Dr. Brandon Ryff grew up in Tempe Arizona, and attended the University of Arizona, where he graduated with dual degrees in Physiology from the College of Medicine, and Molecular & Cellular Biology from the College of Science. Upon graduation, Dr. Ryff then attended the University of Michigan, School of Dentistry. After Dental School, Dr. Ryff became an associate in a small group of privately owned dental practices in Arizona. Subsequently, this group was approached and acquired by a national DSO backed by private equity investors. This transition was a complex process that Dr. Ryff found very interesting. Watching his father-in-law successfully serve as the President & CEO of a multibillion-dollar international corporation only further fueled Dr. Ryff’s interest in business and executive leadership. Accordingly, Dr. Ryff then completed a 2-year business program, earning a Professional Graduate Certificate in Strategic Management from Harvard University Extension School.
VIDEO - DUwHF #1184 - Brandon Ryff
AUDIO - DUwHF #1184 - Brandon Ryff
Alongside completing his business program and practicing dentistry, Dr. Ryff was also appointed Vice President of Business Development within the private equity DSO group that had acquired the practice. Dr. Ryff was involved in multiple acquisitions made by the DSO from 2013-2015, during which time the company ranked #14 for the Inc 500’s fastest growing companies in America.
A drastic shift in executive leadership and corporate strategy at the DSO prompted a strategic transition for Dr. Ryff himself. In August 2016, Dr. Ryff left the corporate practice environment and acquired a private practice in Paradise Valley Arizona. During the first year, Dr. Ryff applied knowledge he had gained from his tenure in business development and business school to create a unique team environment. After hearing through social media of a themed ‘team-unity lunch’, held in good fun to help mend wounds of the 2016 post-election divide, the Washington Post featured an article about the unique atmosphere and team at Dr. Ryff’s practice.
Among many factors, the leadership and management lessons Dr. Ryff acquired through his work and educational experiences contributed to a 33% growth in his new practice during the first year. Behind the scenes, Dr. Ryff negotiated improved terms with suppliers, vendors and labs with whom he had previously established positive relationships. On the front line, Dr. Ryff focused on leadership and worked to build a culture of positivity and appreciation. With the simple mission of providing clinical excellence and uncompromising service, Dr. Ryff rallied an exceptional team of focused, motivated, and accomplished professionals to take the practice to the next level. To reward their hard work and dedication, Dr. Ryff also implemented a unique bonus program, which resulted in pay increases of 24%, on average, for each employee. The combined result of applied strategic management principles, his consistent focus on positive leadership, and implementing a generous employee bonus program was a 75% increase in profit dollars for his first year as owner, 2017.
The journey for Dr. Ryff and his team was not without some turbulence however. Months after becoming the new owner, Dr. Ryff learned that his landlord had suddenly passed away, leaving the entire property to charity. A big commercial real estate developer made intentions made clear that the plan was to demolish and redevelop the property. Accordingly, Dr. Ryff found a new location to continue the 60-year legacy of the practice. With the unwavering support of his loyal team and their active participation in all levels of the process, Dr. Ryff and team built a brand new state-of-the-art facility, which will serve to take the practice well into the next generation.
Howard: It's just a huge honor for me today to be podcast interviewing Dr. Brandon Ryff, we had him on the show at number 969 and we decided to bring him back with an update. Brandon is a graduate of the University of Michigan's School of Dentistry he holds a professional graduate certificate in strategic management from Harvard University and dual undergraduate degrees from the University of Arizona College of Medicine and College of Science. For the first five years of his career Dr. Ryff practiced for a corporate group owned by a private equity firm while practicing dentistry from the group Dr. Ryff also served as vice president of business development and was heavily involved in mergers and acquisitions and operations. Serving his role exposed our trip to a multitude of business principles and models which he brought along with him to the next and current phase of prayer serving as a fourth owner of Scottsdale Smile Center and we just had the guy on just recently of the one that you bought that from.
Brandon: Yeah
Howard: Don Chiappetti
Brandon: Chiappetti
Howard: So thanks for coming back for another round of Dentistry Uncensored give us an update so what have you learned since you've been on the show last time?
Brandon: So we've been busy with the build-out and first negotiating the new lease we had to move the practice actually ran into kind of an unfortunate situation where our building was sold and the new owner wanted everybody out and he was bound and determined to do it. We fought him for a couple of weeks and then found that he's got a lot more resources than I do and it was not going anywhere. So we went ahead and relocated the practice a mile and a half down the road to a beautiful new location that we had built custom for our patients and our team and we've been there for about a year now and it is...
Howard: Now do you own the land and buildings?
Brandon: Nope nope yep we're renting it wasn't available for purchase.
Howard: but now looking back do you think I went buying that practice that the practice broker the legal team should have had more red flags on the lease?
Brandon: Yeah that's that's an interesting question usually the rule is if you're going to buy a practice you have to have at least the number of years left in the current lease including options as you do for the term of the loan. So if you've got a 10-year loan you need to have at least 10 years left on the lease and in this case we didn't have that we had three years left on the lease and one five-year renewal option and so the bank looked at the situation and the fact that the practice has been there since the seventies and came to the conclusion that the risk was very low that we would lose the lease and not be able to be there for 10 years so they granted us an exception and then unfortunately that's exactly what happened was we didn't have the right to be there.
Howard: So the guy that owned the building died he died left it to a charity.
Brandon: Charity liquidated which charities do and then the new guy who owns all of the surrounding properties came in and decided he wants to level the building and it was not long after he bought the practice or the building that he came to our practice and told us that essentially our lease and this is an interesting point there's a difference between a renewal and an extension the original lease was signed by Chiappetti I think in the 90s and and it had an initial term of I think it was 5 years and then there was one five year renewal option what happened was the lease was extended and extended and extended the initial term of the lease was extended four or five times and then it was never renewed and so that was a point of distinction where the new landlord came in and said you don't have any options you don't have any extensions and our position was no we extended the initial term it was extended and never renewed so we still have one five year renewal at the end of our current term and yeah so that's where a lease extension and at least renewal or two different things when you renew a lease you're signing the new lease when you're extending one you're extending the term with an addendum more or less of your current lease at that at that time. So it would have been really really tough and challenging to fight a guy like that and cord into what n spend a bunch of money lose stomach lining over it and you know probably still lose he's got more resources and better lawyers and so yeah it wasn't a winning argument for us at that point we just we saw how he was going to play and
Howard: Yeah I've seen a lot of brutal examples and that the pointing away is on a stay in your lane when you're a dentist and you know when to refer for wisdom teeth implants you probably not going to do it all on four but then you got to do that in the legal world too. There's 1 million attorneys the United States and it's a very complicated landmine and so you really got to play put your best lawyer at it. In fact I look back at them the best dealings I have is when I switched attorneys that 20 years ago I switched to a different attorney and I've had no legal problems since you know I mean.
Brandon: Yeah
Howard: So the so part one was the lease negotiations so what are your thoughts on the lease negotiations now?
Brandon: Yeah so we had to obviously choose a new place we wanted to keep it as close as possible to limit patient attrition and we wanted to make sure that of course the property itself was suitable for our needs. I looked at the location in terms of visibility parking the size of the property but I also went beyond that and looked at the politics of the area since that was what directly affected us in the past. So I went on to the Planning and Zoning Commission website for the town of Paradise Valley read through the minutes and searched and made sure that there's not some big master plan that I should know about and luckily there's not it's a it's a safe bet at least at this point and then the last thing that I also because of the situation I had prior I wanted to know about the person I was dealing with so it was the property the politics and now the person that being a landlord and who are these people and so now with the public records are so easily accessed now I looked to see if the land or the landlord of this property had been involved in any litigation and I looked up the last guy at the property the guy had sued tons of people and been sued by tons of people and so you know you're dealing with litigious person someone that thrives on that likes it almost.
Howard: Right
Brandon: but luckily the new people no such history and they seem pretty reasonable and there's there's no history of them.
Howard: The number one predictor of future behavior is past right and so when you see these red flags yeah you know it's like the patient who's not happy with seven different dentures from several different dentist you know I'm sure it's not the border molding.
Brandon: Yeah exactly exactly
Howard: So did you use a lease attorney did they deal with dentistry or commercial or how did that work?
Brandon: So the firm that sold the practice to me also has a real estate dental real estate arm to it.
Howard: and who's the firm?
Brandon: Menlo group
Howard: Yeah we've had him on the show.
Brandon: Yeah so Matt Porter was the broker that sold me the practice and then Rich Andrus is the real estate broker that I dealt with for this transaction and he wasn't representing the property he was actually me so I went to him to help broker this deal and it's interesting the whole thing with the attorneys and that's something that I learned real early on I kept the broker and the lawyer they oftentimes have competing priorities and one wants to get a deal done and closed the other wants to you know go through the agreement and find any potential problems in my opinion sometimes unfortunately create problems that don't need to be there and then you know people get emotional and they get upset and then all of a sudden you have this long drawn-out thing everyone's upset and and no one's happy and that's it's not a good thing not to mention the fact that in the few weeks that I was taking on the last landlord with lawyers I racked up six seven thousand dollars fighting with someone that doesn't even matter. So my approach with this was to keep the broker as a resource to help guide and to be my communicator to the landlord and represent me based on what I'm telling him he can say and then the lawyer wants to get in and do the negotiating on my behalf and for a hefty fee I would presume so I had a lawyer have had a lawyer the whole process but I kept him till the end his job was to review the final documentation and make sure that it reflects the spirit of the deal and the broker key he was my go-to person to interact with the landlord and so that negotiation going in number one I had to make sure that I knew what I wanted and what I was talking about so I did a lot of research just just googling things so people talk about tripling that what is tripling that what does that even mean and and so literally I self educated myself look up these terms just be prepared and knowing what you're talking about when you're going into a negotiation I think is critical and then I from that I needed to what I what needed to happen out of the deal what did I need what did I want what could I negotiate and what things was I prepared to lose and that's a really important part of it because sometimes you can you can plan your acceptable losses and I don't know maybe aim high for what your wanting and what you asked for and then they counter back with something maybe less but in reality that's probably possibly what you wanted all along and then you both feel like you won they feel like they won because they didn't just give in and they were able to counter and then you accepted something lesser. So you know we did that and I've also learned in the past to mimic the response of whoever it is that you're negotiating with so if it start out reasonable you go first so these these guys were were decent and reasonable professional and I mirrored that back. They sent me an initial contract that had some problems in it but you know their lawyer wrote it about them and so just remembering that it's not like the landlord went in there and tried to write some crazy agreement it's the lawyers it's always the lawyers and so the first one who ever is least prepared and who ever gets emotional losses and so just kind of keeping an objective frame of mind when looking at this and trying to preserve the relationship is remember to the landlord he's going to be around for who knows how long so we want to sour the relationship over something that really doesn't matter and so I had a list of things that I absolutely could not bend on and I had some things that I wanted but it didn't have to have and so I didn't hit them with this huge list of demands but at the same time I gave them enough to where the second time I go back I I may ask for the rest of it but what I tried not to do was say okay let's make a deal here's what I need here's what I want I get it and then I say oh yeah actually one more thing and then we're good and then okay and sorry there's one more thing you know that's how you that's how you ruin the relationship and so I was very clear and upfront but again that took preparation knowing what I was talking about number one knowing what I wanted and needed and then approaching it with the thought in mind that this is just business it's not it's not personal stay level-headed and preserve the relationship and it worked out well I think they're great people and they've been excellent so far.
Howard: You know I'm Armand Hammer I remember in his autobiography twenty years ago he was undead collecting bowls he flew he wanted this bowl and it was like a million-dollar bowl and he got in his private jet he flew all the way over there and do one to buy this bowl and they died pulled that step out on me said oh by the way and you know I'm gonna do this any reason for money was a million two million one hundred thousand dollar Armand Hammer had a billion but it pissed him off he went right back to his jet and flew home. Never even talked to him again so preserving relationship is so important. Did you want to own the land in building so you wouldn't have to do all this do you think about that going to another place where you could own the land a building or was this just a better location?
Brandon: Yeah it's a better location and and I guess this is a this is something that a lot of dentists try to figure out and some agree it's advantageous to own the building some agree that it's or think it's better just to rent and spend your money in front of the things and make other investments that have a higher return, I guess it's situation by situation. Me having student debt still plus the debt of the the practice I think it would be probably impossible to be honest to even get financing at that level in that part of town and I don't know that it would really help me out a whole lot because right now I think having credit available and having cash and not adding additional layers of risk is worth it to me to just rent.
Howard: So are you in Scottsdale or Paradise Valley?
Brandon: It's Paradise Valley if you right Scottsdale on the envelope it still gets there but we're technically within the town of Paradise Valley.
Howard: So I bet land and being pretty pricey up there?
Brandon: Yeah yeah it's pretty pretty expensive but the lease I think is quite reasonable and so we were able to actually get this beautiful practice that a rent that's lower than what we had in this old dilapidated building that is soon to be knocked down if it's already it might even be knocked down I haven't been over there in a little while but.
Howard : So do you have to personal guarantee this lease and what is all that mean?
Brandon: Yeah so actually that when I was talking about the things that I absolutely had to have that was a really important one to me because personal guarantee what does that mean okay if I default on my rent payments what remedy remedies would the landlord have to collect could they come after your house because they'd come after your park and they take your first born can they what can they do and what happens when the situation becomes more complicated, let's say you get divorced is your wife on that that guarantee still you know because she's gonna fight you for it and that's going to create some tension beyond what would already be there in terms of who's getting what assets and now who's getting what liabilities and that's a big liability. What happens in the case of your partial or total disability what happens if you if you died and so and this was this one's interesting what happens if you sell you sell the practice does that does that guarantee follow you? Well for my two assessors tactically on that on that lease if i were to default they would go after both of them and Chiappetti he doesn't own the practice he doesn't have any control over its operations or any of that yet he's on the hook and so that was important to me to not be in that position and at the same time I also understand the purpose of it you know the landlord's trying to secure you know at least some idea of the rent being paid for and not having to go through lots of hoops to get the money that they're owed and and so I get it but once you have the risk level to what's appropriate for someone just to take you at your word whether that be making payments on time for five years and never having a late rent payment at what point do we get rid of that and when is that when is it appropriate when you sell it versus anything else and what I demanded was if I'm dead or disabled there's nothing that I can do at that point and those are two things that have nothing to do with me running the business poorly or running it into the ground and so I didn't want my family to be on the hook at a time that they would need financial security the most. So I was able to get that if I'm disabled or if I die I'm off the hook if I sell the practice I have to be on the hook for one year and if all payments for rent payments are made by the new owner then I'm all off of that guarantee.
Howard: So you want to have your so you have the lease assumption agreement.
Brandon: Yeah you got the lease assumption agreement and that's that's one that's a challenging one for a lot of people too. I've seen deals fall through because the landlord refused to grant the the buyer at least assumption agreement where it could be transferred from the seller to the buyer and that's a requirement of course for the bank to fund the deal. I saw one where the landlord said yeah I'll do it but it's going to cost you and they basically held the deal for ransom and so I programmed into our lease agreement that it's a guarantee that my successor will get a lease assumption agreement if he has or she has at least three years of experience is they've got a FICO score in the excellent category and if they have one year of rent payments in cash liquidity those three conditions are met it's a guarantee that they they get at lease assumption agreement. I felt that those three things would mitigate their risk and a reasonable person would grant the lease assumption agreement and that circumstance and they agreed.
Howard: Now I now did you learn some of this in your Harvard training?
Brandon: With respect to the negotiation one hundred percent of what I know came from that and the other stuff was a combination of the broker Rich Andrus was very very helpful and kind of gave me you know some tips Rich Andrus the broker from Menlo.
Howard: Okay
Brandon: Yeah he identified these main areas and he was a great sounding board so I say to him here's what I'm thinking is that reasonable or what do you think their response is going to be because I don't know I don't know if what I'm asking for is completely unreasonable but I do know that I ended up writing the language myself instead of the lawyers and sent it to him and it's clear enough language it doesn't not every this my point not everything has to be done by the lawyer sometimes two people that speak English and want to have a deal can write plain simple verbiage and can get it done.
Howard: So you recommend Menlo?
Brandon: I do, I do you know they were they were very fair and very honest. I remember time especially with Matt Porter or exactly Koons that I bought the practice from Coombs bought it from Chiappetti anyways there was a point of disagreement and I remember Matt Porter and I meeting for coffee early in the morning like 6 o'clock early and and talking about it and mind you Matt representing the seller and he instead of trying to push and pressure me into things you know he laid it out is I think very neutral very fair presentation of it here's what Coombs is thinking here's riff would I presume your concerns are with that you guys got to work this out but not in a way that's pressuring me not in a way where he was trying to strong-arm me and support his client. So you don't see that very often usually brokers are trying to just close the deal as quickly as they can and they tell you how great this practice is and all of that but I think Matt was very forthcoming and very fair and ultimately Dr. Coombs and I came to agreement and today I consider him my friend and he still to practice.
Howard: So how does that feel I was you know that he wanted an exit strategy so I looked him honored I'm telling it to you or Jonathan Holmes to get them sold to you does that how does that change relationship when you used to work for them now they work for you?
Brandon: Yeah I thought back to how I felt when I worked for corporate and I didn't mind working for...
Howard: Who did you work for?
Brandon: It was Dynamic Dental Partners it's gone defunct now but before that it was my family dental centers under Eric Herps but I remember...
Howard: and why you think it went defunct?
Brandon: Ah that's I think that once they fired you know Alex GianninI he's a great guy I consider my mentor and a friend and once the private equity guys pushed him out now we had a non dentist serving as CEO and I believe that you need to be a dentist and actually live the experience...
Howard: Whats Alex's last name?
Brandon: He's been on your show.
Howard: So you thought that prime that the main deal was that private equity they didn't know dentistry when they got rid of their dental guy.
Brandon: Yeah it you know dentist they don't like being scripted their autonomy we like to feel that we can have the freedom to do what we think is right and what's best for a patient and once you start making it difficult for us to do our job while at the same time reporting to be there to make it easier you know when it's the opposite and if you come to work and we find that we're having to unravel problems that don't need to exist in the first place just changing things that aren't broken making it difficult. I was talking to one of my buddies who works for corporate and he was saying basically you can't even you can't even replace the light bulb without having to fill out some form and fax it across the country and have it get processed and then have it approved and then have a work order generated when in private practice you'd get a stepladder and you reach up there and you unscrew it you put in a new one it's a simple thing and that's a real example and so with that in mind my relationship with Chiappetti and Coombs is one of mutual respect and I give them their full autonomy whatever materials they need they order whatever equipment they need we make sure it's there. I don't tell them what labs to use or not use and I never interfere with their daily practice they have full autonomy as if they were an owner in terms of who they who they have assisting them I don't interview their assistant that's their going to be working for them so it's important that choose who they work with and my goal was that the whole the beauty of being an associate is being able to be a dentist without the headaches of ownership and that's always what was practiced before I got there Jonathan never script Chiappetti from any of his autonomy and and so I just kept that tradition going and it made a lot of sense.
Howard: but they both still work with you.
Brandon: Yeah yeah well Dr. Coombs he was only he was only supposed to be there for three months that was the agreement I didn't have a problem having him there longer but he didn't want to at the time and so three months came and went and I said hey what's your plan what are you gonna do all I'd like to stay I'd like you to stay and you know it doesn't made sense but I don't think that he was really expecting it to go as smoothly as it did and I think this should serve as a model for an example if you're able to keep people in one place and have them actually want to work there versus having to work there because neither one of them trust me neither one of them has to work they they want to be there they love the patients they love the team they love their practice and they enjoy what they're doing trying to keep it just clean pure and simple practice dentistry so I manage all the headaches cuz I'm the owner I'm doing my my time in that regard but they come to work and they do what they do best and they're both amazing dentists and they're just there practicing.
Howard: You know it's kind of a mindset some people like the business and some people hate it and what that's just a given what I always wonder about is when I got out thirty years ago if more people had the mindset to own or is that change some people point to an obvious demographic that now the class has got a half women or women more or less likely to own. I don't know I can't go back to my graduating class all the average woman dentists for my graduating class crushed it more than the average man they were all aggressive big million-dollar practices I mean it was amazing but do you think the average classmate from AT Still coming out of your back of Mesa to Midwestern of Glendale, what percent of them do you think will want to own versus they just want to be associates their whole life?
Brandon: Yeah well my understanding is most of them from those two schools so there's a high percentage relative to other dental schools across the nation of them going into specialty school and of course in many cases incurring additional debt beyond what dental school cost for some undergrad and so I think that the dream of owning your owning your own practice whether it be doing a start-up or or buying something that's existing I think that that dream is is threatened and challenged by the debt crisis to student debt crisis and to answer your question I think it's going to be a very small percentage that directly go into doing these would be people that you know there's family money or whatever it may be but someone like me when I graduated dental school that that wasn't even an option I was just trying to make sure I could make my minimum payments which you know that that didn't even get me very far. So I think that the dream is alive and well but it's it's threatened and I think that we need to do something about managing student debt and really be smart about approaching that so that we can keep the private practice model alive. One thing that's going for us though is in my opinion the lot of the corporate practices and they're wrong they're not all the same some are worse than others but my view on this is that a lot of patients come to us because we're not corporate we've had patients call and say this is a corporate practice you say no it's not okay great I'd like to make an appointment and so I think that we've created this segment of patients that wants a private practice where you don't have some non dentist CEO who's focused on you know the shares and profits and everything else and is actually committed to the number one priority being the patient.
Howard: Yeah I always I'm always worried if all the dentists work for a business person and where do the Americans go and they need a doctor
Brand: Right
Howard: and you know if the doctors are if their hands are tied by insurance government corporate Wall Street you know then then where do they go and they need a doctor it's just it's just... I always think now I'm you know there's always when I my practice where would I want my four kids to go and now it's like when I pass on I'm you know I got five grandkids now it's like you know I don't I don't want them going into it's not an anti-corporate I'm not an anti-corporate or anti- DSO I'm just pro grandchildren I mean I don't want my five grandchildren going into a dental office or some non dentist saying well I mean they say things like well you know if it's a pocket is over five millimeters you should put in a TRADOC surge but I mean you know all these things like where does that come from yeah you're not expand your lane right you're not a doctor and there's just way way too many doctors did you see that out of me if you have one um what was that anyway what one dentist just got a 15 years in jail accepting corporate kickbacks did you see that news?
Brandon: No
Howard: It was all over dental town but basically we reward that story metro health dentist got convicted big big insurance coming but anyway I'm so do want to continue I'm what what about the relationship between tenants improvements and rent?
Brandon: That's a good question so of course when I found out we had to move I'm scared because I just took out just huge loan for this practice and then now now I've got to move it and incur all this additional expense and so when we were doing the negotiation it was it was almost I can formula that they had. So when they started was got base rent and then they offered I think it was $25 per square foot for a base rent not including the triple net and then they they offer $75 a square foot for TI's which amounted to about a quarter million for that size suite and I'm looking at it like wow that's great and they gave me a couple it was like a worksheet where we had a couple different scenarios and another one I think it was okay we'll go up to 26 dollars a square foot for the rent instead of 75 we'll give you 80 Wow so that's even more money that's well gotta be more than a quarter million well that sounds great but that's where I think people need to be careful because while it may be enticing to take that additional TI because it's only increasing your rent by so much you got to remember that you've got a 3% or my case is 3% annual increase of your base rent and so if your starting point you know is 26 now instead of 25 then you know you're incrementally getting bigger and bigger at a faster rate than you would have if you were 25 and the other thing and I have no intention to sell but let's say I had to now since the rent has hire and my business is less profitable and a lot of these models for valuing practices now it's not so much that it's whatever percentage of your collection that's in my opinion a thing of the past because you could have a practice that does a million a year and loses 200,000 I mean so you're not going to pay eighty percent of a million dollars for that and pay nothing. It's become a function of what is the profit of the practice and it's a multiple of that three to five times and in most cases what they term that EBITDA. So if you're if you are increasing your rent you are decreasing your profit and so that's going to affect you in terms of the enterprise value of the business by a factor of at least three to five if you if and when you go to sell and that's just where you're starting so this is going to become even worse as time goes on and so where I went with it and I could have gone the other way too I could have gotten my rent lower below the 25 with less TI dollars and so where I decided to go it was 25 as market rate and I figured that's a good place to start because its market rate what I also programmed into the agreement was it's a it's a 10-year agreement so at the end of the 10 years I've got two five-year options so at the end of the initial term when we're looking to renew it for the first five-year option at that point we go through an analysis of market rate and what is and we can calibrate it let's say we've had three percent increases over 10 years the ten-year period and my base rent at year 10 the end of year 10 is way higher than market rate now we're going to go back to market rate and so I think keeping the your initial base rent no higher than market rate is a safe place to be and then the TI dollars that come with it you get more TI dollars for signing a longer initial lease. So if you sign a five-year lease you're going to get less TI dollars or so if you sign a 10-year lease we're going to get more and it depends on if it's already or not if it's not improved you could expect more TI dollars it's already built out they're not going to give you those kind of dollars well this this was not built out it was a it's a plastic surgeon's office and so we had to have everything demoed and then start from scratch and so then at that point it became what's all this going to cost I know I've got the quarter million from from the landlord I know that I've set aside some cash and then I know that in the bank by the way First Citizens.
Howard: First Citizens
Brandon: Incredible people I can't even begin to tell you they're just awesome.
Howard: Do they have a dental department?
Brandon: Yeah yeah they do they do and
Howard: and where are they out of?
Brandon: I think North Carolina is their their base
Howard: First Citizens Bank?
Brandon: Yeah and they've got a couple branches they're not a very big bank at least in Arizona but they're they're incredible people just really really good people.
Howard: Why do you think East West Bank got out of dental?
Brandon: That's a good question because I think most people know that the dental practice alone is one of the least riskiest loans that make possible offer.
Howard: It was for mounting losses with DSOs but I think one of the problems that people think about DSO is they always think of you know people have 500 plus locations like Aspen and Heartland what they don't realize that the average DSO is two or three locations and so yeah you see Heartland Aspe, for Pacific you know they've long passed critical mass and gone dead I see the highest bankruptcy level somewhere between two and four million dollars. Just like that when you're talking about when you start work you know these guys that have get to they get to two or three offices without their if you're gonna go from one office to two or three you better have the best systems in the world and they they start expanding emotionally because they want to grow but they don't have the systems in place.
Brandon: I think that's absolutely true what we see a lot of growth companies even outside of dental you follow this s-curve so you're going real slow then and then practice takes off or the growth company and then starts to level off again and I think that we're where people hit that ceiling like you're describing when the skill set and the business decisions that one makes to get on that initial upswing for the s-curve are not the same skills and business moves that are required for the next level of growth beyond that. So at the time you've got a dentist or anyone who's running a growth company when they're hitting their peak they're right before they peek out they should have established and in place the next set of skills and the next part of their plan ready to go before that the top of that s-curve levels out that way they can tap into another upswing and another s-curve before the first s was complete and so what it takes to run a single practice is not what it takes to run three and what it takes to run three is not what it what it is to run five or ten and the nationwide level completely different skill set.
Howard: Yeah and there's a lot of dental offices that are doing forty thousand dollars a month and they don't have their management team to go to evening.
Brandon: Right
Howard: and there's a lot of dental offices you know I mean you see dental offices you know 750 is the sweet spot median mean but there's a lot of offices that are dead do 2 to 4 million in one location and so many times like a staff will come and you were doing 30 a month and they build you up to 60 a month so they think we're doing so great and they just want to stay there forever but sometimes that team that's gonna take you from 60 90 weren't the ones that take you from 30 to 60.
Brandon: Right
Howard: Their just different people and it is also interesting where you're you're and that meets that we're you've had two successful dentist I mean have an exit strategy a lot, when we did is get married they never have a prenuptial so their divorce though it's gonna cause four to ten times more than their student loans and so when they wouldn't talk about financial planning it's like everything they talk about financial planning has nothing to do with financial planning like don't get divorced you know drop a bunch of kids and if you're gonna get divorced two or three times and have a big family I don't care how big invest your money ya gonna have any.
Brandon: Right
Howard: but the other thing is with them but that's the strategies I mean Jonathan I mean Jonathan Coombs and Dan Chiappeti it's just not that common for dentists to have exit strategies. Why do you think they had exit strategies while it was still in their prime and does that mean that you have an exit strategy I mean the two guys before you exit strategy you're a young kid two young babies and do you already have an exit strategy?
Brandon: I do from not from dentistry maybe from the stresses of running a large practice and it's a lot of work it's you you don't know what it's like until you do it and I love what I do I don't know that I'm going to be doing that ten ten to twelve years from now I do know that I want to be doing what those guys are doing and doing the dentistry and maybe not having to deal with you know the HR issues and you know being the fiduciary for 401 K and dealing with compliance and regulatory issues and all the other nonsense that his Dr. Chiapetti puts that anything that gets between him and his patient he's got a problem with and sometimes it's directly like some of the things that I described with some of the corporate practices and sometimes it's indirect because it takes up your time and it's those things that I think would would prompt me to want to have an exit strategy but it wouldn't be from dentistry it would be from the management and an ownership part of it I'm also having fun there's a lot of really cool things that we're doing and we've got a team of really talented people that are engaged and enjoy coming to work and take pride in the practice as if they themselves were owners and it's a really unique opportunity to create such a culture and environment where I look forward to coming to work but it is stressful. So I think that doctors Coombs and Chiappeti played it right by being good dentist knowing that if do good work and you work hard you treat people well that you're going to find success and financially you'll never be in a situation to have to do anything and I think that's the best strategy business exit strategies anyone could have is not being forced or having to by necessity do any particular job especially if they're not enjoying themselves but I know those guys do phenomenal work and I know that they enjoy doing what they do. I asked Dr. Coombs the other day I said what would you do if you had millions of dollars you know would you still come to work and he said absolutely I would, I wouldn't walk away from dentistry and he said that it would become at that point the hobby of course but he would still do it and I believe it he's he's good at what he does same with Don and that's where I want to be so. I see their exit strategy is one that doesn't involve leaving dentistry as I said before both them could walk away from dentistry but they don't and in the habit.
Howard: If I won the Powerball I just get divorced you have paid for that. So do you care about filling us in on what you decided about the lease everything or go next into the build up.
Brandon: Okay so of course you know it makes no sense made no sense for me to think about all the things that were going do and now we're going to build it until I understood the budget I needed to get my head around what things were going to cost in a general sense before getting specific as to okay we want these kind of countertops you want this kind of this and that and the other thing we needed to understand from monetary perspective what's our cash flow situation what's our leverage how much how much credit would the bank give us if we needed it and and what is this going to cost a range and once I understood that kind of had an idea of what I could spend high and low range of that then it was time to start thinking in terms of the patient and it was really important I think to think about the build-out in terms of the patient it's not what I want what I like if that's for my house not for the practice so the practice built it for the patient. We thought about the demographic the kind of patient that we have there what they expect and and what was consistent with our philosophy of care. If you've got high quality practice you're doing high quality work and you're not insurance based and you've got patients that come in and expect the best or you're gonna put IKEA chairs out in the waiting room probably not and it's consistent with the business model and the money that's coming in to support not putting IKEA chairs not saying is anything wrong with it my point is know your patient base know the demographic and build the practice based on the patients that you're serving. I knew that I was going to need some help it was really important to involve the designer I think because her things that I just never would have thought of and that's why some was a designer they've got gifted minds in terms of creating a feel do you want a certain feel to your practice you're not going to do that on your own I don't care how good you think you are at designing you got to have a good designer who works well with the architect in general those three are critical and managing because again this is just like I said with the lawyer and the broker they've got competing priorities you got the designer who wants to do all this outside the box stuff which is cool but you've got the contractor who's thinking about you know the framing and the drywall not the feel and the ambiance and that the artwork didn't care about that it's he's got his part designer has their part and the architect is is trying to reconcile what the two were trying to communicate in terms of the structure and the design and the overall feel the practice and so I assembled my team and I chose my people for that and then I literally got a piece of paper and I drew out what I had in mind for the floor plan and then I gave that to the architect he made it look official and you know there was an initial concept and then I took that and I put it on the break room table and I got the in the opinion of the team and they had some really really good suggestions I'll give you one my office now is more toward the entrance of the practice and the sterile is all the way at the end almost to the back of the practice and before it was locked and my hygienist she said why do you want to have sterile toward the front so all those people have to walk past the the sound and unsightly appearance of a sterile area versus having the doctor's offices there and then putting it with the back to minimize the number of people walking past it's brilliant I didn't I wouldn't have thought of it it's absolutely brilliant so I did that for a number of reasons one of course to get the ideas but two to get the team engaged and excited they're a part of the process and so they started talking to patients about it and hey we're going to be moving and the design is really really great you're gonna love it we're really excited about it now they're excited about it just sending out a letter and saying okay we're moving and then the patients are finding out it at that point and so that's how we we did design once we conceptualized the floor plan then it was time to have the designer come in and like Chiapetti and I met with a designer she had a presentation here's here's how we're gonna do it here's how we think that we're gonna get the feel that we're looking for and this is our idea,. Presented it to us and it looked great.
Howard: Now does she only do dental or not really?
Brandon: No she does she does all kinds of stuff I know when she was working on our project she was also doing the interior of some some guys jet so I don't know she does boats Jets nice houses I presume everything in between but she had she had done the design for our former office many years back and had a great reputation and did a great job and so we just went with what we knew we could trust and it was being a good choice.
Howard: You know I'm the two founders of the Key Construction Kansas which was from start up to the largest construction coming all in Kansas they said they were gonna go into construction even though there was nothing really new and construction they've been building pyramids five thousand years ago but he said that in construction you know that it was typical that they weren't dressed uniform they didn't have name tags they were always running late you know we just we just then if he was just gonna go in there and everybody showed up to work and they stood behind all their work and stayed on budget that they would just crush it and then they did they built the largest construction company in Kansas and I've been living out here in Arizona where everybody it's the same thing where they say construction you know they say it's gonna take 30 days it'll take 60 they say they lost a dollar let me a buck 20 it just construction never I mean your dentist did root canals like construction hers do construction you know so what were your thoughts on that I mean did it did it run smoothly as you said should people listening to this expect construction to go smoothly and timely and on budget?
Brandon: No no but remember that these guys have other jobs others other places that they're working on and they've got their own pressures within their own companies and they understand that you've got a deadline but sometimes you got to keep people focused and you got to keep them coordinating and communicating because again you've got the designer who is ordering things and ordering different decorations and tile and all this other stuff and she can't do her part until the contractor has done with his part and a lot of cases and so it's just managing the tension between them and and keeping my expectations reasonable but one of the most important things that I did tell anyone don't rely on anyone except yourself and maybe your dog that's it you need to be there. I went there almost every day during lunch and if I didn't get there during lunch I went there on my way home and I would walk the site and I can't tell you how many mistakes that I found it proactively addressed and still we finished about two months late and I'd say about 20% over budget. I think it planned on spending no more than 130 dollars a square foot and we were up past 170 so yeah.
Howard: and what do you think most of that when they got $40 was mostly?
Brandon: Things that I didn't have to have that I chose to do anyways and I don't regret it anything and everything that I said yes to had to either add to the patient experience or had to add to the efficiency and so the flow of the practice was really important and in terms of patient experience that comes visually of course when walk into the practice I think you should spend most of your money on the lobby because that's the first impressions are for and that's where patients ideally don't spend a lot of time unless they're waiting but still they're there and the hygiene area has the highest volume of patient flow and so spending extra money on that part of the practice I think was important and just giving it a feel and a look that I think added to what the patient's expect and what it's consistent with the level of care that we deliver there it's I think important to make sure again that when you're doing something it really does have to add something if it doesn't you're wasting your money.
Howard: and when you're building out I mean when we talk about EBITDA earnings before interest tax depreciation amortization the IRS is it's insane because when you were spending all this money on the build-out it's just not deducted right?
Brandon: Yeah
Howard: Appreciation, taxes, amortization. Well what are your thoughts on all that?
Brandon: I'm gonna share with everyone it's kind of an embarrassing mistake even with all my training and business but I made a really dumb mistake in thinking that when I was spending all this money I was thinking I'm not gonna have any any tax due this year he's been spending all this money and then came December and I met with the accountant and it became evident at that point that I was wrong and what you're doing and these are not what I did was I confused purchases of all this equipment and paying the contractors and and putting out all this money those are not business experiences that's not to say it doesn't it's not counted against your your revenue like dental supplies it's reflected on your balance sheet and instead of incurring an expense as the IRS season I acquired an asset just like if I went and bought a car it I fired an asset you have to pay ordinary income tax on that and so I ran into a situation where my expense became not the actual expense of the project but also the the tax dollars that I needed to pay the IRS in order to get that amount of money and the other thing at the same time was we started the project that build out in October and so it was just long enough left in the year for me to put out a lot of money before the end of the year just to learn that because these items were not placed in service and because we didn't have a certificate of occupancy none of it could be counted in that calendar year and so I not only had to pay the money to you know all the contractors I had to pay the IRS a six-figure bill at the end of that year, a few months after I started the project and the TI dollars that quarter million that that the landlord shipped forward and helped us out with it was in the agreement and I missed it and I'll tell everyone if you can don't do the the fronting of the money like I did I had to pay the contractor and then get reimbursed by the landlord in three different payments and so I had to front that money and then of course I didn't get reimbursed by the landlord overnight and so the combination of the unexpected tax bill and having to front that money and of course paying the money in the first place all of that came together and it was it was tough for a while but it was my mistake and it's one I hope other people don't make. So if you're gonna start a project start at the beginning in a year make sure you're gonna finish it within the calendar year because you cannot deduct depreciate any equipment or tenant improvements until you have placed the equipment in service and you have a certificate of occupancy for the TI's to be deductible at that point and remember too that the equipment especially now with the tax and Jobs Act of 2017 the Trump tax cuts now there's bonus depreciation which is rapid accelerated depreciation of equipment you can depreciate essentially all of it in the first year in some cases it gets a little complicated I'm not versed in all that but I do know that TI's depreciating on the situation your depreciating that over 15 20 sometimes 30 years that the useful life of the tenant improvement versus the equipment you can depreciate that right away so because of that in the bonus depreciation that is in effect through calendar year of 2022 so anyone that's thinking of buying equipment you can depreciate the the equipment rapidly over the next couple of years but not beyond that unless they renew the tax cuts.
Howard: Well you said you didn't you didn't know that it was a mistake I mean nobody means as of 2014 the tax code was 2,600 pages long I mean it's just a when everybody's gonna screaming this my entire life I mean the tax code I mean when they started the IRS it was one question what was your income anytime two times three percent then he submitted it and now it's twenty six hundred pages long how when I talk to my tax attorney that's all he does and every time they asked my question he's gotta think about he's gotta look at it he's got to see what kinks it's just it's really criminal. I mean it is nothing simple or straightforward about it and most of that code was written but most of those written by lobbyists to make anything workers. Is there anything that I didn't ask you that you wish we want to talk about?
Brandon: One last thing about that depreciating the assets if you ask your general contractor very nicely they can allocate the tenant improvements that are specific to dental so say the plumbing for all of your operatories versus the plumbing in the bathroom which is not dental related if they can allocate the tenant improvements that are dental related then those can be depreciated like equipment on the rapid acceleration table versus taking fifteen twenty thirty years and can that really I think helps out a lot too so does that but other than that.
Howard: So he's really saying though is I'm what my dad used to sing to me when I was little and I would say to my four boys, the easiest dollar earned is a dollar and expenses saved the second easiest dollar earn is a dollar tax is saved the hardest dollar you'll ever own is going back and doing other dollars worth of dentistry and the dentists on you know they're all stressed out so how do they do their stress they take an extravagant $20,000 vacation a year. Well hell you were stressed because we were living above you means so now that this makes it even worse cannot end and you gotta you got to play that tax key when you there's twenty six hundred pages of tax code and you have to navigate you know that IRS because when Americans say that the most the most expensive item they'll buy is their house that's because they never see they just see their paycheck so if I get my paycheck it's as I make fifteen hundred bucks every every month I just see that fifteen hundred I don't see the gross pay I don't see what the employer had to pay with FICA matching they don't even see the taxes they taking out if they did they would never say their house is the most expensive things order buy, taxes is the most expensive thing you'll pay more in taxes than second a house and third in a car and you know so taxes is it's crazy. So it's not what you earn it's what you burn and the easiest dollar urges dollar in taxes save secondes dollars in tax delayed and the hardest dollar you'll ever earn is going back in that operatory and do another quadrant of MOD composites.
Howard: Yeah
Brandon: That's just work.
Howard: Yeah I think one thing I wanted to point out here about buying a house I can't speak for every dentist I can't speak for every bank I can just tell you my situation I bought a house a very modest house right after dental school and I drove the vehicle that I had all through college all through dental school and I drove that vehicle till finally blew a head gasket five years into my dental career but I bought that house right away and I think that it's really important to point out my situation having bought that house the appreciation of the house itself is gonna pay off I've got a balance it's going to pay off 75% of my student loan debt later on this year when I sell my current home and move into the new one and then the student debt is gone. So I essentially lived I bought this house I lived in it for free and then it paid for half of my education so that's something that otherwise you're paying rent I know we sound like a hypocrite because I'm paying rent on the business side but on the home side don't pay somebody else's mortgage pay your own mortgage and trust me when I say the bank is going to look at the house and say okay that's fine what's your what's your payment and they take all of your personal finances and they take all the finances of the practice and they lump it all together and then if it's positive on the bottom then you know we're good if it's not then we have a problem. So by a reasonable home it will not if it's reasonable and it's the right practice at the right price it's not going to keep you from buying the practice it does not do that and I know a lot of people or do I buy a practice first or do I buy a house first.
Howard: I I've had it I've had a funny conversation about three times over the years were a dentist and they were all three in southern Cal which you know I was exploded in was 30, 40 years but this dentist was so emotionally because when he had when he went to go tell his practice the person who bought it you know there's this old fuddy-duddy dentist he sells his practice he thinks the dentist is a young guy but the dentist's wasn't dumb he bought the practice land and building and then as soon as it was his he sold it too a developer who leveled it like I mean they the dentist didn't even realize that the land was worth more than his own office. Remember that movie what was that movie with Danny DeVito but the lawyers the liars well basically that scam that movie was a very common theme where Wall Street would see a a factory usually along the coast somewhere in Pennsylvania and it maybe was a textile or whatever and they realized my god it's on the ocean we we need to turn that into a golf course and condos and and so they would buy these factories and of course when you do that everybody lose their job you know been working there forever but three times I've seen a dentist sell their practice in good faith only to realize it was some young kid who realized that the lands worth more than the whole damn practice everything.
Brandon: Yeah
Howard: and the dentist was upset about it just like that what was that movie with Danny DeVito do you remember it, it was that most famous the funniest quote in the the girl asked him know he goes would you like a doughnut and she says I'm not hungry and Danny DeVito says since when do you have to be hungry to eat a doughnut but after that movie was a very common real estate play where the real estates worth more than the business but I want to thank you so much for coming back.
Brandon: Yeah thanks having me.
Howard: For being transparent for being honest with what you did well you did wrong and transferring those knowledge to other dentists I just think that's really out of the way, your an awesome guy and I'm just so glad you came back and shared.
Brandon: Yeah thanks thanks thank you very much for having me.