these big, big groups that have own hundreds and hundreds of practices with hundreds of millions of revenues. And you say, hey, I want to be that guy, you know? So what's the first thing that somebody should be thinking about if they want to be a multiple practice owner.

Diwakar Sinha First is you know, the journey is not easy. It takes a lot of commitment from financial commitment as far as ability to scale back clinically. And what I mean by that is, you know, a single practitioner or a doctor that has an associate in the practice, six, eight chairs, you know, he or she may be producing a million, a million five, you know, three hundred thousand dollars.

That's a level of distribution on top of that. In order to scale the business, they really have to commit over a 12 to 24-month journey to take a step back and allow somebody else to do the dentistry. And that is one of the initial hurdles for a lot of doctors that are looking to transition into a group practice. Building a group practice, again, is not an easy journey. Just to kind of give you some macro-level statistics that, you know. One in five doctors that is looking to build a group practice and get to five practices actually makes it. You know, one in 15 actually makes it past 10 practices.

Art Wiederman, CPA Wow.

Diwakar Sinha So you when you look at those.

Art Wiederman, CPA It's bad, but it's great statistics.

Diwakar Sinha Yeah. And this is just our perspective from the banking days when we looked at people that had started the journey, talking to different industry leaders, just kind of, you know, aggregating the data and then even from our perspective of just speaking at different events and talking to the expertise there.

So 1 in 15, you know, that's, you know, not to discount the other 14 that didn't make it. It's just that people's journeys changes. So if you're starting that journey you just ask yourself the question, the why. You start with the end in mind. Why are you building it? And if the journey is to, hey, you know, I want to make 20 million dollars because a doctor down the street made 20 million dollars. That's probably, in my opinion, not going to be a reason that's going to sustain itself over the next three to five years, because the journey is tough. I mean, and I give kudos to all the guys that I built three, five, 25 locations because that requires a lot of self-sacrifice. And if somebody wants to think about, you know, growing a group, they need to kind of look at John C. Maxwell's book, 21 Laws of Leadership and all those 21 laws of leadership are applicable if you're building a business from one location to 25, 50 locations.

And that journey to build 50 locations is really a seven to 10-year journey. Assuming you already have three to five locations. If you have one to three locations, you're probably to be at 10 to 20 locations in five years. And that's if you have consistency, commitment, tenacity. We're able to work through this COVID situation in a very responsible manner and be resolved towards the long term goal of building the right team, the right culture, the right clinical care in the right business. And so, again, for me, the one question I would ask is the why. And we ask that a lot. You know, when people give us a call and say, you know, I want to build the next DSO, and I think that why is very important, not for us, but more importantly for your audience.

Art Wiederman, CPA What's a good why? What's a good reason to want to do this?

Diwakar Sinha A good reason to want to do this is, you know, I see there's a vacuum in the space. You know, I am a pediatric doctor. I'm an orthodontist, oral surgeon, an endodontist, general dentist. And I believe in my business model, I can provide a better quality of care for this community, provide better quality of employment for the team members that work, and build the best in class culture around it. And I think I can provide better services. You know, as we go into more of an on-demand service, you know with COVID, you know, there's been spacing requirements. You know, more and more dental practices are open in the evenings. You see Wal-Mart Health entering, the Walmart dental entering the market. They're doing a really a great job as far as providing services at a macro level.

So what is going to be your difference in the market? And if you can, you know, say, hey, I am going to provide better services through longer hours, better team culture. I'm gonna accept more insurance plans. I'm going to provide all in-house services. That means I'm going to have rotating specialists, even if you are a pediatric ortho oral, you're integrating with other services and you can provide a one-stop solution for your patient base. Better quality of service and a good why.

And also more important, I think people, you know, may not put this in the forefront is to provide the best in quality culture for team members. If you look at Southwest Airlines, for example. One would say, you know, hey, they're cheaper airline and cheaper usually means worst service. Southwest has really done a good job in saying we can be more cost-effective, create best in class culture, and build one of the best airlines in the U.S., if not the world, as far as employee retention, employee satisfaction, and customer retention and customer satisfaction. And that's a good why. I mean, when people look at their business.

Art Wiederman, CPA And I think Diwakar, I think that I always tell people, you know, provide a good service and the money will come and that is very, very true. I want to divert just for a second. So I know that individual practices, you know, they were shut down March, April, May for eight to 12  weeks and they've come back. And I had mentioned earlier that I interviewed Dr. O'Loughlin, the Executive Director of the American Dental Association, and she had mentioned that their statistics show that dentists are back at about 75 to 85 percent ish of where they were. How did the larger group practices fair in COVID? Was it different than the individual doctors?

Diwakar Sinha So, again, based on the statistics, I would say yes and we don't manage a lot of the private practice space statistics beyond I think A.D.A., by the way, just want to give them kudos for their data reporting they did throughout COVID. I think it was great for the macro space of dentists in space, but also for service providers in the space like us, where, you know, we were trying to understand what's happening on a macroeconomic level in the industry.

As far as group practices, yes. You know, most of the group practices that we were engaged with were at 80, 90, 100 percent recovery within 60 days of operation. You know, most of our groups were at 110, 120 percent of month to month performance of pre COVID levels. I will tell you. And I think this is a really good precedent to kind of think through, you know, new patient attraction is going to be really relevant as we go into Q4. If you had a hygiene cycle that was due in March, April, May, that those patients did cancel, may not have been reactivated yet. So a lot of our groups were focusing on reactivation of patients.

And they're really starting to figure it out. We're big on development, Art. You know, so if you think about the book, Good to Great, talks about three economic cycles. You know, I've lived through three economic cycles in my health care career. You know, just really build a business I can sustain long term economic up and down turns. And that's building a good, healthy business.

Art Wiederman, CPA Alright, Diwakar. So if someone wanted to become a multiple practice owner, okay, are there any educational courses that they should take, anything they should be reading?

Diwakar Sinha I think there's a great level of industry seminars that are out there. Just be on the cautious side. There are a lot of the macro picture. They don't, I think, go up to the detail of running a group practice. You know, I will tell you, we offer a full day deep dive. That's a one-on-one business operator course. It's a one day course and that focuses on dissecting individual business, the leadership skill set that the doctor has at that point. We do a SWOT analysis on that and then really out of that one day, kind of give them some takeaways of okay, if you were to build a group practice, this is what's going to take from a financial perspective, from an organizational perspective and really customized to that operator.

And my partner Perrin DesPortes runs that at Tusk. And I think that's a good, you know, micro-level course, one day course that is there. And then as far as the macro-level courses - you have ADGP, American Dental Group Practices. They do a really good job. You have ADSO, they do a good job out there and there's other seminars that are there. So I think there's good content available in the market. But if you're looking for macro, that's there. Tusk also runs seminars, you know, that focuses on macro-level education. But if you're looking for granular data and say give me the playbook, I'm at one practice, I'm at three practices and I would encourage that before they deep dive.

Art Wiederman, CPA That's great information and in a little bit of let's give out your information and it'll also be in the show notes. So we hear the term DSO Dental Services Organization. Let's talk at a very high level. We know that there are dentists that are owners. We know that there are nondentists that are owners. And we know that in many states, nondentists are not allowed to own dental practices. In some states they are. So talk about, again, at kind of a high-level, Diwakar. How does the legal structure of a multiple practice owner set up if you have partners? Give us kind of a high-level overview of how that would work.

Diwakar Sinha Yes, so let me kind of separate that into maybe a question that people didn't think about as they're building a DSO. So we work with, and on legal structure I work with several law firms to set up the right legal structure. And typically the question one I would ask is if you're thinking about building a regulatory compliant DSO, I use the word regulatory compliance because there is a legal process that's very intensive to make sure we structure correctly. And if there's a financial reporting part that I will tell you that I think you guys do a really good job, Art, that we worked on several clients with you guys, that the financial reporting is accurate. And I think that's really the meat and potatoes of the financial reporting after we set up the legal structure.

But to take a step back, in the legal structure you'll have two, three, five practices that will flow up to a management company and the management company, the DSO, the dental services organization or the dental support organization will employ all the nonclinical team members. So that would be legal, accounting, marketing, accounts receivable, accounts payable. That would be a front desk team. That'll be practice managers, regional managers.

All those people are employed by the management company, the people that are in most states and again, their space state-specific law, in most states, the dental assistants, the hygienists, and the doctors are employees of the dental practice. The patient charts live at a dental practice. All the other assets, assuming there's no tax consequence, and then this is where you guys, your expertise comes in, looking at their balance sheet and any depreciation that might have been taken.

Can we move up those assets into the DSO? And if we can, in some states you can, some states you can't. That's where we want to hold the assets. And then structurally, as you go to expand more practices in a startup or an acquisition, especially an acquisition, you now end up having two buyers.  You know, one ends up being an acquisition. The buyer of the hard assets and nonclinical assets ends up being the DSO and the buyer of the clinical assets ends up being the practice. And that's on a typical transaction. And then on a startup, you know, the leases and everything else and the equipment purchases and the supplies are all procured by the DSO and then any new patients that come in as a result of marketing services provided by the DSO are the assets of the practice.

And you really start to work as more of a management company in a DSO that provides services. And the best way for me to think about is think about a hospital. The hospital has a management company that employs the CEO, all the non-clinical staff, and they actually own the real estate, the hospital, or they might lease the real estate. But all the doctors and nurses, they're all employed by a different entity, that is a medical entity that owns the patient charts for the services provided for the hospital. And that's what you're seeing in the dental space on the legal side.

Art Wiederman, CPA You talked about the legal side. And you know, I'm here in California and I've talked to some attorneys who have put deals together here in California, multiple practice owners, DSOs. The state of California and the dental board, they're not terribly enamored with multiple group practices and nondentists owning. So talk about and I'm sure there's other states that feel the same way. Talk about how important it is to dot the I's and cross the T's and follow all of the legal and accounting compliance rules. Because if you don't, they can come down and shut you down. Can't they?

Diwakar Sinha That's correct, yeah. And as you build a group practice, I think you become a little bit bigger of a target. You know, from the state board's perspective and, you know, I think getting the right legal guidance and legal contract is very essential to setting it up correctly. And then, you know, again, I give kudos to you and Scott Haberman with your team that has, you know, really kind of invested the time to set up the right accounting process of onboarding these dental practices correctly and managing the management services agreement, making sure the financial reporting is in line with how the legal contracts read.

So in the event of an audit from a state board, and obviously good counsel and those attorneys can set up the contracts correctly to represent you. But also, you need to be able to document the financial reporting and how you charge the management fee and how you substantiate different line items and what should be at the DSO level versus what is an expense at the practice level. Accounting is a I would say equally, if not more important for the long term continuity of it.

Obviously, you want to have, you know, make sure your contracts are compliant with regulatory changes every 12 to 24 months. But accounting becomes a real time issue, especially have multiple partners. I think the previous question you ask that, if you have a one percent partner or a five percent partner in a bigger group, that partner asks you and says, hey, please tell me how we're charging our management fees in the six practices that I'm managing, you have to be able to substantiate and document that. And the accounting aspect is essential to building a right group practice.

Art Wiederman, CPA I mean, you can't, and I've seen multiple practice owners. They just basically, you know, move money from the professional corporations to the DSO intermittently with no rhyme or reason. And we tell them, we say, you know, if they call your number, they're going to look at this contract and they're going to shut you down. So you've got the legal and accounting compliance part of this. We're not going to get deep into that today.

I want to talk a little bit about financing. Now, you know, someone wants to own five, 10, 15, 20, 50 practices. You're not just going to go down to your community banks, alright, Joe, I want you to put about 50 to 100 million dollars aside for me over the next five to 10 years because I'm going to go buy these dental practices. Is that a problem? It doesn't quite work that way. Right?

Diwakar Sinha No, it doesn't. The community banks, I think they're a great resource and your traditional conventional financing banks that you may be currently working with at one or two or three practices. They've been, I would say, give them a handshake. Thank you so much for getting into the first practice or second or third practice. But if you're looking to build a, you know, five, 10, 25, 50 location group you really need to start, and again, think about your financial reporting that's where it starts.

Think about your cash balance position planning for that. And then start looking at the lower middle market lenders that are in the space and, you know, we do a lot of that work. And the lower middle market lenders are really looking at how the operators are making the decisions, how they're acquiring practices, how they're creating equity in the balance sheet. I'll give you something to think about. You know, we were just currently working on that.

And one of the calls from a bank was that, okay, we know this client bought this practice and in November of 2019 and the practice was sold for 1.5 million, the revenues were 2.5 million. OK, know what have we done with that practice in the last 12 months? Even though there's COVID, right, I mean, and these are questions that are happening.

Art Wiederman, CPA Yeah, they don't understand the space.

Diwakar Sinha Yeah, they do. I do want to say they understand it. They just want to know what happened. How do we create equity? So I think what a lot of these banks in the middle market space are doing is they're discounting the revenue for March, April, May and we're not going to count the expense or the revenue. Some banks are looking at a group with a different perspective. So I think they are being very compassionate to what happened for those people. But they're saying, OK, if we exclude those three, four months, how do the business operators still run the practice?

And I think there's substantial capital available if you are running your business correctly, and we always tell people like, you know, we do provide equity capital and sources of equity capital. That's what Kevin does. But if somebody came to us and said, hey, you know what, I want to build the next hundred location group over the next 15 years or 10 years, and I don't want to go to equity. I want to create a platform that's generational changing wealth for me and my family and really create a family fund of my own and have this as part of my estate planning for me and my family. Great. We can provide a capital source that can get you 25, 50, 100, 200 million dollars in debt. Let's worry about how we build the right business. We build the right business, capital's available. Even post-COVID, even during COVID we are closing a transaction Art, this next month for just about 23 million dollars.

We started that journey in April. Our client called us and said, let's get the next level of financing. I mean, think about the mindset in April. You know, we were shut down. You know, and we started this journey and we started having the conversations with the right banks, you know, around May and June. And we were in this state, we weren't even open till June. And the banks were very receptive to say, hey, we know this is going to happen. Tell us about the operator and the conversations from lower middle market, middle market bankers is materially different than your commercial banker, your business banker, the banker that might have helped you finance the first one to three practices.

It's more macro level, more holistic, more vision oriented. Of course, the numbers have to kind of be there. Make sure that those makes sense. But they're much more focused on the operator and how the operator decision tree processes in a stressful environment in a day to day operations environment, if they have infrastructure. What does that look like? So a lot of these decisions that you and I Art, may be thinking on the corporate side or business side. These guys are focused on it. And I do want to tell your audience members, there's a lot of capital available. We just want good operators that want that capital. And I think that's where the key thing is as you go into Q4 and Q1 of next year.

Art Wiederman, CPA And so, obviously, folks, you can tell that the Diwakar knows what he's talking about. I want you to, first I want you to give out your contact information. So if you're at pretty much any stage, you're thinking about this, or you own three practices, you own six practices, you don't know what the next step is. This would be a good phone call to make. So Diwakar give out your contact information, it'll be on our show notes that everybody will be able to access, but give out your contact information. And then I want to talk a little bit about what your company does at different stages.

Diwakar Sinha Sure. Thank you. Yeah. So our website is www.tusk-partners.com. I'll give you two different e-mail addresses, mine and our company, and it goes to all three of us partners. So mine is diwaker@tusk-partners.com and a company email has info@tusk-partners.com And my cell phone is 973.722.5913 And we also have a podcast that goes into a lot of the things we've talked about. So if you go to our website you can subscribe to our podcast as well.

Art Wiederman, CPA That’s great Diwakar. So what does Tusk do that's different? I mean, it sounds like you're a management consulting firm. And you can also help take that doctor to market and do an exit strategy. Right? Talk a little bit about what your company does.

Diwakar Sinha  Yes. Thank you. So, our website is 'Start, Grow and Sell'. And when we put our content behind you know, what are we building and what can Tusk provide the market space. So the START side is run, you know, primarily by my partner Perrin DesPortes. And that is a full day deep dive. So if somebody has one location, we've had groups that have had 10 locations that will ask the question, you know, I hear this term called DSO or somebody down the streets building a DSO or we have a DSO coming in the market. You know, what do I do? Do I build a DSO or not?

And, you know, so we provide that content for their full day deep dive. And I will tell you, our goal is not to make multi-practice owners every day. Our goal is to educate. And if anything else, in our full day deep dive, we do for a lot of the private practitioners that come through our process is educate them how to compete against the downward pressure of consolidation. I'll say this again. You know, how are you positioned to compete against the downward pressure of consolidation?

It is happening. It's going to happen for the next 10, 15 years. And I think as a private practitioner, you can be positioned very well. You don't have to have 15 or 20 locations to end that journey. So we don't promote just building group practices and that start side probably say 40 to 50 percent of people that go through full day deep dive course will say, hey, I really appreciate the content. Building a group is not for me, but now I know what I need to do as a single practitioner to compete against the bigger guys. And I think that's really important as far as an education component.

About the other 40 to 50 percent of their people will come in and say, I want to build a group practice. And I think that's a journey for me. I think that's going to explore a side of my brain that I've always wanted to build upon. And I do want to build a group practice. And from there, some will go through that journey themselves. Most who engage us for consulting services. Our consulting services are 12 to 18 months. They're all month to month. We don't do a contractual service. Because every single month, they're getting value out there. And in that course, I call it a 12-18 month dental aid program. And in that work, show you how to work through the legal structure, if that's applicable to them, work with them on how the accounting works and how to read those financial statements. More importantly, how to lead a team, how to work through that process. You might be in one location.

Art Wiederman, CPA So now my doctor's got five practices and they're doing pretty well and they want to keep practicing. OK. Talk about management structure. I mean, what do you have to put in place and when do you hire a CFO? When do you hire an IT, HR? What are the different components that you have to put in?

Diwakar Sinha So at three to five locations, you typically need to have somewhat of a regional manager in every five locations, a private and a regional manager in about 10 locations, you probably need to hire on a director of operations. So think about every five practices, a regional manager. Think about every, so when you look at, you know, you talked about the book John C. Maxwell's 21 Laws of Leadership and different leadership books you can read. You know, in a more effective organization, a leader can manage about five to seven people at max. If your infrastructure reporting structure is more than five to seven people reporting to an individual, it's going to create a diminishing rate of return in leadership.

So as you're building that around five as a regional manager, 10 is a director of operations, typically around 50 to 75 team members. Before that, you might outsource H.R. After that, your pride bringing on a H.R. generalist. I think some people think about bringing on an H.R. director. I think, you know, I'm going to be very cautious of titles when you hire people because with title becomes compensation, one can argue with title, you get different talent. And I'm not against it. But I think if you start looking at the word H.R. generalist versus H.R. director, I think you get someone that can do 80 to 90 percent of the job in most processes.

As far as centralizing an I.T., that's objective. We've seen groups of five or seven locations, bring on in-house I.T. That's really a component of what services you have outsourced. Most around 10 will bring on an in-house I.T. person. And again, when I say 10, that's typically 10. This is around 50 to 60 chairs. Usually that practice is about 15 million revenue. So I want to give some metrics there to kind of think about because there is a cost structure component to it.

And usually, as far as a CFO, I mean, this is where we work with you guys a lot to see when to bring on a CFO, but really is for me to step one to be more of a controller role before a CFO role and the controller role is typically around 20 to 25 million revenue and usually around three and a half, four million EBITDA. And every time you add this and I think I do want to add this one component to the answer is I would ask your audience members to ask why? What is the rate of return you're looking for by adding that regional manager? What is the rate of return you're looking for by centralizing the H.R. person in-house? Do you want improvement in culture, implemented retention and faster recruitment time? How will you measure the additional cost and how will you add revenue by using leveraging that person?

So I think when you think about call centers, you hear those terms. People look at that and say, hey, I'm going to save cost, but how are you going to improve revenue by adding a call center? So I think each of those things of adding infrastructure has to have two questions answered of which is how are you saving and how are you growing? And if you can answer that in each of those phases, I think, and then be able to measure and deliver that change within a six to 12 month period, you're building a good business. And you're going to get more capital in the market.

Art Wiederman, CPA Okay, so let's talk about, you know, everybody wants to talk about the exit and the valuation and we talk about EBITDA. So, you know, I have 20 practices. I have 40 practices. You've been working with me for a year or two. We've got a pretty good, well-oiled machine. Who are my buyers? Is it only private equity or are there individuals, are there the large national chain companies, if you will? Who's buying these? And what's the exit strategy? And then maybe just talk to high level about valuation.

Diwakar Sinha Yeah. So I'll kind of address the valuation question first, a little bit. Valuations are changing post COVID. You know, I think I want to say the valuation's going down. I think valuation's holding steady and these structures are changing. So if we saw a business pre COVID trade for 8X typically, it's still trading for 8X. What we may see 8x on a positive is eight times EBITDA, which is the denominator we'll kind of use for the podcast. And we'll look at that EBITDA for a business loss. Let's say two and a half, three million, EBITDA. And it would have created for eight times EBITDA. That business would trade it for 24 million dollars in enterprise value and that value should still hold steady.

I think what's happening now is there's more of a question around recovery of those businesses, validation as recovery of businesses and might be a little more in an earn out provision are a little more in a rollover equity provision. So, if you know, let's say let's keep the 24 million dollar number in the past, somebody would have said, hey, we'll get you 8% cash at close and 20 percent in a rollover equity position. That would have meant, you know, you got four point eight million dollars in a rollover equity position and you would have got seventeen point two million dollars as cash at close. Well now, that number might be closer to 50 million dollars cash at close, still a 24 million dollar enterprise value and a little more in rollover equity.

But, you know, the M&A market still pretty strong. We're seeing valuations hold for good businesses. And I think as people are looking at what are they building they need to think about what kind of infrastructure they have, and that's going to dictate if they're going the route of a strategic or going the route of an equity partner.

If you're thinking of going strategic, sometimes strategics pay more. Now, I'll give an example. We have a transaction closed in a market where a bigger strategic had a void. They wanted to, they've been looking to buy a big platform in that geography. They actually placed a higher LOI, a letter of intent offering than a private equity buyer. And that's sometimes impactful.

So I wouldn't say that equity private equity buyers offer a higher valuation versus strategics or vice versa. I think it's really going through a marketed process to understand who's looking for this platform, this market and what is our client built. And more importantly, what is the client looking to do over the next five to 10 years? And that drives valuation also. If somebody said, hey, I want to be in Bahamas in six months to 12 months, that business now is trading for 24 million, might trade for 20 just because the buyer has to accommodate a higher risk profile. So I think those questions just need to be thought through from, you know, our process, from a client perspective to understand that valuation looks like.

Art Wiederman, CPA You use the term strategic partner. Can you explain to our listeners what that means?

Diwakar Sinha Yes, strategic partner is going to be a bigger platform, DSO, Heartland, Dental Care Alliance. You have MB2. These are the bigger guys Pacific Dental, Western Dental. So I'm just giving you some of the top names that  most of your audience members may have heard in different demographics. So those are considered strategics, but there is a lot of strategics that are at 15, 20 locations.

I would say some of our Tuft clients that have 20 locations are strategic buyers and they will look at transactions differently than the bigger groups, the private equity backed groups. So you have a strategic, somebody that already has a platform of centralized services and they're willing to acquire a smaller group from their perspective. So a 20 location group could be sold to a larger 500 location private equity backed DSO and a 20 location group, depending on the infrastructure and the goals of the operator, might be a better alignment of the private equity firm. With different goals from those different perspective as far as growth strategy and aggregation.

Art Wiederman, CPA So Diwakar, I'm going to switch gears just a little bit. So now I want to talk to my single practice owners who may be in their 40s, 50s, 60s. They're getting tired. They don't want to manage anymore. They would like to. They love seeing their patients and they get approached by a Heartland or one of these MB2. And so what should they be looking at? What kind of a deal? I mean, that's happening all the time, isn't it?

Diwakar Sinha Yes, and I think that's pretty COVID and that's really more relevant post COVID. I think just going through the journey for business owner so this last six months really helped resolve the pain. Do I want that the headaches of management long term. So I think as far as where they're looking at structure, I think comes down to understanding, number one, what the valuation looks like to how that valuations and how the buyer came to that conclusion on the valuation.

And but I would not be tied there, and obviously, Art, you guys do a lot of tax planning. You know, and I think people look at say, well, I'm getting four times EBITDA, 80 percent of revenue from my practice or 60 percent of revenue for my practice, or 100 percent of revenue from my practice. And is that a good deal? And I think that that percentage of revenue for the value of the practice is a component of an answer another component of the answer where you guys are really good at is a tax structure, right? Asset allocation drives valuation a little bit. And I think that's where you guys, your expertise comes in a lot. I think people need to think through that.

But also, I think for that 40 to 50-year-old doctor that is tired of managing, I think they need to ask the question, okay, do I want to completely exit the ownership component? Because you could exit management. You may not have to exit ownership.

And I think that's what people sometimes lose in that, is okay, if I must exit ownership if I want to exit management. No, I think there's a lot of business models out there that will say, you know, Doctor Sinha, you know, you don't want to manage a business. We're good. We'll take over all the support functions. We will maintain the culture you built and help improve upon that. We'll maintain the culture of clinical care philosophy and, you know, leverage your expertise to how to grow that in that practice or within that geography.

But we want to maintain ownership of 20, 40 percent. And I think that's important. Where that equity line is important is that a preferred stock position which client shares is at the practice level? Is it the sub DSO or joint venture level? Is that the management company level, DSO level? These are all things that could have a significant economic impact for your audience members. And those are things that, you know, we work through to help structure because that's important, especially if you do want to maintain ownership, just don't want to run the practice.

Art Wiederman, CPA Yeah, no, that that's great. And the other thing that we need to talk about is that we have an election coming up in about two weeks. And I've talked about this on the podcast for the last three months. And I continue to say and hopefully everybody believes me. This is not a political statement. But if Vice President Biden wins the White House and the Democrats flip the Senate and take control of that, they'll keep control of the House because they've got about a 30, 35 seat advantage. There is a very, very good chance that capital gain taxes and tax rates are going to go up.

So that's another conversation, I'm sure, Diwakar, that you've been thinking about if you've got any deals in the hopper. I've got one right now that they did. We want to close before, you know, 31st. When do we have to do this? I said 11:59 or earlier on December 31st works just fine for me if the money hits the bank account, because I mean they could. And the numbers that you live with, that you deal with are, could be eight figures and that, if they raise the capital gains rate in 2021, I mean that's a huge amount of tax, right?

Diwakar Sinha That's correct. Yeah, all the deals we have in the pipeline and are closing the next 60 days, I mean, there's a huge sense of urgency. Independent of what happens on November 4th we have to make sure that we know what the known is today with the tax rate is in 2020, no matter what happens in the party, we don't know the tax rate in 2021. And at some point, the federal government has to recover the investment they're made to sustain economy in 2020. So I think both parties will have to make some decisions that will have some impact in the next upcoming year.

So, yes, I mean, that is imperative for any of your audience members to think about, you know, if they are looking to have a transaction happen by December 31st, it is imperative that you have a known. If you're comfortable with the known, let's move forward the known because the unknown can may be the same, might be more. It's not going to be less.

Art Wiederman, CPA So one of the last things, we're coming to the to the time that we've got to wrap this up. And so what I've read is that right now, 20 to 25 percent of the dental profession is, we'll call it good practice. And a group practice could be anywhere from two practices to a thousand practices. Where do you see this going in the next, first question is where do you see this going in the next couple of years? And is there a time? I mean, I've had some people say to me, Diwakar, you said 10 to 15 year window earlier in the podcast. I've had people say, you know, this window to exit as a multiple practice owner is going to end in about five years. Where do you see the market today? Where do you see it going? And is there an end to this?

Diwakar Sinha Well, I play the lottery every weekend, and I get to tell you, I haven't won yet. I'm Powerball, Mega Ball, You Pick It, I'm in it. You know, you got to be in it to win it, right?  So I think, you know, we're, you know, I think the, I'm not going to challenge somebody that's made a five year statement, but I think that'd be an aggressive consolidation in the space. I will say if anything COVID has done is added more fuel to consolidation.

So I don't want to discount the perspective of five years, but we do think there is a substantial amount of growth in the private practice space to kind of push back from it or even not go to corporate. So we're seeing more and more emerging groups that are, emerging group, I would say, two to three locations getting there and just kind of having that position to hold on to to compete. So I do think the window still stands on my statement 10-15 years is a good consolidation window.

A consolidation window would mean that 70-75% of the market is with bigger groups. So I think that's little bit longer of a window than I think, you know, some of the other speakers might have said. Maybe I'll be corrected in three years or four years. But I think, you know, when we started this journey in 2016 and we forecasted, well, we thought the journey would be in 2020 to 21. I think we're pretty much in line with what your statistics are at. And we anticipated a 22 to 25 percent market penetration from the group practice space. And your statistics are right in line with how we anticipated it. And we think it's another 10 year, 15 year journey. So I wouldn't say the sky is falling. I don't think that's happening.

And I would say if you think the sky is falling, you're still be resolved to the right business. And really answer the question, if a bigger group opened up across the street from you and you are facing a bigger, the next Walmart across from you. What is your competitive advantage? What is your value proposition? And how are you going to compete against that? And I would not dissolve to the fact that, you know, they're going to run you out. I think you can still be very competitive and have a good market opportunity.

Art Wiederman, CPA Last question real quick, and we'll have you give out your information one more time. What about specialists? I mean, are there consolidation and exit strategy for specialists?

Diwakar Sinha Yes, I was surprised 40 percent to 50 percent of our client base is specialist. So I think I alluded, you know, we work a lot in the pedo ortho space. We work a lot in the oral surgery in a dynamic space. So probably about 50 percent of our clients is that specialty. So I think there is more and more platforms for that space that are growing. Consolidating. The other 50 percent happens to be just a general business that's aggregating other specialties, you know, as far as bringing pedo, oral surgery, endodontics, perio in-house.

But demand for specialty platforms, specialty platforms on a general basis, tend to be more profitable. I'm not going to make that as a broad stroke over GP. I see GP businesses being around 22 percent EBITDA. And I've seen pedo businesses being around 22 percent EBITDA. But usually pedo ortho's run 25 percent. And, you know, and bottom line profit after normalized clinical compensation, so when you say EBITDA, you know, obviously dentists would be paid for their normal services. And so I think there's a real attraction from the buyer position to buy specialty services.

Art Wiederman, CPA Well, your information is absolutely spot on. Very, very informative. We really appreciate it. One more time Diwakar give out your please give out your contact information one more time. And if you would be so kind to be so, hang on. After I sign off, that would be great.

Diwakar Sinha Great. Yeah. And then, Art. Thank you so much for having us. Again, our website is www.tusk-partners.com. My email address is the Diwakar@Tusk-Partners.com. And thank you again for having us.

Art Wiederman, CPA Alright. Diwakar hang on until I sign off. Thank you, everyone, for listening to the podcast. If you want to get a hold of me in my office in Tustin, my number is 657.279.3243. E-mail me at AWiederman@eidebailly.com. Make sure if you're interested in the Research and Development tax credit to go on to www.eidebailly.com/dentalrd. Well that's it for this episode of the Art of Dental Finance and Management with Art Wiederman, CPA. Thank you for listening. Please tell all your friends about the podcast and we'll see you next time. Bye bye.