Brian Colao on the Frontlines of Dental M&A in 2024

Embark on an insightful journey into the realm of healthcare M&A, where the market's ebb and flow dictates the future of dental practices and real estate. With Brian Colao, a luminary in the dental sector, by my side, this episode peels back the layers of complex transactions, revealing how economic currents like rising interest rates and geopolitical unrest shape this nuanced industry. If you're curious about how larger deals are taking a backseat to the tenacity of smaller ventures, or how real estate holds up against financial oscillations, this discussion will leave you equipped with a wealth of understanding.

Navigating the waters of partnership acquisitions can be fraught with unseen hazards. We pour over the importance of cultural synergy and talent retention – the lifeblood of any thriving dental practice looking to merge or be acquired. The conversation shifts to a cautionary tale, urging due diligence before joining forces with any Dental Support Organization, lest your equity risks dissolve into nothingness. Moreover, the episode sheds light on the opaque dealings behind distressed DSOs and the imperative of a cultural and financial match to ensure the prosperity of your life's work.

Lastly, we cast our gaze toward the horizon of group dentistry and healthcare real estate, predicting that consolidation trends, while momentarily slowed, are far from over. Drawing a parallel to the airline industry's consolidation history, we muse over the robustness of dentistry and its recession-proof nature, contrasting it with the fluid M&A market. As physical spaces continue to be a cornerstone of healthcare, the episode promises to leave you contemplating the future of in-person medical services and the enduring demand for healthcare real estate.

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Transcript

Speaker 1: 0:00

and everything they do is what is it? The old nails on the blackboard screech? You're there and everything they do is like nails on the blackboard and you're just going crazy. I've had several situations where the partner is running it right, you're all going to make money someday. It's just not a good fit. Just everything they do, their management style, is driving the seller crazy. So that's the first thing For your personal sanity, you've got to make sure it's the right fit for you acquiring real estate through our fund on the blockchain.

Speaker 3: 0:27

Visit us at wwwreuniversityorg and drop us a line. That's re as in realestateuniversityorg. Hello, welcome back to Helping Healthcare Scale. I'm your host, austin Hare, and I'd like to welcome a repeat guest today, brian Kaleo. He's the director of Dykeman's DSO Industry Group. He's won Group Dentistry Influencer Awards from Group Dentistry. Now Nifty 30D Dentists that's a mouthful and Planet DDS, and a little bit about Dykema is that they are the leading law firm in dental and they host the industry-leading DSO event every year. Quite the accolades, brian. Thanks for coming on the show.

Speaker 1: 1:18

Austin. It's always great. I never get tired of coming on your show. It's always a real treat and I'm happy to be here again.

Speaker 3: 1:26

I love it. I love it, yeah, yeah, if anybody's listening in, they haven't heard Brian yet. He's been on the show a couple of times. So if you want to go back into the archives, I think in 21, you shared your whole story, so they can go into that and listen to how you got into this. But today, yeah, I'd like to keep it. Dive right into it. It's just like we're talking off camera. It's always crazy, right? What's the newest thing that's going to disrupt the business industry? And I know that you're right in the thick of it, doing all of the M&As. You got your finger on the pulse, and so maybe if you can give listeners a little bit of context about how the economy has been shaping M&A deals. It's everybody's talking about interest rates right now, but over the past four or five years there's been some significant changes, and so maybe hearing some context around that from your perspective would be helpful.

Speaker 1: 2:09

Yeah, coming out of COVID, there was just even before, say 2017, 2018, 2019, there was a record amount of consolidation going on for a decent part of 2020 as the market shut down because of everything that happened. But by the third and fourth quarter they exploded. 2021 was a record year. 2022 was a little under 21,. But still for half the year, pretty strong right about halfway through 22. Of course, you had the war in Ukraine.

Speaker 1: 2:39

The interest rates began to creep up, inflation began to creep up and this is a big problem for the M&A market. So for the back half of 2022, a lot of the sizable transactions screeched to a halt and the smaller deals were still going until about first quarter of last year, where the activity significantly slowed down all across the board because obviously, the cost of labor is the highest it's been, the interest rates are the highest they've been in a long time, inflation is the highest it's been in decades in a long time, and those are not good conditions for M&A markets to function. The lenders have tightened up considerably. It's very hard to get financing. Your money doesn't go nearly as far, so all of these conditions have really harmed the ability to get maximum value for your dental organization.

Speaker 1: 3:33

There are still transactions going on. There's a lot of dentists Austin that are maybe in their 50s or 60s that they're financially secure mostly because they've been practicing for decades. They have an asset their practice when it doesn't bother them if they would have gotten an eight multiple, but now they're going to get a six or a five and a half. They just want to monetize their practice and head to the golf course and retire. There's a decent amount of deals still going on, without question, but the absolute explosiveness that we saw in the last part of 20 and 21. And that those days are, I would like to say they're taking a pause. They're certainly not going on right now. I'd like to think that they're not dead forever, but they're definitely taking a pause all of that super explosive stuff that we saw and the culprit, austin, is the interest rates. It begins and ends with the interest rates. You've got to get the interest rates down to see that type of explosive activity again.

Speaker 3: 4:30

Yeah, it has been just a wild ride, especially in real estate. It's very similar, obviously, to what you guys are doing in M&A, because the interest rates tie directly to the amount that you can pay. But it's been really surprising on our end how resilient prices have remained, and so it's great for the assets that we own. But it's bad if you're trying to do acquisitions, and I would have thought if you would have asked me in 2022, beginning of 22, what's going to happen over interest rates, over the next real estate prices, over the next two years.

Speaker 3: 4:59

At that stage, it was pretty evident they're gonna have to start hiking rates. I would have said, oh, was pretty evident, they're going to have to start hiking rates. I would have said, oh, yeah, they're going to just come down, because how are people going to afford to pay it? But they're not. We've seen, even though interest rates are up, double I think, that the cap rates are only up about 75 basis points and we were at six and a quarter up to seven. So that's only a 10% reduction in price for a lot of retail healthcare real estate.

Speaker 1: 5:19

Yeah. But the big difference though because I also on the side unrelated to being in the DSO industry, I do some real estate investments. Just other people manage them, but I have them and I educate myself the big difference as far as I'm concerned with the real estate is cash buyers. See, there are not a ton of cash buyers in the DSO industry. My understanding of why if you are hoping that beach condo in Florida would lose half its value and you could sneak in and go buy it, the reason that's not happening is there are cash buyers everywhere, not just in the US, and investors, but a lot of foreign investors have a lot of money because they're in an unstable economy or an unstable country and they want to plant, park their money somewhere where it'll be stable or appreciate. So there are so many cash buyers that are keeping the real estate prices high.

Speaker 1: 6:06

Unfortunately, in the DSO industry there are a couple. There are a few people very uniquely situated, some foreign investors, some things like insurance companies or institutional investors are very well suited to come in and pay cash, but that's 5% or 10% of the market. It's not a big part of the market. So 90% of the market still relying on financing, and it's just very tough. But real estate you're right, the prices have not come down, but that's because there's just so many cash buyers out there. We just don't have that in the DSO industry right now.

Speaker 3: 6:40

Yeah, it's a little different when you're buying a $2 or $3 million building versus a $20 to $30 to $50 to $100 million group.

Speaker 1: 6:48

You say that Some are even bigger than that. But yes, in some of the PE funds they have the money, but under their charter they just can't do it Like they have to say our model is we put 60% cash down and finance 40, or some are vice versa. They can't all of a sudden say no, we're a cash model, everything's 100% cash. That destroys their investing algorithm and they're not in a position to do that. So because they're not, we're in this difficult position right now.

Speaker 3: 7:17

Yeah, it's interesting too, thinking about the different types of consolidators that there are. One of the topics I've been hearing about recently is just the difference between, like arbitrage or consolidators, versus value add, and it's like for a lot of the DSOs, they were just going in there and it's hey, a single practice is trading at a six, group practices are trading at 10, 12, 13, whatever. So let's go gather them up, roll them up, package them together and sell them off, and so it seems like those are the types of groups that the phrase from Warren Buffett when the tide goes out, you see who's swimming naked? It seems like those are the groups that got exposed, versus the ones who, when they acquired a practice focused on same store growth, did a lot of whatever value add or markets of efficiency. I don't know, is that something that you're saying?

Speaker 1: 8:06

Yes, what you're saying. I will say it a little differently than you maybe, because I do this all day long, but the point you're making is a very good one, and what I think you're saying, or the way I would say it when I'm giving lectures or addressing this, are the days of duct taping a group together without fundamentally understanding the business of dentistry and basically just acquiring things, duct taping them together and then selling them for a higher multiple and making the arbitrage. Those days are pretty much over. In 18, 17, 18, 19,. People got away with a lot of that. They said you know what? I don't really understand this dentistry thing, but I'm just going to buy 20 practices and then I'm buying them all at, say, 5, 6, 7 multiples and I'm going to sell them for a 10 or 11 when the time comes.

Speaker 1: 8:55

And there were a few people that snuck in and snuck out Before anybody found out. Using Warren Buffett's example, nobody knew they were naked in the water. They got in there and they got out of there and they made their returns. But now, in this marketplace, starting really in 2022. So I would say the 2022 through the present market, those days are over. If you just thought, hey, I don't really know a lot about this, but I'm just going to buy stuff and then just get a return on it. Very difficult, very.

Speaker 3: 9:23

Yeah, it's like trying to time the market. You think back on the dot-com bubble. It's like some people got out Most didn't for sure. Most people were caught because you just you thought the party was we always think that. You just never think the party is going to end. But some people actually did get in and get out, but everybody else was caught holding the back.

Speaker 1: 9:38

No, and it's like the old adage Sometimes it's best to be first. If you're in there first, you can get away with a lot of stuff. Just in life, only a few people can be first. Most people are not first and, look, luck is a little bit of a component to it. Maybe somebody said, hey, it's not going to last forever, but I'm going to get in and out, and God bless all those folks that were able to do it. But all we can comment on right now for the show is where we sit in 2024 here, and where we sit in 2024 is there's still incredible opportunities to roll things up and sell them.

Speaker 1: 10:11

The markets are going to loosen up eventually, but you have to understand dentistry and you have to focus on same store growth and you have to build stuff that's not on a foundation of sand, something that's on a foundation of concrete or steel or metal or something like that, and you can't build a house of sand, something that's on a foundation of concrete or steel or metal or something like that. You can't build a house of cards or a house of sand or something. So that would be my only thing. If you build a solid organization. Yes, there will come a time this may not be your year in 24, but when the interest rates come down a little bit, there will come a time in the not too distant future might be a couple of years or something where you can get a really nice return on it. But if what you do is you build a house of sand or a house of cards, yeah, I think you're going to struggle.

Speaker 3: 10:55

So if you're a private practice or even like a small DSO that's looking to sell to a larger DSO, what are some questions you think that they should be asking to make sure that they avoid the arbitrage versus the actual value adds?

Speaker 1: 11:06

Yeah, if you're trying to get ready for a sale, the first question you have to ask is have I maxed out on my same store growth opportunities? What can I do? Because, without spending a bunch of additional money on acquisitions, you may have certain things like technological innovations and things where you've got to pay some subscription fees or something, but without spending huge amounts of money to go buy new practices, what can I do to maximize my same-star growth? Lots of things. You can utilize artificial intelligence. You can utilize innovative patient finance plans. You can utilize membership and discount plans. You can integrate specialty into your office.

Speaker 1: 11:44

You can make sure you've got a proper procurement plan so you're maximizing your savings on everything. You can make sure that you're maximizing your reimbursement rates across the board. You can make sure you've got a compliance plan. You've got cyber protection in plan so nothing can happen to disrupt your business HIPAA compliance plan. You do all those things and you maximize your opportunities. Then you're going to be on a solid foundation, not a foundation of sand, when the time comes to sell. Work on your culture Do you have a good culture? Are you hemorrhaging staff or are you attracting and retaining talent? These are things that are very important if you're getting ready in the future to sell your organization.

Speaker 3: 12:28

Mm, hmm, that's good, but like and then, in addition to that, what about in terms of just vetting through? I think that probably most of the guys who are in it for the quick buck are probably not really acquiring right now. But just to be on the safe side, because I've heard stories about people who are essentially selling their practice. That's your life's work, right, and then you roll your equity into this group because you're promised a second bite of the apple, where you know they keep growing and, like now, your equity is worth more because you're part of this bigger organization. And so they gave a huge chunk of equity half or more thereabouts. They got half in cash and they rolled the other half or high percentage.

Speaker 1: 13:02

Yeah, 60, 40, 70, 30 is what we were seeing a lot in the marketplace.

Speaker 3: 13:06

But then that DSO went under right, they started struggling and then so now that 70, that 30% that they might have given away is worth nothing. You know what I mean. So like, how do you make sure that you avoid that type of thing?

Speaker 1: 13:15

Yeah, we've talked about this on other shows before Austin with you and I and you know what a big proponent I am of picking the right partner. I say this over and over again this is not like you're selling a Burger King franchise and you leave after 30 days. You sell it, you help transition for 30 days and then you're out of there and it's up to the buyer to worry about it. This is not that You're going to be in partnership for three, four, five, six years post-closing with whoever the buyer is, and you've got to pick the right partner First. Look, you've got to pick the right partner for your sanity. Got to pick the right partner First. Look. You got to pick the right partner for your sanity, even if they're a good partner but they're not a good emotional fit for you, and everything they do is what is it? The old? Nails on the blackboard screech.

Speaker 1: 14:01

You're there and everything they do is like nails on the blackboard and you're just going crazy. I've had several situations where the partner is running it right there.

Speaker 1: 14:09

You're all going to make money someday. It's just not a good fit. Just everything they do, their management style, is driving the seller crazy. So that's the first thing. For your personal sanity, you've got to make sure it's the right fit for you. But then, second or maybe they're both equally important you've got to make sure whoever's buying you has a good track record in general. They've got a good track record in dentistry. They've got a good plan. Their strategy fits with the strategy of your office.

Speaker 1: 14:35

And if you do those things and you really do your diligence when I think, Austin, of the handful of things that have failed in 2023, I believe in almost every case, if the buyers really I'm not the buyers the sellers really drilled down and diligence, that they may not have done the deal. So I feel like, if you do proper diligence, I'm sure there's like a one in a thousand deal that, despite all your diligence, you did everything right and it just didn't work, Maybe 99% of the time. If you really diligence this and you drill down and you look at the buyer, there will be red flags and things there that, if you notice them and you decided could cause you to not do the deal and walk away from it. Most of the bad outcomes and we're not going to name names on your show, but most of the bad outcomes were predictable by me when they said, hey, company ABC is acquiring practices, and I said, oh, let me look at that.

Speaker 1: 15:36

Just because I'm in the business all the time, I like to know about these things, Let me research what they're doing. And I looked at it and most cases I'd be like, oh, they are okay, like a house of cards type of thing.

Speaker 1: 15:46

Let's see how that's going to work. There really has not been a failure in the last year. There have been. There have been there's been nine or 10 of them that went down in 23. But of the nine or 10 of them, there are very few of them where I thought they were going to be a smashing success and I was like, oh, my God, how'd that happen? When I was looking at them I was like, eh, this is going to be a little challenge for them. Let's see if they can pull it off.

Speaker 3: 16:18

This is, if it was my money.

Speaker 3: 16:18

I don't know if I would do it. Those tend to be the ones that have gone down. Last year, yeah, and I talk about this a lot with some of their different people, but it just seems to be hard to find out, like because from our perspective, we're leasing to these groups and so we're acquiring a building to that's going to be leased by Dea, so we want to make sure that they're going to be around and they're going to pay rent, and it's surprisingly hard to find information on who exactly is in bankruptcy or whatever. It's like the banks want to hold it close to their chest because they don't want egg on their face, but they end up shopping the debt that they owe to other people and sell it at a discount, but it seems like it all happens behind closed doors.

Speaker 1: 16:51

Yeah, I mean there were a lot of organizations that were what I called in non-payment default last year. Like, I mean, there were some that we just talked about a minute ago that flat out failed. That was a minority, but there was a pretty large group that was in what I call non-payment default. They could service the debt but they were out of ratios and, you know, in default and you know, in those situations, nobody yeah, nobody wants to publicize it.

Speaker 1: 17:15

The banks basically want to get together and say how are we going to solve this, how are we going to get you back in compliance? But we're not going to advertise this to the world. And most of the people that were on non-payment default could pay their. They could pay their rent too. They may have been challenged a little bit, but they're paying their rent and making their payroll. There's just not a lot of free cash and the answer in a lot of those situations was layoffs and downsizing.

Speaker 1: 17:40

If you've looked at the situation and you're out of ratio and you've got to get back into ratio, and what happened? Of course, austin this is what's so insidious about the last year. Right, you take a typical organization, just an average organization, right, and let's say you had a million dollars of free cash every month after debt service when the interest rates were where they were, and all of a sudden your interest rates triple. Now you may be running a deficit of a couple hundred thousand dollars a month and you got to cut payroll. You got to just say I'm sorry. We got to lay off a certain amount of people to get back down to where we're breakeven or making a little bit of money.

Speaker 1: 18:16

It's just, I've never seen, at least in my lifetime. There were times in the seventies I was born in 1970. And I remember my lawn mowing business I'd get 10% interest at Chase Bank. I'd go in there, I'd get a hundred bucks and I'd make $10 a year on that 100 bucks and they would give you.

Speaker 1: 18:32

So there were times in my lifetime when interest was 10%, but I never remember a time when it happened so quickly, when it tripled in three or four months. I remember it being 10% in the seventies and then I remember it being like eight and a half and seven and six, and this is going on over years. And then you'll wake up one day and it's 5% and there was probably a decade that it was in the fives and fours and then over another decade it went down to almost nothing. From that we ended up. Money was almost free for a while there. This happened over decades. I can't remember a single time from the late 70s, the 80s, the 90s, the 2000s where, like in the span of three or four months, the interest rates tripled. It's been breathtaking what's happened.

Speaker 3: 19:16

Yeah, and it's like I have been doubling it the recession of the rich, meaning, like you know, we've been all waiting for a quote unquote, even though we did hit it right, like we had two economies of two quarters of negative GDP growth. But it's like most people didn't really feel it in the sense that, like people were traveling, people were vacationing, the job market was strong People kept their jobs and were able to like you want to go to Disney World.

Speaker 1: 19:38

You kept your job, you had a steady income, you went to Disney World.

Speaker 1: 19:42

Those that are trying to do big M&A deals, big real estate deals, big stuff it's very difficult and those that were levered rich people that you go to the average person on Main Street and those that were levered rich people that you go to the average person on Main Street they're not levered a billion dollars, they're not levered $100 million. They're locked into a 30-year mortgage that maybe they snuck in and they got 3% and it's 3% for the next 30 years and nobody can do anything about that. So those people probably don't want to sell their house. They're probably like we were thinking of moving to a new neighborhood but now, with interest rates being seven, we're gonna keep our 3% and just live in our house the way it is. Maybe we'll do some renovations, who knows? But the average person is not affected in that situation. But the people that are heavily levered, that are variable interest things and are trying to do big M&A deals, big real estate deals yeah, they are really feeling it right now.

Speaker 3: 20:35

Yeah, and they've been feeling it for a while, and so I've almost, because what I'm trying to work through is there's these two different forces at play right now, one of them being it's an election year which, historically, these have caused interest rates to go down.

Speaker 3: 20:43

Right, there's pressure from the administration, but on the other side of things, when you have a lot of debt, then it also keeps interest rates elevated, because everybody's, if you're getting a great return, if you know that we're having inflation and you're printing money, everybody's going to switch to assets, right, and then there's no, there's going to be less people lending, and so then they've got to increase those interest rates to keep inflation down. And so you've got one force, whereas the amount of money printing goes up and the amount of debt we have goes up, like that kind of keeps interest rates high. And then you've got the other force, which is like presidential election, which is pushing downward pressure on rates. And so it's my prediction right now, subject to change, is I can see where interest rates will go down to the end of the year, to the election. Then I can also see where the macro forces start to push them back up again. And so I'm just curious what your thought is on all that.

Speaker 1: 21:38

My thought is it's we're not going to have an answer till we get the election out of the way. I do think the current president wants to do everything he can to lower interest rates, because last this is not a political show, but last I checked his approval rating is pretty darn low, so a lot of it honestly, just like with any president.

Speaker 1: 21:46

if you're in American history and you study this like I remember when I was in college I did they'll tell you that first and foremost it's the economy. All the time it just doesn't. There are some presidents that were horrible, but the economy is good and they're popular. There were some presidents that were great, but the economy went south. A big case study was Bush senior. He had a lot of popularity during the Gulf war and everybody thought he did a good job. And then the economy started going south and he loses in a landslide to Clinton almost the economy first and foremost.

Speaker 1: 22:17

So what I think is the current president's going to try as hard as he can to lower the interest rates. I don't think in the next 10 months, or the elections in November, the next nine months, they're going to be able to lower them enough so that everybody's wow, happy days are here again. I don't think so. So I think it's going to come down to the election. I think if a Republican gets elected, I think they're going to do everything in their power to drive the rates down and I think they're going to up and including market manipulation and other things legal market manipulation with the Fed, but they're going to do everything they can to drive those rates down.

Speaker 1: 22:53

They're going to make it like this current president has not made it his ambition to drive those rates down because, like you said, it tends to be a rich person problem and he doesn't seem to care. But if a Republican gets elected, they're going to do everything in their power to drive these rates down and I think you're going to end up seeing the rates lower in their power to drive these rates down and I think you're going to end up seeing the rates lower. Now, if a Democrat gets reelected or elected or whatever ends up happening there, it's going to continue to be tricky. I don't know it's going to be tricky.

Speaker 3: 23:23

Yeah, how do you plan for the future right now? Not knowing, because it seems to be like anybody's guess.

Speaker 1: 23:30

A lot of people are just waiting. The good news is it's not like 10 years, you don't got to put your life on hold for 10 years. And a lot of people. If I say, austin, you're just going to have to chill out for nine months, I probably haven't ruined your life. You know you're like hey, I got a business. If you were telling me, if I told you, no, no more American Ninja, you're going to be like oh hell, no, I'm not going to do that. But if I told you, no, don't buy any giant pieces of property for nine months, let's just see what's going to happen, you're probably like, yeah, I'm doing, okay, all right, I can wait nine months. I don't got to buy a giant house or a giant piece of property for nine months, I can wait there.

Speaker 1: 24:03

And a lot of people, especially in my industry, like my advice could possibly be in a lot of cases hey, don't look to sell your organization for nine months, you're just going to have to hang out here. And a lot of my clients they're fine, they're making money, they want to monetize their group practice someday. But they're like no, that's reasonable, brian, I can wait nine months. You're not telling me to wait 10 years. I guess I'll just wait till the end of the year and figure out what makes sense, and I feel like right now where we are, a lot of people are doing that. They're just like it's not that long till the election. There's a lot of uncertainty. Let's just sit tight for nine months and see what happens. You can't do that if the horizon is 20 years or 10 years, but when the horizon is nine months, a lot of people can just say you're right, we don't know. We're just going to put everything on hold and go about our business and see what happens in nine months.

Speaker 3: 24:52

Yeah, a lot of people have been doing this for 20, 30 years. So nine months is not that much longer to keep operating your business, especially if you're only selling a portion of your business and you got to stay on, then things aren't really changing all that much from your day-to-day anyways, but yet is do you? One of the things I've noticed is just like the transaction volume is down so much, and that's another reason that kind of pricing has remained elevated. Now in real estate it's really a supply and demand thing with, at least when it comes, you got to segment out real estate right, like multifamily is really under pressure, office is under a lot of pressure, but primary residence, residential and retail for what we do industrial, all those are doing fine and there's just there's not a lot of supply out there, and so what happens is people, like you said, want to stay in their house so they can list it, but they might not be that motivated to move. They're not distressed, and so that's keeping the prices elevated. I think residential has still continued to go up a little bit, even though even after all these hikes that even and then retail healthcare our niche is like maybe about 10% down, and what kind of it seems like the same thing's happening.

Speaker 3: 25:47

I have transaction. What percentage of transactions have hit pause? What percentage drop have you guys seen?

Speaker 1: 25:53

It depends what you're talking about. If you're talking about big deals almost all of them, I mean, it's not probably 100%, but it's a couple Like a small you might have 25, 30 big deals in a year and it's one or two maybe, and that's because a cash buyer showed up or something. On big deals, on the smaller group deals where I told you, the dentist is maybe in their late 50s or early 60s, or even 70s in some cases and they're financially secure, but they just want to unload this asset so they can go to the golf course. If you tell that person, hey, you would have got an eight multiple, but now we're giving you a six or a five and a half, that person's like, hey, it's better than nothing, let me monetize this and go to the golf course. And there's a number of dentists in that category.

Speaker 1: 26:36

So deals are still getting done. But in terms of just the free for all, everybody's doing everything. No, everybody's not doing everything. And a lot of the young folks like yourself or people in their 30s, 40s that are looking to maximize their return, they're like, hey, we built this with an eye towards maximizing. They're waiting that nine months. They're saying we're not in a hurry to sell and we're going to wait and see.

Speaker 3: 27:01

Yeah, there's so many different factors that come into play. You mentioned you would have gotten eight. Now you're getting five and a half six. Do you think 25% is about the average correction amount that we've seen?

Speaker 1: 27:15

No, I mean, it's tricky, so let me talk about that. For things that were deemed in the eyes of the market to be sellable okay, to be sellable, there's probably anywhere from a 10 to 25% reduction. But where you're seeing it is some things now are being deemed in the eyes of the market to be unsellable. Right now, there's a term that just showed up last year and a half just brand new term called seasoned EBITDA. Okay, it used to be EBITDA is EBITDA. If you got the EBITDA, we want to buy it. Now it's is your EBITDA seasoned? And that doesn't mean we're going to put salt on top of it. What it means is is this relatively new you?

Speaker 1: 27:55

had three offices, but now you've opened up two more in the last year and it looks like your EBITDA went up. But is it a flash in the pan or is? Your EBITDA is relatively new and we want to make sure it's for real, and you got to show us the track record of a couple years of that EBITDA being sustained and then we'll believe it, then we'll buy it.

Speaker 1: 28:18

But if you're just saying, hey, in the last year my EBITDA went up a million and a half, they're almost like you're unsellable. We're just not going to take a chance on that right now. Let's look at it in two years and if it's there then okay, we can agree, but right now you're just not sellable. So I don't know how you calculate that. What you can do is say the deals that are deemed sellable now are down 10 to 25%. But what about? How do you account for the ones that are just would have been sellable but in this market are just not sellable?

Speaker 3: 28:49

Yeah, it's like putting lipstick on a pig.

Speaker 1: 28:51

They're just not sellable. They went to zero. They didn't go down 25%, they went to the organizations are not worth nothing. Someday they'll be worth something, but in this marketplace they're just not sellable. You just can't do it.

Speaker 3: 29:03

Yeah, we always, as people and industries, have a tendency to overcorrect. Right After the real great financial crisis of 08, it just became unbelievably hard to buy a house because it was so easy right before that. And now it's like people were paying these crazy multiples and now they're like on the cautionary side, throwing their hands up like, nope, let's wait a really long time, and like almost overcorrecting because you could probably get a great deal for practice, like who are a group that did go up like a million and a half, but because everybody's sitting and waiting, it's like they're overly cautious, almost.

Speaker 1: 29:32

Yeah, they always swing back dramatically. It was like you can say this with anything, right, you could say it's COVID, oh my God, you're locked in your house and you got masks on and if you get COVID it's 10 days of isolation. But now it's like nothing really. You could probably come to the office and cough on everybody and they're just like whatever. So there's always a massive swing and then it comes back to something that's in reality and who knows what the answer is. There's some people that think they can come to the office and cough on everybody. The answer really might be isolate for two or three days or something, not two weeks and lock yourself in your house. There's always that whiplash, it swings way back and then it takes a while to come back to reality.

Speaker 3: 30:16

Yeah, no, that's true. We talked a little bit about what we see for the next nine months and coming into the end of the year. But what about long-term? What are your predictions for what's going to happen with group dentistry?

Speaker 1: 30:27

Consolidation. Consolidation, it's just the timing. It's slowed down a little bit like anything. You have a consolidation going on but certain economic conditions are going to fuel the fire, others are going to slow it down. I think I still think what I was saying in 10 years the consolidation might be 75% or 80%. Maybe that's now 12 years due to what's happened here, but the consolidation is going to continue.

Speaker 1: 30:55

Dentistry is fundamentally recession-proof, pandemic-proof, been one of the strongest performing segments of the economy over the last 100 years. It's a very solid business. It's not going anywhere. What I always tell everybody is please don't confuse the fundamental core business of dentistry with the M&A markets we layered on top of it Even on a worse day of interest rates. Today, dental practices might be down a little bit but by and large are doing really well and performing really well. But the M&A markets that depend on banking and interest rates and levering and things. They may not be doing as well, but don't confuse the two. So this consolidation is going to continue. We may have added a year or two to the consolidation timing due to some slowdowns, but it's going to continue and if we're here 10, 12 years from now, the consolidation is going to be somewhere 75 to 80 percent the consolidation is going to be somewhere 75 to 80%.

Speaker 3: 31:56

Yeah, and it's like we also sped up a year or two when we had the zero interest rate environment. So, yeah, we're just going to end up hitting baseline again.

Speaker 1: 32:01

I mean something might happen where the interest rates go down to zero and, all of a sudden, all the ground we lost this year gets made up, and then some in another year. You don't know. But what we do know is the consolidation is here to stay. It's not going to stop. I can't tell you whether it's 10 years, 11, 12, 13 or something, but it's not going to stop and that's what we can expect. And then there'll be a second consolidation and anybody you might be, your American Ninja days might be over. You're not going to be able to grab onto that thing anymore, 30, 40 years from now.

Speaker 1: 32:31

But, at that point in time there might be like the airlines there was a time when there were hundreds of airlines. Now the justice department just told, if I read correctly, like JetBlue can't merge with Spirit because it would be too much.

Speaker 1: 32:45

They're not going to let them do it. It might be like that there might be like 10 dental organizations in 30 years and one of them wants to merge with the other and they're like Nope, you can't, we got to keep 10 of them in place here. That's what I think the future will look like, 30 years, 40 years out.

Speaker 3: 33:02

Yeah, that's interesting. Yeah. And then last thing I want to touch on is just the. I've heard people say like when they find out we're doing healthcare, real estate is oh, aren't you worried that with automation and people doing stuff from home, that like they're not going to need physical locations to go and get their healthcare work done, not for?

Speaker 1: 33:19

healthcare. I will say this Like I recently walked through the Dicoma's Chicago office and I was disheartened. It was like empty, you know there and I was asking myself you know, we got a couple floors primary space in Chicago and I was asking myself the same question like what's the future of this law firm in Chicago going to look like? Are we going to scale this down? Are we going to have a big open space where, if you happen to be there that day, you grab a cubicle or something? It used to be? Lawyers had these nice offices.

Speaker 1: 33:45

Maybe it's going to be like no, you just grab a cubicle if you're here for lawyers and things like that, but for healthcare they can't fill a cavity in your house, they can't do a colonoscopy in your house. So if you're out there leasing space to gastro doctors and dentists and orthopedic surgeons, they're not gonna operate on your knee in your house. You're gonna need that space going forward. So I think healthcare real estate is gonna be strong, because it's one of the few things where you've got to show up in person. We've tried the telehealth experiment. Telehealth does work for psychology If it's something where you're just talking to somebody and getting some talk, therapy or something. Sure you can do that over Zoom, but any other thing where they're doing a procedure for you anything medical, dental they're actually doing something got to be done in person and you need an office and you need space.

Speaker 3: 34:38

Yeah, yeah, and I agree too, given a far enough timeline, who knows? Right, like a hundred years from now. Yeah, probably going to have an Optimus robot, tesla robot in your house or whatever you have it's. You have a 3d printing machine. Maybe that's 50 years, I don't know. But in the meantime, in the foreseeable future, yeah, you have to go into the office to get your health care, whatever surgery, whatever, and even after that, let's say, they got really cool.

Speaker 1: 35:00

Like you ever watch Star Trek on TV, I do. They show up in sickbay and they scan them. A lot of this really sophisticated stuff, like even if you envision, wow, we're going to be like Star Trek. They're going to be like Star Trek, they're going to fix broken bones with a laser, like your bone heals. You're going to have to go somewhere to get that done. I think the likelihood that they're just going to let you in your house do it is almost nothing. I think the health care is going to get more sophisticated. There's going to be lasers, there's going to be technology, but more than likely Austin, you're going to have to go somewhere to participate in that technology. You're not just going to get to sit in your house. So I think for several hundred years, until they get warp speed and stuff, you guys are going to be good on your healthcare.

Speaker 3: 35:42

Real estate is what I think yeah, I think so too. Okay, is there anything that we didn't get a chance to touch on that you'd like to talk about?

Speaker 1: 35:49

Just look, this is the most exciting time to be in dentistry. There are technological innovations for artificial intelligence, being the biggest game changer in the history of the industry on diagnostics, but if you follow dentistry, like I do, this is the most exciting time in probably 100 years. More has happened in the last five years than has happened in the last 100 years in terms of technological innovations, and it's just fun. It's a fun time to be in dentistry.

Speaker 3: 36:28

Yeah, I agree. Yeah, hearing about a lot of cool stuff, just all the time changing. Hopefully they don't turn into our Terminator overlords anytime soon.

Speaker 1: 36:36

The Skynet becomes self-aware. When Skynet becomes self-aware, it's all over with, but we'll have to see.

Speaker 3: 36:42

Cool. And then just lastly yeah, can you share the dates and the location for a document this year?

Speaker 1: 36:48

Yeah, we've signed a five-year contract in Denver, so if you ever came before, it's back at the same place, the Gaylord Rocky Mountain Resort in Aurora, colorado, right by the Denver airport. It's July 10th through the 12th. We're expecting 2,500 people or so. It's the largest event in the history of the DSO industry. I know you'll be there, austin. We're looking forward to seeing as many people. If you want to register, go to Dykema D-S-O dot com D-Y-K-E-M-A D-S-O dot com and we'll get you registered.

Speaker 3: 37:19

Great, great. Yeah, I'll put those in the show notes for anybody listening. But yeah, it's definitely a great event. Tons of people it's always packed. People are doing deals and networking and stuff like that, and so it's like drinking from a fire hydrant a little bit.

Speaker 1: 37:32

We got the drone show back. It'll be like Disney World Nice. Come see the drone show.

Speaker 3: 37:35

That thing. The first time I ever saw a drone show was there. It's just absolutely next level technology. Great, hey, listen. Thanks so much for hopping on the show. It's really been fun. Always love talking shop with you and I look forward to seeing you in person here soon.

Speaker 1: 37:48

Austin, always, always a pleasure to be here. So good to see you again. Look forward to seeing you in person soon.