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This podcast covers from START to FINISH How to Acquire a Dental Practice. Michael Dinsio, founder of Next Level Consultants has literally seen hundreds of deals as a banker in the industry & he has personally consulted hundreds of dentists as a Buyers Representative. Michael talks with GUEST SPEAKERS about Due Diligence, Legal, Demographics, and more... He invites experts to the show to help you avoid those headaches and heartbreaks. So start at the TOP w/ Episode 01 and work your way through the transition process. We break it down step by step in a true #UNSCRIPTED and genuine way.
00:00
Oh yeah! Here we go! Practice acquisition! There are pitfalls throughout the entire process.
00:27
All right, all right, guys. I'm super excited about this episode. This is episode four, banking, how to get pre-qualified and how to look at practices. My name is Mike Dinsio, founder of Next Level Consultants. Thanks for joining us today. We've got an awesome episode with Morgan Stump and Provide. We covered a lot of ground today in this episode. just to recap really quick, what are the banks looking for?
00:57
when you approach them to get pre-qualified and all banks are not created equal in this department. However, Morgan gives you the keys and the layout of what most banks get into. The other thing that we covered that I thought was really, really cool was how you could structure a loan to set you up for the most success. know, banking is so important to the deal. It's not that you're just getting money at a particular interest rate and we will go over this.
01:25
but it's also how you structure the deal to set you up for success. Morgan's going to talk about how his bank does that. And it's so key. It's so key. Too many times you guys chase interest rates. the lowest interest, you never get an award in life for the lowest interest rate folks. You don't. You do get an award for best business owner. Banking is a huge piece to that puzzle. And so don't just chase interest rates, but Morgan will talk about structure.
01:55
With that being said, I'd like to do a little plug on the episodes to come. We've got a lineup. We've got Shark Week practice broker, Shark Week coming up. We've got attorneys, CPAs, bookkeepers, marketing folks. We've got more attorneys. We've got so many things coming up down the line. Credentialing, equipment valuation, HR, technology integration.
02:23
All kinds of stuff coming up in this particular season, but what we're trying to do is run you all from start to finish how to buy a practice the right way. Thanks for following folks. Make sure to like us, write us a review, pass it to a friend. I'm doing this for free, not making any money. I do it because I love doing what we do and I love sharing information.
02:47
Folks, that's what this is all about for me and I'm bringing it to you. So let's get right into it. Episode four with provide and Morgan stone. Thanks for joining us guys. Let's get this started. Acquisition on sensor, the truth when buying and selling a dental practice. now your host Michael Dinsio. All right, all right folks. This is Mike Dinsio with acquisition on sensor. I'm super jacked about.
03:16
because we got a special guest, a friend, someone that I work very closely with and have worked close with in the past. And it's such an important piece to the entire acquisition process. you know, listen up folks, because you could learn a lot in this episode that could help you get through the process a lot easier, cleaner, more streamlined. So.
03:43
But today it's episode four, Acquisition Uncensored. And today my guest speaker is Morgan Stump with Provide Practice Finance. Welcome to the show, brother. I'm super excited to see you. Me too, Mike. Thanks for having me. Absolutely, man. So what Morgan, let's just get right into what who you are, what you do, what provides all about. Give us the rundown, man, because I'm going to say that.
04:10
There's been a change of the guards in the practice financing world. And I've been in for folks that have followed me and know me. They know that I came from banking. And so it's been really interesting watching this whole thing unfold in the last five years. But provide is fairly new to the game, but just crushing. And dare I say you might be or are I don't know if we want to go on record, but maybe the largest dental acquisition lender in the country.
04:39
And I think I might be able to say that you might not be able to say that, but I'm going to say it. So give us the rundown, man. Who are you and what do you do and what's your bank all about? Yeah, thank you. And life kind of comes full circle, right? I mean, we used to compete in the Pacific Northwest as competing bankers. And so it's been a lot of fun to watch your success starting this up to support the industry of dentistry. So thanks again for having me.
05:05
I've been in finance for about 20 years now. I'm originally from Oregon, went to the University of Oregon. Then upon graduation, spent 10 years in Southern California, and that's where I cut my teeth and dental before moving back up to the Pacific Northwest in 2012. So I've been working specifically with Dennis for 12 years now. I was with one of the big national banks for seven years. And then I had the good fortune of leaving just over four years ago to be the first outside sales rep.
05:33
when we were known as Lendeavor. We did rebrand and pivoted from Lendeavor to provide last year as we were scaling out. And so it's been a heck of a ride. And yeah, we just keep building and keep doing what we can to help the most amount of doctors possible. Did I hear you say you were the first outside guy for Lendeavor now provide? I was. was. I had a 10 month old baby at the time and I had a really successful territory at the big bank.
06:02
But I honestly felt like I had reached my potential there as far as how many doctors I could help. The application process was extremely archaic, like PDFs, 30 megabyte emails. And I was just sitting there pulling my head, the hair out of my head because I felt like we were leaving so much on the table. And then I took a step back and I said, man, all of my first time practice owners are millennials. Like, are we gonna be able to deliver a...
06:28
You know, a solution to help them fill out an application online. When are we going to be removing these barriers to entry at that level? And so I had the good fortune of meeting our founders back in 2015 and 16. We just picked each other's brain. They picked my brain on the industry. I picked their brain on FinTech because I was kind of an old, crunchy banker at that point. And it was just kind of a match made in heaven. And, you know, when Lendeavor came knocking once they secured their funds, the writing was on the.
06:57
I made that one. It's been fun. Game on it. It is. It's crazy. They're like I said, a changing of of the new guards and the old guards. And that's that's super exciting. So you're right. Provide definitely has something different when it comes to the overall process. And I think the millennials definitely appreciate it. So without further ado, let's just jump into this because I don't like to hang out in this this get to know you.
07:26
I know you, the audience knows provide. So let's get into some good questions just to set the table a little bit of where we've come from to this point. So episode one was we interviewed Cindy Polly, who is a doctor herself, a practice broker today. She had bought and sold and bought and sold. So she was a great first interview. So if you have if you've missed it, definitely check it out. But she walks you through kind of like the.
07:54
the process of a buyer and a seller, which was a great episode for us. Then we jumped into demographics. And demographics, unlike what you heard in our first season, Startup Uncensored, really, really important part of a startup. But demographics are also fairly important for an acquisition too, just different. You look at it a little bit different. So the boys over at Dental Graphics did a great job. Then me and Justin Schaefer did episode three, is how to find a practice.
08:23
and the strategies around how to do that outside of maybe the conventional ways. And then that leads up to episode four, which is banking. So as you can tell folks, we're walking through the entire process of how to buy a practice from start to finish. And so today banking, and I'm sitting here thinking like, what are the true first steps? And we're walking through that right now, but banking is definitely one of the first ones and pre-qualification is probably...
08:50
A very important thing specifically because the brokers and the sellers, the CPAs or whoever's representing the seller want to know you can get money. So let's get into that. So that's probably your first call, right? Morgan, like how does, how does a doc get pre-qualified? What's that look like? Absolutely. And I'd start by saying it's never too early to have that conversation. Whether it's a second year, third year, fourth year dental student, even it's never too early to kind of understand where you sit today.
09:19
versus where you need to go in order to get into the practice that you wanna own. So don't be shy about reaching out, whether you think you're a year out, five years out. And that's somewhere that we really excel to the point where when I did come over from the bank, I had to kind of, changed and I mixed up the way that I kind of would approach the first conversation with doctors because the process was a little bit more rough and time consuming over at the bank.
09:46
I would typically have a first call where I would spend 30 minutes, 45 minutes plus with the doctor going through, you know, asking them questions, taking notes. Here, we've got an online pre-qualification process that takes literally about three minutes. And it's all online. You can do it on your phone, but it basically gives us three, three data points where I'm going to know immediately whether or not we've got a path to ownership for you right now, or if you need to go back and work on some things.
10:15
So those three data points that we glean from the pre-qualification are gonna be production capability, credit score, and liquidity. If I've got those three data points, I can tell you within pretty much 100 % certainty, what you're gonna be pre-qualified for, and we can get you a pre-qualification letter, and that's like gold to the brokers. They understand that if they see my letter or somebody on my team's letter, they're gonna...
10:45
know that they're pre-qualified with real tangible data points, not just something that we're sticking against the wall. Yeah. I figured we were going to probably get into some of those things. these are great places to go for a conversation like this in a podcast. But I do want to touch on that it's only half the story too, but let's dangle that. We'll get to that because half the story is the buyer, the other half is the practice.
11:14
So if we're focusing on the buyer and what that looks like, every time I talk to a client, these are obviously my favorite ones as well. First things that I ask when I sign a client to represent an acquisition. But to me, cash, cool, credit, probably fine. Let's dig into the production one, because to me, that's my favorite one.
11:39
And you all know, guys, I'm a consultant. I look at practices every single day and we help buyers and doctors elevate the practice to the next level. My favorite thing, Morgan, is saying hiring me or advisors like your team, CPAs, attorneys, to me, that's eliminating, and I'm just making up a percentage, but follow my logic here.
12:08
It's like eliminating like 40 % of the risk, which is a pretty big percentage of eliminating risk. Like you're looking at production reports, you're looking at, you know, new patients, you're looking at the hygiene, you're looking at the marketing, you're looking at the collections, all the practice, right? But the other 60 % of the risk of a successful transition is always my client's ability to produce. If they can't replicate, we're in trouble.
12:37
Bottom line, bottom, bottom line. And if they can't replicate, we got to come up with some kind of solution there. So I love that your first one is production. Let's talk about it. Morgan has the bank look at production and what are some things that they could be doing to be prepared for that conversation? Yeah, no, I, I love starting with this because to me it's the most nuanced of those three items that I spoke about, right? Like have a good credit score, right?
13:06
Have some cash in the bank, right. But the production is not always, you know, as cut and dry. And I will say that the doctors coming out these days, more so than any generation before them, are coming out with more skills. And that's just simply because in order to be successful and relevant in this industry, you've got to come out with skills and be able to produce. You can't be referring everything out. I don't know how many new doctors these days are just doing bread and butter.
13:34
Not the folks that are coming out these days So what we look at is we do ideally we want to see about 12 months of experience outside of school Okay, but we're not rigid there. We can we try to operate from a place of common sense So if you're able to get you know, four or five months of production reports the first four or five months that you're out We can actually connect the dots and extrapolate that out for the year. So let's say we have six months of production reports
14:03
that showed that you did $400,000 to dentistry in those six months, we'll give you credit for 800,000 even though you don't have 12 months out. So that's really important. But also to have a consultant like yourself, somebody that's looking at the procedure codes, understanding, hey, you know what? This seller is really unique. They're doing a lot of full mouth cases. Is that something that you're gonna be able to come in and step in and do? Or are you gonna have to refer that out? Are you gonna have to have the seller work back for a while?
14:31
Now we're talking about stripping away some of the production, which is ultimately going to hit the cash flow. So all of these things are intertwined. And so it's not just as simple as, I could do 700,000. It's well, what's making up your 700,000 and how does that align with what the seller has been doing? One trillion percent. Right. Spot on. I couldn't agree with you more like on the skill sets. Like I.
14:58
Most of our docs have come out doing implants. Now, they may have placed one implant, one, maybe two, if they're lucky. But that statement, not all schools, of course, are coming out with just one implant. But the point is that some schools are graduating people that have placed an implant. That should just set the tone of they're coming right out of the gate with different skills. You're right. Bread and butter is great to buy, but
15:27
The exciting thing is looking at what the practice is doing and how you're going to grow it or maintain it is the conversation. Hopefully the conversation isn't, is the production going to go down after it changes hands, right? And that's what you're looking at. That's what I'm looking at. That's what all of you guys should be looking at here. I mean, if you don't have Morgan or Next Level or someone in your corner looking at that stuff, that is 1000 % what you need to be looking at. And by the way,
15:56
We're gonna get into chart audits later on in the season and what you should be looking at and all that. dude, that's where you look for that kind of stuff because numbers are one thing. Oh, they did 200 crowns. Well, is that 200 crowns of a full restore? Or is it just 200 single crowns? It's just a number, right? And also, don't take anybody else's word for it, right? Right.
16:23
Like I've got many good friends or practice brokers, right? And there's like any other industry, there's good ones, there's bad ones and everything in between. So you don't take a seller's representative and take their word for it necessarily. You take their word, but then you verify, right? And so a chart audit and pulling those random files and really kind of digging in deep to understand the type of dentistry that's being done. I don't know that there's anything more important. A hundred percent. And to follow up with that with
16:52
practice brokers are friends in the industry. You know, I'll go on record and say that I've helped go actually sell practice. It's not, it's not my forte and I don't want to get into it, but me and I think I'm one of the most thorough out there. I will tell you, you pull the reports and you put the information from those reports into the, the, the perspective prospectus that's about
17:20
the extent of their responsibilities to represent through the reports. They're not actually, the broker's not doing the dentistry, so they're doing the best that they can. And by the way, most of these brokers are listing 20, 15 practices. It's just like selling houses. It's a volume game, I hate to say it. So my point to that is absolutely 100%, Morgan, spot on. You gotta check that, you gotta verify that yourself. And by the way,
17:50
A CPA, a banker, even myself, I can't tell you if you can do this work. You have to tell me if you can do this work. I'm going to ask you three times and I hope every single time it's yes, yes, yes. But like the bank's going to check the numbers. They're going to do the things they do. I'm going to do the things that I'm going to do. But like I said, back to my original statement, 60 % of the risk is probably your ability to take the bull by the horns and run with this practice.
18:19
If you can't do it, that's the biggest risk of failure. So anyways, I love that production's it. So, needless to say, getting production reports as an associate, Morgan, is super important. Any tips and tricks on that? Like I know sometimes associates have a challenge doing that in those weird situations. Well, I mean, it is tough and it's easy to sit here behind a desk and say,
18:47
You know, you might have to pass up on that job that's closest to your house or that job that you think might be the best for you in that moment and get outside your comfort zone, whether that's a little bit of a commute, whether that's a little bit less pay, but to be able to go into a place where you know that you're going to be able to capture your production reports because your ultimate goal is to own within the next year. Sometimes you got to make sacrifices on the front end of your career to ultimately chase down the carrot, which is practice ownership. So that's what I would say. And listen, you know,
19:17
If you're going to be signing up and to work with one of the big DSOs, go that corporate model, you're not going to have full control over not only the production reports, but then the cases that you're assigned. And so I would go into these interviews, treat yourself as the asset as opposed to the commodity and really ask the right questions. I know your team does a good job about arming them with these questions, but it
19:41
It's okay to ask, my ultimate dream down the road is to become a practice owner. Will I have the ability to capture my production? Will I have the ability to get busy if I want to? Am I working out of one column? What is my scene gonna be? Because how many conversations, Mike, have we had where it's like, well, they told me that I was gonna be super busy. They told me that this was gonna happen, that this was gonna happen. I'm sitting around half the day.
20:11
You know, and listen, you can't control that somebody might not be as upfront and honest with you on the front end, but if you ask the right questions, you're going to really kind of narrow down what that right fit opportunity is. And just kind of circling back to my point about maybe finding a position that's outside of your direct area where you live. That's also going to come into account with, with, uh, with non-competes if a non-competes relevant in your market. So you don't want to necessarily plant that associate flag.
20:39
you know, right down the street where you would ideally like to work because you might be boxed out or working in your ideal situation.
20:46
Perfect. That's exactly right. Well, I think we hit production pretty hard. We could probably keep going. Actually, before we move on, what if, Morgan, could your underwriters, can your folks look at pictures of production reports? they buddy up with a practice manager that's their friend running and just say, can you run my production real quick and snap a picture?
21:15
You know, because sometimes you can get a little creative there, right? That's a good point. you know, we got to obviously be careful by that kind of advice that we get but give. But yes, I mean, if you can just take screenshots of the software of a computer screen, again, it doesn't have to be 12 consecutive months. You know, I'd always say if you've got access to 12 months worth, take me out your four or five biggest months, because if you can do them in a moment in time like that over a month.
21:43
We should be smart enough as a lender and as an underwriter to understand that you can do that for the year. And just to go back to the production, you know, real quick, we understand that not all doctors can get their hands on production reports. It's a tale as old as time. But once you do have that 12 months of experience, if you're a GP, and I think we are the most aggressive lender, national lender that's out there with this, we'll automatically default to giving you $550,000 worth of credit as a GP.
22:12
550 where that is that is higher. Yeah, it's 450 at our biggest competitor and and you know, that's going to be a big chunk of cash flow with that hundred thousand that we're giving you. So if you think a good, you know, healthy practice is going to have 30 percent hygiene ish, then that five hundred and fifty thousand a dental production is enough to get you into a seven hundred and fifty thousand dollar practice right out of the gate once you've got that 12 months of experience, even if you don't have production reports to to show.
22:42
Okay, okay. You got two ex, an ex banker, a very good banker, and we're spitting numbers. Let's break this down to layman terms because what Morgan just said was super important, super important, folks. Here we go. The bank, let's think about this, the bank, any bank you work with wants to know that you can handle the production of the practice that you bring to the table to them. Okay.
23:10
If you bring them a practice and you can't prove that you can handle that in production reports or some kind of proof, then what Morgan just said is we will default at 550 that you can do without a production report and other lenders will default at a lower amount. So that means that Provide has the faith in you as a GP in today's terms.
23:38
that you could handle at least 550,000 in production. That will hurt you pretty badly if you can't prove anything. And I've had those clients, big producers and can't show reports. And it sucks because we know that they can handle it, but banks have to know. so what he's saying is their default is higher than everybody else's. And so therefore you could buy a bigger practice. Now, yeah.
24:06
and specialists are at 750, so keep that in mind. All right, so ortho, whatnot. Now, if you do have that over 12 months of experience, but you are, let's say you're working in a big DSO or whatever and you're not able to show it, but you're turning and burning all day and you made 400 grand, like we can back into it, right? We can say, okay, we know that this DSO is paying 30 % of collections, 35 % of production.
24:34
You're making 400,000, you're working four days a week, four tens, 40 hours a week. We can actually back into that number. So we can get comfortable there, but the income piece is the integral component to that equation. I like that. they show their contract essentially to you and say, hey, I make 30 % and you know, math is hard. You could take the divide 30 % of how much you made and you could kind of determine how much production you could do.
25:02
So those are two, I love that discussion because of the production, cash and credit criteria of the pre-qualification. We spent a lot of time on production. Someone that's done a lot of deals in this room, hundreds between you and I, that production is the biggest one. Cash, we can touch on it just briefly. And of course we're assuming that you decent credit. Walk us through the cash situation Morgan because
25:32
I always get the question, do I have to put that in? Do I have to not put it in? Yeah. Yeah. So, you know, this is a unique market, right? We're coming out of a period when dentists were forced to shut their practices down for two months in March and April of 2020. And so we saw the market react to that, which I believe was right. Because those are the most stressful months of my career. I had doctors that I just put into practice ownership.
25:58
calling me up saying, Morgan, I'm burning through that working capital that you gave me and I am unable to create revenue, right? That's scary. And so that really points to the fact that liquidity and a secondary source of repayment, which cash on hand, that's why it's important is if you do hit a rough spot, what do you have to kind of lean back on? And so we did see the market adjust to really wanting, most banks wanting to see at least seven to 10 % liquidity coming out of
26:28
COVID. So if you're looking to buy a million dollar practice, most banks would want to see that you've got 70 to $100,000 in the bank. We are seeing a lot of lenders loosen up on that metrics at this point, but ultimately it comes down to common sense, right? Are you Dr. Frugal or are Dr. Spender? In underwriters, this is going to be what they look at. It's more of a vibe than anything else, right? A lot of dentists, after they have been slaving away at school, making no money,
26:56
pulling out five, $600,000 of student loan debt just to get by. Now they've got that associate position and they're making 200 grand a year. It's like, I made it, right? And what do they do? They go get two Teslas and a million dollar house, right? Well, if you think about it and you look on paper, that's why these seven or 10 or 5%, these numbers are arbitrary. Because if you come to me and I look at your personal balance sheet and I see all of your assets and I see all of your monthly liabilities,
27:25
Well, if you've got a $7,000 a month mortgage, $3,000 in car payments a month, you still have your student loan debt. That's $70,000 of the previous example that I gave of buying that million dollar practice. If they have 70 grand in the bank, that's not going to stretch very far for that person I just described. But if we've got somebody that's coming that has a reasonable mortgage or they're renting and they've got a reasonable car payment,
27:52
They've worked hard to pay their student loan down a little bit while still saving that five or seven or 10%. That's somebody that an underwriter is gonna really wanna stretch for. So the biggest piece of advice I would have for the listeners is you're getting a little taste of money. Don't go crazy with it because the more money that you add to your balance sheet and monthly expenses, that means that you're gonna have to now find a practice that's putting out more cashflow. And you might miss out on that opportunity that comes along.
28:21
that you have to jump in at a low price point, build it up. Maybe it's an old retired doctor that's referring everything out. And now you miss out on that opportunity because that practice isn't putting out enough cashflow to support you.
28:37
Perfect. think you well said there, Morgan. I get into these conversations daily and it is frustrating. Let's make it real real quick. you did bust your butts to get through school. You've been broke. know, half of you are probably married and scratched as much money as you could to get a ring. And like you're trying to plan for your life here and you're up to your eyeballs in debt.
29:06
you finally get an associate position, maybe making 150 grand and it's not enough, but at least it's, you know, you're six figures. Most people aren't in six figures. So, you know, life's good. And, and, so you deserve to have some fun and you deserve to go on vacations and you absolutely. The reality though is if you want to take your career to another level to buy a practice,
29:34
Doesn't it make sense a little bit to have some cash in the bank? When I started Next Level, do you think I had five grand in my checking account? The answer is no. I mean, I had at the time one kid and one wife. She didn't work. I worked. I had to have some cash. Like, what if the water heater blew? What if the roof needed fixed? What if the car broke? So that's what I think the lenders want.
29:59
Am I wrong there? mean, that's ultimately what it's about. That's it. You want to be able to just take a quick look at it and be like, does this profile make sense? You know, this person's been making two, 300 grand for five years and this is all they have to show for it, but they have a bunch of monthly payments. That doesn't make an under underwriter feel warm and fuzzy. Yeah. And that's what it is, is making someone feel warm and fuzzy. All right. right.
30:26
Where the market is settled back into now is more of wanting to really see probably about 5 % ish of, assuming you've got a pretty light balance sheet, you don't have a ton of debt. If you've got 5%, you've got great credit, you're a good producer, you're going to be able to find financing at 100%. So you're not having to inject it. that's, you mentioned that, and that is a key point. Us banks, we're not asking to see how much cash you have on hand to take it and ask you to inject it.
30:56
That's what makes you a more secure borrower because if, excuse my language, but you know, if shit goes downhill, then you know, what are you going to have to lean back on? And that's what it's all about. We do swear on the show, Morgan. It's okay. I'm glad you, I call it, I call it passion words. Maybe John did last season passion word, but that's a passion word because, because Morgan loves what he does. Okay. That's right. Uh, that's perfect. All right, folks.
31:25
So the pre-qualification is where we're at. Remember where we're at in the season. So banking pre-qualification. We haven't found our practice. Last episode, we gave you some ideas of how to find. Now we're starting to look at practices. We're talking to some brokers. Brokers want to know, and forget brokers. The seller wants to know that you can get money. Forget if there's a broker involved. But here's the thing about where we're at in this conversation is it is half
31:55
of the conversation. I always say you could take pre approvals and line them up on the wall because they literally mean nothing. The brokers and the sellers want to know that you can get money. The funny thing is the practice is just as equally as important to look at from a bank's perspective than the buyer's credibility. So we just went through the buyer's credibility. Folks, follow that to the tee.
32:25
But I always used to say, if you're a good borrower and you bring me a good practice, that's an approval. If you are a weak borrower and a weak practice, that's an obvious no. The gray is good buyer, weak practice or great practice, weak buyer. That's where we don't know if it's a yes or no. And so again, there is another piece to this. So Morgan.
32:51
How did I do there when I explained that? Like it's not the full picture. It's not. And so that's why it's a very different conversation when, you know, somebody introduces me to a doctor and they don't have a target practice in mind yet. We're just focusing on the half of that equation that they can control, which is themselves. And buying a practice is an equation on one half of that equation is the practice because that's putting off the income. The other half of the practice is the buyer. They're the ones that have the monthly bills, the monthly liabilities.
33:21
And that practice has to be able to support that doctor. So it's two very different conversations, whether or not somebody comes to me with a target practice in mind or not. So if they're coming to me with a target practice in mind, and it's one of those kind of gray area situations, that can be very challenging on both sides because let's say we've got a super strong buyer. Maybe they owned a practice before, maybe they've been a 10 year associate stocking away cash, but also living a certain lifestyle. But they have
33:50
the utmost confidence in their ability to go into a practice that might be underperforming because they're like, that's being referred out. That's being referred out. The doctor's gone from five days a week to two days a week. I'll get in there. I got my machismo going. Like, let's get the If you have an old though, that practice needs to cashflow for that person. So if they've built this, you know, nice robust, you know, uh, personal financial statement, and now they're trying to find this, you know, by this underperforming practice.
34:17
Now we're going to have to get really creative. Maybe they'll have to work outside the practice a day a week to add that income back into the cashflow. So there are ways to get creative, but typically, you if you've got a really strong borrower with a, with a weaker practice that can present challenges. And then on the flip side, you've got a kind of a weaker borrower that might be just starting out, not a bunch of liquidity, but they're trying to buy this large robust practice. I would argue is the front end sales guy. would, I would argue that.
34:47
The chances of that last scenario failing are very small because they're going to get in there and they're going to figure it out. And the cashflow in those scenarios is usually going to be 1.5 to two to one. Um, and I don't mean to get in the nitty gritty on cashflow, but point being, I do feel a lot better with that ladder, uh, example than the very first one, just as far as being able to figure out a solution to get them in the door. Because it can fall and it still works. talk to docs all the time.
35:14
Like I'm I'm helping a buyer right now. It's he's a periodontist and I think provides on it. Congratulations. I think that that guy decides by the way. But he he he's right out of school. He's a periodontist. So we talked about this. He doesn't have any production reports. He's a specialist, though. And so you can give credit for specialists that's a little bit different than GPs. We didn't get into that. But that's that's that's obvious. If you go and get extra schooling.
35:42
the banks are going to have a different set of roles. But this is a pretty big practice for him to take on. the truth of the matter is, is there's so much cash flow in this big practice that even if it did drop 10%, 15 % to your point, Morgan, he still can pay his bills and he's making way more money than he used to. Right. But you're right. I have a webinar I did, folks happy to send it to you if you want to listen to me for literally
36:12
two hours and what I do is I break down my favorites in order. Practice that's throwing off after debt 250 is my or more 250 or more. It's my favorite deals. Next would be startup and then the next would be an underperforming practice. And the reason for that being the third one, people get really frustrated with that because they think they're going to take something to your point and
36:41
make it this big practice of buy for pennies and build it. Well, you guys Morgan and I know we've been a part of a hundred deals. That's way harder. That's way harder to do. Why is it hard in your opinion, Morgan? Cause it's the great unknown. It's, it's projection based mindset, right? As opposed to historical based. So you're going in there and you're saying, I can do that. I can change this. I can do that until you're in there. You don't really know what's going on, you know, and you don't know if
37:09
You know, the doctor went from four to two days a week just because a superior competitor opened up down the street and they're just making excuses. Right. And so there is a certain amount of faith that, that, that needs to be drawn upon to jump into those, those scenarios as opposed to, know, the robust practice with maybe a weaker buyer. get in there. They've got, I like to look at it as a, uh, they've got a little bit of a, uh, you know, room, I hate this word, but room to fail.
37:37
Like they can get in there and kind of figure it out on the fly because the cash flow is so robust that they're going to figure it out. And at the end of the day, if you're a doctor, a dentist that has made it through this amount of education and gotten to this point in your career, you've got grit. And if you walk into a cash flowing practice, you're going to figure out a way to make it work. Not everybody has a skill set to do a turnaround though. And so I think that's the separation. Well, well said. It's so much harder to
38:06
fix something. You're like doing a startup and an acquisition all in one for those. And startups are hard and folks, acquisitions, this whole season should explain to you how hard acquisitions are. We're gonna get into pitfalls. I'm gonna interview other doctors of what didn't work for them very well. Startups in a lot of ways, if I could do a plug for season one is,
38:34
It's very predictable. And as long as you follow the path and the structure and the box, 99 % are successful. Acquisitions, anything could curve ball you. And everybody thinks they're going to be the best owner until they actually have the keys and the hygienist walks up to them the first day and says, I need a raise. And then the dental assistant says, I'm out of here because I never really liked that guy and I don't really like you.
39:03
Yeah, okay. You could do dentistry, you could do endo. The other guy didn't do endo. But now you're a practice owner and nobody really understands that until they have the keys. I literally just got off a call this morning with a doctor and this is rare. I we've got a large portfolio at this point. The losses as far as a default rate, I believe less than one third of 1%. I just got off the phone with a doctor of ours that bought a practice last year in the Bay Area.
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struggling, quite frankly, and not necessarily due to anything that she did. There was a non-competent place. This is in the San Francisco area. The practice is eight miles away. The seller opened up eight miles away, which might as well be a thousand miles in some areas, but all the staff left to go follow her. This is something that our buyer could not have seen coming. This is something where our cashflow was 1.7 to one and out for you folks out there that might not be on the finance side.
40:03
A minimum that we need to approve a loan is 1.25 to one. So this means for every dollar going out the door, she was collecting $1.70. That is really strong, really strong by metric standpoint. Good cash flow. is that the seller was gonna be a bad human being, break that covenant, and then take all the employees. So we're sitting there trying to scramble to get a hygienist in there, get somebody to answer the phones in a market that is extremely hard to find good help these days.
40:31
So those are the kind of things that you just absolutely can never see coming. Send her over Morgan, I'll help her. Send her over, send her over. that's... It's to be the next conversation, to be honest. It's going to be the next conversation. We're happy to help anywhere we can, but the reality is, is you can't predict that. there are definitely some scary stories. And like I said, hiring great professionals can reduce the risk considerably.
41:00
There's always risk folks. I think everybody on your team, CPAs, bankers, buyer reps, consultants, attorneys, they follow their lead, folks, follow their lead. I didn't mean to cut you off there, but I think this also points to how important a proper transition is. mean, this was a case where the seller and the broker were so dead set on the staff, supposedly not knowing that this was going to happen until the very last minute.
41:30
So there were no team meetings, you know, somebody like you wasn't able to come in and put an incentive program in place that shows the staff that, hey, as a new owner, when I win, you win. It was basically like, hey, I'm leaving on a Friday, here's the keys. So when that happens, well, this sort of result isn't that big of surprise, unfortunately.
41:53
It happens. Let's get off of doomsday. Let's go into what are some things the bank can do to structure a deal in a more favorable way to help buyers buy practices in a cashflow scenario that might not be as good as the scenario you just talked about really good.
42:18
but might be marginally good, but not marginally good. I know there's ways you can structure loans that, well, why don't you walk us through some of those ways? I mean, you're probably reading my mind, like, feel like folks chase it. Here's where I'm going with this. I'll lead the witness a bit. I feel like folks chase interest rates just to chase them, to brag to their buddies at the dental society meetings, instead of thinking about a business and thinking about
42:47
having extra cashflow and stuff like that. go for it. What are some ways you guys can help? I love that question. I mean, the short answer is, I there's ways to structure it where we really wrap our arms around doctors in those first crucial six months of a transition. So we're going to want to make sure that we build in enough working capital for them. We want them to buy the ARs if them and their consultants deem that it's worth it. But then also, we're going to give a doctor six months of interest only payments to start that loan.
43:17
So if you kind of think the difference on a million dollar loan, I mean, that's going to be eight, nine, $10,000 a month in a difference of payment, which effectively over six months is now $50,000, $60,000 that they're keeping in their pocket. So that's just a simple structure thing. A more kind of exhaustive answer is, we trust the doctor a lot. A lot of big banks and a lot of dental lenders out there
43:44
they need the practice that they're buying to cashflow for them on their own at that 1.25 to one metrics that I already mentioned. Now, if we are short on cashflow and getting that smaller practice to work for a doctor, we've got a couple of different ways that we could go. One is we can consider it what we call like a jumpstart, where now we're looking at the historical performance of the practice, but based on the production capability of the buyer and the personal strength of the buyer,
44:11
we're actually able to build in projections as well on top of the historical cashflow. You know, we're limited to about 500,000 or less on that product, but that's a classic case of a doctor that maybe was working that four days a week, doing 800,000, a million bucks five years ago, know, 2008, 2009 kicked their ass. Then COVID comes along, kicks their ass a little bit further. Now they just throw their hands up and they're done. That jump starts a good way to get into that underperforming practice, you know, relatively inexpensively.
44:41
The other thing that we allow, and I mentioned this, is if a practice is only a two or three day a week practice, and a buyer can show me that, I can work over here a day or two a week at this per diem, we'll actually add that back into cashflow at a one-to-one to help us kind of get over that cashflow hump. So we really look for reasons to get somebody into a practice because the data is there. We've lived through, you and I were doing this in 08, 09. We lived through the pandemic.
45:08
And even during these tough times, the failure rates of these practices are so low that we want to find a reason to say yes, as opposed for looking for a reason to say no. I love that Morgan just laid out like the creativity of his particular bank and how they can make a tight deal work and and specifically one of those that's underperforming if it's structured the right way. I I I love those
45:39
I love those scenarios. Let me stress one thing about let's press on a little bit more what you said and that was things like longer terms and interest only. Like, can you get more into that? Because remember that scenario I was just talking to you about that Perry O'Donest big practice. He could fail and still be fine, but he ended up going for some different things that was guided by me. He didn't go for the lowest interest rate.
46:07
because I wanted him to beef up his checking account in the first six months. What did you do in a scenario like that? we're getting, banks are getting more and more comfortable really trying to recognize what the overall monthly operating expenses are from the practice. I think Mike, you would detest to this that it's been hard to even on these larger practices to get a doctor more than $100,000 from working capital.
46:33
That's counterintuitive. mean, we'll give a doctor that's buying a $600,000, a hundred thousand. So why was there that cap? So the industry has moved away from that kind of arbitrary number. So now we're looking at, okay, what is a monthly operating, you know, top line expense for this practice and then building in 1.5 to two times that. So on a million and a half dollar practice like that, their normal operating expenses is probably going to be a hundred grand a month, right? So then to be able to give, recognize that, give them $200,000.
47:02
on top of a six months of interest only, on top of a 15 year term. Now we're basically saying, listen, you've got all the tools that you need to step into this transition feeling very confident because how much of this is a mental state of mind when you step into ownership. If you're constantly looking around saying, how am gonna pay that bill next month? Or am I gonna be able to retain this? Or gosh, this whole practice needs a little bit of a facelift. I just closed my loan.
47:29
I need my working capital for working capital, but I also would love to put 20 grand into this space and make it pretty. know, and so if we get all those things. me, that's next level, Morgan. That's it. Because if a bank can set you up for success in going into a transition using common sense, that's a win-win. And sometimes you talk to banks, credit unions, local banks.
47:56
They get very restrictive on the things that they can offer you because they're trying to get you to fit their box. What I'm hearing is a bank happens to be provide that's giving folks the ability to be successful. And that is smart lending. This particular scenario that we keep talking about, it's a big practice. Any other bank could say,
48:24
Oh shit, this is a big practice. I'm a little nervous about letting this dude money and they start shrinking what they're able to do versus being a little bit more abundant and saying, well, let's support this guy. Let's give him more working capital in he wants to invest like Morgan just said. Let's stretch the terms a little bit so he can save more money on a month to month basis. Let's give him interest only.
48:50
All of this equals more cash in your bank. And when you have cash in your bank, you could throw it back at the bank. You could invest in your team. You can invest in technology. You can invest in marketing. All of those things are good things. And the key is that you could throw it right back to the bank if you have too much at the end of the year. So why not put them in a scenario where they're getting more cash? And I'm not saying just throw cash at it.
49:19
everybody and anybody. It's not what I'm saying, but when it makes sense, it's got to make sense. It does. And kind of to bring that full circle to how you open up this question, you know, of course, I'm going to be a banker sitting here saying, you know, it should all just come down to the lowest interest rate. Yes, rates are important, but it's all pretty vanilla. Like we're all in the same range. So you have to find out not only who's going to be able to provide that best structure for your transition. And if you have to pay point two point three percent more.
49:48
because somebody is giving you more working capital. It's a no brainer. These rates are historically still very low. And that is the one point I wanna kind of get across to viewers and listeners is also ask the question and Mike, you with your background and lending and understanding the landscape like you do, the question also has to be who's gonna be there to support your growth in the next few years, right? Because we all know, you know,
50:14
our biggest competitor, if you buy that practice and you don't buy the commercial real estate right out of the gate, they're not going to want to step up for you and finance that building for two years, right? So asking questions on the front end saying, hey, you know, do you want to buy your commercial real estate down the road? Do you want to open up another practice, two practices, three practices? Are you going to dominate the world? There's that's how you decide who you're going to kind of, you know, hit your ride up to because all of these loans have prepayment penalties.
50:42
So I've seen so many times where I'll lose out on an opportunity because I wasn't the lowest at the table on interest rate. I told them that they would regret that decision. They come back a year later saying competitor bank over here isn't allowing me to finance my commercial real estate. Can you finance the building with me? No, because we don't have the practice. So unless you're willing to pay a four or 5 % pre-payment penalty, you're stuck with them. So now I know why I lost some deals to.
51:09
That's why I lost some deals to you, Morgan. You've got a good way of explaining things. I think we battled pretty hard back in the old days. is fantastic. Final comments, man. I'm thinking, okay, we pre-qualified the buyer. We talked about some points with the practice. Actually, if we could do this in two minutes, what are your favorite things you like to look at when you're looking at practices? Because we talked about
51:38
pre-qualifying the buyer. We talked about what things you could do to structure the loan to set you up for success. Maybe a little bit out of order, but give me like really quickly two, three things that you like to see in a practice that you think, oh gosh, this is a great fit for you doc.
51:57
So my mindset's a little bit different. Like I rarely look at a prospectus without having a buyer attached to it, right? Like my broker partners will send me their prospectus before it hits the market. Hey, look through this, let me know if you've got any buyers you wanna tee up. But that's where my brain goes, right? And so I try to back into that answer. I try to talk to all the buyers, the pre-qualified buyers that are looking for practices to understand what their one year, five year and 10 year plan is.
52:24
And so when I'm looking at a practice, my brain immediately goes to, could this be a flagship practice? If a doctor wanted to have a great quality of living or quality of life, where they just grow a practice to a million, $2 million, five, seven operatories, is this a practice that has the space to do so, the runway as far as the space goes, a relationship with a landlord that's gonna be able to grow with?
52:51
Or is this going to be a very limited situation where it's going to be three or four chairs forever? Probably better as a satellite office. So my brain goes directly to who can I match this practice up with so that it actually fits the buyer's goals and needs. It's like anything else in this world. Like there are so many different ways to skin a cat and be successful. And so every practice I see there is potential in it. just depends on the buyer. It's a great answer because it is so buyer.
53:21
dependent on the success of every single transition. One buyer could totally change the outcome of another buyer on the same exact practice. So it is the right answer and well said. That's how you can tell folks if a banker cares.
53:37
about your success is by answering that way because he and hopefully the bankers that you're working with are looking at you and looking at the practice and making sure those fit because and that's what I do on a daily basis as a buyer's rep because
53:54
It's not the same answer every single time. yeah. Yeah. Well, thanks, man. This has been great. I could talk to you for hours. We don't have hours, but this has been fantastic. Final points, my friend. I really appreciate you being on the show. Thank you, Mike. It was fun. Take care, buddy. Thank you. Oh, oh, folks. Last piece. Morgan's information is below. If you're watching on YouTube, Facebook, whatever you're you're listening to, check out
54:24
down below, rewind in your browsers. Morgan will be putting contact information for Provide and all of those goodies below. So check that out. Thanks, Morgan, again. I appreciate you, brother. You're all you're doing, Thanks, bud. Tune in next time for another truth-filled episode of Acquisition Uncensored. We want to hear from you. Interact with your host, Michael Dinsio.
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