Transcript
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Tom Whalen:
I do think it's a really good time to be a buyer with there being a glut, we'll say, of practices for sale on the market and maybe not as many buyers. I think there's a big opportunity for those people who want to be buyers and practice owners because somebody might take a little bit of a haircut on the sale of their practice just to get it sold.
Corey Brown:
I'm Corey Brown and this is Provide's the Path to Owning It podcast, where I sit down with trusted industry experts in Provide's network to give you the tools and advice you need to take your practice ownership dreams into your own hands. From owning your own practice to expanding or improving an existing practice, we'll help pave the way for you to achieve your dental or veterinary career dreams and guide you through all the nuances of the practice ownership journey. Please make sure to follow us on Apple Podcasts, Spotify, or wherever else you listen.
Today we are joined by Tom Whalen, CPA at Edge Advisors. Tom spent six years on the professional services team at his previous firm, and the majority of Tom's time was spent working with dental and medical clients. Tom's hands-on style and personable demeanor led to early successes in his accounting career and helped build his reputation as a go-getter.
Tom partnered with Edge Advisors in 2016. Since then, he has helped dozens of young doctors buy their first practice and empowered dozens of established doctors to run their practices more efficiently while saving them thousands of dollars in taxes. In 2019, Tom obtained a certified valuation analyst designation, making him the perfect guest to talk with us about acquiring a practice for the right price. Tom, that's a pleasure having you on the show today. Thank you so much for joining us.
Tom Whalen:
Yeah, thanks for having me.
Corey Brown:
It's a pretty impressive background there and we have a lot to cover.
Tom Whalen:
I try. Yep.
Corey Brown:
Let's just jump right in your time. How have you seen the landscape of the dental industry change in the recent years?
Tom Whalen:
Well, there's a couple things that are pretty different than they were maybe a few years ago. I think right now the biggest challenge that we're seeing with our clients, all the doctors that we have, the staff costs are just shooting through the roof. Ever since COVID really, it seems like assistance in hygiene are really hard to come by, they're asking for a ton of raises, so that's a big deal. Another thing is the insurance reimbursement rates maybe haven't been changing, which is not ideal. We want to see them go up, up, up as our costs are going up, up, up. But a lot of the times the insurance companies are stagnant with their reimbursement rates or just decreasing their rates. That's another big one.
Corey Brown:
Has that really been just since COVID that you've seen this change or did that start before that?
Tom Whalen:
I think with the staff costs, it seems like COVID created this shift where people were either just leaving the workforce altogether, not necessarily feeling safe in the dental space, but it seems like everybody blames workforce issues on the baby boomer generation. I think we're seeing a mass exodus of the workforce of hygienist assistance and they're not being replaced quickly enough with the hygiene and assisting schools out there there. That's a big deal. The insurance reimbursement rates seems like they've been a little bit stagnant for a few years now. That's just a trend. I don't think that's a COVID-related issue, but it seems to be an issue. Yeah, definitely.
Corey Brown:
Now you mentioned that mass exodus of the baby boomer generation. What opportunities do you see for young buyers today with that in mind?
Tom Whalen:
I do think it's a really good time to be a buyer. I think that with mass exodus, there's a lot of practices that are either for sale now or will be for sale in the next, say, 5, 10 years. With there being a glut, we'll say, of practices for sale on the market and maybe not as many buyers, I think there's a big opportunity for those people who want to be buyers and practice owners, because somebody might take a little bit of a haircut on the sale of their practice just to get it sold.
I do think there's a lot of deals to be had out there. I also think a lot of people that are ready for retirement have their financials locked up and maybe aren't grinding as hard as a young motivated buyer. I think a lot of these young buyers, there's a lot of upside within the practice itself to be able to grow it compared to what's happening today. Like I said, a lot of these sellers do have their financials in order. They're taking a lot of vacation, they're working three days a week, et cetera.
Corey Brown:
Yeah, and like you said, even though there are some good deals on the market, I wonder with that millennial generation, we've been saddled with unprecedented amount of student loan debt as compared to previous other generations. Do you think that's at all compromising our ability or willingness to start a acquire practice?
Tom Whalen:
I don't think it actually is. I think mentally, like you said, maybe the willingness piece of it. I mean, you look at it today versus 50 years ago, you could go to a dental school D4 50 years ago. It's like, "Who's going to own a practice?" 98 out of a hundred people raise their hand. Well, dental school today, who's going to own a practice year one out of school? Maybe 3 out of 100 raise their hand. It's very low. Now, banks, they do want to see that you can produce to be able to give you a loan. What we typically see is those who do own, they will be an associate for three to five years, get their hand skills up, show to a bank that they can do the production, replace the loss production of a seller. From that regard, I think from day one out dental school, there is a little bit of a compromise of your ability to, but I think more than anything, it's the willingness.
We work with a ton of buyers. The vast majority of our clients are practice owners, so they're out there, but it's a little later in one's career than maybe even 10, 15 years ago.
Corey Brown:
When do you think that from day one in dental school to D4 and then shortly after, when do you think that idea of I want to become a practice center changes?
Tom Whalen:
I think when they realize how much money they're not making, you might see somebody that's producing a million bucks and maybe they're writing off 20% for insurances, so they're maybe collecting 800 and they might get paid 30% of that, so we're making two 40. Well, once they start putting that number together and see that, "Hey, the hygiene's collecting another 400, and if I did the same 800 in a practice ownership model, I might be making 500, 600, but I'm making two 40 as an associate."
It doesn't take terribly long to see that you're giving up a couple few 100,000 dollars a year to really start putting the pieces in place that, "Hey, I can afford this loan. This loan might cost me 10 grand a month, but I'm going to make an extra 25 a month over the course of the year doing the exact same work." You got to manage people and whatnot, but doing the same level of dentistry, I could double or triple my income. I think that's the main thing that turns the light on for associates to want to acquire.
Corey Brown:
Yeah, definitely. It's a big difference. Let's say I've made that decision, I'm going to start looking for my first practice to purchase. When should I enlist the services of a dental specific CPA, in your opinion?
Tom Whalen:
Same day. I mean, obviously it's a self-serving answer, but yeah, we tell people all the time, "Time kills deals." If you decide today that, "Hey, I'm ready, let's go start looking for practices and maybe the right one comes along, and at that point I'll start talking to a banker in a CPA and whatnot," but more likely than not, what's going to happen is it's going to take you a few weeks or a month or two months or whatever to nail down that relationship and decide who you actually want to work with. In that time you might find the perfect practice and then it's gone because it took you a month to find an advisor and then it took you another month to get an offer to put together. Well, in that two months that thing's off the market.
Realistically, when you decide that you're ready to buy, even if you don't have a practice in mind, I really think you should be getting in touch with some people who understand what to look for in the metrics of potential practice to buy and start getting your finances in order to be able to be bank-ready when you start to do those bank applications and whatnot.
Yeah. Like I said, I think day one is when you should really get your team in order before you even have a practice. Obviously that's an ideal world and things happen and you maybe aren't ready today, but this great practice opportunity presents itself. It might not fall in line exactly as you'd planned, but if I could drop a roadmap, it would be, "Hey, I'm ready to buy. Let's go get my team in place. Let's start looking for practices."
Corey Brown:
That's great advice, thank you. In your experience, what are young buyers looking for in their first practice? What are some of those things that make them go, "Yeah, yeah, this is the one."?
Tom Whalen:
It seems like a lot of young buyers want the bells and whistles. It looks pretty. It's got the new equipment, it's got the combe, it's got the cic, it's got all that good stuff. But I think realistically more than anything, they want stability, because we talked about it a minute ago with the unprecedented levels of student debt, you might have 400K of student loans coming out of school, and maybe you've got, say, 300 grand on a mortgage and you're looking at buying a practice for 700,000, and the building might be another half a million, and we're starting to knock on the door of 2 million a debt, and we haven't really made ownership money yet.
More than anything, a lot of these buyers are scared to swallow that debt pill, if you will, and they just need to be secure in the fact that the cash flows of this practice will more than cover the debt service. I think that big, big ticket item is just security stability. Maybe I'll pay a little bit more for a practice that's turnkey, ready to go. I would personally look for more upside than stability, but from my experience, I think that's what the number one concern is at this point.
Corey Brown:
Talk to me about that a little bit more. What do you mean by the upside versus stability?
Tom Whalen:
Sure. Let's just say I'm looking at two different practices, and let's say they both are collecting a million dollars. Well, one of them might have 3,000 active patients, and the other one might have 1,500, but maybe that practice with 1,500 active patients has 20-year staff that have practices in place forever. The staff's locked and loaded, you come in. Let's say the cash flows are the same on each practice. Well, maybe the staff is just more stable and the practice has been around for 25 years on one of them, but the other one has way more patience and you could grow that thing, double it, triple it overnight, or maybe even it's a under-producing practice with a higher patient base that you might be able to get for a little bit cheaper, but you know that day one, maybe I'm not making 400 as an owner, maybe I'm making 200 as an owner-based on what the seller was doing, but there's runway to double or triple this practice overnight based on the patient flow of the practice.
Again, personally like to see high patient levels and maybe a little bit of an under-productive selling doctor because you're typically paying for what the practice is doing today or in the last couple of years. If it's an under productive doctor seller, we might be able to get it at a little bit of a discount. Then if I can come in and do some extra specialty work and grow it, I've got a practice that's worth way more today than it was yesterday, but I paid based on yesterday's prices, not my own prices, if that makes sense.
Corey Brown:
Yeah. Now you mentioned paying based on the performance of the practice written recent years. What are those metrics? How do you know if a practice is listing prices fair, and what are you looking at to determine that?
Tom Whalen:
It's all going to come down to cash flows. A lot of times people will get hung up on the percentage of revenues as a list price. Again, we got two practices. They might both be collecting a million bucks, but they both might be listed at say, 800,000 for sale. Well, a lot of people would say that's listed at 80% of revenues or 80% of collections. I don't necessarily like to get into that game. I like to look at it as a multiple of cash flows. If practice A, the owner doctor's making 300, and practice B, the owner doctor's making 500 or 600, I'd rather buy practice B, even though they're both 80% of revenues. We look at cash flows more than anything else.
Cash is king, that's what's available to service your debt, pay the bank back, pay your taxes, pay your personal loans, whatnot. It all comes back to what are the cash flows of the practice. But beyond that, we really like to look at active patients within the practice, and we can run our metrics and then come up with a good estimate of how many patients are coming through that door day in, day out in a practice that's got, say, 2000 active patients versus a practice that's got, say, 1,200 active patients, all else equal, we're trying to get that one that's got 2,000 active patients because there's a lot more runway to do dentistry, given that there's way more patients. Cash ultimately is king, but patient flow is the source of where the cash flow comes from.
Back to your question of how do we know if it's listed at a fair price? That's a little bit tricky because every single doctor's different. You might do ortho Endo and I might not. A practice collecting a million dollars in your hands, I might only be able to collect 700,000. Maybe it's listed for 800,000, and that's fair based on the work you're doing. But if I can't do that work, I don't want to pay that number. Not to say that it's unfair, it's just I maybe have a different skillset. It really comes down to what work is the doctor doing and can we replace that production? If so, then more often than not, it's going to be listed at a fair price. Again, we're looking at multiples of cash flow in a solo doc practice. Usually, we're looking at three to five times cash flow after paying a fair salary to a doctor.
Again, if you can't do what that doctor's doing, it's probably not the practice for you. But on the flip side, if they're not doing ortho and endo and implants and extractions, and again, it's collecting a million dollars in their hands, well, maybe it's [inaudible 00:13:05] in my hands and I'll gladly pay that 800 they've got it listed for, because I'm going to come around, crank it up 50%, and this thing's going to be cash flowing way more than it what it was for that selling doctor. Yeah, it can be fair or unfair or good or bad for every single doctor that's out there because everybody's skillset is different.
Corey Brown:
In order to compare that, is that done in the due diligence period after you've already signed an NDA and you're interested in a practice?
Tom Whalen:
Yeah, typically you're going to sign an NDA before the seller or their advisors are even going to give you anything. We just had this, literally today I had this exact same thing pop up. We had a mutual vendor that knew a guy that was selling a practice. We said, "Hey, we got a buyer that may or may not be interested. We need some info." "Hey, sign this NDA. We'll get that info over to you. Let us know what you want." Okay, we're going to look at tax returns, profit and loss statements, production data, doctor hygiene, you name it. There's a whole laundry list of items, but we can get a pretty good feel for the finances of the practice in a couple hours once we get all that information, of course. But yeah, yeah, typically you're signing an NDA before you're getting anything at all.
Corey Brown:
I guess my question then would be, if I'm starting to look for a practice, how do I know what I can afford? Number one. Then number two, if I know what I can afford, how do I know it's a good deal for me until I get involved in that due diligence period?
Tom Whalen:
Yeah, it's a little bit backwards when you think about what can I afford. A lot of times people try to compare it to buying a house where if you make 100,000 dollars a year, the bank's going to say, "Here's what you can afford." Well, that's not how it works in a dental practice setting. It's the cash flow's first to understand what type of purchase price does it support. You don't go to the bank and say, "Well, can I afford?" You need to make an offer first, get the deal done first, and then go back to the bank and say, "Hey, will you give me the money to buy this thing at these current cash flow levels?" To understand if you can afford it, again, it all comes back to cash flows. That's where you work with your CPA, your advisor, your consultant, whatever, to see what true cash flows of this practice are.
Now, typically when you're buying a practice, they have at least a ballpark number to throw out for an offer price, and then it's up to you and your team to make sure that the cash flows are there to support that purchase price. Now, again, we go back, let's just say there's a practice collecting a million bucks listed at 800,000. If the free cash flows after paying a doctor are 50 grand, it's just not going to work out. The debt service is too high and the cash flows aren't enough. That might be a practice collecting a million listed at 800, but then the next one, collecting a million listed at 800 has cash flows of 250. Well, that's going to more than service the debt, pay the taxes, everything. Really it's identifying what cash flows are available in that practice and making sure that services the debt, your personal lifestyle, your tax, all that good stuff.
But again, can I afford it? You don't know until you look at the numbers of the practice. You can't just say, "Oh, I want to stay under a million dollars." Well, maybe you do. But if there's a practice that comes up that says, "Hey, it's making a half a million dollars a year free cash flows, you can afford way more than a million dollars. Really it's again, we need to understand cash flows first before we can understand if it's a fair price or if it pays for itself.
Corey Brown:
That's great advice. Thank you for clarifying that, Tom. Tom, we've talked about how to find the right practice at the right price, but when we return, I'd like to dive in on how we can hit the ground running with a new practice. More with Tom after the short break.
I'm Corey Brown, and this is Provide's the Path to Owning It podcast. We are back with Tom Whalen, CPA at Edge Advisors to talk more about best practices for new owners during their first year of ownership. Now, Tom, we talked again a lot about how to find the right practice at the right price. Let's say we've done that and I've just acquired my first practice. How can a CPA firm like Edge Advisors set my practice up for success?
Tom Whalen:
We always say to our clients, "We can do tax returns and bookkeeping and payroll, all your standard accounting or CPA type services that most or all CPA firms out there can and should be able to do, but what we really think sets us apart is that we know the ins and outs of a dental practice. We work with hundreds and hundreds of practice throughout the country. We know what the metrics ought to be. If they're not there, what are some areas that we can look in to fix them? If our staff costs are out of line, are we overpaid or are we overstaffed? Are we under productive? Is it a hygiene production issue? Is it a doctor production issue? We really know how a well-run practice should look. If we're not there, then we can steer you back on that right path to get you to that well run practice."
Corey Brown:
How would you recommend that new owners go about finding a CPA firm that's right for their specific needs?
Tom Whalen:
You want to make sure that they obviously know your industry. When I first started, I didn't really think it mattered. I thought just a tax return was a tax return or a financial statement was a financial statement. But having been at this now for over a decade, there's a lot of nuances within each industry.
I mean, I'm not going to be out here trying to tell a manufacturing firm what to do because I really don't know. I mean, can I do their tax return and put together a PNL? Sure. But can I guide them down the right path? No, I can't. But I would want them to have the industry expertise that you need. Obviously, you want them to be personable and accessible. We hear that a lot where we get a lot of people switching over that, "Hey, I just can't get a hold of my CPA." Accessibility is a big deal. Industry knowledge is a big deal. Then this hopefully is a 20, 30-year relationship, you want to work with somebody that you like. That's understated a lot, but I think that personal relationship is a big touch because what dentists do and what we do is provide a service, so there's no physical product that's being delivered. You better the person that you're communicating with day in, day out, week in, week out, especially if that person's helping you manage one of the biggest purchases of your life.
Corey Brown:
Yeah, absolutely. You got it. You mentioned some of them, but if you can just dive in a little bit more. Besides helping dentists prepare for taxes and that sort of thing, what are some other maybe niche areas that a dental CPA can help with?
Tom Whalen:
Again, understanding the metrics of your practice, where we need to be for our supply and staff costs, our lab, our advertising, this and that, that's all important. A lot of other things that we do that are specific to dentistry, put together bonus plans for staff members, whether it be different plan for hygienists versus assistance versus front office. Talked about Dr. Buy-in's valuations of the practice. When we let an associate buy-in 50-50, how are we going to value the practice? How are we going to structure the buy-in? How are we going to structure the compensation after the fact? How are we going to prepare this for a sale on the backend? There's a lot going on day-to-day, year-to-year, besides just the nuts and bolts of the day-to-day accounting.
Corey Brown:
How do I know if my practice is measuring up and if I'm really set up for success? Are there certain metrics that are most important to focus on when looking at that?
Tom Whalen:
Maybe there's a handful of five, six, seven big-ticket items that people look at, staff costs being one of them, our supply and lab costs, other operating, our occupancy, our building costs, what are we paying in rent and how does that compare to our revenues? Everything that people are talking about are going to be tied back to a percentage of your collections, not necessarily gross production, but your net collections.
If we say, "Hey, we want your staff cost to be at 25%," we mean 25% of collections, not of that gross production. Our insurance-adjusted net collections is what we use when we're saying a percentage or a metric, a benchmark for a specific overhead category. I mean, you should be able to stack yourself up against the industry pretty easily. You should have your financials organized in such a way that allows you to carve out these staff costs separate from doctors, separate from owners, and maybe the owner might have their spouse or kid on payroll for tax purposes. We want those split out separately so they're not lumped in with normal staff costs, that we know that, hey, our staff costs aren't high, we're just doing this discretionary tax move. Again, we want our financials organized in such a way that allows us to stack ourselves up against the industry.
We do see a lot of dental practices that have a chart of accounts or a profit and loss statement that looks like this standard baseline P&L that QuickBooks might offer that has no specialty or organization relative to the dental industry. We should be able to look at 100 different dental practices and white out the name on the top and know that, "Hey, this is a dental practice, just by the way that the financials are structured." When we do that, it's very easy to compare ourselves to those a 100 different practices. If we're not in line with our financials compared to the industry, there's no way we're going to be able to compare to the industry. We want to make sure our financials are wired and in line with the industry, and we should be able to stack up pretty quickly.
Corey Brown:
Along the lines of stacking up many new owners, they just want to have that feeling of where they stand compared to their peers. Is that something that they should look at as a comparison or just leave it to you?
Tom Whalen:
I mean, I think whether they should or shouldn't, we get asked it all the time. I think the number one question we get asked is, "Hey, how am I doing?" Then the second question we get asked is, "How is everybody else doing?" More or less, how am I doing relative to the industry? If I'm doing poorly, but everybody else is doing poorly, for some reason, it makes everybody feel better. But if I'm doing well, but everybody else is doing really, really well, then I don't feel as good. Again, right, wrong or indifferent, people are asking the question.
I do think, should I think you should see how the industry's doing, because if there's one of those rising tides, but we're not part of it, well, why not? What am I missing out on? Or if there is an industry-wide downturn for some reason, let's not beat ourselves up too much about it. But yeah, I do think they should be asking that and should be stacking themselves up. I personally am a little bit of a competitor, so I want to know just for my own personal sake, but I do think it's healthy in understanding what the marketplace is doing and how they're reacting to different trends, and to be able to make sure you're on par with the rest of those trends.
Corey Brown:
When you're comparing, are there certain benchmarks that are commonly known that a new owner should strive for to know where they should be? Or does that vary state to state and practice to practice?
Tom Whalen:
There's some big ticket items. Everything starts with production, that's the work we're doing. From production, we have insurance writeoffs down to collections. Maybe we're fee for service and our writeoffs are 5%. Maybe we're heavy, heavy ppo, and our write-offs are 35%. That's a big, big benchmark there, and it really will dictate a lot of the other benchmarks within your practice. If you're fee for service, I'm thinking your staff costs should be less as a percentage of revenues because you don't have to do as much to get the same level of collections. But if we're heavy fee for service, I would also think that our advertising would be way more, because we're not writing off 35%, and it's a lot harder to get that patient to pay cash rather than an insurance company to pay 70 cents on the dollar. It depends on what your makeup is within your insurance base.
But assuming a decent mix of a few PPOs and decent chunk of cash patients, staff costs are a big deal, that's a bucket. We don't just talk about hourly rates, we talk about wages paid, benefits like retirement plan, health insurance, everything that costs to hold a staff member. That's a bucket. That's a big deal to look at. We say, "Hey, we want you to be 25 to 28%." Again, not just wages, we got to consider everything. Another bucket would be our, what we call, variable costs, the costs at rise and fall with production like supplies and lab. That's another big ticket item. We've got our operating costs or non-op operating costs, occupancy. I can go on forever about the different cost breakdowns, but there's, like I said, five or six key items that are pretty much widespread across the industry.
It's so important to have a good relationship with your CPA to know where you're at at all times.
Corey Brown:
Absolutely. Yep. Tom, let's do something a little different. Let's play a little game of, would you rather?
Tom Whalen:
Okay.
Corey Brown:
Keeping in mind all of the dental practices you've worked with over the years, would you rather an owner be very involved with the daily accounting activities of their practice, or would you prefer they allow you as the professional to handle that on their behalf?
Tom Whalen:
This is going to sound self-serving, but I would rather them do more dentistry rather than spend a couple hours a day doing accounting and payroll and looking into this stuff. I'd rather them do a couple extra crowns per day, because they're going to be more productive than the fees that a CPA firm's going to charge. We as advisors, we're trying to make you the most profitable that you can be.
I think your highest and best use of time as a dentist is doing dentistry, not doing accounting. Again, that sounds self-serving, but strictly from a profitability standpoint, it's the right answer. Now, you might have a different mindset than I do as a dentist and say, "I really like this stuff. I don't care about the feed differential or my production differential. I just like getting into the nuts and bolts of the day-to-day." Good for you. That's great. Go ahead and do it. I'm not going to argue with you. But if the question is, "How do I become the most profitable practice." It's by doing dentistry, not by saving a few 100 bucks a month and doing some accounting work.
Corey Brown:
I think you're absolutely right. If any of our listeners would like to work with you and Edge, what's the best way for them to get ahold of you?
Tom Whalen:
Our website is just edgeadvise.com, E-D-G-E-A-D-V-I-S-E.com. From there we have our about us or our team where it's got all our CPAs listed, it's got our bios, our email address, cell phone numbers, office lines. That's going to be the catchall for all of our CPAs. Realistically, shoot one of us an email, we'll get back to you. Call, text, email, whatever works for you works for us. But that's our website and you can get ahold of any one of us from there. Do you work all across the country? All across the country, coast to coast.
Corey Brown:
Perfect. Well, Tom, thanks. You've given our listeners a lot to consider when it comes to acquiring their first practice, and we just appreciate your time and sharing your expertise with us. Thank you very much.
Tom Whalen:
You bet. Appreciate having me.
Corey Brown:
Thank you for joining us for this episode of the Path to Owning It. If you're ready to take your practice ownership dreams into your own hands, be sure to visit getprovide.com to pre-qualify and browse our practice marketplace, or check out our news page for more helpful resources. The Path to Owning It is brought to you by the team at Provide with production assistance Sarah Parky and Slide Nine Agency. It's produced by PodCamp Media, Branded Podcast Production for Businesses. podcampmedia.com. Producer, Dusty Weis. Editor, Emily Kaysinger. For Provide, I'm Corey Brown. Thanks for being on the Journey with us.
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