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Episode Summary

Is your healthcare practice ready for a high-value exit, or are you stuck with outdated mindsets that keep you from reaching your full potential? On this episode of Practice Freedom, Mark interviews Thomas Allen, the insightful founder of The Practice Companies, to unravel the complexities of healthcare practice transitions.

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Is your healthcare practice ready for a high-value exit, or are you stuck with outdated mindsets that keep you from reaching your full potential?

On this episode of Practice Freedom, Mark interviews Thomas Allen, the insightful founder of The Practice Companies, to unravel the complexities of healthcare practice transitions. We discuss how private practices, specifically those valued between $5 million and $35 million, can achieve successful exits by adopting efficient business practices and keeping pace with market trends. The conversation highlights the untapped opportunities in well-managed practices, even in a fluctuating economic landscape, and the emerging healthcare verticals set to grow.

The episode also explores the dynamic role of private equity in healthcare, particularly in the wellness and dental sectors. We talk about how integrating wellness with aesthetics can catalyze growth, and we examine the dental industry's valuation challenges. Thomas sheds light on the types of buyers—those targeting quick profits versus those investing in long-term value—and how understanding these distinctions can lead to more strategic and beneficial partnerships. A real-life case from Texas illustrates how nuanced business strategies can attract savvy investors eager for sustainable growth.

Delving into the technical aspects of business valuation, we provide essential guidance on preparing for a sale, especially within the aesthetics industry. We unravel the mysteries of EBITDA and add-backs, offering a primer for those not familiar with these critical elements of financial assessment. In the final segment, we stress the importance of clean, organized financial data and its transformative impact on the market value and personal satisfaction of healthcare practice owners.

By preparing well before any potential sale, practice owners can boost profitability and ensure a smoother, more successful transition when the time is right.

In this episode, you will hear:

  • Exploring healthcare practice valuations and exit strategies, with a focus on transactions between $5 million and $35 million
  • Insights into the private equity landscape within the wellness and dental industries, highlighting valuation challenges and growth strategies
  • The importance of aligning values and visions between investors and practitioners for successful healthcare business transitions
  • Financial concepts like EBITDA and add-backs to enhance enterprise value and present clearer profitability
  • Strategies for maintaining clean and organized financial data to boost market appeal and profitability
  • Emphasis on leadership's impact on business valuation, particularly in the aesthetics industry
  • Considerations for engaging the right buyer and understanding market dynamics to maximize value during a business exit

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Episode Transcript

0:00:02 - Mark Henderson Leary

Welcome to Practice Freedom. What if you could hang out with owners and founders from all sorts of healthcare private practices, having rich conversations about their successes and their failures, and then take an insight or two to inspire your own growth? Each week on Practice Freedom, we take an in-depth look at how to get the most out of both the clinical side and the business side of the practice, get the most out of your people and, most of all, how to live the healthy life that you deserve. I'm Mark Henderson Leary. I'm a business coach and an entrepreneurial operating system implementer. I have a passion that everyone should feel in control of their life, and so what I do is I help you get control of your business. Part of how I do that is by letting you listen in on these conversations in order to make the biggest impact in your practice and, ultimately, live your best life. Let's get started. 

Welcome back practice leaders. We've got a little bit of a different one today, speaking with Thomas Allen, who is founder of the Practice Companies. One is focused on real estates, another one is focused on transitions, and we talked mostly today about transitions. So the practice transitions group is really about helping private practice owners exit, sell that kind of thing. So really fun conversation. I thought about some of the things that go into getting ready to sell, sort of the range of deals that he specializes in $5 million to about $35 million transactions in terms of the valuations of the business. So that's kind of the landscape there and a lot of good conversations about how that goes, what's going on there, and I hope you find it valuable and useful. Of course, before I let you go in to listen to it, don't forget I'm here. If you're stuck, don't stay stuck. If you're imagining and dreaming of that high value practice with a great engaged culture driving super high value to your patients, that you love and they love. 

It's giving you the life you deserve. I want you to have that. 

I want you to have that. So if you're stuck, you don't know what the next step is, if you're hitting your head against the ceiling, reach out. I want to help you get clear. What does it look like for your first or next step to gain that practice freedom? Reach out at practicefreedomcom. Slash schedule. Love to have that conversation With that with no further ado. Thomas Allen and Practice Valuation and Exits. All right, so we're rolling. So, Thomas, how's it been since we last connected? What's going? 

0:02:32 - Thomas Allen

on in your world. Things have been good, you know, just chasing doctors and healthcare entrepreneurs around and watching the market seem to be coming back a little bit and managing our team and working with all them, so and and dealing with the wonderful family of five. 

0:02:47 - Mark Henderson Leary

So everything's great. So you're chasing the doctors. Are you catching? 

0:02:50 - Thomas Allen

them, we're catching them, we're catching them and they're chasing us and we're in a great position. So been very blessed and very happy with their things. What about you? 

0:02:59 - Mark Henderson Leary

Yeah, certainly lots of chasing and, and one of the things that I I I mean, I've been doing this long enough to know the impact of what I do and it has been for over a year or two, depending on how you slice it trying to really bring awareness into the healthcare communities of there is a better way. 

We know how to run businesses, we know how to manage it and we can get your energy back to lead well and make a big difference. And it is exciting and exhausting to be in so many pockets where there's so little awareness of that. It's still a lot of the old thinking of just we got to hustle. The founding physicians, the founding healthcare providers have to know it all, do it all, and hyper-dependency is just still so common and these very scattered wealth creation strategies of like I'm running a practice and I'm adding a thing and I'm buying a laser and I'm investing in a car wash and I'm you know, I'm doing all these side projects, and it's like, oh, the recipe for exhaustion and risk is just so so you know. It's like there's the recipe for exhaustion and risk is just so, you know. It's like there's a way, better way, man. 

0:04:10 - Thomas Allen

Yep, completely. So what are you seeing? 

0:04:13 - Mark Henderson Leary

in terms of, I mean, exits is kind of what we talked about. Talking about and are you what's going on? Private equities, you know, always a favorite topic, you know what's kind of kept me up to speed with the language and the buzz. 

0:04:29 - Thomas Allen

Yeah, absolutely. You know. It obviously depends what vertical you're in. You know there's obviously different verticals within healthcare. One thing we talk with all of our clients about that come to us and want to talk about what it would be like to exit their practice and what options there are in the market, is that for well-run healthcare practices there are still many great exit options and opportunities out there. 

In this kind of last cycle that's been going on the last 18 to 24 months, where larger transactions have been down, has also allowed us and our clients to see, you know, which groups are kind of rising to the top and which groups are struggling. 

So that's been good in the space that we play in, because we are typically advising doctors in their exits that are, you know, sub $35 million, which are not the big blockbuster deals in the grand scheme of things. Obviously, five to $35 million deals is a blockbuster thing for a lot of people and they have not been affected as much depending on the vertical. And then we've seen some new verticals come up that we are excited about and I've been doing a lot of work in where things have been really hot, and so it's been. It's been a good market for good practices because the good practices are are the buyers are really paying attention to the ones that were a little on the fence. That would have transacted maybe in a little little healthier. Valuations have stalled a little bit but yeah, there's still plenty of options out there. 

0:06:10 - Mark Henderson Leary

So that's good. We got the sort of sandbox of the $5 to $35 million. That's the transaction. It's sort of like the purchase price, right. 

0:06:17 - Thomas Allen

That's right, and so what? 

0:06:21 - Mark Henderson Leary

are the worst ones right now? What are the ones when somebody says I'm going to sell the thing and you're like you know? 

0:06:29 - Thomas Allen

none of them are horrible, but you know one really hot vertical for the last. Call it gosh, I get my ears mixed up. I can't believe it's been you know, six years since 2018, but call it 2018, middle of 2021 into 2022. Dental was one of the hottest verticals there was and there were groups paying 7X plus multiples for deals that in the past would have been worth five times. 

0:07:05 - Mark Henderson Leary

And you said seven extra times Seven yeah. 

0:07:09 - Thomas Allen

Seven times you would on multiple. That in the past would have probably been a five X multiple pre 2018. And those now there are still plenty of seven to nine X multiples for really good dental practices out there. But the guys that were getting seven back in 2021, early 2022 are probably down to six now, which is still better than five right, or maybe even six and a half. But it's just kind of recalibrating expectations and explaining the market and why things have changed and it's not just interest rate driven has been a challenge. 

Obviously. Veterinary got insane. I mean it was up to 15, 20 times, even to four. You know single and two location practices at one point that's. That's that's come significantly down but once again there's still incredible exit opportunities if you compare it to 10 years ago. So it's just the recalibration of expectations there we are. We're doing quite a bit of family practice right now internal medicine and there are different factors that are involved in those healthcare businesses. Some are getting huge payouts and some you're hoping to get five times for it. Location and payer mix is a big driver in those. So once again, it depends on the vertical. But if you kind of look at the private equity appetite for healthcare businesses as a whole. It'd be hard to argue that it's ever been better. It's just maybe the valuations have settled into a more manageable, less risky range. 

0:08:43 - Mark Henderson Leary

So yeah, I wanted to kind of unpack what the forces are at work. And from my perspective and I'm not the expert, I mean from the distant armchair quarterback optics to me look like dental has been in the value creation business for a long time. They've understood how to add value, how to add cash pay, how to market, how to build a brand and they've been on a hunt. And then private equity has been in a land grab to get the good franchises and the good marketable and scalable things and at some point that the data comes in and people know how to run those businesses and prices kind of come down and it's sort of like it just matures and that people the land grab is kind of over. It's still high value and a lot of the players have critical mass. 

And then on the the family practice side, I see it as kind of the other end of that. It's there is well-known massive value there and it is so undifferentiated like no one has figured out. I said no one. I mean I guess people like village and clive and those guys they understand a brand through a massive scaling. But it's not the same thing. Like you don't like all the dental brands all out, you can do it on the freeway. And there's this, there's this, there's this, smile, something. 

And something else is like you know bright one of the tips of the value, one of the potential tips of the value chain. We can get a patient's relationship started in family practice and we can build a whole life around it. We can add all this value. And yet I don't see a lot of business models out there who have completely ironed out. This is how you maximize it. This is how you build a brand. This is how you maximize it. This is how you build a brand. This is how you scale it. And there's a ton of people out there who just have a very nondescript but healthy operating family practice, and so is that what you're seeing and you know you take it from there. 

0:10:41 - Thomas Allen

Yeah, and on a lot of what you did on of the brand and the scale and the how do you add different service lines to also increase the values? So I didn't even mention, you know, the hottest vertical, kind of new vertical right now that we are. We got in, I think, before our competitors. Frankly, in our deep into it I think we've got, we've already sold about seven and we've got 11 at different stages past loi and another seven or eight in the underwriting phase is the aesthetics wellness vertical. 

So we'll, we'll kind of add that in the mix and that's, and what you were describing earlier is the land grab we were. I don't want to give away too many, too many secrets on the, on the, on the podcast give away a couple, though I feel like we're managing yeah, we'll give some. 

Yeah, yeah for sure, we were managing expectations on multiples on some deals, thinking, hey, you know, this is a really good business. You know you've got a million plus in. You know you've got a million plus in the EBITDA. You've got solid providers, your provider concentration isn't too high, with one nurse, injector, laser technician that is, you know, carrying the practice. But we still think this is probably a six to seven and a half times deal and we've gotten offers in that are just just kind of blowing that out of the water. Because I think a lot of these groups are seeing a future in the wellness industry. They can layer in kind of this wellness practice into the aesthetics practice and really grow top line and then eventually heave it off through that. And I think they believe in what you're talking about as building a brand around a big anchor practice and doing de novos. That brand, uh, throughout the marketplace and if you can be that brand, that one of these I mean literally our buyer list has 28 different private equity backed entities right now on it that they can grow in a market. They're going to come pay you for it. 

Now, on the dental side of things, you know they were just land grabbing, rolling everybody up and paying you know, significantly high multiples and then, as soon as these interest rates bumped and then they were trying to integrate more practices that they were trying to integrate, you know, 10 to 40 practices a year into their organization, that integration was difficult and that's what's caused more of the the multiple drops. Just because they're so busy integrating and getting up. You know cause they also want to add service lines. You know, maybe it's a general dental practice that isn't doing implants or isn't doing orthodontics and they're going to. They're part of the business plan was to add that into the mix. 

And the thing that we're hearing most is out of the groups that did buy and integrate all these practices in the dental space is that, as they're going to exit, the buyers of them are wanting to see same call it same store sales growth and seeing that the actual individual units are continuing to grow as opposed to just being like an ebada uh puzzle. Everybody was slamming together and just stacking a bunch of even all up to sell it to a larger pe firm, and so we've gotten to see the groups that have bought the good practices integrated them well and use their systems and processes and brands, even though they keep it as a separate brand, but they still have this separate back office and marketing plans and everything else to actually grow those locations. They have been able to exit and so that's also been the kind of leveling out of multiples in that space is some of the exits for the bigger groups have not been as high and as great as what they had hoped for, because you've seen this like if you're going to sell fast. 

0:14:33 - Mark Henderson Leary

From a private equity perspective, you're working from a different mindset, but you don't have to solve those problems. You sell fast, you catch it on the growth. Everything looks great in the near term. If you slow it down and you have a value play and you're trying to sell from smart buyer to smart buyer, you will pay the price of not integrating or you will have to pay the price to integrate and to come back to those fundamentals of our same store growth, retention, churn, increasing margins and really the health-based metrics that play out over time. 

What do you because I heard you sort of mention, at least imply, the two types of buyers and the ones from the? So, seeing from the private, active perspective, how often are you seeing smart, value-add buyers who understand that, hey, we might have to go into this with a patient's mindset and that we're not going to sell or die in three years, but we're going to look at the curve and we're going to see where we can add maximum value in brand creation and creating healthy organisms? How often are you seeing both? You know both sides of those. 

0:15:46 - Thomas Allen

We're seeing both. I mean the good buyers are also underwriting the seller and really trying to understand their plans for the future and why their practice is operating the way it is. A good example is a practice we're selling right now. It's a diddle practice in a great Texas market and it's legitimately has 38% EBITDA margins, and which is you know. For comparison, 20 to 25% is considered pretty healthy. Anything above 25%, the buyers in the dental space start to look at it and go, hey, why are these margins so healthy? 

0:16:22 - Mark Henderson Leary

Are they super? 

0:16:23 - Thomas Allen

understaffed and and what what is, and maybe occasionally it's because hey, they're just they got a good deal on their rent and the rent's 4% of the of the revenue as opposed to eight, and there's some things that can kind of add up as to why it's 30 plus. This particular seller has some secret sauce of how they structure their associates compensation where the associates are happy with it. But it's different than most and most the buyers we took it to were like there's no way we can maintain this margin and have same store sales growth. But there were two buyers that said wow exactly you flip the model, you don't incorporate. 

You know and incorporate, you incorporate into it into it right and they said look how cool these sellers are, look what they're doing. There was a lot of opportunity for revenue growth and a lot of opportunity for marketing with this particular seller in the way that she is, and we just got two screaming offers on that deal where the other 18 buyers that looked at it just ran the other direction. And I would say that these two buyers are two of the most. They've been two of the more successful ones. They both already had an initial recap with super well-known private PE firms doing, because ultimately, I'm rolling some of my equity as an investor into the group and I think really diving in and understanding why the seller's doing this and what the near-term and long-term partnership is going to look like is super important for both sides. No, I love this question. 

0:18:09 - Mark Henderson Leary

I love this kind of discussion, because everybody who's in private practice has a perception of private equity is a bad thing, and one of the first things I discovered interviewing the more successful practice owners was that they were attributing some of their greatest success to amazing private equity partners. And there's a whole model and I've got a separate podcast episode where I kind of break down the different ingredients podcast episode where I kind of break down the different ingredients and the two. Just to be simple about it, you're either getting money to grow or getting money to exit, and then you're either doing that because you're strong or you're doing that because you're weak, and those are two by two right? 

So if you're weak in growth, you're going to be in a situation where you're out of power and your investor is going to tell you what to do. If you're weak, when you sell for exit, you're going to get sucked into a roll up that has you know it's not value driven, that has no sophistication and it just destroys your value. If you're strong in both cases like if you're a strong leader of your organization, like that dental practice you described like we have a way, then you really lead the direction of where the investment is going. You have command and what you can do with that is really take over the land you can dominate. We are going to do this everywhere. It's going to be amazing and that's really vision-led leadership. But the same thing is true if you're exiting All the things, you're talking about having sophisticated enough buyers, like there are people. 

Private equity is just private money, right, so led by people. Well, what do they think? What do they believe? What's their experience, what are their industries? And there is a way to match, and sometimes it's a little bit of panning for gold. It's finding the right one, because there's a lot of money out there that makes people think they're super smart and then they're not. And so finding that match is, you know it's a process and like finding a vendor, like hiring an employee, like selling a deal. You've got to do the work and get matched and they're out there and if you don't take it seriously you can be one of the bad stories. 

0:20:10 - Thomas Allen

And if you do take it seriously, some great stuff could happen. 

Absolutely, I mean, there's a reason why a lot of these private equity firms exit an initial investment in one of these healthcare verticals, wait out their two to three year non-compete and then, but in a new region and all all kind of your position of weakness or strength, even our strongest sellers. The initial conversations with them are typically around uh all right, if I go do this and I get this nice check and I invest into the group via rolled equity, what are they going to come in and change and how is my life going to be different? And what I like to do is obviously answer their questions and then kind of flip that set of questions on its head and say well, what do you want to be different? What do you do? You think you could could kind of, with the right team behind you, right, play off your strings for growth and, with the right team behind you, delegate all this stuff that you don't want to do anymore and you don't want to manage. 

And when we can get good, clear answers on those, it a it helps their valuation when they're able to answer those clearly on some of the initial phone calls with the different PE-backed entities and B. It really helps us find the right match for them. It's the right match. It's an important part of the process. 

0:21:44 - Mark Henderson Leary

It's not just getting it railroaded through the system. Especially, I mean really being clear on exit for departure as opposed to finding investment. That's a different mindset and a lot of this conversation is really exit oriented. But especially if you're trying to on the growth side, it's not about more of whatever. 

You don't want to go give up equity for something you've already got. Be really discerning. We have lots of this. We have lots of local knowledge, great process, strong leadership. What do we have? Lots of this? We have lots of. You know local knowledge, great process. You know strong leadership. You know what do we have Great vendor contracts or what do we have but we don't have this other thing. We don't have a capital to buy the stuff, we don't have reach outside the state, we don't have licenses in different places, and so those are the things like what do you need to put into the recipe to make sure you can match the vision hopefully the vision that you have yourself, which is really important part of this. And it's really not smart to use that investment mechanism as a way to fuel the vision, because that is definitely a recipe to making your investors your leadership, and that's rarely a good outcome in my experience. 

0:22:52 - Thomas Allen

Absolutely, and I think the good investors they don't want to be the leaders of your practice. I always like to say that if I'm investing in Google and I've got Google shares. 

0:23:04 - Mark Henderson Leary

If somebody at Google calls me up and says you know what, mark, we need you down here, we need your help, we need you to pick up the phone, do some dialing. That's the day to sell. I bought the Google shares so I didn't have to be in the leadership team. You guys need to drive this ship and be successful in where you're going, and that's the mentality that I want most of the investors to be having. You know we trust you and we like to support you in the way that an investor should, not as an operating leadership team member. 

0:23:32 - Thomas Allen

Right and even on the exits the good sellers and the good doctors. They care about who they're exiting to, because they do care about their patients and their staff and everybody else and the business that they build. And as much as we'd like to say that a lot of these healthcare entrepreneurs and physicians and dentists and vets can exit for a nice multiple and be out of there quickly, you know there's going to be some commitment of a transition period, so they need to be working with the right group that they trust and like and have a shared vision for yeah, I think that's a good point because there's I think there's a little expectation that if you sell it, you just don't, you don't, you don't go back there, you don't think about it, you don't work with it. 

0:24:21 - Mark Henderson Leary

But if you're in transition, you're going to leave there with a really good sense of what's happening to the people that you leave behind and but I think most people that I know want to leave with a good sense of good stewardship, that I did the right thing for the right patients and this is a good thing 100% and, to be clear, they all say that and I think they all mean it, but some mean it more than others. 

Well, I mean, I'm not going to go down too far that path, but I think you're right, because I know you're right in that regard. But what I've discovered is that that intention I mean you can say it, you can mean it, you can be lying, but even when you say it and you mean it, if the ship steers toward an iceberg, you got to get out of your chair and like we got to go do something, and so if this thing is on plan and it's working, you got a much higher chance of those words being true If there's volatile revenue, volatile patient retention and churn and turnover in your organization and if the exit numbers were so on edge and not proven, and you're back to turbulence. 

the odds of getting a freaked out set of investors who mean well, feeling like they have no choice but to get involved is really high, and that's the scenario you want to avoid. 

0:25:47 - Thomas Allen

For sure, and I feel like you just hit on another piece that's changed in the market over the last couple years. There are some transactions that we used to be able to white knuckle through the process despite the seller, and the seller wanted it done, but the seller was acting in a way that would be difficult to be partners with, you would think, as a buyer, but we were kind of able to get it pushed through For the foreseeable future. I think those days are over. The sellers have started to realize some of the mistakes they've made of partnering with people that maybe would act one way at the beginning of the process and act one way at the beginning of the process and act another way, you know, at other parts of the process. 

0:26:37 - Mark Henderson Leary

Yeah, I think that's a great great point. I think that healthcare in particular, we afforded like chefs of the old day. You know a bad attitude was expected and almost sort of you know admired as a you know the ego driven. But now it's good. Leadership is a real thing and we see now that you know it, it leaves. It's a telltale sign of whatever else is unhealthy throughout the organization. People who are frustrated, abused can't wait to leave. 

0:27:08 - Thomas Allen

Right and on the flip side of that, you have good leaders that are great people that are owning these businesses. We've got a couple right now. There are a few businesses that we're working on in the aesthetics industry, which is obviously cash driven, and you know we call it recessionary. Things are going on and we've seen a consistent small percentage revenue drop across. Most of the groups and the PE firms that really value these good leaders that they're about to buy into and partner with or help exit over the next couple of years are staying firm on their valuations and understanding that this is probably just a little downturn. Now, if these sellers were not good leaders and had a different attitude, I think we'd probably be getting, if you want to call it, retraded retraded, but the QOV is not. Quality of earnings is not shaking out just because revenue has been decreasing in the last six, nine months in some of these businesses. 

0:28:10 - Mark Henderson Leary

So, on the point of quality of earnings, say a little bit about the factors that create enterprise value, and I want to. This is, I think, a good opportunity to unpack any jargon and make this sort of stuff plain for somebody especially. Let's imagine somebody who's running a good practice, not currently in the mindset of exiting, but let's give them a primer. By let's I mean you give them a primer on a handful of things that lead to high value exit right. 

0:28:46 - Thomas Allen

So let's use some simple math. Let's just and this is going to be lower multiple and everything just because it's easier to use simple math. Let's call it a five times EBITDA multiple and EBITDA is a million dollars. 

0:28:58 - Mark Henderson Leary

You're a five million dollars. So most of my clients understand EBITDA, but that might be because I told them. So EBITDA is just a sophisticated way of getting accurate measure of profit right. Is that a fair way to? 

0:29:18 - Thomas Allen

but yeah it's, it's a, it's a net income metric and but that is also what's the go forward, even all of this practice or this group. What's the go-forward profit of this group after they pay the seller? Because a lot of times the sellers you know are just paying themselves in random distributions or maybe they're writing themselves a little salary, but from the day of closing moving forward, how much is that seller going to get paid? If they're staying on or if they're replacing that seller, what do they have to pay? Let's slow that down. 

0:29:43 - Mark Henderson Leary

So EBITDA is earnings before interest, tax, depreciation and amortization. So that's our version of profit. It's a specific version of profit. And then we're talking about this concept of ad back. So when we're running a profitable business that's personalized and say you only have one partner, you then probably there's a lot of things you can legally do that are confusing in a situation where it's another organization like you know how much of my, you know my beach house is a part of the operating for the business. 

Well, some of my patients go down there for recovery, we'll say, or whatever we have a lot of business meetings down there, and so the profit and loss statement might be very confusing looking and this concept of ad backs or whatever terminology you use is sort of saying like well, after we sell the business, those numbers aren't going to be there anymore. We're going to know I paid myself a lot, or I paid for that Ferrari that's not going to be there. What is it? What is this going to look like moving forward? 

0:30:42 - Thomas Allen

Correct. Let's just normalize all the expenses. Let's remove all this, all this, all these expenses that aren't going to be there moving forward aren't going to be there moving forward. And then there's, typically, you know, some added expenses around, maybe the seller's compensation because the you know they weren't paying themselves normally, or you know this is. 

I mean, there's a lot of ways that we go in and defend our EBITDA in the quality of earnings process, but you know there are different management company burdens that that the buyers might be wanting to put on the practice, that we can argue are overloaded or unfair. But ultimately your goal is, as a seller is to come out with an EBITDA that is both real and as high as it possibly can be. So if you've done a great job of doing that and it comes out to a million dollars and the market is five times EBITDA for that practice, which is going to be a low multiple typically for a million dollars in EBITDA in the healthcare space, but for easy math, let's call that a $5 million enterprise value. Well, great, I just got $5 million for my practice. I get to walk away, right? Well, no, typically not. 

Now, how much of that do you get at close? Well, what factors are in that? I think that's an important thing for doctors to think about as they're building their business. Well, if you're the only provider and you're generating that million dollars in EBITDA because you're the one I mean, a plastic surgeon is a great example You're the one doing all the work. The business is called Dr John. 

0:32:24 - Mark Henderson Leary

Smith Plastic. 

0:32:25 - Thomas Allen

Surgery and a market compensation for a plastic surgeon doing the amount of work you're doing is $700,000. And so you've been making a million $1.7 million a year. Now you're going to move forward and they're going to replace you and that person is going to make $700,000 and there's going to be a million dollars in profit. Are they going to pay you $5 million for your plastic surgery business? No, because unless you walk away the day after closing, is I mean, yeah, you're built into the business, you're the brand. 

0:33:15 - Mark Henderson Leary

There's going to be an impact of a brand rebuild or unless you're selling brand image and likeness or something like that. 

So it's very complicated in that sense. So that speaks a little bit to again I don't want to get too complicated here but a term called valuation arbitrage having to do with you know, if you're a certain size practice, you know, say you've got a million dollars in EBITDA right now and it's a one doctor practice, a $5 million EBITDA practice with five doctors in it, just for simple math, could be, you would think, just worth five times as much. But it turns out it might be worth 10 times as much because you've already proven that it's not dependent on one doctor and if one doctor leaves, the practice is still very viable and risk tolerant. And so understanding these factors, so kind of going back to you know, one of the first factors is EBITDA. Second, this factor is understanding sort of these add-backs like what would this look like if you would normalize this? And then also understanding sort of the valuation arbitrage based on how big you can be or how big you are, which symbolizes the scalability and sort of potentially the risk tolerance of one possibly you doctor leaving. 

0:34:31 - Thomas Allen

Yep, absolutely. And so then, within that enterprise value, well, let's just stay on this million dollar EBITDA business. And if you're saying, hey, I'm doing this because I want to work another seven years and then retire and I just want to take some chips off the table and kind of have this out of the way before I retire, so I've got continuity in my business and I'm willing to make like a five to seven year commitment and I'm also willing to retain 30% ownership. Your $5 million valuation could go to seven million dollars. So, like, enterprise value can also increase or decrease based on structure, right? So how are we going to structure this transaction to where these investors that are buying this from you? And these investors might be a group of doctors down the street too. It doesn't necessarily have to. 

that has some pe backing or something like what, what are the risks of this investment? And like let's just go ahead and lay out the risk and that's the other thing we go through with our clients is like let's have a, we tell them we're gonna every business has some skeletons in the closet right. Like let's go, take these skeletons and turn those into opportunities, which that just speaks to like time right. 

0:35:48 - Mark Henderson Leary

Every, every business, broker, investment banker, anybody on the private equity is like start the process early. Like we can fix any problem with enough time if we're down to the wire like I can't fix it, you know. 

0:36:01 - Thomas Allen

So we got to really get ahead of this, yep yep, yeah, and there's as you know, there's these transactions can be. 

You know there's a term deal fatigue for a reason you know. The other day I was talking to my business partner. I was like, what's the fastest one of these? You know, call it sub seven million dollar transactions can get done and I, like you know what I'm working on right now where they had clean books and clean information we could talk about that too, how that affects enterprise value valuation and structure, and we were able to rip through the underwriting process and get the package out in the market. We had buyers, we had LOIs. I mean it was still a five month process from start to finish, with just a great seller and a great market with clean information. And there were still you look back on that on that transaction there were still some points of deal fatigue where, you know, there were some emotions from both the buyer and the seller. So there's this whole emotional piece to all of this that people don't give enough credit to oh yeah, absolutely. 

0:37:07 - Mark Henderson Leary

And then the gamesmanship that can go into that. I mean both, either party being sort of invested or irritated or both. Yeah, all right. So we talked about sort of the profit, we talked about scale, we talked about clean book, kind of touched on that, how clean the books can be, cause that's I've been through that. I mean, if you want to build trust, clean books and if you want to have a hard time telling a story and you constantly explaining yourself, then leave the books dirty and make sure you never look like you're telling the same story twice. So clean books is such an important part. What are some other things that you talked about earlier, like provider diversity and things like that? And what are some other things you know retention, ancillaries, sales margins you know what are the things that you look for in a deal like this is going to be valuable yeah, absolutely well, obviously margin is is a lot of it. 

0:37:59 - Thomas Allen

So are you running this business efficiently, but not too efficiently to where you know they can tell that you probably need a another office manager or front desk, but you're stressing everybody out just to make the extra $50,000 a year or $60,000 a year they can. That can get sent out. You know the, the, the provider diversity and the revenue diversity amongst providers. I'm not saying you can always have it spread evenly over five or six providers. If you've got a practice and you're the owner and you've got one provider that is producing the majority of the revenue behind you or even more than you, you've got to have a plan for them. You got to go into that eyes wide open. So really being able to show like, hey, I've been able to retain this provider for them. You got to go into that eyes wide open. So really being able to show like, hey, I've been able to retain this provider for the last, however many years and they're not going anywhere, and here's why. And if they do, here's how we recover and here's why you know what they are producing a lot of the revenue. But I have all this data to show that. All the patients. Yes, we have returned patients that are coming to see them, but we're also generating a ton of new patients and so I can replace that provider with another provider. Um, and having that data to show why this is an actual business and not just a a kind of lifestyle sole proprietorship where that provider quits like like this thing's in the tank, appropriate staffing to show you've thought that out Clean and so you might have clean books. 

We have practices with clean books, but then their practice management system's a mess and it doesn't match the books. So at some point before you're planning on exiting, start cleaning up your practice management system, especially in some of these kind of quasi cash insurance businesses system. Especially in some of these kind of quasi cash insurance businesses Like I know it feels good to show that you're producing $6 million a year in revenue on your practice management software, because if you got to charge your full fee every time, you'd produce 5 million, but then your books are showing 3 million in revenue. Like, go ahead and adjust your fees in that practice management software to match it up and so we can actually trace it back and make sure that within the practice management software, your staff is tracking the right procedures with the right patients and not just in the patient charts, so that you can show what is. 

What is your business? What is generating this revenue? Are the patients coming in to get this one service? In this revenue, are the patients coming in to get this one service? And then you're able, you know, to I don't want to use upsell, but educate them to where they might start taking this other service and show that track record of that loop that you can keep building on, but being able to prove out and articulate why this is a good investment and a good good practice, to bring into a good group which data right, start tracking and having clean data. 

Yeah, they especially in the doctor where we see all the time, and I don't blame them but you know they've been running this business for 10, 15, 30 years and all they know is that they've made more money every month than they spend and they've got the beach house and life is good and that's great. 

But if you're going to sell, maybe think about it two, three years ahead of time and spend the extra thousand dollars a month on a good bookkeeper, consultant type person to get all this stuff organized. Go, go through the EOS process and at least get some of these things in place, because it is going to affect you If you start thinking about selling for six, seven, eight, nine, 10 times EBITDA, if you say every thousand dollars of value you create is worth six, seven, eight, nine, $10,000. So start making those investments, preferably at least two or three years early, but the earliest at least 12, 18 months, so you can at least see the last. The buyer can at least see like all right, in the last 12 months it's done this and it probably did this in the last three years, because we have this data but just just cleaning it up and I know it's hard because you work all day, but that that that goes back to you. Know somebody like you putting it, helping them kind of find the processes and systems. 

0:42:10 - Mark Henderson Leary

Sure, one thing that's just kind of bubbled up for me, as you were describing that and we've all any of us who've been through the process know this refrain it is the process to get your business ready to sell is the same thing as make your business fun and profitable to run and keep, and so I love this as an exercise, and I do think it's important to really wake up to the fact. For most people, this is not a generational business. I say that Maybe and if it is, it's going to be sold to the next generation in some capacity. So there is an exit reality to this. Somewhere down the line it's going to be evaluated, it's going to change hands, hopefully to better, even better hands to take care of it. And so at some point in the conversation, being aware of what that looks like, what matters? Because it's not arbitrary, right, it's. You know, private equity, and investors and buyers are not just sort of arbitrary. It's not like a bank. They're just going to want what they want, or an insurance company that sort of has arbitrary things that they need for their stats. These valuation attributes and descriptors and measures are actual measures of value. It's an efficient organization, it's profitable, people are happy, the customers and patients are happy, and so, getting into these things that have been measured and observed for a long, long time, it's going to be valuable to you. 

And so often, the process of somebody saying I don't want to be in this business anymore, I think I need to get rid of it, okay, fine. Well, let's talk about that. Are you ready to sell it for half of its value today? Oh no, that sounds terrible. So let's get it healthier. And you get it healthier, and in a year or two, down the line, it's like so you're ready to sell it. Well, you know, I kind of like it now. It's kind of enjoyable. The people are nice, faces are happy, it's not so hard on me, you know, maybe I'll sell it, maybe I'll keep it. 

0:44:12 - Thomas Allen

This is a good deal right 100 100 yeah and it's hard for some of these docs pull themselves out of the weeds. I don't really get it, but it as you said it's not. 

It's not arbitrary. These buyers, we all have a finite amount of time and even when they're in the land grab mode, as you described it earlier, they're trying to buy every business that they can. They still want to know that the likelihood of close if they enter into an loi is is you know that's close to 100% and they'll be able to know that by the initial you know viewing of the SIM and your books and everything that. All right, this can make it through quality of earnings and we can close this. So it's important to be prepared. 

And then our belief from the non-arbitrary thing and it's even back when, once again the land grabs going on and if you want, you can go get 10 LOIs for your practice the highest bidder every time ends up being the group that A feels like they're going to fit best with your business culturally and B feels like it's something that they can integrate into their organization efficiently. And that bidder always oh. Why do they pay the most? Well, because you fit the best with them, because it's all about the value for their situation, which is that's what it's kind of calling For theirs. 

0:45:46 - Mark Henderson Leary

Every buyer has a different need, right? If you're buying a house, you know a $2 million house is not a $2 million house to you. If you know, if it's got 14 bedrooms and you're like, well, I don't other than the loan. This is not adding value to me. It does not fit my investment thesis. 

0:46:04 - Thomas Allen

Exactly, investment thesis, it exactly. And you know it can be something like well, the ceo has a house in charlotte, has been really wanting to get going in charlotte and they don't have a practice yet. And maybe you're talking to the two or three groups that your two or three friends sold to, but you missed that buyer that I don't know what's. Another example you're an orthodontist and you missed that buyer that has 10 dental practices they already own within 20 minutes of you. That buyer is they're gonna have the most value for your practice because now they've got an orthodontist for all these dentists to refer to. 

So it's like it goes back to a marketed process. Even though you might be able to pick up the phone and call two or three groups that your friends have sold to, you might be missing out on all of this value, to use your words because you didn't find the right buyer that's going to value your business. 

0:46:56 - Mark Henderson Leary

Yeah, that's probably a great point to end on. I'll give you a chance to fill in and then we miss. But if there's one thing I've learned and teach, if you get into that spot of you know, I think I'm going to sell it Really. Yeah, somebody called me up and said they want to buy and I think I might sell to them. I'm like whoa. 

0:47:14 - Thomas Allen

Take a step back. 

0:47:15 - Mark Henderson Leary

If you don't take this process seriously and go to market and find multiple buyers and understand what your value is, you are going to leave massive value on the table, and it's nice to think of it. It could be a personal situation. The timing could work out great. It's like you know, a buddy has an old car and he doesn't like it. I told him, you know, if he's ever going to sell it, he would sell it to me and he sold it to me. Well, that's a great story for a car. This is your life's work. 

Get this thing evaluated in the marketplace and get them a deal that feels fair. Now, obviously it's not all about the money. It can very much be, and it should be very much be, about the big picture and the fit, but really the stakes are so high and making sure you're really eyes wide open in the transaction is so important. 

0:48:02 - Thomas Allen

Yeah, absolutely I. I mean it happens on a lot of deals we're working on, but we got lmizing this morning on one. It's a well-known town in texas of you know, call it. I don't know the exact population, I'm gonna call it 200 000 people, and it's not a major city, not even near a major city, but this, this lady's lady's built a $2 million EBITDA healthcare business and her friend sold to this group and she called us and she was about to sell it for four times EBITDA and we literally have offers at seven to eight right now and it's just like thank goodness she called us and and she, she's, she understood, and that was the buyer. 

the original buyer was like well, your friend sold to us. How are you going to go more? I mean it's it's just crazy, but so it's. It's. Yeah, you're exactly right. You got to go through the process. 

0:48:55 - Mark Henderson Leary

Well, Thomas, we covered a ton of stuff. It went longer than I thought and it's a lot of great stuff, but anything come to mind that we missed in this conversation you missed in this conversation? 

0:49:09 - Thomas Allen

No, not at all. This was great. I enjoyed it. I'm happy to answer any questions that any of your listeners might have later. 

0:49:12 - Mark Henderson Leary

Awesome, and to that point we'll obviously put contact information in the show notes. But if somebody wants to find you, you know, continue the conversation. What's the easiest way for them to find you? On the internet. 

0:49:23 - Thomas Allen

Our website's practicetransitionsgroupcom. I mean y'all are welcome to text or call my cell phone 713-299-4602, or you can find my email address on our website. 

0:49:35 - Mark Henderson Leary

What's your? What's your thinking about your from a leadership perspective? You run, run across a lot of leaders in that space. What's your passionate plea to them right now and you can take a second to think about that. I know I kind of sprung that on you. Passionate plea to healthcare leaders in their organizations. 

0:49:51 - Thomas Allen

You know as somebody that I really can feel for them because I am both working on the business as a growing organization. You know we're at roughly 33 people now and we are running, between real estate and practice sales, over 200 transactions a year through here. But I'm also leading uh transactions and working in the business much like a doctor would be as a provider. Uh is to really try to block time, to take a step back and work on the business. It's something'm really. You know I what's in the EOS world clarity break. 

I really have been trying to schedule in the clarity breaks. I'm I'll even make the clarity breaks like an entire morning because ultimately I I believe it. It it helps my clients and it helps our, our, the people working, working in the business, and we have great people that are leading transactions that I am leading them and so you know you as a practice owner are both working in the business. But you really need to take the time to go work on the business and I know it's hard to make yourself do it, but you got to do it. 

0:50:59 - Mark Henderson Leary

Great, great Fits into the theme of well-led organizations. It's kind of my quarterly theme really understanding the balance between the systems, which is what I teach most of the time, but also making sure that you don't get caught up in the academics of the system and forget to really lead with passion and clarity. And a lot of it has to do with that self-observation, you know, making sure you're not stuck in the weeds, stuck in the flow. You really got to get out and observe and listen. Well, so awesome man. Thanks for the time. Thomas. It's been a great conversation. So grateful for the time. We might have a conversation like this in the future and dig into other aspects of this, but thank you for your time. 

0:51:33 - Thomas Allen

Yep, thanks so much. 

0:51:37 - Mark Henderson Leary

So that's our time for today. So if you thought this was valuable listening to us, we'd love to get the feedback. Send us your comments, feedback and all things that go with that Obviously, five-star reviews, whatever you feel comfortable. If you get constructive feedback, please send that to us as well. Don't forget I always got to remind you that if you're imagining this high-value, thriving culture business that you love and you imagine it giving you the life you deserve, but for some reason you're stuck, you don't know where to start, you don't know how to crack this open. Don't stay stuck. Please reach out. We'll love to help you get you on your way, in whatever capacity. That is Practicefreedomcom slash schedule to get a few minutes with me. We'll talk about what a first step or next step could look like to get you on the path to practice freedom. With that, that's our time. We will see you next time on Practice Freedom with me, Mark Henderson.

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