Unleashing Entrepreneurial Potential in Dentistry: A Journey with AJ Peak

Get ready to join us as we embark on an awe-inspiring entrepreneurial odyssey with AJ Peak, a dental CEO who’s been making waves in the industry. Having cut his teeth in the world of management consulting, AJ gives us a glimpse into his unique journey, highlighting how his experiences in the boardroom have served as invaluable lessons in M&A and business development. Discover how AJ transformed from a solo dentist to a multi-specialty model, and learn the strategies he employed to teach other gyms to reach their potential.

In an industry where customer experience is paramount, AJ underlines the importance of utilizing his corporate background to introduce customer experience metrics into his business. We examine the role of retail locations in the consolidation of the dental industry, and AJ sheds light on the significance of making well-informed investments for better visibility. Listen as we delve into the art of picking the right locations for dental practices, and what factors spell success in this competitive field.

Get ready to take notes as AJ imparts his wisdom on raising capital for your business. From utilizing local banks and tapping into friends and family investments to securing commercial loans and aligning with private equity, AJ has seen and done it all. Hear about his experiences and learn about the critical role of an experienced attorney in setting up the right entity structure. AJ also divulges his private equity search process, providing invaluable insights into the journey. This episode is brimming with practical advice and tips for entrepreneurs, so tune in and let AJ’s story inspire your own entrepreneurial journey.

Get in touch: aj@peakdentalservices.com 

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Transcript

Speaker 1: 0:00

Yeah, one thing led to another and I built a large business plan and turned around and asked him to be the test case and do it with me. So we started with just solo dentists for employees and our first look, you know, we moved his cottage dental practice into a real retail format with multiple operatories and converted into kind of a multi specialty model. He's since retired, but that was a pretty big part of our journey and a special moment for me to do with my dad. That was was never a by plan, but it was pretty special time.

Speaker 2: 0:41

I think a lot of fathers would like that, would say that's their dream, you know, is to be able to do business with their kids, so that's really cool. And then I know, so you start with this one location and then was it all the Novo at that time.

Speaker 3: 0:54

The goal of this show is to help health care organization scale by leveraging real estate strategies and interviewing high level health care executives who are actively in the trenches in order to pull out lessons learned along the way. If you'd like a free site selection analysis from our team, or you'd like to learn more about how we're acquiring real estate through our fund on the blockchain, visit us at wwwreuniversityorg and drop us a line that's RE as in real estate universityorg.

Speaker 2: 1:19

Hello everybody, Welcome back to Commercial Real Estate Secrets. I'm Austin Hare. Our guest today is AJ Peek, and AJ is the CEO of Peek Dental Services. They currently have 60 locations under management throughout the states of Colorado and Texas and AJ excited to dive into your story today. Thank you. So I know that when you were in your 20s you were working at a large management consulting firm. That was kind of like your first step into the business world before getting the DSO. So can you just tell us, like your background, like what you were doing there, you know maybe how that helped prepare you?

Speaker 1: 1:53

Yeah, I was fortunate enough to work in for McKinsey and Company. They're one of the largest strategy consulting firms. They only do strategy projects for the kind of global 1000 C level executives and love the work, and mostly in financial institutions in Chicago and New York City. They then put me through business school in Chicago, came back to them and then as I was going up in the firm, I knew that if I left that they would always take me back if I left on good terms and that gave me the courage to do something entrepreneurial.

Speaker 2: 2:34

So management consulting how similar is that to doing acquisitions in a DSO Like? Is there things that you learned early on in that career that are similar?

Speaker 1: 2:48

It's a great training ground to be in the boardroom of a bunch of CEOs. I mean, by the time I left McKinsey and Company, I'd done projects for over 15 CEOs and Fortune 500 companies, so that had at times involved mergers and acquisitions on a bigger scale operational projects. You know what's the biggest differentiation on pricing, marketing etc. So it did help a bit on M&A and just building a business and running teams for sure.

Speaker 2: 3:22

Yeah, that's interesting. I don't know, are you familiar with Alex Hermosi at all? No, okay, he's a guy. He did this program called Gym Launch. He went from like zero to a hundred million in sales in like three years, like teaching other gyms how to do it. But it was essentially a consulting company and I always wondered how he got started.

Speaker 2: 3:44

And he found out one day he was a consultant right out of college and so that, like by him doing that, he realized how important it was to hire other consultants and then he ended up hiring a. He ended up becoming more or less like a consultant, like he taught a program that other gyms could implement how to do it, and so he's actually yeah, he's kind of he has a little bit of a following in the dental space I think too, just to like you know how he made so much money so quickly in his early 30s. But the reason I bring it up is just because I was curious if you had any like stories that came to mind. I know we didn't prep this earlier, but like, did you have any any stories like of a particular company you don't have to say their name but something that happened that you learned a ton from it and, like you know, we're able to maybe directly apply that to your group.

Speaker 1: 4:27

Towards my last couple of years at McKinsey and Company. I was running projects for CEOs on driving distinctive experience, customer experience and how to drive loyalty and profitable growth. So it's really a super topic that there's a science between customer experience and really trying to fixate on the key moments of truth and business. That can, you know, win market share and profitably grow. That actually I brought to the dental world and it's one of the things I don't talk as much about, but it is innate to what we do in driving things like net promoter score. I don't know if you're familiar with it or talked about it, but just you can to listeners?

Speaker 2: 5:11

Yeah, that'd be great.

Speaker 1: 5:12

Yeah, you know, net promoter score is the most heavily researched kind of metric on true loyalty, turns out we as humans are liars on customer satisfaction. It doesn't correlate with profitable growth but net promoter score does, which is the one question on a scale of 10. What's your willingness to refer us to friends and family that, those projects and the kind of front lines that I saw 4500 companies implementing and how it's rolled? Profitable growth? I brought that, the bear and the model we built in our DSO and we do a ton of things unique around that and measure around customer experience, I'd argue more than just about anybody else, and so that that was a big part of the beginning and in how we got you know high new patient counts and sort of grow and many of the things we do today to manage our practices.

Speaker 2: 6:12

Okay, so then how did you transition from that into the DSO world?

Speaker 1: 6:19

I knew I wanted to do something entrepreneurial and I wanted to do something in healthcare and, fortunately or, my father at the time was 60, I was turning 30. It's just 15 years ago and he said hey, the dental industry is consolidating.

Speaker 2: 6:35

You know, if you ever looked at this 15 years ago, he was telling you the dental industry was consolidating.

Speaker 1: 6:39

Yeah, he was semi joking, semi serious.

Speaker 3: 6:44

That was another.

Speaker 1: 6:46

Yeah, one thing led to another and I built a large business plan and turned around and asked him to be the test case and do it with me. So we started with just solo dentist for employees and our first look, you know, we moved his cottage demo practice into a real, real retail format with multiple opportunities and converted into kind of a multi specialty model and we went for it in 2008. It was insane to do that and, you know, now gotten to our current size he's since retired but that that was a pretty big part of our journey and a special moment for me to do with my dad. That was was never a by plan but it was pretty special times.

Speaker 2: 7:38

That's really cool. Yeah, I think a lot of fathers would like that, would say that's their dream. You know it's to be able to do business with their kids, so that's really cool. And then I know, so you start with this one location and then was it all. Didn't know at that time.

Speaker 1: 7:53

First 12 we did were to know Okay locations and then later on we took the you know to know those. You got to get everything right and we took that discipline then to doing acquisitions and applying those best practice acquisitions and had great success there. So then our continued growth. After the first 12 I'd say it was like an 80 20 blend of acquisition. We continued to do all those, but a little slower pace.

Speaker 2: 8:21

So 80% acquisition, 20% to know those. So, alright, how did you know to go retail? Because at that time there was really like a push. You know, I mean it was just common to do medical office, right, like you. Just you got your dental office, it was back wherever. I mean, the goal is to get rent not very expensive and get referrals and whatever. But you know, in 2008, doing retail is very unique. So like what, how did you decide that?

Speaker 1: 8:48

I think, came from some of the customer experience work and, you know, leading 4 to 500 companies driving new patients. I sort of didn't know the industry but I definitely knew new people coming in is going to be pretty important and I had an opportunity and some exposure to some of the bigger layers in retail networks et cetera in my former job. So I was a believer it was going to drive new patients and the incremental cost was worth it and we happened to get lucky in good markets. But we also, I think, demonstrated going from a sleepy medical space to just a couple of miles away high foot traffic area that, combined with some of the marketing tactics, we were generating 200 patients a month.

Speaker 2: 9:37

Wow.

Speaker 1: 9:38

I mean we were jamming, so I mean a little bit was locked, but it wasn't all locked. I mean the fact that we retail high visibility road. It was with deliberate intent to get more consumers, you know more eyeballs and you know, get a higher throughput.

Speaker 2: 9:56

Well, it's a point that we hammer all the time on this podcast. But you know, rent yeah you rent is a factor of your marketing and so if you get a better location, you pay more rent. But you can either A get more patients by coupling that with the existing amount of marketing or, b maybe lower some of your other marketing attempts. Right, because the thing about digital ads is their auction platform, so they're only going to continue to go up, and what are the chances that they go up faster than your 2% or 3% annual rent bump? Right? Probably a lot, and so that's the thing you know. I think, just I think you guys looked at it smart and I think, like almost all the time if you're especially, it's different, but like almost all the time you can make a solid case for paying more in rent to get good visibility, like being a really good investment 100% and so much.

Speaker 1: 10:42

So you know the industry is consolidating, which shouldn't be in news to maybe other listeners. But if anybody's desiring to be joining a DSO or they want a private equity investment, if you don't actually have retail assets now, you may get penalized or passed over. So the highly educated investor or buyer is now going to pay a premium and or pass you over if your assets are less visible.

Speaker 2: 11:13

Okay, yeah, I think it's. It's great. Yeah, it's crazy, like how many people are still growing office locations? I mean they're you know they're putting in new ones or acquiring new ones. But yeah, I think we're in agreement about that. And one of the things that we talked about was costly de novo mistakes off camera. So can you kind of go into that and explain what you learn?

Speaker 1: 11:33

It turns out that in dentistry, you know, try as we might, we we we picked a couple variables in the beginning to pick a great location that we thought would drive new patients in. In dentistry, you know, location matters like many businesses, and you can be in an amazing location, but we as humans, in our brain, can only handle a couple variables. And it turned out in my early journey, you know, we step in a couple of landmines where we picked a location that if I showed your listening audience you think this is amazing location and it turns out, for reasons I couldn't comprehend at the time, it was a lousy location and you know there just was. There was other things that we didn't, we didn't, we weren't aware of that time and some of it was just not even intuitive. It wasn't competition and wasn't visibility on that front. So that was pretty painful and I think for us it wasn't, it wasn't dentist, it was literally, literally the market and the market is, you know, a five to seven minute drag time for most.

Speaker 1: 12:46

you know metropolitan areas and that really matters in dentistry and you know people think dentists can print money. But if you pick the wrong, the wrong spot, it's incredibly difficult to be successful.

Speaker 2: 13:05

So, yeah, let's, let's, let's hammer that out a little bit. I want to double click on that. The you mentioned that you had to shut down five locations, and so can you specify what exactly is the difference between a good location and a bad location for you guys?

Speaker 1: 13:21

You know good location. You know average to better than average marketing with great. You know Google reviews, et cetera. You should be able to generate 70 to 150 patients a month and you can do the math. If 80 to 90% of them come back, you will grow a practice a million dollar run rate practice very quickly, let's say within 18 months or sooner. But if you can do that same level of marketing, same dollars in some markets and you only get 30, 40 new patients, that growth rate is going to be very different. And with the dollars it takes to invest in billing out facilities and DeNovo's, you know, hitting a million dollar run rate revenue business in 18 months versus three or four years is incredibly material Right If it makes or breaks whether doing a DeNovo is a better investment than buying a.

Speaker 1: 14:16

You know practice in our, in our world it really the whole algebra that goes up saying yeah, yeah, and ultimately for us it was, it was new patient counts and we tend that 40 new patients is great. If you're on mature practice, no problem, but if you're DeNovo that is very difficult. If you're a DSO, particularly to really ramp a practice, you can. You're just going to be added a lot longer and so you got greater cash flow burn. You're more susceptible to the dentist turnover because they want more patients. You know dentists can see hundreds of patients a month and you're only giving them 40 in the beginning. So that was the litmus test that you know. We kind of knew within six months that we had made mistakes in the early days, because the same strategies, great reviews, you just weren't getting the same, the same response.

Speaker 2: 15:13

Yeah, I think it's interesting and so, like factors you know that we consider and that we try and coach people would be drive by traffic, traffic counts, street visibility, like, are there any obstructions? How big can you make your sign, you know, to the legal city limits, cinergistic, neighbor neighbors, and then anchor tenants like large grocery stores, and big one of those is those large grocery stores. Like you know, it's like trying to figure out, okay, as your patient avatar, are they more like a Whole Foods or a Walmart? Because there's no right or wrong answers, just preference, you know, or they like, and certain, even certain targets can skew either way. Like there's, it's not like just one brand necessarily means there's a more fluent patient. But those are just the kind of things that you look at and you have to study each market to figure out what the actual demographics are. So, are you guys of those things that I mentioned? You guys look at all those things as well, anything that extra that you look at?

Speaker 1: 16:07

Those all are factors and in our journey and our mistakes, you need mistakes to actually build a model, and we built, we're on our, we're on our third generation of a predict model that is, searching for factors.

Speaker 1: 16:23

And one of the things we didn't think about as much in the beginning is the amount of people within the drive time and how many humans in drive to your location within seven minutes. And though that sounds so intuitive, you know, I'll be honest with you, in the beginning we didn't. We looked at population but I didn't know what was good and what was bad. But I, you know, is it 10,000?, is it 100,000?, is it 50,000? And I think that was something we didn't have. A great reference point in our early days is to the density of people near the building, and you know, those are the, those are your prospects, and in we're in a little more metropolitan areas, or you know half a million, the million million population, and it's a big deal if you're in a market where it's 15,000 or as many as 60 to 100, all within a seven and a half million you know drive time.

Speaker 2: 17:24

But how does dentists population factor into that? Because you know, 60,000 is four times the amount of 16,000. What if you have four times as many dentists? I mean it it definitely matters.

Speaker 1: 17:35

In the predictive model it's. But in in our predictive model, competition is a. You know it's one of the 10 kind of predictive variables. But I'll tell you what. The predictive power of competition is only as strong, or not stronger, than the density for us. So density can almost overcompensate competition to some degree. You have more. You have more at bats more people.

Speaker 2: 18:05

So it's not to say you can't, you don't get any at bats yeah.

Speaker 1: 18:10

So you know, you know you could be the only. Then you know only three options. But have, you know, 15,000 people and it's for us density has almost as much predictive power as competition. Now it both matter. But you know the the competition, less competition, but sparsely populated for us in our model, hasn't been a great success for us. And you know our expectations are just growing quite quickly. You know it's not a solo practitioner, that's fine. Taken seven years to build a, you know, a million dollar practice. We're after it like rapidly.

Speaker 2: 19:01

Well, like, what kind of revenue minimums do you expect? Like do you and do you look forward to acquisitions?

Speaker 1: 19:08

acquisitions million plus.

Speaker 2: 19:10

Okay, Um. Well, and then just to pivot a little bit, I know where the novos. You talked about credentialing being one of those underrated things. Can you talk a little bit about that?

Speaker 1: 19:22

In the novos, one of the tactics that I speak about and I tell anybody you asked me you're thinking of a thousand things and you're trying to build out your contractors, but the most obvious thing you want to do the day you sign the lease is credential one doctor to that location. It takes several months to show up on all the insurance panels and it pretty much will instantaneously give you you know, your, your average 20, maybe you're lucky, 25 new patients just having credentialed the day you you've signed the lease. Um, it's, that's why you accept insurance. You want the free marketing. But I find I made that mistake and so many other people are so stressed about all the other avenues of of doing a de novo and they forget just pay, that you should put a ton of energy to get them credentialed such that when you open the doors, um, you know patients have you on the insurance panel. Uh, it's, it's sort of the the free marketing. But you, you know you'll miss out six to nine months if you start that two way.

Speaker 2: 20:27

How hard is that to credential Like? Is it a six to nine month process? Is that what you're saying Can be for some bears?

Speaker 1: 20:32

Yeah.

Speaker 2: 20:33

Okay, um, so let's pivot a little bit. Um, you know, we're kind of at the story partner journey where you had grew to 12, learned a lot of mistakes, made a lot of, but learned a lot as well, and then started doing these acquisitions. And so what I wanted to talk about is lessons learned from private equity and like at what point did you realize that you needed a private equity partner?

Speaker 1: 21:00

Uh, you know I talked a little bit about it, but I, uh, I got to the end of the road with commercial banks. I ended up being the uh large borrower. I hit the borrower's limit of the bank, so, uh, it's um, I'm not sure that's the award you want to win. It was no. They legally, in their bylaws, cannot lend us more money, um, and so access to capital.

Speaker 1: 21:27

We either needed to uh go to a bigger bank, um, or find other capital and, uh, at that level too, it's just a um, uh, I, uh, I pretty much was too big to find the right capital to grow at the pace you know. I wanted to, and then also give, you know, talented management team, um, equity incentives. I needed to give, uh, a real flight path for capital to grow at a level that the management team would be excited that we're building something where they have skin in the game and it could be rewarded for. So that that really was the. You know what we came up against? Um, uh, on that front, we thought we had gone private equity sooner and, um, we kept taking money from creative sources until I think we hit that wall.

Speaker 2: 22:20

Um creative sources, meaning like friends and family type thing.

Speaker 1: 22:25

So first, you know, it's kind of three waves for me. The first waves, uh, my father and I, you know, borrowed from local banks and our own money and got us to, you know, attend practices. At that time we were borrowed through our nose and, and you know, we couldn't get another dollar. Um, I used my professional network to bring on a minority, uh, uh, investment, so it, these weren't private equity investors but they were, um, you know, wealthy individuals that will make private investments in companies and I? Uh then enabled me to grow the management team, um, grow larger, uh, get a little more financial stability. And that then gave banks uh, over the hump from it, which is my dad and I uh, sweat equity too, and bigger financial resources, got bigger commercial loans, um, that got us another wave of growth. Under the third journey, you know, end of the line, where here I am the largest borrower of the commercial bank, Um, uh, and as we were bumping up to that limit, that's when we started, uh, the private equity search.

Speaker 2: 23:37

Okay Now, did you have a sort of fund for doing this? Or was it just like legal docs, you know, individual people, uh, you know, here's the money, here's what you're getting, et cetera.

Speaker 1: 23:50

Through my uh professional network and and uh people that counseled me that had gone before me in private equity, um gave me access and introductions to attorneys that are um uh expensive, but they helped me, you know, set up our, our uh entity structure through accommodate private investments just the way that private equity companies would want to accommodate.

Speaker 2: 24:16

So you kind of preemptively did it.

Speaker 1: 24:18

Yeah, so you, almost six years before we did a private equity transaction, we were already um well set up uh to how a private equity uh firm would would like to um consider an investment, um, uh, and, and so that that enabled me to take on my your minority investments. I had the legal structure. It did cost some extra money and more attorney fees, but that's you know how we did it.

Speaker 2: 24:47

Okay, um yeah. So that kind of brings us to a point which we're kind of talking about, which you know different ways to raise capital, so can you maybe dive into a little bit more detail on different strategies that you've been doing?

Speaker 1: 25:00

The top of my head, at least four or five. In the early journey I did the traditional dental practice loans from some of the bigger names that got us to three or four locations. That was number one in the journey. The second is I don't recommend this, but we were incredibly aggressive with equipment financing firms. It's short-term money. It's four or five years in high interest rates. At that time I took a dollar from a lot of places. The third was the private minority investors.

Speaker 1: 25:39

If you're listeners asking enough people, there is a network of wealthy individuals that may entertain doing minority investments. It does require some sadness on the sellers. I had raised a lot of money that way. That leap frogged me into the world of traditional commercial banks. Number four being a source of capital. This type of capital I got from commercial banks would not have been possible without the minority investors money. We were financially more secured, strong than the commercial banks were, lending us the volume of money they were. Then the fifth is on the private equity firm. That's the most recent for us. How recent was that? In January 1, 2021. I got it covered.

Speaker 2: 26:34

I would like to talk to you about that, because I know you were saying not all PE firms are made alike. What was the process for you? What did you learn to get on private equity? We got. This is an important topic for a lot of people and so don't feel like you need to be brief. I would love to hear your experiences and everything that you learned along the way.

Speaker 1: 26:57

We were reasonable size when we decided to go through the process. In the number one there's many private equity firms that actually reach out to founders now directly. I would just encourage anybody considering private equity to get an advisor. There is a universe of advisors. There's your tier one, tier two and tier three. It depends on your size if those types of advisors will represent you.

Speaker 1: 27:34

Our first part of the journey is to pick an advisor. This is not like a dental broker. This was like an investment banker. We interviewed and actually did a whole process, probably for three months, talking to different investment bankers some of them brand names, some of them niche and getting proposals. Have they taken dental businesses, healthcare companies? What would the fees be? What would the process be to run what's called a process for private equity? That was the first journey. They'll also, if they're very good investors, they'll tell you what to expect by that process. We actually had a pretty good idea of what the valuations and deal structures would be. Probably we were highly educated. We knew the transactions in the marketplace, who would probably be interested in us, et cetera. That was phase one. Then phase two we picked an investment banker and ran that process. Most of them are going to spend three to six months taking your data, making sure you're ready. It makes you ready, includes your financials, quality earnings, et cetera. They'll build a big presentation. Then you start with phase three, a roadshow where they will send out your confidential materials to private equity firms. From that, entertain a bunch of management conversations to do what's considered to be wave one and a bid. Usually they'll do a three-bid process over another three months. All of that stuff we started in 2019. It went a lot longer due to COVID on that front. Had it not been for COVID, it would have been a 12-month process for us.

Speaker 1: 29:30

I'd say tips for us. Number one pick the right advisor. They're not all the same. Who will work with you often depends on the size of your asset and your business. The bigger, better you'll get the pick Any advisor you want to work with you. If you're a little smaller, it might be more of a niche advisor, but I would not try to do it on your own. It is worth the fees. This is a lifetime decision that you might only do once or twice in your lifetime. They do this all the time and know what's more normal. The second lesson I would mention I got exposure to over 100 private equity firms in this journey.

Speaker 2: 30:13

Did you have conversations with all 100 of them? Conversations with all 100. Wow, that's a long, big time.

Speaker 1: 30:20

Not always the case For me, I did really intimate conversations with 30, then narrowed down to 12, multiple conversations with 12, and then four who did multi-week diligence on us. At one point the four it was weekly calls to give an idea Through that journey. It is such a wide universe of what private equity firms are going to do for you as a founder beyond giving you the money. There's different deal terms. They're not standard. They're a handful of things that are standard, but then there's a lot of things that are not standard in deal terms how that private equity firm wants to work with you and expect. For me it was wildly different.

Speaker 2: 31:15

What was important to you in the process?

Speaker 1: 31:18

In our journey. We weren't big, but we weren't small. I really needed more analytical support. I needed some more management team support. I felt like at that time that was the biggest company I'd ever run. I felt like I needed more help.

Speaker 1: 31:41

There are some private equity firms that just want a monthly update or quarterly update. You're doing well in your numbers, good job. I'll give you high-level advice. Even with my business background, I needed help. I wanted an advisor who was in it bringing the table. Some private equity firms have what they call operating partners. They're retired CFOs, retired CEOs that have been there, done that, and they're there to help. They're not there to be your boss. The partner that I picked brought that to the bear. I felt like that's what I needed. It's really to be told it has been. I needed the help. We were not a professionalized business. At that point We'd done a ton of great things. I felt like I was a teenager going to college and needed a little more help. That was important in my decision criteria Not help to tell me what to do, but an advisor can be lonely at certain size in the business. I really wanted to be able to tap experts, cfos, ceos that have been there, done that. That was a big part for me.

Speaker 2: 32:55

Is there a percentage that you could say your growth rate increased by by having the right partners, right strategic advice, that sort of thing, or is it hard to measure?

Speaker 1: 33:05

It's hard to measure but I think some of the challenges in the last year with inflation and high interest rates but I take the wrong firm we might have went off the rails We've doubled in size since that investment but we would have not navigated some of the more headwinds just macroeconomic for all healthcare businesses with a margin compression and higher interest rates had I not had the firm I picked. Not because of their money and their financial backing, it's because of the guidance and the professionalism they've helped with the business and some of the analytics that they helped us develop that architecture in our business. I don't think I would have gotten there, just had a gotten their money and you know quarterly board meetings. I wouldn't have made enough improvements in the business with some other partners that I had an opportunity to work with at that time.

Speaker 2: 34:09

Yeah, that's cool, that's so important. I think that is, you know, if you're like creating a, scaling a company, like what types of things is it important to make sure that you're doing to be attractive to PE?

Speaker 4: 34:27

You need to be able to say you know this is question.

Speaker 1: 34:31

but you got to describe what your general business case model is and that if they give you a ton of capital, can you grow rapidly, you profitably grow. So I mean you got to be able to describe your story of why, if they can give you millions of more dollars, you know you can put it to work and just buying random mental practices is not that. That story is a little work. So you know they got to get behind the premise that you have enough infrastructure and enough of a proven model, that with more capital and a little more help you know you're going to be able to grow the company three or five times its size. And it can't be a scattered I'm good at everything. It's got to be a real deliberate story. You know whether you're a pediatric and you're accepting Medicaid and you figured out that model or whatever it is.

Speaker 1: 35:29

That story's got to be really tight and especially now and I think in a high-energy rate environment is a big deal and I think more and more private equity firms and why we were one of the first in the dental space to get a deal done out of COVID is number one.

Speaker 1: 35:49

We were retail, we were in good markets, we didn't have pay or risk. We really had a diversity of payers and not much managed care and we were density play in growing markets. I mean we had high retail, high visibility, lots of density in that case. So there was a lot of outside indicators that we'd proven we could do the density play and for us it's density of general dentists that, offset with specialty specialty, is a third of our business. It's that story gave certainly private equity investors. They want to make money but they don't want to lose money and you're going to get asked as much questions if they give you more capital. You profit with the draw but they also don't want to lose and so having highly attractive assets we talked about this earlier retail right market not having pay or risk as much and providers with skin and gain those are becoming almost like table stakes.

Speaker 2: 36:55

And when you say pay or risk, are you referring explicitly to the percentage of collections? Like that you're able to get like the percentage, like how high your percentage of collections is.

Speaker 1: 37:05

Yeah, percentage of collections. But also there's nothing against managed care and Medicaid. Those business models can really work. But as soon as you have managed care, the diligence is going to go up, meaning the bar in which they're going to invest money in your business just got higher. And I didn't have managed care or Medicaid, so that meant like I didn't have to overcome that bar. It doesn't mean that, you know, discourage anybody who does. The private equity firms do invest in those places. But for me, that was one less hurdle I had to get over in terms of the payer mix.

Speaker 2: 37:51

Okay, and do you think like that, there's been a shift in more firms wanting to invest in the real estate, like I know historically it's always been? Pe firms don't want to touch the real estate just because it ties up their capital, their balance sheets, all that sort of thing. Are you noticing more of them get into it, are starting separate funds, or do you think it's kind of the same as it's always been?

Speaker 1: 38:14

I think it's. There's a few, and I'm sure you know there's more than a few, but it hasn't been as many as I would have imagined getting into real estate. But I'd say, you know, in the last three years there's at least three that I'm aware of, that have, you know, started to be private equity firms that set up a separate fund for the real estate. But I mean, there's thousands of private equity firms I'm surprised there isn't more and even my institutional investor, they only invest in healthcare and, you know, have lots of locations and they don't have a separate fund, which you know, surprises me, one of the reasons why I did what I did on the real estate front to solve that problem and take advantage of it. But no, it's not. It hasn't been as wildly pursued as I would have anticipated, knowing what.

Speaker 2: 39:18

I know, I heard recently a phrase called how long can you carry the piano, like referring to right now. There's a disconnect between buyers and sellers because, rightfully so, sellers do not want to account for interest rates. Right, like, that makes sense. Why would you? Nobody wants to lower their prices, but they're holding on to the valuations that happen pre-interest rate hikes over a year ago, which are very, very significant. And so I've been surprised at the resiliency in the healthcare real estate market.

Speaker 2: 39:47

You know, I know you and I were talking about that in person the other day, and but I, but I wonder if I mistook that, for you know, just not. Or I wonder if my mistake was not giving in enough time frame, because nobody, we never know what's going to happen in the future. But, like, I'm surprised at how expensive buildings are and when you, when you think about it, like is it a question of that's just their actual true worth or is it simply the fact that you can, the sellers can afford to carry the piano right, like they can afford to just hold the asset, not worry about the payments, or at least cover them right, even if even in a higher interest rate market. And so it's just like I, you know, I do think we're going to have to see some sort of of correction, but of course that's the that's the headwinds.

Speaker 2: 40:35

Tailwinds in commercial real estate are the fact that replacement costs is really high, and those two forces are competing against each other. And so if we're in a since we're not technically in a recession I mean technically we're in a recession, but in reality it doesn't feel like we're in a recession because business growth is still good and so if we're not in a recession and people want to open new stores in general, even outside of dentistry, doesn't matter Then that's the competition right, because you're going to have to build. And so as long as you're like need more space for more businesses, then I just don't see how the price can come down. And so that's just one of the things I've been wrestling with in my head, trying to figure out what's going to happen, because I mean, it's such a tumultuous time.

Speaker 1: 41:10

Yeah, I, I nobody knows. My educated guess is that the lenders are going to drive the prices down, so access to capital is shrinking, even for real estate and as that continues to contract and in our regional banks they need to maintain higher deposits etc. Even if sellers want to hold out for high evaluations, buyers can't underwrite the deal, meaning the banks are are going to be the anchor and some of this happened in the way. This isn't new. There's some new dynamics now but I, my personal opinion, is in the next nine months I think it'll stop and some degree, but maybe less on psychology and more banks telling buyers we're not going to underwrite that deal, like at that price, and therefore at some point I think that will influence sellers. But you know I might be wrong, we'll see.

Speaker 2: 42:20

I know, yeah, look, all you can do is you can't sit on the sidelines, right? So you have to address these questions which we don't know for, right until until the time passes. But I think that I'm going to align with you about that. If I had to put a date on it, I would say, yes, sometime between nine and 12 months, we'll see. So I think it'll be slow softening for throughout the next 12 months starting now. We're already seeing it a little bit, just not as fast as I would think. I think it's going to be slow, continual softening, specifically in the real estate market, you know. But I think it's kind of happening in the practice side too, like the acquisition, you know, dental acquisition side as well.

Speaker 1: 42:53

I think it is happening on the dental acquisition side for sure.

Speaker 2: 43:00

Okay, well, briefly, with our time here as we come to a close, I just wanted to ask you what's like a commonly held belief in your industry that you disagree with.

Speaker 1: 43:10

I think probably one of my number one is that many new dental entrepreneurs or healthcare entrepreneurs. For so long I had this mindset if I only had 25 locations, I'd have all the cash flow I needed to fund an angel team and grow outside capital without meeting outside capital. And it was a dreadfully wrong belief that you know. The concept that if only I was bigger is a bit of a logic trap that I think it took me some time, candidly, until I had 25 locations, to realize some of the fallacies in that thinking.

Speaker 1: 43:58

The second one you know for my thesis that, particularly in healthcare and dentistry, often they think, hey, you got to grow your skill set to grow revenue, so placing in Blance and Visline, which I'm a big fan of. But there's sometimes this belief that that's the only way to be a million dollar producer in our world. And I think what's been fun for us and that we've been able to demonstrate is there's a lot of other ways, particularly being efficient and to become a high producer, whether you know in my world dentistry, but I think it's some of its applicable in healthcare and that took some time for me to understand, but that as a business person that was exciting because there's ways to enable dentists to be million dollar producers in spite of, let's say, or in lieu of their skill set, and that meant we could build systems to enable them to be million dollar producers, whether or not they went after some of those fringe skills.

Speaker 2: 45:05

I think that's great. Um, is there anything that you want to talk about that we didn't get a chance to address?

Speaker 1: 45:15

Nothing at the top of my mind. I'm putting you on the spot here.

Speaker 2: 45:20

So yeah, if anybody wants to learn more about what you guys are doing and get in touch, which is a good resource for that.

Speaker 1: 45:27

I'm pretty open. They can email me at AJ at peakdentalservicescom. So it's just the letter A, the letter J at peakdentalservicescom.

Speaker 2: 45:36

Okay, perfect, I will put that in the show notes and definitely really appreciate your time and your insight. It's always cool, like opening up, you know, the curtain and being behind the scenes, so we appreciate it.

Speaker 1: 45:46

Thanks so much Awesome.