98: Acquisition Secrets with Host Ken Kaufman

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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.

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to a whole new level.

You have this natural talent, this unique ability. Hello everyone and happy day to you. I am Ken Kaufman, your host for today's episode, filling in for the always illustrious Emmett Scott. Today I'm going to tackle the topic of acquisition Strategy Secrets. I see this come up in the Facebook group often. I see this come up in other dental groups group Facebook pages and other chat groups often. And I decided to go through the mentality and the mindset that I take on when we look at an acquisition, from how we price it to how we build a strategy around it, to a post acquisition integration plan. And I want to take you through the thinking and the thought process that I want to be able to go through that ultimately gives me the confidence whether or not we should move forward with a deal or not. And it is all really summarized in one core document. Now, when you do due diligence, you're going to get a lot of different information. Financial statements, maybe reports out of the practice management software and a lot of other anecdotal information about what's happening in the dental practice. And as I jump in here, I want to pause for just a second, be really clear. I'm going to talk about this as if you or your organization is looking to potentially acquire a dental practice, just one single practice. These principles will apply. If you were buying a large DSO that was supporting five or 10 or 20 or more practices, you would take, I think, a similar mindset. It would just be at a more complex and comprehensive level. And perhaps a lot of work needs to be done around a consolidation so you can see what does it all look like at a grand scale. So just know these principles I think apply through scale. But just going to talk about this as one practice. So when you look at a practice, there's a lot of things to think about in process. But I want to tell you where I think all of the important information gets summarized and it is right in what I call the 12 month go forward pro forma or you could also call it a forecast. And what this means is everything that they give you about what the past has been and then they might be selling you a bright future about how there's so much opportunity. With a little bit of marketing you can bring in and attract new patients and, and with a little bit of work you can maybe apply some specialties or bring a second associate in to expand the practice. You may be hearing all sorts of things about growth and opportunity and where the practice has been. This 12 month go forward pro forma is your best estimate post acquisition. So day one, after you purchase the practice, what is actually going to happen in the practice and what under under your leadership or under your ownership? And where do you foresee it going? So I'm going to jump through several different topics here and it's important that as you go through due diligence that you find answers to these questions so that you can make your best assumptions to fill out. What's going to happen to this practice over the next 12 months after I'm officially the owner. And of course in many states I need to probably pause here from a compliance perspective to be super clear. In many states it's impossible and not allowed for a corporation or for a non licensed dental professional to be able to own a dental practice. And in those states I would be gearing these remarks directly to a licensed and a licensed dental provider for that state. There are other states where non dental providers are able to actually own a dental practice. And so just put that in context. Be aware that if you're in a state and you're a business person and not a doctor, that the ability to purchase is just going to be stopped and precluded right away until that element gets solved. Now here's the list of things that I want to start going through and I'm bringing all of these up because they're critical to how you build out your pro forma or your forecast for the go forward 12 months after the acquisition. And it starts with what is, what are you expecting the gross production of the practice to be? And when I say gross production, understanding what are all the insurance companies that the practice or and the and or the provider are credentialed with. What are those contracted reimbursement rates? Not what UCR is not usual and customary. What is the gross production contracted rates as well as you know, however much of the base of patients is a fee for service or cash paying out of pocket patient base. You want to also categorize, you know that that pricing and you want to take a look at what are the patient visits, what does that patient flow look like and how many first visits are coming in each month on average. And what is the recare base and what is the retention from a historical or a traditional perspective up until that point. And you also want to see how successful is the practice at bringing in unscheduled treatment, meaning at some point a provider produced a treatment plan and presented it to the patient. The patient did not receive the treatment at that point and for some reason has not come in for a follow up to get any of that or some of that treatment completed. And so you want to think about those patients and you want to think about, once you make the acquisition of the dental practice, what is going to happen to that patient flow and what is going to happen to the care that's given to those patients if there's a provider change or if you're going to bring in some specialties or whatever your focus is and whatever your vision is for, for bringing this practice under your fold. And so as you think about this, you want to get to this gross production number that says, and again, it's simple math. It's how many patient visits a month in each of the 12 months after acquisition and then how much care on average will each patient be receiving? And you may say, hey, I think it's going to go up over time because we're going to add these services or we're going to bring in this specialist, or we're going to do whatever it is that's causing your growth and that gets you to this total gross production number. The next piece that you've got to think hard about is your. In our business, we like to call it reductions, but this basically is any insurance write offs, any bad debt that you're not going to collect because patients owe it and they decide not to pay it for whatever reason. Any other adjustments or discounts are really kind of the patient level changes as opposed to down at the EOB level that can happen within the practice management software. And you want to look and see from gross production what is going to happen to the collections. Now, often one dental practice that doesn't have a sophisticated revenue cycle system may be collecting, let's say 85% or 90% of its gross production. But when you make this acquisition, maybe you have a billing team or you have a solution that when you go and take a look at who the payers are and the contracted rates and what types of claims are being denied and what issues you might find in your due diligence around the billing side, you will see, hey, we might be able to collect an extra 1% or 2% or 5%. Probably not right away, but maybe after you get in there, after three months you can start to make some improvements. Maybe at six months you can make some improvements or maybe you decide, no, the way the practice collects is just going to be the way the practice collects. But the key thing is, is to be thinking about this, asking the questions and in your 12 month go forward forecast out, what do you think collections is going to be relative to the gross production that's being generated? And hopefully you're bringing some value there and you can find some nice pickups that the in terms of revenue and earnings that the current ownership is not gaining and all of this is heading toward. When you look at where this 12 months is going to go, you start to gain some confidence around how much am I willing to actually pay for this practice? I'll get to that in a minute. Let me go through a few other items. The next question you've got to ask yourself is who's going to be the provider? Is the current doctor an associate and if so, will they convert to your associate agreement or will they keep their existing and are there any challenges with that? And you need to think about what their skill set is, how long they want to stay, will they be unmotivated if ownership changes? Any of those sorts of things have to be considered and you have to be able to think about that in your go forward plan. If it's an owner doctor who's also functioning as a chairside doctor or what we'd call in an associate role, then you have to think about, okay, does this doctor want to stay and what does their compensation need to be? And how do you organize all of those costs into your go forward model so you can see, hey, what is the profitability of this business going to be once I come in and I bring in some systems and whatever it is you're planning to do, again, it's whatever your vision is for the practice, what's going to be happening with your doctor in terms of their willingness to see and treat patients, what types of services that they are the most comfortable providing, you know, basically what's their standard of care, and building out your financial pro forma around that. So you really want to understand that if you're in a situation where the doctor is going to exit in a few months, then you got to put in your pro forma, possibly not having a provider for some period. Of time or having a fill in, or maybe you've already recruited and found somebody that's going to take the spot. Whatever it is, you want to plug that in and have that inform both what's going to happen with your revenue as well as what your compensation model is for them, so that you can be really clear on what is the doctor pay going to be. The next big one is practice staff. Now, sometimes when a new owner comes in, some of the staff leaves or all the staff eventually leaves because maybe they're not quite bought into the same vision. They don't like some of the things the new owner is going to do or policies or procedures that are put in place. I generally have seen, just to be a realist here, I rarely see that a dental practice is acquired. And if there's any change at the clinician level, if there is any change at the clinician level, I've never seen all the practice staff end up staying. There usually ends up being some turnover. Just because some people don't like change, they don't buy into the new vision. So when you think about staffing, you have to plan out and say, hey, when do we think maybe there's some turnover is going to happen and how are we going to account for that? How are we going to make sure the practice stays fully staffed? Very important in your 12 month go forward plan, because if you, again, if you have a beautiful facility, everything's working, you have a great doctor, but there isn't the right support staff in place, you will have challenges in really maximizing what the practice can be from a financial perspective, but more importantly, what the practice can be in terms of attracting patients and doing a great job taking care of those patients and creating that amazing patient experience. It's part of your vision. Next thing to think about are supplies and lab fees. Now, perhaps this is a practice that you're purchasing that's owned by a doctor and it's just one doctor, and it's been that type of a practice for a while. It could be that if you're a bigger organization, there's some scale potentially and some price savings on supplies and on labs. And so you want to start to look at what have those costs been historically and then how are those going to change over the next 12 months after you, you become the owner. Also, you want to take a look at the occupancy costs so that you really know and understand what is, where's the rent at, what are the utilities, so you know what to expect. There may not be much to change there and you may even say, hey, I've got a more complex IT system. I need to bring a fiber line in so that I can get access. You need to build those costs into your model so that you're prepared and ready to get this practice up to whatever par. You need to be able to get the data that you need to be able to effectively support the practice and support the, any, any clinicians that are working within the practice properly. So now I'm going to go through a few more. The next one you want to look at is marketing. What, what spend has existed in marketing and what has, what activities has it been put towards? How effective do you believe it's been and are there any changes you want to make to that? Do you want to increase the spend for a little while because you really want to try to drive some first visits for a short period of time? Do you, do you think that those dollars are not being spent very effectively and you want to keep the spend the same, but you think there are different activities for the same dollar amount that will generate more patient visits and be more successful in that way? So you want to put your plan together 12 month, go forward on marketing costs. You want to look at centralized services. Is there anything you're going to centralize that they're not centralizing? Billing and call center tend to be the most common centralized services that we see. And billing is pretty broad. That covers from insurance verification to EOB payment posting to claims quality assurance and submission, to even running basically an in house patient finance program. And there are a lot of other gaps in there that I didn't bring up. The key point to understand here is that if you're going to layer in these new costs, because if this is a practice that didn't have any of these types of centralized services that it was accessing, I mean, someone on their staff has been doing the billing, has been making phone calls, doing the confirmation reminders, sending out texts, whatever the communication pattern has been there. You've got to grab these costs and you've got to put them in and then look at, well, do I need all the practice staff then if some of that staff was doing some of these functions, and I'm not advocating that people should lose their job after an acquisition or that really this should be approached from an opportunistic perspective at all, if it's about right, sizing the costs moving forward. And sometimes an acquisition happens, the acquirer drops in a bunch of centralized service costs and they say how come the practice isn't so profitable. And so I'm giving you this context to think about the centralized services in. You also want to do a nice good tour of the facility and really understand are there upgrades or improvements that need to be made to, to drive a great patient experience. Perhaps there's even some things from a compliance perspective that might need to be changed or that you care about more than the prior owner. All of that needs to be looked at and understand what are the costs to maintain the facility, moving forward to repair equipment. I can't tell you how many air conditioning units we've had to replace throughout the years that we've had of owning dozens of dental practices. There are a lot of things to think about and consider there and putting a plan together for what is it going to cost to keep this practice looking good, fresh, clean and in and attractive to the patients. You want to look at any other credentialing costs, compliance costs, IT expenses that will need to happen in order to make sure again that all that's provided correctly, HR expenses, recruiting. You want to layer these costs in payroll costs, contractors, any and all of those things. You want to layer these costs in so that you can be really clear about over the next 12 months against that revenue. What is the profitability going to be moving forward? And as you get to this point, and I'll skip, there's some other line items we could probably talk about. But I think the key, the key element here is, is you gather up all this information and then you think, well, what am I supposed to do with it? You, you turn it into this 12 month go forward pro forma or forecast and you look and see what's going to happen over those 12 months. And you should expect, because a lot of times after an acquisition with if there are any changes that are happening, or sometimes staff might lose their motivation, there's, there's a, or if you're changing practice management software, it can sometimes cause the revenue to initially go down. And you want to, you want to look at that, you want to plan for that, you want to look at how all the expenses are and then you want to get out there to that 12th month and you say, hey, look, for the first year, this is what ownership is going to look like, what cash is going to be needed to support this. Is it going to be profitable? You go through all those questions and then this is the biggest acquisition secret of all of them. You then look at that month 12 and you decide to yourself, is that the end of improvements and changes and everything from there forward is going to be the expectation for the practice, or do you think there will be things you'll do in year two or year three of owning the practice? Perhaps you decide that you want to, in year two, introduce Invisalign services, or again, I could go down a list that is very long, and I'm not going to spend the time doing that. But you want to look at that second year and that third year and say, what else are we doing? And then here's the power of and why this is the biggest secret. Because when you look out and you see it year two and year three, what is the profitability or what are the earnings of the practice going to be at that point? Now, all of a sudden you start to get really confident about how much you're willing to pay. And let's say that the practice is profitable and let's say making 100 or $150,000 a year. And you look and say, hey, with some of these savings, with some tweaks and changes here, we think we can collect a little bit better. We, we believe our centralized services are gonna be more efficient and will drive some staffing costs lower than where they were before. Net, net everything all added together. We believe we can make marketing more efficient and increase patient flow. We believe we can expand the practice. Whatever it is you now look out and you get confident about, wow, this practice was making 100,000 or $150,000 a year. I think with my team's efforts, I think we can get it to 200 or 250,000 a year. Now, as you're thinking about how much are you willing to pay, you're going to get more and more and more confident about a price. I guess I shouldn't say it that way. You're going to get either more and more confident or less and less confident about what price you're willing to pay relative to what the seller is willing to offer. And then here's the most powerful part. So once you go through all this and you might look and say, whoa, I'm going to get this from 100 to $200,000 of earnings. And they were asking for six times EBITDA on their hundred thousand dollars a year of earnings of ebitda. And so you say, okay, am I willing to pay 600,000? You look out and say, whoa, at the end of year two, I think I'm going to have this to $200,000 of profit every year. And you say to yourself, so that means I'll get my money back in three years once I get it built up to that point, not to mention what I make in the first year and then beyond those three years. And that's the power of understanding and really thinking about does an acquisition make sense? And it has everything to do with what's going to happen to the practice after you own it. Because what happened before, I hate to say this, but it doesn't matter anymore. What matters from you, understanding the benefit and value that your investment is going to bring you. It starts on day one, once you are the owner of the practice. So again, just, just to reset the whole concept from the very top and from the very beginning, this podcast is about acquisition strategy secrets. The secret is the biggest overarching secret. And then there's sub point secrets within. That I just went through is get that 12 month pro forma locked and loaded, get your team bought in, make sure everybody's good to go. And then as soon as the acquisition is done, start tracking your performance against it month over month. So you can see are you performing the way you thought or are you ahead, are you behind? And you can start to strategize with your team and figure out how to help the practice be as successful as possible. And then you want to take that month 12 or month 10 through 12 and then forecast those out to years two and year three. If you think there will be some material changes, then you want to capture that profitability. And then you have this amazing concept in front of you. You're going to track budget versus actual or your pro forma against your actual performance and you'll be able to measure did I actually end up really buying that practice for three times, Did I buy for four times, Did I buy for five times? And really understand what your return on investment is going to be. So I hope that this has been helpful for you. Think about and the discipline. Whenever I'm involved or organizations involved in supporting a clinician with any type of acquisition, it really comes down to this analysis. The 12 month go forward years 2 and year 3 and diving into the details, if I know it may feel painful, it may feel stressful, but when you put it down on paper, it's so powerful and it starts to take emotion out of your decision. And now you can start to see, hey, where is this really going? Is this a fair price and do I have some confidence that we can get there and that my team around me can execute on the plan to make this practice, however successful it is, you feel like you can make it after you acquire it. So again, I hope this has been helpful and instructive and will help all of us think harder and understand more deeply that when a buyer, or I'm sorry, when a seller comes to us and the seller says this is how much I want, rather than evaluate it based on the financials they give you take those financials, forecast out to the future and then look at that purchase price that they're asking for and then make adjustments to that based on what you think you can accomplish with the practice once you're the owner and work with that seller so that they can. They don't necessarily need to see your go forward model, but you work with them to get a price into a range that makes it acceptable based on all the best guesses, best assumptions about what's going to happen in the future that will happen under your stewardship, under your leadership as the new owner. Many, many thanks for you to you for joining today. I can't tell you how just how much fun it is to be a part of this podcast, to be a part of the DSO Secrets community. Grateful for the Facebook page. I've learned things there. Hopefully I've been able to contribute some things there that have added value and thankful to all of you listeners, thankful to everyone that participates in the Facebook group. The back and forth, the exchange. It's really healthy place. If you're listening to this podcast, you haven't joined the Facebook group. I highly recommend it. DSO Secrets and there's a lot of great content going on there. And this was all part of Emmett's vision from the beginning when he created this podcast was I want to share secrets. I want to share how to be successful in this industry. There aren't very many resources to go to. There aren't many people who at least in the past have been willing to share that are out ahead. I believe that this DSO Secrets podcast and this movement has helped make people feel more and more comfortable that we need to be in an abundance mindset. We need to share, we need to help each other and give each other ideas because ultimately as each of us win, I think it really is just a win for the entire industry and it's a rising tide floats all boats concept. So again, feel free to come join the DSO Secrets Facebook group. Happy to engage any questions around this and I will sign off in the traditional Emmett Scott method. As he always says, keep smiling.

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