96: Different Aspects of DSO Finance with Host Ken Kaufman and Guest Ben Hernandez, CFO of Skytale Group

Welcome to DSO Secrets. I know what it's like to be an entrepreneur in the dental industry. I've had my ups and downs, just like you. There's so much opportunity to be excited about, but so few resources to get answers. From here on DSO Secrets, we get you those answers so you can change the lives you're meant to bless and achieve your personal success.

When I was working as an associate rat at a school, I never imagined I could own these many practices with this amount of support. So thank you.

You have helped build my marketing mind

to a whole new level.

You have this natural talent, this unique ability. Happy day to you and welcome to another episode of DSO Secrets. I am Ken Kaufman, your host today, filling in for the illustrious Emmett Scott. I'm excited to introduce today's guest. He and I met several months ago at the summer DEO event and have had a chance to connect and talk about things and find a lot of alignment around the way we think about the world of DSO finance. He has an undergrad degree in business from Texas A and M, an MBA from msu. He worked at Mike White and Associates, which is now CLA, up until 2018, and then started his own group called the Skytail Group. And they do all sorts of things which we'll get into here in today's episode. Ben, thank you for joining me on today's show.

Thank you for having me, Ken, longtime listener. So excited to be here this morning.

Outstanding. Great. We always like to get this started off with this question so our listeners can kind of understand how it is you came into this DSO space. And I like to ask it this way. What is one of the biggest, or. I'm sorry, what is it that led you into the DSO industry and why in the world are you still here?

Good question. So you touched on some of that in 2015. Toward the end of 2015, I joined Mike White and Associates. They were scaling and growing and needed some help in the consulting space. While they were doing that, when I came in, I realized they were heavy in dentistry. They focused almost exclusively on it. They did tax accounting and consulting there. And I thought, okay, how am I going to fit in here? Clearly there were consultants there that focused on the single solo docs, knew it very, very well. But there was this focus on the DSO space that was starting to happen. They had already been working with DSOs, but there was more of a focus to really start growing it. And they saw a big need there that the industry wasn't yet servicing full. There was a hole there that we

thought that we needed to fill.

So I was tasked with doing a lot of that. So as I was studying the industry, it was this 130 billion or so dollar industry. I think at the time it was 16, 17% consolidated. So very fragmented, but in the middle of consolidation. And it grew 2 to 3% a year. So it was going to grow whether there was a bull market or a bear market didn't really matter. It was very resistan recession. So just had all of these economic qualities that investors love to see ultimately and just really became fascinated by it and decided to try my hand at it and fell in love with it. And it worked very, very nicely with my past. So as we were working with these groups, I realized, you know what? Growing up, my heroes were entrepreneurs. I always wanted to be one. And as time goes on, it gets a little bit more scary to put your chips in the middle of the table. But as it just so happens, it was just pretty serendipitous that my background was out of school investment banking. So obviously understood the concept of how to market a company, how to sell it and what buyers were looking for. And then post mba, worked at a hedge fund for most of my career, so understood what we look for from a macroeconomic point of view all the way into the micro of what makes a really good business. So that's ultimately why I'm still here. As we started working with these DSO Dr. Owners, they were such dynamic people, they had such big visions. They were a typical entrepreneur and we thought that we were doing a really good job helping them. On exactly how do you scale? Why are you doing it? Here's what the industry is, here's how you centralize, here's how you pull yourself out of the mouth to be an executive. Just fell in love with this space. And that's how my partner and I decided to found Skytail is to add some of her components. She cut her teeth in big four CPA background cane waters. So she serviced the solo docs and we thought, what if we kind of service the entire dental industry and added M and A to it as well? Which we think does a nice job of coming back to the strategic component as we scale these clients.

I love that story. You got your taste of dental and then said, hey, I'm going all in.

That's basically what you said. And this DSO space specifically, that's exciting. So I know when the few times that we've interacted since last summer, I

know you have a lot of energy

about helping clients get their financial statements really clean. And organized. Can you maybe talk to our listeners for a second about what are the top one, two or three things where they are just missing it on their financial statements? Where you say, hey, if you could take these few steps, how should I organize my chart of accounts or whatever it is? What, what are the, what's the advice

you'd give them that would really help

them get a leg up in terms of getting their financial statements to be really effective for them?

Yeah.

So on the financial statements, the first thing that we like to ask and would suggest you do is if you already have that legal structure in place, so it's hit and miss. Some people already have their DSO documents and they're probably off to the side somewhere. We would suggest dusting those off as a step one, if you do already have that, and then really tie your chart of accounts, your flow of funds and even where your people live to your management services agreement, your msa, if you have one in the DSO docs, and really make sure that those two play nicely that way. What you're doing is you're taking the legal documents and you're actually making it become alive with the financials. They're talking to each other, they're very, very consistent. That's important for a multitude of reasons. If you're the sole owner right now, it doesn't matter as much, but as you start scaling, you bring in partners and such, that's going to become critical. So that's step one. Step two, once you get that, take that to your internal accounting and finance team, or if you have it outsourced, take it out to them and say, this is what I want the flow of funds to look like. And then if you have multi offices, what we suggest you do is you have a consistent chart of accounts. That's key. What that allows you to do is let's just say you have five offices and typically what we see is different chart of accounts for each. That makes it difficult, especially as you continue to scale, to consolidate into one and to compare apples to apples. So how is my practice number one doing versus four? If you have that consistent chart of accounts, consolidation becomes easy. And so does the ability of being able to tie back to that and really identify performance and compare it on an apples to apples basis. And then the third thing that that allows you to do is as you scale, you're going to be able to have reporting, and we call it MD and a management discussion and analysis to where what you're doing is you're creating a report, your team is creating A report for you and you have a report, let's say, for the C suite. You're looking at various financial and KPI metrics, then you maybe have a regional team, they're seeing a bit of a different report, probably fewer, but things that they can really take action on. And then at the office level, same concept, you're able to really scale it down and provide the financial metrics and KPIs that the Office needs. It just allows for a seamless transition. The final thing I would say is from a dissemination to you, I would suggest the books be done no later than the 15th of the following month. If you think about, let's just say, a $10 million organization, any action that you take, any opportunity that you see, the faster you can do it, the

better it is for you, for your

bottom line, for your margins, for your operations, everything. Let's just say you find a 1% efficiency on that $10 million, that's $100,000 that's now dropping to your bottom line. And if you have very clean financials, you're able to do that and keep your chart of accounts short.

Ish.

We see a lot, 200, 300 lines. You don't need a DirecTV account in there. You can find, you know, kind of bigger accounts to consolidate. If there's something that you're tying metrics to each of those accounts, you can always go back in and look at your general ledger, things of that nature

to see why you're off. If you are off.

Awesome. So I kind of heard three themes there. There's always the timeliness and accuracy of the financial statements. Those are critical elements. And there was one other piece I think you hit on. And I can relate to this. When I came into the DSO industry on a full time basis about five years ago, I looked around and noticed that the amount of legal support to get DSO documents created and organized properly for your organization was high. And there are law firms that have specialty groups that are dedicated to this and we've interviewed some of them on this podcast. It felt very wild, wild west in terms of how people took those documents and implemented them. And as I looked around and networked and talked with folks, I found a lot of people had documents. Almost none of them were implementing them correctly. And so all of the compliance and all of the value of the legal documents were getting completely unraveled and undone in the way that either they weren't being applied or they weren't being used and fund flow funds wasn't, wasn't following the pattern that was consistent with what the legal documents require, which meant totally uncompliant or they had tried to. Or they just. Anyways, either they completely, you know, left it on the shelf or they tried to implement and it was not compliant with, with what the legal documents said, which means, you know, any court, any attorney could just, you know, drive a wedge in that, split it apart in terms of protecting the assets of your dso. So I'm just more, more validating, Ben, where you're coming from and appreciate, I think that I, I think it's great advice for our listeners. Now tell me, and I get asked this question a lot. Interested for your perspective on this. So organizing all this because we know that the listeners here are dentist entrepreneurs, which means they're dentists first and then they're becoming entrepreneurs. And they may not have that much experience with financials or sometimes dentists are hiring business people to come and help them who may not be accounting experts. They may be really smart in business and strategy and operations or marketing, but they don't have the finance side. I find a lot of DSOs, as they're just getting started or trying to grow and scale, they're just constantly scratching their head about how do I get, how do I know? Should I bring it in house, should I outsource it, who do I hire first, what's. What stays outsourced, or do I just start at the beginning and build it all myself? What software should I use? There's a lot of interesting questions. And still we're a little bit of the wild, wild west in terms of how all of that is thought about and gets organized. Can you maybe share some thoughts around that from your experience? As I understand, Ben, you're working with and doing consulting for over 50 groups between the DSO space and I think you told me MedSpa, right?

Yes. So we have a bit over 50 clients in either the DSO space, single doctor, solo docs, and yes, the med spa space as well. You're correct.

Yeah. So can you, can you maybe tell us like, what advice are you giving and helping them to know when is it time to start to build in house versus outsource and everything within that realm?

Sure. So that's a big, big question. And really what we do at the very beginning is we like to understand where they are today. So really we ask for a plethora of information because every DSO is a little bit different. Every client of ours that has multiple locations is a little bit different. So we try to really understand where they are today. We ask for Financials for legal docs, for operational assessment. And really the aim there is, try to find where are their holes. We have some doctor owners who are fantastic operators, for example. We have others who even have finance backgrounds. So what we try to say is hire for the people where you're weak and let them take the wheel. Let the professionals take the wheel. We also need to understand where everybody is from a financial perspective, because I know you guys talk about it, the, the dark tunnel, right? That's very, very real. As you start investing in your organization, Oftentimes, as we project things out, what we say is depending on where you want to invest within your management team, this is what's going to happen to your margins and to your take home personally specifically. And we need to be sure that they're okay with that. So from there, depending on their answers, depending on how they feel, we like to tailor it to each of our groups. We then say, okay, let's bring accounting in house, let's bring apar in house. Billing collections, some of those things are

typically early on in house.

And then here are the things that we find that we do, okay, outsourcing for now, but we like to have targets where at a point in time, as you go forward, as you scale, you start bringing those things in house. Including us, potentially, we were eventually aiming to put ourselves out of a job as well. As we start scaling, when does it make sense to bring in a very sophisticated director of ops? Because this is the type of strain from a payroll perspective that it'll put on the management company. So we like to have all that mapped out well ahead of time. So when we reach certain points in time, we're able to bring it in house versus outsource. But we like to form that team

as soon as we possibly can.

Yeah, I appreciate that and I appreciate your answer. And I realize it's a very big and loaded question based, and it's so specific based on each organization and where they're at and where they're tracking. But I appreciate that. I can tell you some of our entrepreneur dentists that I know or interact with, they feel frustrated at the fact that, wait, I start outsourcing, I get all that training and get all that done and then I start letting them go to bring it in house full time. And that feels so painful and there's a loss of information. But it's just from a financial perspective, unless you have unlimited funds, you just have to decide to outsource for some period of time. And then as you start to pull down on those resources more and more, then it's time to bring it in house. And so, Ben, these are the types of things you and your group are having conversations with. It sounds like often we do.

This is a big, big conversation because we really do. In addition to the CFO role, we're strategists alongside the way, where we try to understand where they are, and then we try to understand that final. If you could close your eyes and you had a magic wand, where exactly would you be? What year is it? What disciplines within dentistry are you taking part in? We try to understand as much as we can on the why and the end of it all. So we know how to fill in that gray space, and so we know how to stay within that, because a lot of it is focus, a lot of this is focus, and a lot of our clients have so many opportunities that without that, it becomes difficult to know which ones to chase and which ones not to swing at. And, yes, these are conversations we have very frequently. You touched on something interesting, the transfer of information. We have that discussion a lot. I would suggest that whomever you work with, from a vendor perspective, we try to do this as best we can. When it does become time to transition out and bow out, if you are that third party, there are some third parties out there that do a very good job of transferring that information while you're. While you're still a team. So I'll speak for us, for example, just because we're in it and we do it is as they start bringing accounting in house, ap, so on and so forth, those don't really affect us too much. But at some point in time, a director of finance is going to come in. And at that point, what we do is we like to team up with them very, very closely. And then anything that we're doing, we start doing as a team. So if ever we do bow out, the transfer of information has already happened because we've already been working together, we've been collaborating, we've been really part of that team, and the transition should be seamless. But that is a very, very good point. And I think it's important that instead of letting people go and then here comes a new person, if there can be a transition phase, period, where those two teams in house and outsource act as one, that tends to work pretty well. Yeah, that's a great point you brought up.

Yeah, well, I appreciate you just unpacking

that a little further for the listeners, because I know it's a place where they feel pain, and unfortunately, neither you or I can give them the perfect formula, but there's just a lot of collaboration and discussion that has to happen and then getting the outgoing party to play nice with the incoming party and have that all be friendly and lots of information share hey Ben, so I want to jump into the next kind of one of the other main topics I wanted to cover with you. And I know our listeners have a lot of questions around this. What do you see happening? We could start at a general level and then break this down a little bit. What do you see happening with debt financing in the DSO space from the small groups, even the individual practices, all the way up to fully organized DSOs? What's happening in the marketplace right now is we're still in the middle of COVID and we all hope we're transitioning out, but it seems like this is going to be hanging around for a while longer. What's happening with banks and what should our listeners be thinking about in terms of if they're thinking about going to market for debt financing for either acquisitions or de novos or for some other form of growth?

Yeah, so it's interesting times.

Credit facilities or commercial banks right now they're a little bit nervous, but they do have capital, but they're a little bit nervous right now. And that's where this conversation that we're having becomes very, very important because they are lending.

So I'll say that they are lending.

Our clients are seeing funds allocated to them for de novos or acquisitions. Now what we can do is how do we separate ourselves? So in order to do that, what we typically see from banks, if you already have a banking partner, then I would say stay very, very close to

them and go ahead and divulge what

it is that you're trying to do. So a lot of the banks, when

we talk to them, they don't know

exactly what the doctor Owners who are scaling are exactly trying to do. So I would say, number one is if you have a good relationship, really have them understand I am scaling. This is where I'm going. When you have that conversation, oftentimes what we see as be prepared for this

is some sort of future pro formas.

Right? So, okay, show me what that looks like. Show me your next two, three years, et cetera. In addition to show me exactly what you're saying, give me your vision of exactly what you're saying. So some sort of deck or something like that as to exactly what you're doing, who your management team is, anything that you can do to give the bank comfort that from a financial and operational perspective, you have things under control that'll give you a head start that's probably number one. And then as you move forward, try to find a bank that's comfortable in the dental space, but also the DSO space that understands what you're doing and says, I'm willing to walk alongside you so long as you take care of xyz. And XYZ could be things like debt service service coverage, ratios, debt to EBITDA parameters that you need to stay around. So as long as you have that for the bank, then what you can do is when you're forecasting all these things out, if you're thinking of acquiring something next year or de novoing something two years from now, go ahead and pro forma that out yourself and see what that would do from a cash flow perspective. And with all these ratios and are you still within those parameters? If not, then what you've done is you've hit that bank, that funding wall

and it gives you a year to

two years to think ahead of time. How am I going to climb over this wall? Do I take fewer distributions, Pay down debt? There are a multitude of options if you want to stay within the debt realm. That's what we're seeing on the short term with the banks right now.

Interesting. I love the way you laid that

out because the first thing is you've got to. I'm going to just summarize here really quick, Ben, and feel free to chime in if I missed something or oversimplified something. So the first step is get your story dialed in and straight and get your financials to tell the story and not just the forward. So the backward looking, you've got to be able to show them what you've

done and then you've got to have

a forward looking story that tells them, hey, this is where I'm trying to go and with your funds, this is what I can accomplish. And what I love about what you said is then you take where their covenant ratios are going to be and for those who haven't borrowed money from banks on this on a cash flow basis, the banks will lend up to a certain time on your funded debt to EBITDA ratio or other financial covenant ratios and go ahead and calculate in your pro formas all that look forward stuff.

Go ahead and calculate and then show them, hey, this is what's going to happen and this is how we're going to perform relative to these covenant ratios. If we're able to execute on our plan that from a bank's perspective from my experience having been sat in a CFO chair since 2004. If anything will win their confidence, show up with the story that looks, that helps them see what's the past, where you want to go in the future, and how you are going to take care of their money and not trip their financial covenants in the future. That looks like you're able to present like you are a good operator. And then as you execute on that plan or even beat it by a

little bit,

the bank's confidence just goes up and up and up. And doesn't it really come down to that, Ben? It's the bank needs to feel confident, but not because you feel confident as an entrepreneur in your business and where you're trying to go, because your story actually all comes together very nicely in a financial package and that's how they gain their confidence. And where you're going with their money, does that resonate or pick out what, what I missed on there?

You didn't miss anything. I should have said exactly what you said. I thought that was, that was perfect. And yeah, you're right. It really, what you're doing is you're letting the bank know I have this business under control and I'm able to prove out a concept. What you don't want to do is come in with a concept with no meat behind it. This is really, here's my concept, here's what I've already done to be successful, by the way, and here's my secret sauce or the way I'm doing it, and I'm being very methodical about it. Another way I think we can say it, Ken, is if you get to that 2 million plus EBITDA, there are other commercial financing sources that are available where instead of going term sheet by term sheet, they'll actually allocate some capital to you. And you have to basically state, I'll grow two, three practices a year. I'm generalizing here. But the reason I mentioned that is why 2 million EBITDA? It's not the number, it's the fact that at that point, what a bank thinks you ought to have by then is a strong management team, very strong and tight financial controls. And depending on the bank, they may

or may not ask you for actual accrual financials.

They'll certainly suggest it. So if you think about it that way, what they're saying is, and what you would be saying on the front end before you even get there is, I already have all those things laid out that I know that when I get larger. You're going to assume that I have.

I've already thought through that.

I'm already there in my mind.

Yeah, that's powerful. I think for our listeners, this is so critical because, and I like how you brought up the 2 million of EBITDA number specifically, because I think a lot of groups get started with that dentist entrepreneur who is able to, based on their being a provider, borrow funds to either acquire or to build out new practices. And then it starts to stall out with the bank and you have to become more professionalized to get up to the next level of lending. And I like how you put that threshold in there. And I think that's about right on. From everything I've heard in the industry is once you get to that next level, then the funding opportunities will open up broader for your organization. But there's a lot of steps that have to take place in order for

you to get there.

And the complexity of your business is going to increase dramatically for you to get there. So there's a lot of things to work out. And it's not just that there's a switch. And so I know, and I'm sure you found this too. There are some groups that feel stuck because they see some practices they want to buy, but some of their prior acquisitions or de novos are underperforming and they're not able to show the bank that they can do it just based on their own personal or individual credit worthiness. And now it's actually all part of the dark tunnel, the phrase that you brought up before of starting to get stuck and then needing to professionalize to get up to the next level. So I appreciate you calling that out. And the 2 million EBITDA is an interesting threshold where you've got to build infrastructure and team. And then that just that alone brings confidence to a bank when you say,

hey, here's where we're at.

So, Ben, this has been awesome. I think we have a ton of other topics we can probably take on another time, but for the sake of our listeners and just time overall, we're going to go ahead and jump to the lightning round. And for those that haven't experienced this, every time that I do an interview with somebody from the finance world, I like to ask these questions. So, Ben, we go rapid fire here and I'll jump into number one. What are you currently working on?

Something exciting. We're working on a bit of a binder where it has all the different concepts that continue to come up for our clients as we scale to really just package it as one so we can get ahead and be proactive and our clients know exactly what we can provide. So that's something exciting that should be coming out soon.

I love it. What's cool about it, Ben, is. Here you are. Your organization is helping DSOs, small groups or individual practices? Small groups. DSOs, helping them scale to the next level. And it's forcing you, as you found success there, you're having to figure out how to scale your own organization to make the deliverables consistent for your clients. Is that a fair way to describe that? Very fair, actually.

I tell our clients all the time as we're trying to find their vision and focus and everything in between where we're trying to determine. It's okay if you don't swing at most things and keep that focus. Stay away from the shiny stuff. As we're saying that. I'm always very careful and sure to say, by the way, I'm not trying to preach from above here. These are things that we also have to suffer as well, is we have to stay focused. We have to basically take our own medicine. So yes, you're exactly right. That was born out of scaling and forcing ourselves to be better as well.

You're right.

That's great. I love that transparency. All right, what are you the most proud of?

My family. Great parents, great brother and sister. And right now forming my own great wife and a four year old little girl and one year old boy. So they're the reason I wake up every morning.

Oh, congratulations. And it's because the four year old and one year old are tapping on your chest while you're asleep saying, come on, dad, it's time to get up.

Right? Yeah. Yes. Multiple times a night.

Yeah, I know that story, brother.

All right.

Favorite sports team.

That's easy. Love college football. Texas A and M. All right. Yeah.

That's your alma mater, isn't it?

It is, it is.

Very nice.

Favorite hobby right now, it's reading. Previously I would say soccer, but I'm getting too old for that. Then triathlons, which I would love to get back to. But as I just mentioned, four year old, one year old. So it's gotta be reading.

There you go. And they're Curious George books probably, or something of that genre.

That's about 80% of my reading.

You're correct.

There you go.

I love it.

Favorite app on your phone.

I tend to always hit up LinkedIn and Wall Street Journal. Those tend to be the two. They keep sucking me back in.

All right, I get it. And Favorite spreadsheet function.

I'd say the function's got to be Vlookup. If we try to find any consistencies, things of that nature. Quick way to extrapolate data. Conditional formatting is also like 1A, 1B because we're able to tie all those metrics to percentages and a threshold and it immediately, you know, I like color coding. So if it's green, it's red. We need to talk. So that's another good one.

Very nice. Love that. All right, so as we wrap up, Ben, parting advice. As you know, we've talked today and you've been thinking about, you know, from that individual solo practice up to, you know, the larger dso. What advice would you give to these folks who are trying to build and expand their groups in today's world?

I think the advice would be we brought it up a few times, but get really tight on your vision and stay true to your focus. Oftentimes when we talk to entrepreneurs that are trying to build this out because of who they are optimist driven. A lot of times, type A, a lot of people are driven to you and you're going a lot of them have a lot of opportunities on acquisitions, people wanting to partner with them. If you get really tight on your focus and vision, that's always the first step in our mind is because then you'll really be true to where exactly am I heading from point A to point B? And then everything else, I think will take care of itself over time.

It's great advice in terms of our listeners being able to get in touch with you. I know that you're a part of the DSO Secrets Facebook group, so they could come there. If you have any questions for Ben or want to continue any conversation, what you've heard, you can come join us in the DSO Facebook group and tag Ben. Tag me. We're probably going to jump into a conversation. How else if they wanted to reach out and get in touch with you, Ben, how would they do that?

Yeah, so as you mentioned, I'm on that Facebook group and I love it. It's been very informative for me and have had some great discussions. So I'll be on there. My email is ben hernandezkytailgroup.com S K Y T A L E or you can go to the website skytailgroup.com and there's a contact us link there as well.

Outstanding. So some of my key takeaways today have been and from your experience working with lots of different companies in an outsourced role, it's Take the time. Start taking the time to organize your financials. Clean chart of accounts. Get those. If you're working on your DSO documents, make sure that they're implemented all the way through your financial processes. And then think about from a debt financing perspective, think about how well you can tell your story verbally as an entrepreneur because entrepreneurs do not struggle telling their story and their vision of where they're going. So think about how do you get your historical financial statements and your forward looking pro formas to actually back up that story and earn confidence with the, with the bank? Would that be a fair way for me to summarize some of the key takeaways from today?

It would, yes. And getting tight on the financials is so important for yourself as the owner, knowing what's going on as we talk from a financing perspective, as we discussed, you'll be able to get some great leverage there. And it's always one of the top two things, along with doctors, that all our groups tend to run into. And then the third one is on the exit side. When a buyer looks at you, if you have very, very tight financials, it becomes harder for them to beat you up, number one. But then number two, they love to see that from a confidence perspective as they partner with you. So throughout your business life cycle, having a really tight financial control is going to benefit you from beginning to end.

That's great advice.

All right.

Many, many thanks to all of our listeners for joining today. This is a wrap on all things DSO Finance with CFO Ben Hernandez of Skytail Group. Happy day.

Thank you Ken. Have a great week.

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