Kay Huff [00:00:11] Welcome let’s just get a few more on this. So those of you that are signing on right now, we’re just going to wait just a little bit, so we get a few more on and then we’ll start the intro.
Kay Huff [00:00:22] My name is Kay Huff, I’m the Director of Coaching at Benco. And we welcome you this afternoon to our webinar. Super excited that you decided to spend the afternoon with us.
Kay Huff [00:00:32] So let’s see. OK. So, with that being said I just want to go over a few of the rules before we get started again.
Kay Huff [00:00:41] My name’s Kay Huff. I’m the Director of Coaching at Benco. And I want to welcome everyone to our webinar this afternoon. So, the only thing that you’ll need to know is that we want you to ask questions during the webinar. So, it’s something that is going to be very interactive. And if you’ll notice on the very bottom of your screen, you’re going to see a Q&A box. I don’t want you to use the chat box. I want you to use the Q&A box, if you will type in your questions in that box. We will make sure that we answer them. However, if we don’t get to answer all your questions, fine. Don’t worry. We’re going to take really good care of you. We’re going to have our two speakers type up the responses to all the questions. And then everyone attending this afternoon will get a copy of the Q&A. So just know that if we don’t answer the questions live, that everyone will get a copy of the Q&A. So, again, we’re super excited about having you. I know we have a lot to cover. So, with that said, I would like to get started by introducing the most amazing person in the world, someone that I absolutely love working with. And I can’t say enough good things about him. Every time I hear the word leader, I think of Chuck Cohen. He’s just an amazing friend and a good boss. And he’s also the managing director for Benco Dental. He’s led his entire team through all of this to help support our customers. So, Chuck I’m super excited to have you here. You’ve been on every single webinar that I’ve done. You’ve taken the time to come on and introduce the speakers and say hello to all your customers. So, I really appreciate that. I’d like to introduce Chuck Cohen, Managing Director of Benco.
Chuck Cohen [00:02:15] Well, okay. Thank you very much. I come on just to hear the introduction you do for me because I guess it never gets old as far as I’m concerned. Thank you very much. I only hope to live up to your wonderful words. So, I’m very happy to be here.
Chuck Cohen [00:02:26] On behalf of Benco we welcome everyone to this evening’s program. We really are in for a treat tonight. Dr. Jim Clark, I’ve known for many years and we are fortunate at Benco to bring him onboard about two years ago. He is from Alabama, born and bred. The former owner of his own dental practice, of course, dental school graduate, former owner of his own dental practice, has sold and bought and sold several practices himself and has experience selling and working in a DSO environment. After his retirement, he reached out to us and said he really wanted to do Practice Transitions. And so far, he’s been a terrific addition to our team. So, Jim, we’re very glad to have you here tonight. Joining him is Brett Mansfield. Brett is with Citibank, and he does dental financing, specifically focused on practice transitions and on the other investments that are involved in dentists changing their practices and buying and selling. So, Brett, we’re glad to have you here tonight as well to offer the financial end of the presentation. So, with that Dr. Clark is going to talk to us about dental transitions in the time of COVID-19 and afterwards. Is it a great time to buy or sell or both? Jim, thank you very much.
Jim Clark [00:03:38] Well, Chuck, thank you so much. I am very honored that you got to introduce me. And I know I say this to you a lot, but you gave me this opportunity in the twilight of my career. And, you know, I’ll always be honored that you let me come on board to Benco, which is a truly fabulous company. Our title tonight, I don’t want to get heavy about it because I absolutely want to come across as optimistic about dentistry. And, you know, we’re all hearing a lot of heavy stuff on the media about COVID-19. And all I can tell you is I came out of dental school in 1983 and we didn’t use gloves or masks. Then boom, about three or four years later, HIV hit. And you think our world didn’t change. They were blaming dentistry for killing people. And it turned out to be an oral surgeon that injected his AIDS infected blood into a patient. So, we went from no gloves and masks to wearing gloves and masks. Back then, gloves and masks weren’t worn unless you were doing surgery. That was a big change. So, you know, we adapted, and I wouldn’t do it any other way now. We’re going to adapt to this. And the guidelines coming out are very strict and onerous right now. But I think as time goes by, we’ll learn to adapt, and dentistry is going to be just great. The timeline is not that different than pre-COVID. The buyers and sellers are pretty much the same. But some of the emphasis has changed. So, Chuck had already mentioned I’m a retired clinical dentist. I did it for 36 years. I love dentistry. I love clinical dentistry. Having said that, during my career, I enjoyed buying and selling practices. And then after the fact, I liked mentoring my colleagues on what they should do and when they should do it. So, you know, I have a passion for this, and I truly enjoy it. I live in Destin, Florida, with my wife, Lourdes. We have two dogs and, of course, have our family. And we love living on the Gulf Coast. It’s called the Emerald Coast. And I would recommend any and all of you to come visit. It’s the most beautiful place on earth. So, what is Benco practice transitions? Well, I think the biggest misconception is that people think we’re brokers and we’re not. We don’t have the same mission as Schein does. They have an all-inclusive brokerage, the whole deal.
Jim Clark [00:06:52] Ours is unique in that we’re a consultation business that looks at the needs of the dentist and we try to move them to where they want to be. Whether it’s buying, selling or even bringing in associates.
Jim Clark [00:07:05] So, you know, this is what I love doing. I love talking to our dentists. And then if they want to sell, we will move them forward and get them hooked up with one of our affiliated brokers that we have all over the country. They’re not Benco brokers, they’re not employed by us. But we have a relationship with them, and they’ve been vetted and they’re of high integrity.
Traditionally, the average age of a dental practice owner is 58 years old. 51% of all dentists are over 50 years old. Of course, this is pre-COVID data. And obviously, we’re only talking about, what, two months ago, eight weeks ago. So it’s the same statistics now. But what that’s telling me is we had a lot of dentists that were at the age of retirement prior to COVID-19. And we still do. It’s just the fact that they’ve been retiring much later. And there’s reasons for that. In 2008, their retirement accounts got devastated. They had to keep working to get the 401Ks and all the stuff they had in retirement back up again. The American population in general is living longer, so they’re healthier. I’ve got a 73-year-old brother that works like a Trojan. He’s a neurosurgeon. And he knows he needs to retire. But he feels like he’s at the peak of his career. So, the demographics have changed over the years. And I think, too, that with all the innovation in dentistry, it’s almost easier. You know, dentistry is hard work. And all you dentists out there know that I’d go to bat for you. It’s manual labor. It’s stressful. But you must admit, what we do now, if you’re anywhere close to my age, is much more fun than it was 20 years ago. And the innovations that we have are certainly wanting to keep dentists in the ballgame.
Buyers are traditionally non-owners. They come out of school with significant student debt. And with that, they are scared that they can’t afford to borrow money to buy a practice. And that is a recruitment tool for DSOs. They come in and they offer a salary for these young dentists and in some instances will even help you pay for your student loans. So that’s very attractive. When I came out of school, I didn’t think about working for anybody else. I thought about owning my own practice, you know, doing it myself. And it’s amazing to me that the thought process has changed that much. One big advantage right now is that interest rates are still historically low. So, if you want to finance a practice, even as of, you know, 10 years ago, it’s much, much lower. And sometimes it just blows my mind. The average general practitioner who owns a practice makes $245,000, whereas the average general practitioner who is employed at a practice, DSO or IDP is almost $148,000. That’s ADA data from 2017. It’s two or three years old, but it’s probably not changed much.
When to sell a practice. You must sell when your practice is at its peak. And I talk about it at the peak of the bell curve. You guys will laugh but getting to be $100,000 collection was a huge, huge year. That was a milestone. And then two hundred. And then three hundred and then blah, blah, blah. But at some point, you can’t work any harder. And your discussion then is well am I going to work harder and produce more the next year. And eventually you’re not. You’re going to be on the backside of that bell curve. So, you know, my advice always is let’s find out. You may not figure it out until you’re one year out of the peak of that bell curve. But don’t let it keep going down. So, you know, typically that age is 55 to 65. You know, practices are valued on your collection on your three-year average. If you had a million-dollar practice and then the next year it’s nine hundred and eight hundred your equity, your earned equity in that practice is just going out the window. So, it’s important to try to hit that peak. And the other thing is dentists have this conception that when they sell their practice, they’re not a dentist anymore. And believe me, I’m the perfect example. I kept my practice for 30 years. The one I started from scratch and I bought many other practices, but I sold that practice and I felt like it was at its peak and I went and bought another practice close to the beach. So, you always have opportunities to keep being a clinical dentist. And in doing that, you might do something outside of ownership where they just pay you without the stress of ownership. So, you’re still a dentist. The second reason people sell is they end up having an emergency exit. They either have a personal or health issue. And obviously, those are sad because you must do it quickly and in doing it quickly, you must discount what your practice is worth deeply. And it’s never a good sign, especially in a death. It’s horrible. And I’ve had to deal with that several times just as I’ve worked for Benco. But some of these are totally unexpected, and you could never have predicted it. Many dentists take a longer approach. They bring in an associate and they let them buy in and eventually buy them out. That was really my last practice. That’s how I did it. And it worked out perfectly. The associate came in and worked with me for years and then bought me out. And it was great. And I have counseled many dentists on how I did it. And I thought it was a good approach and it worked for us. But every practice is unique.
Jim Clark [00:15:43] When to buy. Well, you know, obviously I don’t think dentists coming out of dental school today quite have as much clinical experience as when I came out. And there’s several reasons for that.
Jim Clark [00:15:57] And you can say they’ve got more on their plate. They’ve got other things that the dental schools require of them that are non-clinical, but they shouldn’t buy till they feel like they’re clinically ready to take over a practice and run it, make their own decisions without the help of a mentor. They’ve got to have the desire to own and independently run their own practice. And so, you know, that goes back to what I discussed earlier, about one in five, dentists under thirty-five. They’re the only ones that want to own a practice, which is amazing. So, a lot of this crew coming out of school under 35 don’t want to own a practice.
Jim Clark [00:16:42] But I think that starts growing after age 35. It’s just a little later, and a little more drawn out. Younger dentists can pay off their student loans quicker if they own a practice. Experienced dentists get into that. I was that person. I was that entrepreneurial dentist. I wanted to own multiple practices. I wanted to before we heard DSOs.
Jim Clark [00:17:16] That’s what I wanted to do. In fact, I had 20 practices at my belt. I never got past six. But, you know, that’s just kind of the mindset that you must have. And obviously, not all dentists have that. I had a background in business and felt like I had a handle on it. And there’s lots of pluses and minuses to it. And I can talk to everyone that wants to do that. I can tell every dentist the ups and downs. But I’ll tell you, merging a practice into your practice is the quickest way to increase your bottom line. I mean, there is no better way to make more money in your pocket than to buy a practice and merge it into your practice. Done the correct way.
Jim Clark [00:18:11] We’re going to talk Pre-COVID. A lot of dentists are over 50 years old. So, you know, many dentists were already at retirement age. Well, what’s happening now? I’m getting phone calls of guys that are saying Jim, I don’t want to go back to practice. I don’t want to go back. They’re scared of the new guidelines that are coming out.
Jim Clark [00:19:08] And so much of it is speculation now, but they don’t want to do what they think is going to be required of them. It’s trying to get them off that cliff to say you’ve got to reopen. You got to go back to work. And if you don’t, you risk losing hundreds of thousands of dollars because then it’s a chart sale because you’ve already been closed two months. To put it up for sale after that, it’s going to be very difficult.
So, practice valuations, and we can talk about this a little right now, Brett. I know you’re going to get into it, but there’s you know, lost revenues. Obviously, those two months. And when this stuff started hitting first, I started asking around. How are bankers going to deal with this? You know, because obviously evaluation of the practice, the value of the practice, is based on what historical facts are. And if we’re looking in the rear, we want to know, well, what was your three-year average? And this is going to really mess that up. And you never want to see practices going downhill. You’d like to see the last three years go boom, boom, boom, you know, up. So obviously, this is going to be a downhill slide. I think. So, it obviously it’s not going to help valuations. I think we can all agree with that. It’s just how bad is it going to hurt? The second factor that I think plays into this is high volume practices are not going to be able to turn the rooms as quickly as they did before. If they want to abide by the guidelines now, I promise you a lot of practices are not going to abide by the guidelines. But I always say that empowers so many people there that I would never want to have in power, whether it’s your staff or your patients. You know, you’re at risk of some real liability. And I would never recommend that. I would recommend abiding by the guidelines and figuring out other ways. And I think, Brett, you and I talked about maybe one way is work more hours, you know, to get those valuations up. Maybe work another half day. And dentists don’t want to hear that, Brett, but it’s just a fact of life man. We feel like we work too much. People always ask me, why do you work for only four days a week? I say, guys, if you work five, you’re going to be an old man at 40. Dentistry is hard work. The third thing that I think about is the increased overhead. You know, this stuff is going to cost money. Now, I saw on one of our teams post this morning, Teams is a Benco site that we all go to. It talked about Colorado. Delta in Colorado was paying $8 for PPE. Well, that’s a start. If we could get insurance companies to start reimbursing us for the extra PPE, then we’ve got to do it. But that’s just one part of the expense. There’s going to be architectural changes, especially with open bay concepts that we have in practices and probably going to have to change the environmental aspects of what’s going to have to be in a practice that’s going to cost money. It all costs money. So, what does that do that decreases the bottom line? That certainly, certainly affects that. Brett, you got any comment here?
Brett Mansfield [00:22:58] Yeah. I’d like to jump in here. And you’re right, I do have some bullet points on some of the slides I’ll be covering, but specifically to this. And I’ll say the same thing when I get to some of my talking points. You know, every practice is going to be looked at uniquely. With lost revenues, the values of a traditional practice would naturally go down. But I think one of the things that we and the lending institute and lending industry have talked about, all of us will land somewhere differently. But it’s almost taken a hybrid approach because, Jim, you’re spot on – a traditional way to look at this is at the last couple of years. Three. It depends on, you know, the trends. And that’s one of our baselines to figure out. Not what the practice is worth, but what we’re going to lend. Right. You know, we joked about this last week. A practice is worth what someone’s willing to pay for right at the end of the day that’s what it’s going to be worth. But what will a bank or lender lend you? I think what you’re going to see is some type of a hybrid. I think you’re really going to see a hybrid where we’re going to take the last twelve months, maybe of 2019, you know, second half of 2020, whatever that might look like. But I think when we get to the specific points, it’ll help the doctors understand that I think there’s some things they might be able to do to help the lenders see the bigger picture of their unique practice. You’re spot on with the higher volume ones. I know everyone works incredibly hard in the world of dentistry. But it’s just a reality, in my own opinion, that as you just mentioned, with some of the new requirements and some of the procedures that are going to need to be followed, that just the sheer volume in a traditional practice. If you keep the same number of hours, you’re probably not going to be able to do the same amount of clinical work with those patients because of those extra steps that they’re going to have to take. Looking at the schedule or increasing the schedules is probably going to be beneficial. And then the last one on your slide on the EBITDA. I was glad to hear that as well about Delta and Colorado that, you know, I think it’s I heard the same thing about $8 a patient. Is that the number? I hope not, because I think there’s going to be more cost to it. But again, when I get to my slides, I think when the doctor who is selling the practice can articulate what that means going forward rather than what it meant historically, because if you just look at it and you say the last three months and this is what EBITDA has been. Of course, it’s going to be impacted. Right? And so I think that’s the biggest thing is if the doctor and or the finance person with the doctor can help us understand the impact of what it looks like going forward, I think we’ll have a much better chance of getting to a more traditional adjusted EBITDA taking those into account.
Jim Clark [00:26:30] Brett, I’d also like to say that, you know, we’re talking banking here, but you can have sellers agree with buyers. But if you don’t have that banker agreeing that transition it’s not going to happen now. You made a great point about sometimes, you know, it’s not what something’s worth. It’s what somebody is going to pay for it. So, you know, some practices are shiny, Porsches. You know, if the Porsche is your number one car you ever wanted, you’ll pay for it. And if you find that practice, that is just the perfect practice. Yet the numbers aren’t going to work. Maybe the dentist holds some money. You know, that that’s a way around it, that maybe he still gets the same number that he did before because quality practices, I think you’re still going to have value just like you mentioned, Brett.
Jim Clark [00:27:32] It’s going to be an opportunity for buyers. And, you know, we talk about, you know, there’s a little negativity on the selling side. It’s probably not the ideal time to sell your practice unless that emotional side of you just says no, then you just got to do what you got to do and we’re going to help you. We’ll help you get through it. But on the bond side, there’s a lot of positive things can come from a negative situation like COVID. One of them they buy, you know, this probably hasn’t happened at the time we’re talking about commercial real estate. But, you know, it is you know, you’re going to have a lot of restaurants closing. You’re going to have a lot of retail closing, a lot of businesses going out. You know, they’ll hopefully be new businesses coming back in. But for a period, there’s going to be a lot of empty office space. And that gives dentists opportunities to negotiate better leases. And that could be on the purchase of a dental practice or even on startups. Again, we talk about interest rates. They’re still low. They’ve got to stay low. There’s nothing going to happen with them for a while. Brett you think interest rates are going up this year?
Brett Mansfield [00:28:58] Now, every economist right now, Jim, that we’ve talked to, even our own bank economist, you know, everyone’s predicting that the FED keeps the rates right where they are. I mean, they are at historic lows. They are basically at zero. There was a comment, FED chairman just addressed it about a week or so ago, that they don’t want to go to negative interest rates, which personally, I agree with that statement.
Brett Mansfield [00:29:23] But these are. But when you’re talking about a conversation about potentially going even lower, then no, they’re not going up any time real soon.
Jim Clark [00:29:33] I bet they stay low through 2021. Buyers are going to be able to purchase great practices at reduced prices. And we’re going back to the dentists that are selling want to just get out of dentistry at this point. And these guys are the guys that are older, and they’ve thought about selling but then this has pushed them off the edge. They’re done. And maybe prior they would have sold to a DSO and worked a couple of years – signed a provider agreement to work a couple of years, but now they’re not. The invisible DSO model is that the selling dentist stays on and works. There’s a post-sale provider agreement for two to five years. Well, they’re not going to do that. So, most of these sales are going to probably favor the IDPs.
Talk a little bit about DSOs. They’re certainly going to be affected, just like the independent practitioners. They’re not going to get their revenues back until patients feel safe going back to the dentist. I happen to think what we have in sterilization and everything we do within dental practices probably creates a safer environment than going to Walmart or the grocery store. But the economy’s going to recover. People must have money to go to the dentist. I think those two things are key components of getting our dental revenues back up. It’s not going to ramp up right away.
Most DSOs practice high-volume offices, they’re going to be off. So, that certainly affects a DSO, just like it would an independent practitioner. But because that’s most of their practices, it’s probably going to have a little more impact on those. The DSO’s have a big corporate structure ahead of them. I think independent practitioners have a lot more flexibility. He can go down to one if he wants to. You know, he’s the owner. He can bring his wife in and be the front and the assistant. DSOs can’t do that when they buy a practice. They have a corporate team behind them, and they usually purchase on 20% of the net income, that’s what they pay out. I know that’s what they did with me many years ago you know, a five-year payout.
So, if they’re off 30 or 40%, they’re not making money. And so, the bottom line, I think, is that the DSOs that were struggling before are probably going to lose. I mean, they’re probably not going to hang around. And that’s what we talk about. A lot of practices are going to come back into independent practitioner’s hands.
Now on the flip side, the ones that have DSOs that have nice cash reserves. They still have the backing of their private equity. And they were sound in every way financially prior. They’re going to be the winners. They’re going to come through it fine and will continue to prosper. The main reason dentists want to sell is because they don’t want to practice under the COVID-19 guidelines. Now, the second component of that when this thing started, I think the stock market was at $28K and it went to $20K, I said, oh my gosh, I know what I’m going to hear. Jim, I’d love to sell, but I have to get back my retirement. I just lost a third or 25% of it, but it’s come back a little bit, so I don’t think that’s going to be as big of a decision maker. But that’s just going to be a fact. And that’s what I hear. That’s what I think we’re experiencing all over the country about dentists. Suddenly we’re on the edge wanting to sell. We’ve had some closings that have been postponed or canceled because buyers are a little hesitant because they’re concerned about what the financial impact’s going to be going forward.
Jim Clark [00:34:41] I think after a few months, they’ll get more comfortable with that and they’ll be right back on it. On the flip side, it’s a great opportunity for buyers. We already talked about that. They’re going to get some great prices and good product quality practices at great prices. Now, how lending institutions value practices.
Brett Mansfield [00:35:07] It’s great to talk to all of you in this new environment where we’re doing this via Zoom versus being able to see those participants out there. It looked like there was one question that might have been directed towards me. It says “how do banks view loaning money to young dentists with school debt and looking to buy a dental practice” before I even jump into my first slide. I think I might want to hit that one real fast.
Brett Mansfield [00:35:38] So, if he or she is coming out of school and they have some student debt, we’re quite comfortable in viewing that in today’s world. The cost of undergrad and then postgraduate school, specifically dental school, has just skyrocketed. And so one of the comments I’ll make is it doesn’t allow the lender to just say no. We’re not going to do it or else we wouldn’t be doing most of these transactions, especially with the younger buyers because they are still carrying a good debt burden.
What I will mention, though, is think about your debt burden and the practice that you’re buying. So, I’ll give you an example. If you’re trying to buy a practice, and you buy it cheap because you see a lot of upside when you get in, the lender is going to be looking at what the practice has done historically and then translate that to you now as the owner. If it’s not producing a lot of income, and then you bring in a large student burdened debt, that could have an influence.
Whereas, if you’re buying a practice that’s really rock solid and is generating a lot of what we call practice cash flow. Usually the banks are good with absorbing that debt of that student loan inside of that, because we’ll look at it as global cash flow. So, that doesn’t usually preclude us from moving forward. So, hopefully I somewhat addressed that question that was posed.
So, how will lenders view the percentage of financing? Again, I’m not saying what the practice is worth. I’m not a practice evaluator. But how much can be financed? Right. Because that usually is a very large component of what the actual practice will be potentially sold for. And this is what I’m talking about. As an industry we’re going to need to use a hybrid collection approach. We’re going to need to see what the impact was on COVID-19. Somehow isolate that if it’s possible. Maybe take six months from 2019 and six months from 2020 and put that together to get a better view on what the practice has historically been and what the practice looks like after COVID-19. This will give us a much better view of the net collections approach to practice evaluation.
You also touched on EBITDA. We look at what the net collections have been as far as how we’re going to evaluate the practice as far as the financing component. But then we also look at what it generates in EBITDA. You can have a super high-volume practice that the dentist is running but if it’s not producing a lot of EBITDA it’s not going to get sold for as much. And then the lender won’t be able to lend as much either. You are like a DSO. A DSO decides how much they’re going to pay based on projected cash flow. And so, to a certain degree, that’s what we’re trying to look at it as a lender. We’re trying to understand what the historical EBITDA has been because that’s usually a pretty good indicator of what it’s going to look like in the future.
I think one of the things that we can really get for the dentist, is if he or she is thinking about selling, is getting good on being able to describe your production pre and post COVID. Not only the mix but the number of patients you’re seeing, the volume per case and being able to articulate the production reports through the whole office including clinical doctors, hygiene and everything else.
Because one of the things that we’re going to want to be able to see is the environment. We believe that with the extra precautions and the procedural differences that are going to need post-COVID, that the volume of patients is going to be slowed down. Explaining that to a banker is going to be important. But specifically on production, one of the things that I will say is those that are in motion right now that are thinking about selling or have already lined up, there is a bit of a pause because in some states we still haven’t been able to open because the restrictions are still in place. Most of the lenders are going to look and see at some horizon, possibly 30 days or 60 days. What does that production look like? And then there’s going to be a metric around current production versus pre-COVID and then they’ll be able to close on the transaction with that condition being met.
Again, I’m speaking in general because the lenders are all going to have a bit of difference around their metrics. But that is a component that all of us are going to be wanting to see once the restrictions get lifted. How is the office doing in production? Same thing with collections. Collections have a lag, right? They have a tale. You must produce first and then you collect, unless it’s a 100% fee for service business. Having those records ready for the lender to be able to document is going to make all the difference in the world. And as lenders, we look at each opportunity with its own merit, with its own lens on that buyer and seller and the financing that’s being asked for that practice. That’s going to become even more predictable, in my opinion, in this environment because I think sometimes when you’re in a booming economy and everything is just going up, something like this, including health care and dentistry, you could just make the assumption that it was going to continue to do that. Right?
And as a banker, you might have made the same assumptions as well. That’s not going to be the case now. One set of metrics won’t fit all. The lenders are going to look at what the makeup of the practice is. I’ll give you an example. If there’s a lot of cosmetic and I’m not saying there’s anything wrong with cosmetic, but those might be impacted more. And the lenders are going to have to take that into consideration because those might be considered more elective. And are people going to do that if we have unemployment rates at 20+%? So, that’s what I mean by case by case, because one size won’t fit all because those are some of the things that we’ll need to look at. What are the changes in the overall structure of the PNL and the EBITDA with the virus? Are reimbursement rates going up? Hopefully but we’ll need to articulate that.
But the flip side of that, the reason why the reimbursement rates would be potentially going up is because there’s going to be more costs for the PPE, the reconfiguration of the office, etc. So, we’re going to need to look at all that.
Other considerations are does this go more towards the buyer or a practice? Because here’s what I’ve had many conversations on over the last couple of weeks with existing practices that are looking at this as an opportunity to go expand and buy a second or third practice in those situations. Liquidity has always been important to bankers, but now it’s going to be a little bit more important, especially if you’re expanding. And in this environment, if you can demonstrate that there’s a bit more liquidity then maybe what you have historically shown, that’s going to be a positive impact. Leverage almost the exact opposite right now. Again, we understand in this space that the whole idea is that there’s intrinsic value in the practice and we’re comfortable leveraging that up. And that’s why we go much longer.
But overall leverage, if people are thinking about buying here in the near future, one piece of advice – student debts are the student debts, but maybe not going on out and leveraging up, maybe other liabilities on the personal balance sheet would probably be beneficial to put you in a better situation and get that maximum value of what the bank is willing to finance.
I couldn’t not talk about PPP not PPE, the Paycheck Protection Program, because I figured it might come up anyways, Jim. The view of most lenders is we’re not going to take that into our debt service consideration, at least initially right now because I think most of the dentists, when he or she got the PPP loan, they did so because of the forgiveness component of the Paycheck Protection Program loan.
And so, our view is, is that a good portion? If not, hopefully all that money will be somewhat forgiven. In talking with some of my colleagues at some of the other lending institutions, most of us aren’t going to initially debt burden the PPP on a practice that maybe is looking to expand or buy the next one in their overall debt schedule. And I think working capital is another thing that we need to be thinking about, in our industry. I think doctors have always wanted that working capital, but now I think it’s going to become even more important to be working with your lenders and articulating what does that working capital need really look like.
Brett Mansfield [00:47:34] If you want to make the transaction go a little bit smoother, here’s a couple of ideas.
1) The more robust reporting, the better you’re going to be able to explain your story around your practice and the true value. So, accurate practice reports from yourself. It’s really going to be critical.
2) Interim reporting. I know I’ve talked with so many dentists throughout the years I’ve been doing this, and they’ll say, but Brett I don’t do PNL. I know that. I know that doctor. A lot of times you don’t need a PNL at your practice for a long time. I get it. And we as lenders have made exceptions all over the place. We’ll say just give us your production reports and we’ll figure this out on our own. We’ll kind of do our own PNL. Those are the things that I think we’re going to be requiring a little bit more often because we’re going to need to see what we keep talking about that pre and post COVID. What’s the impact?
3) Clean reporting. I know there’s tax strategies and we see that all the time and I get it. But the cleaner the reporting and truly having the business have its revenue and expenses and be just the business I think is another way that sellers can help really make their practice be as valuable from a lending perspective as possible. 4) Explain that you’ve already done this to your potential buyer, but make sure your lender understands the makeup in your office. How many untreated cases do you have? There’s value there in those untreated cases. What’s your mix of hygiene? But you all know that’s where we get our sources of revenue. How well are our hygienists are doing? If you can articulate these things to your banker, it’s going to help as well.
5) Mix of procedures. What does it look like and how much of it is the bread and butter? You know, a crown is a crown and they’re always going to be needed. But some of the other stuff that might not be as necessary and maybe a little bit more elective, that is going to have an influence on lending in regard to the overall value that we might lend to.
What can a buyer do? This probably is no different than post and pre COVID to be honest. But here’s what I’ll say around why I think COVID might have an impact on your historical production components.
1) You were working four days a week. But now, because of the office in COVID as an associate, you’re now only working three days a week. Explain that. Because when we as a lender are looking at what your production capabilities are, the only reason we’re doing that is if Dr. Clark is selling his practice and Dr. Clark has historically been producing himself clinically. $800K or $1M a year net collection. We need to know that the buyer coming on in can replicate that same type of production. Right? Or else there’s one of two things that can happen. One, the office isn’t going to perform as well or the doctor’s going to need to hire an associate to make up for that production that he or she can’t do at the same speed that Jim could do. And therein lies an additional cost. Right? So being able to explain what the historical production has been, what impact, if any, COVID has had and articulate that and the explanation of those potential gaps, I think it’s going to become critically important for our buyers.
2) Management exposure has always been important for buyers. You talked earlier about being an entrepreneur. I think not only being a good clinician, but a really good business owner is going to be critically important post-COVID. So, if a buyer has some exposure and can articulate what that exposure has been around, maybe they’re the lead associate, whatever that looks like, make sure that your banker knows that because that will influence the overall decision in regard to what the lender’s comfortable doing.
3) And the last two things, just like what I was talking about earlier on the leverage side, again, the student debts they’re long term, they’re going to be there. But if you can come in with leverage, that’s acceptable. I think that’s going to help your case rather than someone that has a lot of what I’ll call toys. That’s going to be harder and harder to do. And the last thing is and this point of view is post and pre-COVID, if you as a buyer are bringing in additional skills that the selling dentist was doing, please make sure you’re explaining that to your lender, because we do take that into consideration. We do try to figure out if something was being outsourced and now it’s going to be kept in house. How does that impact the overall value of what the banker is going to be comfortable lending to?
Jim Clark [00:54:08] Great stuff. Kay, do we have any questions?
Kay Huff [00:54:15] We do have some questions. Did you want to read them, Brett?
Brett Mansfield [00:54:25] So, I’ll try to take the first one here. What is your opinion on the selling dentist partially financing the buyer? I love it. Great question. And, Jim, you somewhat alluded to that, right? When you gave your example of Porsche, right? You know, some lenders won’t be a fan of that. But there’s a decent number of lenders that if the selling dentist is going to make the note somewhat coterminous, maybe about the same length of time as what the bank is willing to do. And more importantly, make sure that the banks in the first position. Most lenders are ok with having this. Again, I know there are some that aren’t, but in many cases there are. That may even become more important post-COVID. If a doctor is trying to still sell at this value and a buyer is still willing to pay this value, well maybe the difference there is the seller carry back deal. Right.
Let’s see, how will banks account for the idle loan? Will it hurt a doctor’s ability to get financing, if they accept it? No. So when you say, will it hurt? No, it won’t hurt. It’s a very good program, but it is a loan and there is no loan forgiveness component to the idle loan as there is on the PPP. So, if someone does have an idle loan, the banks will need to look at that and put that into the overall debt service of that borrower, because it is an obligation.
Jim Clark [00:56:32] You’re talking about more than the $10K, right?
Brett Mansfield [00:56:34] Yes, sir. I didn’t read the whole question. It said $150K. Will you be requiring life and disabilities on loans still? Yes. It’s kind of the general rule right now with most lenders, that if it is over a million dollars, we’re still going to require the life and disability. Again, this is with just a few lenders, my company and a few others that I know usually only apply it when it’s a solo-owned practice. Meaning if you have ten doctors but it’s owned by one, then yes, life and disability is still going to be critically important because that person is the owner. But if it’s a dual ownership office, then life and disability shouldn’t necessarily be a requirement for the lender. But some lenders require it and some won’t. But I know a good number of them in adult ownership office won’t necessarily require that.
I think the last one is a dentist with two thriving practices, had an application in with Citi prior to COVID-19 and we placed it on hold waiting to reopen. Is it still a great time to buy? Yes, I think so. I think the biggest thing we’re going to have to show is that production levels are back up. And again, I won’t give you a specific number because I think that’s where each lender’s probably going to have its own metric. But it’s going to need to be somewhere in that 75-80+ range because that’s what we need. The good thing is, dentistry is going to be fine. It has been. And it will be again, but it’s going to be different. But I think that what we need to be able to do is say, where is it? Where was it? And is it back up to at least a certain percentage? So, Kay it looks like you’re give me the nod that I think we’re getting close to the end.
Jim Clark [00:59:00] You guys at Citibank had a unique piece of your loan where you were not requiring personal guarantees on practice financing. Are you going to continue that post-COVID? Or is that not a decision made yet?
Brett Mansfield [00:59:23] It’s not a decision made yet.
Kay Huff [00:59:24] Good job, guys. A lot of great information.
Kay Huff [00:59:31] There’s probably a lot of people out there that are debating if they want to go back in. I mean, especially if they were getting ready to retire. So, really good information. Thank you both for being on tonight. We really appreciate it. All the Q&A questions will be sent out to everybody who came on tonight. We’ll get the two speakers to answer all the questions and then we’ll send them all back to you so everyone will get a copy of the Q&A from tonight.
Kay Huff [01:01:39] We really appreciate it. Have a great evening.