Bill Barrett is the CEO of Mandelbaum Salsburg PC, a full service law firm headquartered in Roseland, New Jersey where he employs approximately 115 people, including 70 lawyers. Bill chairs the Firm’s Professional Practice Transitions and Business Law Practice Groups and has nearly 20 years of experience representing a wide range of businesses, with a unique specialty in mergers and acquisitions. He is known throughout the industry as a deal maker and problem solver who provides personal attention to his clients and who applies a collaborative and collegial approach to see a transaction to completion. Bill has successfully managed the transition of hundreds of businesses and professional practices throughout the United States and focuses much of his time in the dental space handling transactions such as purchases and sales, associate buy-ins, startups and the structuring of management services organizations.
VIDEO - DUwHF #1016 - William Barrett
AUDIO - DUwHF #1016 - William Barrett
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Howard: It's just a huge honor for me today to be podcast interviewing William S. Barrett, Esquire, CEO of Mandelbaum Salsburg. He is a full-service law firm headquartered in Roseland, New Jersey where he employs approximately a hundred and fifteen people including seventy lawyers. Bill chairs the firm's professional practice, transition and business law practice groups, and has nearly twenty years’ experience representing a wide range of businesses with a unique specialty in mergers and acquisitions. He is known throughout the industry as a deal maker and problem solver who provides personal attention to his clients and who applies a collaborative and clique-will approach to a transaction to completion. Bill has successfully managed the transition of hundreds of businesses and professional practices throughout the United States and focuses much of his time in the dental space, handling transactions as purchases and sales, associate buy-ins, startups and structuring of management service organizations. Bill, thank you so much for accepting my invitation to come on the show. I asked you, you didn't ask me, and the reason I wanted to bring you on the show is that when you look at the S&P 500, man, mergers and acquisitions are all day long. In fact, there are some people that grade the health of the market by how much M&A activity there is. In my thirty years of dentistry, every dentist I know that's doing three to four million a year, they were in some small county and every time old man McGregor decided to sell his practice, he thought, well shit, I'm just going to buy it and move it into mine because I'd rather do that than him sell it to some young, highly energetic whippersnapper. So they might have started practicing in a small town with ten dentists and twenty years later now there's only seven dentists because he bought the guy that retired every five years, so my question succinctly is this, why is M&A activity everything in Wall Street and it's just not even looked at in dentistry.
William: Well, it's interesting, I've actually seen recently a major uptick in M&A in dentistry. There's a lot of deals going on out there right now and right now I think that sellers are in high demand. There's a lot of buyers out there and really in the spirit of full candor, we're busier than we've ever been in terms of the volume of transactions that we see. We have a lot of multi-practice operators that are trying to compete with DSOs in their own right. You've got DSO deals that are driving a very active marketplace and I think that you see M&A expanding also because doctors who are maybe not necessarily ready to retire and sell that practice to the young doctor or who wants to take over or to maybe their friendly competitor up the street, they're looking at offers from DSO's, where part and parcel of the deal is sticking around for a few years and it gives them an opportunity to take their chips off the table and put it in their pocket and then continue to work. So what I've actually seen is a lot more activity that I've seen over the last twenty years.
Howard: So it seemed like ten years ago, any old man that was my age to sixty-five knew they could always call up like at Hartland and sell their practice and then the great thing about selling to someone like that they could do the deal and close it and just write you a check, no big deal. But now you hear a lot of these DSO guys saying you know what we don't like them as much because ... say you buy a dental practice and it's got 32% labor and then they go in there and they have to give people pay cuts and lay people off. They say that doing a turnaround is so difficult they'd almost rather start from scratch. Do you still see a lot of DSO's swooping in and picking up existing offices? Are you seeing a trend towards shifting towards more denovo, meaning they start them from scratch as opposed to acquiring an existing?
William: Yeah. I see them acquiring existing practices more so especially when they can establish a footprint in a particular geography and if they can find a physical plant that's available for sale. My experience is that often as they enter into a particular geography, they'll look for a larger practice that they can target and then what happens is it facilitates a lot of smaller deals around it. I have a deal right now going on where one of my clients might not be the typical DSO target. He's got a practice doing about six hundred thousand a year, more of a traditional, single practitioner practice that would be the classic scenario where selling to a friend or a competitor or a kid out of school maybe through a broker, but now is potentially getting a bigger premium because the DSO has a large enough facility nearby where they can acquire the practice and merge the practice into their existing facility. So instead of him getting we'll say the typical seventy to 80% give or take of the average of his last three years gross, he's getting one times gross and merging this into a nearby DSO. And by the way, as I tell you this from a background standpoint I'm not necessarily saying that I'm a big fan of where this is all going. I'm just stating simply that from what I see and we average, we pick up about two new practice transitions a week on average, and we do them all over the United States and that's what we're seeing and I guess time will tell whether this is a good thing, a bad thing or indifferent, but it's definitely a thing and it's happening.
Howard: What about all our Canadian listeners? Do you do Canada too?
William: We don't practice in Canada. We have some relationships there, but because of licensing issues and other issues, we are pretty much anchored in the United States.
Howard: So well, as far as your comment about the DSO I mean I know it's an emotional issue. I know whenever you talk about religion, politics, sex, violence, DSO's, Pew, dental therapist I mean they're hot-button topics. But the bottom line is 8% of emergency room visits, 8%are odontogenic teeth in origin because the dentists all work Monday through Thursday, 8:00 to 5:00. In Phoenix, Arizona if you're going to get injured on a Sunday, you better break your leg or your arm because the ambulance will pick you up and take you to an open the hospital twenty-four hours a day. You could find the tooth fairy riding a unicorn before you'd find a dentist open on Sunday, so and the other thing is the existing practices, they don't hire all the five thousand dental graduates every year and the DSO's will take all of them. So if you're old school and you're not going to hire the dental graduates who need a job and you're not going to be open weekends than the free market is going to [rail? 00:07:38] in the end. But what I see in the DSO's is when I see a small town, say Sioux Falls and you got a dental office and you decide, you know what I'm wearing too many hats. I like to have a full-time marketing director, an accountant, HR, so I'm going to cover this town instead of just being the South Park town, I'm going to build an office in the north, east, and west. Well now you got four offices so now you can have a layer of five people that are full-time president, marketing director, HR legal, accounting, and they're crushing it. But what I don't see working is then when they have another layer of management, some headquarter in another state that's trying to scrape fourteen, fifteen, sixteen, 17% off the top they're not adding 17% value. So I see the DSO market that's really hot is the local DSO's that are just in like a certain state or a certain county, those guys truly have scales of efficiency. And then with group practice, you cover more hours for the consumer, you're more patient-friendly instead of dentist friendly and plus when you're going to buy $100,000 CBCT machine, it doesn't make sense when one guy's going to use it. It makes sense when several [perio? 00:08:563] so I try to be unbiased and listen to these things. But I want to ask you another thing before we get in all these mergers, acquisitions, partnerships, so when a dentist gets some married it's based on great sex, love, children, family, holidays and that fails half the time. Now you're going to advise some kid to marry another dentist that they don't have sex with, they don't have children with, they don't spend evenings, weekends, and holidays. I mean doesn't that have to fail more than a marriage? Isn't the failure rate of that have to be greater than that of a marriage?
William: Well, that's an interesting question. I would say that in theory, that's exactly how it should play out. It should be worse. Sometimes and I don't know what it is, but sometimes money can be the thing that binds and heals all wounds and perhaps I don't know, but perhaps it's one of the reasons why partnerships somehow find a way I think to work on a higher level or more percentage than a marriage because there's something about one's living that manages to keep people together. Because I've had partnerships fall apart for sure over the years, but I can't tell you how many times I'll sit down with a client who's complaining about their partner, but they're really not prepared to do anything about it or to split from the partner and they're much more interested in working it out. And ironically, maybe even more so than working out their marriage they want to make sure things work with their partner. I don't know, Howard, can you [inaudible 00:10:32]
Howard: So what I just heard you say is, stop the sex in your marriage and just focus more on money. Money is the answer, what's the question? But no, I think that's an interesting point and then the next level of emotional with partnerships is I hear this every time I'm in school, you know be some twenty-five-year-old girl graduating. She's going to go into practice with her mom and her mom wants to sell her half the deal and she's like, "Do I really want to be in a partnership with my mom?" Because they always hear the maximum, you and I've heard it for decades, business and family don't matter. How do you advise a kid and say you're that shy little girl and say the dentist is your dad and your dad's this dominant alpha bull male and now she's going to be a partner with her dad. How do you advise mixing a marriage and blood and dentistry?
William: Well, it's a hard question and I think you kind of nailed it when you described the different types of relationships. It really comes down to for maybe lack of a better word, a cultural thing. How you're going to get along and how this relationship is going to work out often goes to the heart of the relationship itself and I've had a number of parent/child practices over the years that I've represented that I continue to represent and transitions that I've done and most of them have actually worked out. But it's usually because junior for lack of a better description spent some time working with senior and had a chance to see whether that relationship was really a good one. But I always tell the younger doctors going into these things to that, and this is not just even for parents and their kids, but for any scenario where you've got a senior person and a junior person, they are always going to view themselves as the boss. I don't care whether you buy 50% and that the document that I draft gives you all sorts of powers and rights. When they walk in the door it takes a very special doctor to be able to really treat the junior partner like a full equal partner and I'm not saying that it doesn't happen, but it takes a special person because usually after somebody has been in practice for twenty-five/thirty years, now they bring somebody in, when they walk in, in their mind that's my practice. And even if they're terrific and they do want to mentor the younger person at the end of the day not only do they view it as their practice, but you always run into the issue with the staff in terms of how the staff functions when there is an order or a directive that comes from the junior partner half the time they turn and they look at the senior partner. Is he or she nodding their head or do they agree with this? Or if they don't like what they heard, it's like when a kid runs to mom or dad and doesn't get the answer they want from one, they go to the other. That's often the case too with the junior/senior relationship. So getting back to your main point, which was how do you advise someone going into a partnership especially a son or a daughter, you really have to make sure that the chemistry works and you also have to establish the full transition. What is not our plan just right now while we're going to start this, but what is the full game plan. At what point does mom or dad or senior partner, whatever the case is, at what point in time do they plan on transitioning and completing a full transition. Everybody needs to be on the same page right out of the gate.
Howard: And I also want to clarify something for the young kids because you after your name have Esquire, Esq. They also see JD for Jurisprudence Doctarian. I think of Esquires as more British. Is there any legal difference between an Esquire and a JD?
William: Not necessarily. Some people will put JD after their name when they're not a practicing lawyer. So for example, I'll see people, for example, a financial adviser who happened to have gone to law school and they'll put that down to symbolize the degree they received, but they're not actually practicing. That's one of the only nuances I've seen, but ...
Howard: So Esq means more practicing and JD means more educational.
William: Yeah, from my perspective but I'd be lying to you if I were to tell you that I knew precisely the answer.
Howard: But are you a JD?
William: Yeah. I went to University of Virginia School of Law and then I passed the New York and New Jersey bar.
Howard: So I already know my homies, they're thinking about selling their practice or thinking about do I call Hartland because they're scared to call you because they think, oh my God, if I call a lawyer, he's going to start the timer and start timing. If any of my homies are listening to you and they're trying to see if it's a deal. How much does it cost for them to call you and run a thought by you?
William: Nothing. The way we operate is and it's funny, I always find that so many lawyers practice in a counter-intuitive way. They actually create a culture by which they discourage people from communicating with them for that exact reason. So our philosophy has always been and we get referrals from all over the country. We have a number of mutual friends in fact in common that refer people to us all the time. We'll always take that fifteen-minute phone call and have a conversation about something somebody's contemplating, give them a little bit of guidance and spend a little time with them. And we're happy to do it just to help them in the process of exploring and there comes a time like in any other business to get retained when we're going to actually move forward and help somebody substantively and take on a transaction, you know that's the time. But to give someone a little guidance and advice and spend some time with them on the phone or in person we look at that really as part of the goodwill. I mean this industry and this profession has been very, very good to us. We've represented many hundreds of dentists over the years and that we continue to represent and frankly from my standpoint spending a little time, it's the same reason why we lecture at dental schools and do programs on entering into your first contract and things like that. You give a little bit back and it goes a long way.
Howard: Well speaking of dental schools we have a four hundred and fifteen online CE courses. I'm here in Phoenix and I watch that University of Phoenix online pop-up, so I started that for dentistry. It's coming up on a million views and all those courses are free for dental students. I wish you'd make us an online CE course on this for Dentaltown because going into dental school, I mean I'm in several dental schools a year, but you can't go to all fifty-six dental schools every year, there's just not enough hours in a day. But I'm email@example.com, the other guy is Howard Goldstein so he goes by hogo, firstname.lastname@example.org, but I wish you would do a course because podcasters are young. So 25% hearing you right now are still in dental school, the rest are probably millennial's. I get about one email a week at email@example.com that says, "Dude, I'm as old as you." But so let's talk to the young people for now. Here's the rumor milling on the dental schools, when you go apply at Hartland or Aspen or Pacific Dental, their boilerplate contract, it is what it is and if you go show it to a lawyer and make changes, no dice, true or false?
William: Generally, for the most part with the organizations you just mentioned, relatively true. Really what you're looking for a lawyer to do when you're going to make that choice in life and go in that direction, you're looking for a lawyer to help you understand what you're getting into. You don't need a profound expensive engagement where they're going to markup and red line and modify those documents because they're going to basically tell you this is our deal and if you want to do it, you do it. So really what you're doing is getting a thorough understanding of what am I getting involved with? What commitments am I making? How is this going to impact my life and these documents that are an inch and a half thick, what do they actually say so that before I put the ink on the paper, I'm going into it with eyes wide open? Because at the end of the day, you're wasting your money on having a lawyer do a full-blown analysis. Contrary to a deal with a smaller player or a regional group that's a different animal where you're in the negotiating seat and then the revisions that you're trying to make to those documents matter and can benefit you and then it's worth actually having the documents revised. But when you're playing with the players you mentioned I think that you're really looking for the ten thousand foot overview and understanding what am I getting involved in?
Howard: I always hate whenever I say Hartland, Pacific, Aspen all those things like that because it reminds me of the S&P 500, a 100% of the news is on the fortune 500 and they employ 15% of America and the other 85% work for mom and pop small business America. And it's the same thing with associates, the hundred and fifty thousand general dental offices hire far more associates than these big DSO's that are in thirty, forty, fifty states. So now I want to change the question, not the multistate DSO's, but now I'm graduating from the local dental school, old man McGregor's up the street and I want to go work as an associate for him. Now, do I have someone, now is it different in a legal mind like yours looking at that contract, because he's probably got a unique contract that his own personal attorney drew up?
William: Right and if you're lucky or it's one that he downloaded online somewhere or that he found somewhere or that old man McGregor got from old man Jones who used an associate, and it goes like that. And the answer there is there's where there's some real value in having good representation and frankly, it's inexpensive representation, but very valuable. So there's a lot of things that that associate can do and the first thing obviously, and the obvious thing is they need to protect themselves on the restrictive covenant in terms of, what if that relationship with old man McGregor is just a short-term association for maybe a couple of years or so and they want to do something after that. You know how is that contract going to impact them? Because one of the perceptions out there that is not reality you'll often hear people say, "Oh, well these contracts are not enforceable anyway. You can't re-force these restrictions." And in a place like California where non-competes are not permissible and only non-solicitations are that may be true, but basically just about everywhere else not only are restrictive covenants enforceable and non-competes in particular, so long as they're reasonably limited in their time and in their geography. There's cases in most states that actually make them more enforceable, for lack of a better description, for a doctor than for a lay person. So the case law is actually if you're trying to enforce the contract, if you're old man McGregor, it's better for you and not so great for the associates. So number one, they got to look at what kind of restrictive covenant are they getting involved in. Number two, they got to think through not only their compensation and things of that nature, but what are the ways this agreement can be terminated. Can they terminate the agreement upon notice or can they only be terminated by the senior doctor for cause and what is that? What is that defined as? What about their own organizations? That's something I mention when I go to the dental schools, I'll say, "Look, what about patients that you go out in the community and you create and bring in?" Even if there's a restrictive covenant, for example, should they be outside of the restrictive covenant as your patient because you created them and you brought them into the practice? So there's a lot of things to look at and consider when you're entering into an associate agreement to protect yourself as a young doctor and it's very important to have it reviewed and a lot of people don't. I get a lot of phone calls where it's after the fact and they say, "Hey, I want to go and I want to open up a practice or I have this opportunity to buy a practice down the road and can you look at this agreement?" And they've really never looked at it very carefully or had it reviewed beforehand and then when I look at it, I see that it's got some restrictions in it that are going to prohibit them from doing what they really want to do. So it's very important that they have it looked at.
Howard: And plus with the internet era, how many consumers read the terms of agreement when they register and become a member of any social media site?
William: Practically zero.
Howard: Did you see the Facebook terms of agreement printed out on the desk? Did you ever see that?
Howard: I mean it was like three feet tall. Who the hell could read that? And it's also very bizarre because when you get in something like New York City, a restricted covenant might just be a mile because there's so much people, but some of these kids go to where they grew up and they work for a guy and they don't realize that when it didn't work out, they can't practice in their hometown.
William: That's exactly right and for example, that's why I mentioned when they say reasonably limited in time and geography there's a big fundamental difference between transactional restrictive covenants, when people buy and sell practices where restrictions can be much broader and when you're a younger doctor and you're entering into an employment agreement, employment is treated differently. So first thing is how long is the restrictive covenant for? From an associate standpoint, I would never want it to be more than a year max and that will be enforceable. One to two years is generally going to be enforceable without a problem and the point about geography is absolutely correct. In New York when we do a restriction, it's often a matter of square blocks, so many blocks to the north, the south, the east, and west. Start sliding out into a suburban community wherever you are and it goes to miles and get into a more rural community and it's not unusual in a rural community to have a fifteen/twenty-mile restriction be enforceable. And if you think about it if you're that kid that grew up in that hometown and you even want to practice nearby and you've got a fifteen-mile restriction, I mean you're out of luck so it's very important to negotiate that up front. I'm a big believer in total and radical transparency and when you know that you want to practice nearby, there's ways to have that conversation with the senior doctor that are not intimidating. And one of the things too is, depending on their age, is to give them the thought that maybe you become their succession plan,you know, and that's something that you can also negotiate into an associate agreement or employment agreement, even if it's not an absolute right or a legal right to make an acquisition. There could be language in there that talks about how you're going to visit the subject matter of equity ownership or partnership at a certain point and negotiate in good faith to make that happen. So there's a lot of ways to attack it.
Howard: Well, speaking of attack, I want to attack my homies right now, especially the ones under thirty. I've been doing this for thirty years and I know a dentist who recently went bankrupt because he's in a retail center and the roof was leaking and then the realtor put it back on ... anyway it was a triple net lease. He's not responsible, the owner, to fix this thing was catastrophic costs. I mean, it's this big ole twenty acre center. Anyway he got tied up in court for ... but then when I'm talking to this guy the first thing I'm yelling is, "Well, who's your attorney? Who read this real estate contract?" "Oh no, no one I did." Bill Gates says success is your biggest enemy because you start feeling infallible and you just start thinking, I can do anything because you haven't tasted defeat. And these dentists, they got A's in all their classes. Everybody said they're the smartest one in the room so they don't get professional help. They even try to sell their homes themselves. You know, "I'll just do it myself. I'll save the real estate fee." Oh really? So now you do root canals and real estate, really? You know all the nuances of root canals and real estate, how this could come back to bite you. So I'm telling you and then the second bias they have, which I feel so sorry for them because it seems smart that you want to trust someone. So what do they do? They go ask their pastor, their priest. the guy at the ward, well, who's the attorney that you recommend or who's the CPA? Well, that lawyer might not have any experience in dentistry. I mean you have seventy lawyers working for you. Do you know any dental transaction law firm of that size in the United States?
William: I don't.
Howard: Yeah, I don't know one that's half that size. So kids what I'm telling you is just because you got an A in Calculus, Physics, Chemistry and biology you don't know shit about real estate law, associate contracts, purchase transactions. Don't sell your house by yourself, don't buy it from someone selling themselves. There's one million attorneys in the United States and you better get the best one. Trump didn't even figure that out. He got Michael Colon. I was reading his resume I mean there was nothing fancy on his resume and it sounds like that's going to be a big pain for him. Let's switch from I'm a young dentist getting an associate job and you have to have an attorney that focuses on dentistry. When you get a CPA, the first question you ask that CPA, what percent of your practice is dental related? Hell, I can give you names of CPAs all over America that are 100% dental. Those guys are ten times better than the guy that's recommended by your priest at the back of the church and who does one other dentist. That's just crazy. But now let's say I see a practice for sale and I read it on Dentaltown classified ads. By the way, those classified ads on Dentaltown, they're all free. If you're looking for a job, you can post your own resume just just like you can on Monster jobs. Dentists looking for associate they can post the whole deal, looking for a deal, selling your practice, buying a practice. So I see a practice should I contact the practice first? Should I contact my attorney first? Some people say in the negotiation, it's better that the first person they deal with is someone that knows what's going on, which is a lawyer. What are your thoughts that? She's on Dentaltown. She's on the classified ads. She wants to practice in Phoenix. She sees five practices herself. She thinks she wants this one. What should her next step be?
William: Well, the first thing that I would do before I'd spend money on professionals is I would meet with the doctor, the seller, and I would want to check out the practice. I'd want to get together with them and talk to them about their practice, their philosophy because you want to identify right out of the gate culturally is this a practice? Because remember, it's a practice, it's been around. It's got patients, it's got, staff. There's a way that things have been done. Is the potential there for you where you think that this is a place that you would fit? Is the demographic in the area where the practice is in the wheelhouse of where you want to be? And really just try to get a warm and fuzzy and at that point if you really think you like what you see, I think that the first thing you do is you talk to a dental CPA, a lawyer and a banker who specializes in dental, and as you know, Howard, all three exist and there are CPAs, members of the American Academy of Dental CPAs and a gazillion others that don't even have any other clients except dentists and you'd want to have them do the due diligence on a practice and look into the [inaudible 00:32:01]
Howard: Because you agree that a full-time dental CPA is better than the CPA who has three dentists as clients.
Howard: I know and the dentist knows it. If they had an eyeball problem, they wouldn't go to an ENT or a cardiologist. You'd go to somebody who only does that organ system, only that organ system, but then they don't do that when it's their business. So dental CPA, dental lawyer, dental banker. who are the top dental bankers?
William: Well, we work with all of them and there's a lot of great ones out there. On a national basis I mean Bank of America, Practice Solutions they have a great presence throughout the marketplace and I've had nothing but good experiences with them on a national basis and regionally throughout the country what's happened is and all the young dentists out there can thank their predecessors for this. As a result of dentists having one of the lowest default rates on loans in the United States, less than 1%, regional banks, national banks, they all are trying to get involved with lending money to dentists. So what I found is I have a hard time remembering the last time a deal that I had didn't work out because of financing. Financing is abundant for young doctors today.
Howard: But how are young? Straight out of school, year out of school, two years out of school. How young?
William: Straight out of school you can still get financing. You could be upside down in student loans, you know your personal financial statement has got more negatives than positives, but if you kept your credit score strong and ...
Howard: What's strong, what number?
William: All the banks have different underwriting requirements, but I would say if your credit score is north of seven hundred you have a strong credit score in terms of lending.
Howard: My ex-wife has a perfect eight hundred. Would you say she had a good lawyer? So Bank of America, yeah I tell them and the other thing is Bank of America tells me their default rate isn't even a half of a percent and what I always hear on the streets, the only reason a dentist goes bankrupt is that their license is taken away and their license is taken away 85% of the time for alcohol and 15% times for opioids. So if you don't have an addiction issue and you don't play with that shit, don't play with fire, and if you don't play with that stuff, you can't get addicted to heroin if you never try it. I would never try meth and heroin and all these things because I'm sure obviously the first time it must feel really good, but it rapidly turns into a disease. So if you don't have an addiction issue, you pretty much not going to go under so financing isn't the issue. You want a credit score north of seven hundred, so you've got your dental CPA, your dental lawyer, your dental banker, what would you do next?
William: What I would do next is try to come together with some terms and in the form of a letter of intent. I'm a believer, again ...
Howard: They don't know what a letter of intent is.
William: Okay, let me explain. Basically, a simple non binding couple of pages long letter between the parties that sets forth what I'll call the most important terms of the deal, price by way of example is an important term. Transition period, you know how long is senior doctor going to stick around and on what basis is senior doctor going to stick around. Due diligence, what kind of period of time will I have so that I can let this excellent accountant and this lawyer that I've hired actually help me look into this practice and make sure that I'm getting one that's financially sound and doesn't have any legal issues and just basically the fundamental, simplest terms of the deal because there's a time to get into the weeds when the lawyers have to prepare the detailed contracts that become the binding agreements. But first, it's important to make sure that you actually have an understanding on the most basic terms. The restrictive covenant on the seller that's a way very early on of flushing out what the seller is intent I because I always say when I represent a young doctor, the seller should have no problem with a very robust, restrictive covenant if they're retiring. If they have no intention of doing something else in dentistry nearby, why would they care? The hair on my neck always stands up when I'm representing a young doctor and the senior doctor who is allegedly retiring is fighting over the mileage on a restrictive covenant and the time on a restrictive covenant. I'm saying to myself if you're going off to hit golf balls and this is the end of the road, why do you care that much? Those are the types of things that worry me, but those are the things that would be in a simple letter of intent and if you come to an agreement on those basic terms then it's worth making the bigger investment in your accountant's going to do the due diligence, your attorney's going to dive in and write the contracts, but at least make sure that you have an agreement on that. And we can help, any good lawyer can help their client with that. In a practice that's listed with a broker, one of the services a broker will often provide is that they'll help with the letter of intent in terms of getting those basic terms established.
Howard: So there's a big transaction firm named Afco out of Atlanta, Georgia, started by Alan F Thornburg and he did something that is very different where he, dual representation. He always said that if the seller gets an attorney and the buyer gets an attorney, all hell's going to break loose so he recommended that he just represent both of you. But I'm sitting here with an MBA mind thinking, well, who are you actually representing? Are you representing me or him? And Alan would say, well, I'm representing both of you. What are your thoughts on dual representation by something like that?
William: Well, look I've worked with Afco before. I've worked on transactions where they're involved and I think that they're very good brokers and that it's a very good company. If I have any departure at all, it's probably on the very precise issue that you outlined because I think that there are two sides to a transaction. For example, under the ethics rules for attorneys, I cannot represent two sides of a transaction because I'm bound by a set of ethics rules. Brokers in dental practice transactions in most states have no rules at all and in some states, they're often bound by the rules or they fall under the auspices of the real estate boards for no other reason than that's a place where certain governments have plugged them in. But at the end of the day, there are two sides to a transaction and they do have competing interests and I think that each side should be represented by their own independent council. Whether you're the seller or the buyer, you want someone who is zealously representing your personal interest and your attorney is not getting paid a commission whether or not this deal closes. Your attorney is representing you and being paid for the services that they render so their motivation is to give you the best representation possible. They want to help you achieve your goal of closing a deal, but it's not at all cost to them. So I am a firm believer that each side should have their own independent representation. [inaudible 00:40:13] I'm sorry, go ahead, Howard.
Howard: Like I say you're the biggest firm that I know that does this. I've lectured in all fifty states probably ten times each. You got seventy attorneys you've been doing this longer than the total age of most of the listeners right now so I want to talk about two points. One on the transition point. Well first of all I want to go one point first, a lot of you guys are on message boards like Dentaltown and you're hearing legal advice and you're too young to realize there's federal law that covers coast to coast and then there's state laws, so a lot of times you're hearing somebody say something in Iowa and you think that applies to Kansas because Kansas is right next to Iowa. But that's not true if it's state law, so remember you're not an attorney. The United States is very complicated. I know when I go lecture in other countries a lot of people are extremely confused by the United States because they don't understand that the states are damn near as powerful as the federal government and saying the United States of America doesn't even make sense. I mean would you really compare Alaska to San Francisco or New Orleans to Manhattan. Even the federal reserve says that America really access twelve different countries flying under a single flag I mean if you talk about the economy. But two things that they're hearing mixed signals on, one is the transition period. Some kids hear, well you know what you want that old guy. He's been seeing these people for twenty, thirty, forty years, he better stay at a whole at least six months that would just introduce you to each one of the recall patients once and if you stayed on for a year, then twice. Other people say, "Oh hell no, that guy's going to be your biggest headache." You want to buy that thing and then show them the door and then file a restraining order on him. You've been doing this a long time. What do you think's better for business? What's better for the return on investment?
William: Okay, well it's a great question and the answer is it depends. So a lot of times it depends on the practice, right? So my experience is that in a purely fee for service, what I'll call doctor-centric type practice, these are patients that can go anywhere they want. They're don't care about what insurance you take, they're paying top dollar and they love Dr. X. So in those practices, I believe a little bit of a longer transition period is appropriate because you need to meld yourself into the relationships and you've got to shave the doc really helping you transition and in those case having the doctor around for six months to a year to help effectuate that is important. Now I still like to build into his transition agreement my ability to terminate him not only for cause, but with some kind of reasonable notice like thirty days because if he turns out or she turns out to be the nightmare doc who's making your transition impossible, you got to have the ability to get rid of them. But hopefully, if you've done your due diligence on the culture and their personality, fee for service practice I like a longer transition. Specialty practice you have to have a long transition because a lot of people forget the fact that it's not so much the referrals from patients as it is the referrals from referral sources which are relationship driven. So if I'm going to go into a specialty practice I need to get involved with the relationships and make them mine in order to keep the referrals coming in. So where the shorter transitions can work certainly in Medicaid practices they can work and in more purely insurance driven practices because my experience is that in an insurance driven practice, you are going to generally get one crack at that patient to do a good job and for them to feel comfortable. If they're familiar with your staff and you've kept everything the same and you take their coverage. This is the office they're used to coming to, this is the staff they're used to dealing with, the hygienist that they're used to dealing with and when they see you and meet you if they feel comfortable, they're going to stay, okay. So those transitions can be shorter and I would say generally you can do a sixty to ninety-day transition in those cases and generally not have a problem. Again, I still always like to have a [car? 00:44:49] about that I could terminate sooner because you do run into scenarios and I've had it happen where the doctor who sold is just impossible to get along with post closing and you need to get rid of them sooner rather than later.
Howard: You know people always think, oh, well this idea's better than this idea. But if you're a scientist or a dentist or an engineer you know that every idea has a trade-off. Like when I got out of school thirty years ago all the fillings were silver, they're metal or antibacterial, they lasted thirty years. Now they're all pretty and white and fluffy, but they're inert plastic and they only last six and a half years. When I was little and got out of school, the selling doctor would always do the finance, he carried. He'd say, "Okay, I'm going to sell you this practice for seven fifty and I'm going to go 10% interest for ten years. And what I loved about that deal is the seller had skin in the game. So when I'm working on a patient named Bill Barrett and he gets all upset and he says, I screwed up his tooth and it don't feel right or whatever, well that old selling doctor would come back to the office and meet you there and smooth out all the ruffles and that guy was incentivized. So at the end of church, he was handing out your business card telling everybody in the town that he could have sold to a hundred people, but he sold it to Betty Lou because she's the best dentist in the world. But now that's gone and now it's all through Bank of America and the selling doctor takes the money and run. Do you ever see any old school stuff where some street-smart kid says, "Look, I'll let Bank of America finance half and I'll give you half your money, but I want the selling doctor to carry the other half for five years because I want him to have skin in the game." Do you ever see that anymore or did that go the way of the horse and buggy dInosaurs?
William: Well, it's along the lines a bit of the horse and buggy because what's happened is the banks in many respects have created the expectations of the marketplace. When I first started practicing twenty years ago it was not uncommon even twenty years ago that a number of transactions would be the doctor held paper. It was more common that they would take back a note as you described and you'd pay them out over a period of years. Maybe they'd get a little bit of a down payment, that was was relatively common and it disappeared rapidly. As of fifteen years ago it was almost completely gone and as of, I'm going to say ten years ago, it virtually never happens. The only time that we're doing deals where you'll see a seller financing, a lot of times it's with parent/child practices where mom or dad is actually going to hold the paper and finance the deal or it's in deals where the bank won't approve the 100%. So the bank will allow a secondary piece of financing behind their primary financing because they'll say, well, we don't have a problem with you paying that much we're just not willing to lend that much. And for whatever their internal underwriting guidelines are, so I had one recently, it was an $800,000 deal. The bank lent six and then the seller had to take a note for $200,000, and it's a subordinate note so the seller really has invested interest in you performing and for those who don't understand what subordinate means, it means that the secondary lender, that seller doesn't get paid if the primary bank like Bank of America doesn't get paid. So that's a scenario where it comes up and it's kind of a secondary piece and it's interesting in deals like that, Howard, you're 100% right, that seller is motivated that you succeed because they know that even if you're paying them, even if you're paying all your notes, but in your covenance inside your loan agreement with Bank of America or some other major bank, that you're not quite meeting their internal requirements. You're paying all your bills, but you're not quite meeting all their internal requirements. They send a letter to the person holding that note, that seller and say, oh, you're not allowed to get payments anymore because our borrowers not meeting all their financial requirements. So even though they were paying you and even though they could afford to pay you, they're not going to pay you anymore. And because that seller had to sign what's called a subordination agreement they're not entitled to get payments. So they definitely have a motivation, but it's very rare you don't see it very much anymore.
Howard: So in real estate, they'll tell you that like in Phoenix, if you got a three bedroom, two bath house you listed, man, it's sold it, it's liquid. But if you got an eight bedroom, four car garage for two million, if it's illiquid. What's the three bedroom, two car garage in dentistry? What's the most liquid size of a dental office today and where does it become illiquid?
William: Okay, so I think what you're asking me is at what point do you become so big that you're hard to sell and at what point are you kind of in the sweet spot where everybody is really a potential buyer? Is it okay to rephrase it that way?
William: Okay, so I would say the sweet spot is, I mean there's a lot of small practices that still trade. There's still practices that we still see in home practices where there's a little practice off to the side of the house. Not a lot, but we still see those around here.
Howard: You know Mark Zuckerberg, the owner of Facebook.
Howard: Did you know his dad's a dentist?
Howard: Yeah, that was what Ed's practice was. Ed's first floor was a dental office and then they lived on the ... and then the second floor was living-room, front room, dining room and the third floor is a bedroom. So, but it seems like in my brain I've only seen those up in the northeast.
William: Yeah, that's primarily where we see it as well and practices that, there are still practices that trade at a hundred and fifty thousand to $250,000. But I would tell you that up until, again this is just ballparking it, but up until a $1 000 000 000 practice young doctors who have associated for a couple of years can get financing for that. There's a lot of buyer opportunity there because right now it is still a seller's market and there are still a lot of buyers. But once you start getting up over a $1 000 000 000 and bigger, the potential buyers start to drop off because now you're talking about significant financing and as you approach into the high millions and up, there's where the DSO market Is becoming very powerful. I have a practice right now that one of my clients is trying to sell, two of my clients actually at the same time, and they are significant practices. One of them is doing about six million a year. The other one is doing about eight million a year. There is no buyer for them except for somebody that's backed by private equity and when I say no buyer, of course, there's exceptions, but very few.
Howard: A 100% of all my friends who got their office to over three and a half million to four million, the only person they sold to was Rick [Quart? 00:52:19] from in Hartland. No one else could even entertain that offer and Rick would do it and just write a check.
William: Yeah, and that's exactly right. These larger practices that's the route they're going, but up until a $1 000 000 000 we see those deals getting done all the time and there's a lot of buyers out there looking for those practices.
Howard: And I want to tell you another thing I've noticed the last thirty years where I've seen these kids a lot of times they anchor on the price. And by the way when these practices are selling what would you say the median mode, mean average selling practice is, what value?
William: So it's a very loaded question so it's hard to answer precisely, but here's how I'll answer it. Based on my experience and what I've seen the range of where practices sell is somewhere, depending on the practice and I'll explain that in a second, somewhere between 60% and 85% of the average of the last three years gross collections is where I see most practice. And whether they're closer to the 60% or the 85% depends on their profitability, the age, and quality of their equipment and their technology. How much and what type of insurance they take. So for example, if I'm a purely insurance based practice and maybe I even have some per capita plans or I've got some union plans, that's going to be down towards that 60%, whereas, if I have a nice fee for service practice that's a blend with some high-end insurance coverage, I'm going to move towards that 85% and that's kind of in the traditional way that we always looked at practices. But again going back to private equity they kind of toss that out the window a bit because they look at a dental deal, the larger ones like we described, they look at a dental deal more well exactly like they would any other deal and that calculation is based on earnings and ...
Howard: Explain Avatar. Earnings before interest, taxes, and amortization.
William: Right. Interest, taxes, depreciation, and amortization. It's basically ...
Howard: What is it? Interest before ... no earnings before interest, then what's next, taxes or depreciation?
William: Earnings before interest, taxes, depreciation, and amortization.
Howard: So I'll just run with that, da because it ends in da. E B I T D A, earnings before interest, taxes, depreciation, and amortization, which is how all of Wall Street works.
William: Correct and that's why when you first asked the question about how we usually see values I described it in the traditional way, which still applies to a ton of deals and when you get to these larger practices, they're looking at it very much in a Wall Street-style model and that's where sometimes you'll see purchase price that exceeds a 100% of gross because the earnings are substantial and it will justify that. And then what the buyer will do in those cases is pay EBITDA time some multiple, right. So what EBITDA really is to try to just make it simple, it drills down to your actual earnings so it takes away, amortization is they take away the debt service. They take away depreciation expense, you're drilling down to the earnings and then they look at, for example, if you weren't performing the dentistry and instead you had an associate performing dentistry, let's say you'd be paying the associate 35%. Well, the difference what that selling doctor did with their two hands would slide its way into earnings because a DSO thinks along the lines of everybody's going to be paid like an employee, not an owner so that goes into earnings. And because they're smart and they understand that close to the nature of closely held companies and some expenses and things like that might be expenses that wouldn't be expenses in corporate America, they even have add backs into EBITDA. So they'll look at things like the car that was on the business and say, well that that car will not be on the businesses books post-closing so that's actually additional earnings and it goes into the bucket and that's ...
Howard: Dentist have always done peanut butter and jelly accounting like they'll tell some guy to stay. By the way, whenever a dentist tells you what their overhead is and profitability is, let me just tell you something they're never right. They don't know their numbers. They say, "Yeah, my labor's 20%." You'll say, "Well, does that include FICA matching?" "What?" "Does that include uniforms, continued education." Again this is why you need a dental CPA. Another thing they'll do is they'll pay off their building so now they don't pay rent so they don't factor it in and the other guy the average mortgage is 5%. Well, but you would charge yourself cost to capital. I mean if you have land in a building and it's paid off, well you sold that land and building and put it in bonds, you'd be making money. So they'd never know their numbers and what you just described was peanut butter and jelly accounting where they'll say, "Oh yeah, my profit margin is 35%." No, if my associates around here, they're paid 25%, so I always paid myself 25% because when I'm doing dentistry the cost of a dentists labor is 25%. So then if the practice makes 15% profit that's from having capital employed in a dental office, not from having capital employed in a dental student dentist so you don't mix profit from a business with labor and a lot of times they'll say they have 50% overhead and their spouse is the office manager and she don't get a paycheck. So it takes a dental CPA to point all this stuff out, but just let me tell you one thing, the dentist never know their numbers. No matter how smart they sound they're completely full of shit when they sit down in front of a dental CPA so they're not accountants. So don't feel bad when you're sitting at a study club and you're like, "God, my overheads at 65% and three guys at the table said their overhead is 50%." Well, those three guys are just probably the three dumbest guys at the table, okay. What you need to do is call a dental CPA who only does dentistry and say, "Hey, I'm in Georgia. I'm in Atlanta, Georgia, what's the average overhead of your dentists in Atlanta, Georgia where all the checks are coated the same. We're comparing apples to apples to apples? And then if he said the average overhead was 50%, you're 65% that would mean something. But if that wasn't told to you by an accountant then it doesn't mean anything. I want to go into two other things that are really big troublemakers. One is a dentist buys old man McGregor's practice and then he finds out he's kind of a shitty dentist and his morals and ethics, he's having to redo a bunch of work, so then he's back there trying to tell the seller you need to pay me for some of this stuff. And then some of the guys who are selling their practice are thinking I sold my practice to you and all you're doing is nitpicking all my work trying to get all your money back. So talk about rework.
William: Yeah, so that's ...
Howard: Do you see that as an issue?
William: Sure. It's come up before and I've seen some things that are mind-blowing where people have done things that I mean I actually had a dentist one time that I was having lunch with after a transaction where it was interesting. I was on the other side of the transaction and he bought a practice that the dentist that I represented years later actually lost his license after the fact, and when you're an attorney you're not inspecting the dental work that's being performed that's not your role. And what happened was when this doctor was telling me about the redos and the work that he had to do and what terrible damage had been done to people's mouths, he actually started to have tears in his face at this lunch. He was so upset because it was that terrible, so the answer is it happens and so part of how you try to avoid that is to do really good due diligence before you acquire the practice. And what I always like to recommend is talk to the staff. At some point in your due diligence if you set it up the right way, you'll have an opportunity before you're fully committed to have a chance to interview the staff and one of the questions I tell my buyers to ask is how often do people come back, recall and they come back for an issue or discomfort, a problem. And a lot of times the staff will be incredibly knowledgeable about the quality or lack thereof of the sellers dentistry. It's not scientific, but it is a way to get information, but let's put that aside and let's say you bought old man McGregor's practice and he turns out to have been a really shitty dentist, okay, and now what do you do? You've bought the practice, you've got your loan to Bank of America or whoever. He's already got a hundred cents on the dollar and Barrett has drafted this clause in the agreement that says you're going to warranty your work for six months, twelve months, that's usually the range, right. Seller is responsible to warranty their work for six to twelve months, but here's the dilemma if they're a terrible dentist, even if they're willing to come back, do you want them to come back and take care of the redos and the remakes on this problematic dentistry or do you turn lemon into lemonades? And it could be costly, it could be a little bit of a stinger, but is it an opportunity for you as the dentist who purchased to develop a relationship and make this person a patient for life by fixing the dentistry, doing it well and taking care of it. Now as it relates to the cost of that obviously that's a problem. There are ways to do it contractually, but I'd be lying if I said that it always works smoothly. So for example, usually we say that they'll either come back and take care of the repair or we'll do the repair and they're going to have to pay us and we usually agree on some mechanism for payment. Usually it's a percentage discount off of their regular scheduled rate and the seller would have to actually pay the buyer to take care of fixing that dentistry. Where we can I like to try to negotiate for a buyer an escrow account where money is actually held back from the closing some reasonable amount in one of the attorneys trust accounts to be utilized to pay the buyer if things have to be remade after the closing. But I will tell you that you always get a lot of push-back. A lot of times I'm not able to negotiate that into a deal because the seller's attorney will fight it and it's not easy so I know I didn't give you a precise answer because it's a question that has a lot of nuances to it. And my advice to my clients when they've stepped into this problem has been based on my experience. If it's not going to ruin you, meaning maybe it's going to cost you ten or $20,000 in expenses to take care of fixing these problems, but if it's not gonna ruin you ... what the value you may get out of just taking care of it yourself and developing those relationships with your new patients, I think may actually be better marketing dollars spent than getting into a big broo haha post-closing with old man McGregor, who now once you fight him by the way, is now going to tell everybody at church instead of handing out the card, is going to say that you're terrible and you're bad mouthing them. And after fifty years in the community of doing great dentistry how dare you say terrible things about their work. It can sometimes do more harm than good to get into a fight post-closing.
Howard: Yeah, it's also why I don't take any of my patients to small claims court. I don't want to take somebody to small claims who lives two miles from my office and is going to live there for the next thirty years. You know what I do, what I do is on Christmas time when America is the most crazy, all emotional and so what I do is I just zero out all those over nineties and then I get a bunch of Christmas cards or hand letter and say, "Hey, Bill Barrett we had a great year and it sounds like you did not have a great year. You haven't paid us in ninety days, so in the spirit of Christmas around the corner I zeroed off your account. All I ask in return is that you refer a friend or loved one back here practice and they come in crying with pumpkin pies and apple pies and they just love you. They love you for life and they live a mile down the street as opposed to taking them to small claims court and have them telling everybody the rest of their life that you're a short fat, bald, drunk Irishman, and you wouldn't send your dog there. I want to go back to a couple of things on that EBITDA earnings before interest, tax, depreciation, amortization. Has the multiple been consistent in your twenty years or does it fluctuate up and down with Wall Street? I mean what is the multiple today? What was it after the 2008 crash? What was it at the peak of 1999 when the NASDAQ was fifty-eight hundred? Is the EBITDA multiple consistent or is it highly volatile?
William: Well, I would say that in dentistry in my career it's been consistent, but it varies depending on the size. So for example, in your bread and butter, one point something million to three million or so practice the ones we've been kind of talking about a bit, generally and even higher than that and if they're one location or maybe two locations, you're looking at somewhere between a four and a five and a half times multiple and that could take you anywhere again from like a million in change or two million up into six, seven, $8 000,000,000 depending on how many locations. When you hear about these stories about, oh, I heard somebody got ten times, you know, they got ten times or twelve times earnings it was because they got their EBITDA number up very high. They were in double-digit type in terms of eight-figure kind of EBITDA and that mandated a bigger multiple and that's where you see that, but I don't see a lot of those deals. I would say that 85% of the ones that I see are falling between that four, four and a half and five, five and a half range and somewhere in between.
Howard: And what would you say the median price of selling dental offices is? I know I've asked that before. I mean out here in Arizona I hear the average price in Arizona is seven fifty but is that an Arizona deal or do you think that's more of a national deal?
William: Well, I guess there's so much variation. We do dental deals that are literally, we'll do deals for a couple of hundred thousand up to millions and it just depends, but I think there's a certain consistency in value depending on the size of the practice and I find that it's relatively consistent. I mean that's based on my experience. So what I mean by that is a practice that is selling for seven fifty where you are, is probably selling within $50,000 of that number give or take everywhere else.
Howard: We went over our hour, do you got to go or can I hold you for some overtime?
William: I'm yours, man.
Howard: Okay, back to the liquidity. Is there a big difference in liquidity between urban renewal? Is it easier to sell a practice in Phoenix than it is Parsons, Kansas?
William: Well, it depends a lot of times on the practice itself really. How robust is the practice itself? For example like New York City, what you got ten million people, but having a dental practice in New York city is tough because the competition is massive. You'll have floors in a building with twenty dentists on the floor, let alone on a block or in a building or in the neighborhood so I find that whether or not practices trade at good liquidity or they're in demand is often driven by just the practice itself in terms of its value.
Howard: So your website is law firm.ms. What is law firm, can't forget that law firm that's an easy one to remember. What's dot ms? Is that Mississippi?
William: No, so the firm's name and we've been in businesses since 1930, the firm's name is Mandelbaum Salsburg so it's part of our branding whether people like it or not because I have partners in my firm that will debate it, either way, it's law firm.ms and ms stands for the name of the firm, Mandelbaum, Salsburg.
Howard: Well, so but it's got to stand for a country though because it's [inaudible 01:10:53] so what is the country that ms stands for?
William: Macedonia maybe. I don't know.
Howard: What is it? That's pretty cool how people are doing that. I think there's what, two hundred and twenty internet ...
Ryan: It's Monserrate, a British overseas territory.
Howard: Say it again.
Howard: Talk into the mic, Sonny.
Ryan: It's Monserrate a British overseas territory, so it's a little island or something.
Howard: Oh my gosh, you're British, but yeah another one is a dot to. I think to's for Tonga. But one of my friends started a referral app technology for general dentist referring to their specialist and he went with refer.to because I'm referring to you, so he put, refer.to so to, which is just the domain name for Tonga and pretty damn cool. So yeah, you're Monserrate you're a British Island, is a Caribbean Island in the Leeward Islands, which is part of the chain known as the Lesser Antilles in the former British West Indies. It is a British overseas territory. Another deal ... what's that?
William: I learned something today too and it sounds like a place that I may want to go to.
Howard: I know, I know. But what are my homies going to find if they go to lawfirm.ms? What are they going to find on your website?
William: Well, they'll find first of all that the firm has been in existence for eighty-eight years this spring, so we have a long history. We have lawyers practicing in twenty-five different areas of specialty within the firm so what's nice about that and what they learn is that when they have a matter or transaction or a deal, no matter what comes up in that deal, we have the experts. So if they have a tax issue, we have tax lawyers, an employment issue, we have employment lawyers, an issue about their pension plan, we have [inaudible 01:13:00] lawyers, real estate, banking, whatever the need is that comes up in a transaction or in their life we have the different specialists all under one roof. So they never have to go to another law firm they can have all the services handled in one place. And what they'll also see is that we're members of a worldwide organization called Primaris and this goes to one of your points earlier about how weird the US is about different jurisdictions and practice. What Primaris does for us is that we basically have in all fifty states, we have sister affiliated law firms so that we have local boots on the ground everywhere, so when we do a dental practice transaction no matter where it is, if a very local issue comes up, we always are able to pick up the phone and call our local affiliate to get an answer on a question that might be very specific or local to a particular geography. But I think people if they come to our site and check it out, they'll get a real flavor for the firm and its capabilities and a long history.
Howard: One final question because I think that I'm just so excited that I'm talking to an attorney and it's not costing me anything, I just can't stop. You talk about shadow accounts, the various deal structures involved in associate buy-ins including creative options like shadow accounts. Well, that's news to me. What's a shadow account? Is that part of the Illuminati or ...?
William: It's a little out of the box. It's one of the things that we're always trying to do is skin a cat a different way and when doctors are trying to do associate buy-ins and they're trying to come up with structures, every structure can have a little bit of a plus or minus to it. For example, if I want to buy into a practice and I want to get financing from our friends at Bank of America like we talked about that's great, but Bank of America is actually going to require the seller and the practice to guarantee the financing. So sometimes the seller will say, oh great, I'm doing a buy-in with my associate, but I'm actually guaranteeing their loan I'm kind of guaranteeing my own transaction. Or if we do, for example, a sweat equity deal where somebody is getting interest in the practice over time in exchange for performing services, we have tax problems with that because if I'm the young associate receiving an interest in a company and I didn't pay cash for it, I got something of value without actually having paid and what happens is then I'm subject to income tax on the value of that interest, so that has problems with it. So each type of structure has its pluses and its minuses. Shadow accounts was an idea frankly a mutual friend of ours, Bernie Stoltz from Fortune Management was the first person that I talked to about shadow accounts and I thought it was a brilliant idea on Bernie's part that I started implementing it on deals that I was doing, which is where you set up, in essence, a compensation structure for an associate where let's say a percentage of their productivity is being credited to them in an account. Now it's not actually a cash account so there's no tax ramification going in either direction, but in essence what we're doing is we're accumulating a dollar amount that when they eventually buy in, if they stay with the practice and they buy in, they will get a discount in their buy-in equal to the amount in this shadow account. And so for example, if their buy-in let's say is $500,000, but by earning X percent of their productivity over a period of years they've built up a $100,000 discount, they pay four hundred thousand instead and I thought it was a very creative way to attack that. And it's good for both parties because you don't have a negative tax implications and there are under the tax code, not to get too complicated, but under the tax code there are certain permissible discounts when you're buying a minority interest or when you're buying something that there's not a rental readily available public market for sale, you are able to take discounts so you don't run into a problem by offering the associate the discount on the buy-in. It encourages the associate's longevity, but it also gives them a real benefit and a real bonus when they ultimately buy-in so I thought it was a really cool idea Bernie came up with and we use it a lot.
Howard: Love Bernie, had him on the show. You know everything's a trade-off, the tax code, it's eighty thousand pages long and if it was fair it wouldn't be simple and if it was a real simple tax [inaudible 01:17:58] it wouldn't be fair. Just another one of those trade-off deals, just tough. I just want to review three quick things that for thirty years I continually see dentists getting screwed buying an office. Number one, they'll go buy some office and it doesn't matter what the value is, five hundred, eight hundred it doesn't matter. Say just the average practice out here in Arizona is seven fifty and the guy part of that seven fifty, he did all of his molar Endo, pulled all of his wisdom teeth and place five implants a month. The kid buying the practice doesn't do molar Endo, doesn't know how to place implants and the first year drives that $750,000 practice down to five hundred and the genius dentists are the ones who reverse that. Again, price doesn't really matter if there's hidden value. For instance, they'll see an office for sale for six hundred and this old bastard selling it, he refers out a 100% of his molar Endo, a 100% of all of his extractions and this kids coming out of school saying, "Oh my God, I can do the seven-fifty this old man does." But he's referring out another two fifty, he's referring out a $1000 molar Endo every other day and instead of wizzies every week so gosh, when you're shattering that office, my question if the dentist is a good dentist, is really simple, I used to ask the staff how much works come back. I go around and ask staff, who is he the dentist of? Does all the staff go to him? Do they bring their husband to him? They bring their offspring. I mean the only goal of a species is to survive long enough to reproduce, have offspring. So you're telling me you got a nine-year-old and a twelve-year-old kid and you take them to another dentist on the other side of town. Those are red flags. But my gosh, make sure you can do everything the sellers doing because whatever he's doing that you're not doing, you're going to have to back off that production and then the final way of getting screwed and by the way speaking of screwed, I just want to say this a lot of kids are very bombed about their student loan debt, but I just want to tell you if you're graduating dental school with a half a million dollar student loans and you're a virgin, well, don't worry because those student loans are going to screw you every day for the next ten years. So, God, that was a bad joke, but here's the final screw I see all the time. You graduate, you go work for this guy and when you get to this guy's practice it's doing seven fifty and you worked with them for four or five, six years, now it's doing a million and three and then he goes to sell it to you and guess what he sells it to you at? A million three, so if you date too long and you build up this practice you're going to do all the work to build it up and then you're going to have to buy all that from yourself. So one thing I want you to do is if you're in a practice, you're thinking, man, this is cool. This is my hometown. I got chemistry with the staff, the patients. I'm kinda digging this, but I'm not ready to buy. I don't know when I'm ready to buy. Maybe you're still single, maybe you're just not ready to commit, especially males. Males have commitment issues. You better talk to an attorney quick and saying get some type of a contingency. I mean, do you ever do this where you say, "Hey, I've been here a year and it's looking good, but I don't want to double the size of this practice and then pay for it." What are your thoughts on that?
William: So this issue comes up all the time and really there's a balanced, fair approach to take to it because you got to look at it both ways and when I represent a junior doctor, I always say look at it the senior docs way. They took an entrepreneurial risk when they hired you in the first place, right? If they brought you on board, they brought you into a practice. You had no patients of your own. You walk in day one and yes you're going to help them, but they're giving you an opportunity and they took the entrepreneurial risk to bring you on. Having said that, you're 100% right, at what point does it end? At what point have they been rewarded enough for the entrepreneurial risk that's fair and that you as the junior doctor are not building up a massive volume that you're ultimately going to pay for later on. So what I try to do, I mentioned earlier, I try to get associates to think about negotiating for equity issues upfront and either in the original agreement or if that's too premature, when it comes time to think about renewing that agreement a year or two down the road, create an equity clause and create a date by which if we move forward with the transaction at some point, we agree that the valuation day will be X. That this will be the kind of the line in the sand that we agree whatever it was worth on that day is what I'm going to pay and it's kind of a fair balance I think.
Howard: And as far as the personality of the dentist because they're going to be nice to you because they're trying to sell you something. Money's the answer, what's the question? It's like why is your waiter being really, really nice to you is because they want a big tip and then when you go to the flip side where you go to countries like Australia where they believe that's degrading and they pay their waiters and waitresses a standard of living, they don't tip in Australia. That's why when you go to Australia, you can't ever get your water-filled or refill on ice tea. You literally have to get up, go to the bar, tap your waiter on the shoulder and say, "Hey buddy, is there any way you could come over to my table and refill all the water." So everything is a tradeoff you know what I mean. Australia has the worst waiters on earth because they don't believe in tipping, but then America everything's a trade-off. Where was I going with that? You're my lawyer, where was I going with that? I got on so many side tangents I forgot the point I was trying to make.
William: [inaudible 01:23:45] about Australia I was getting ready for a trip there at some point. Now I know [inaudible 01:23:45] I don't tip.
Howard: Well, yeah, and that's what I love the most about the law of unintended consequences. When I decided I was going to go do my first lecture gig I was a little boy in Kansas. Went to undergrad in Omaha, Creighton, went to dental school Kan City. I never left this little area, little did I know I would lecture in fifty countries and you don't know what's going on in your own country till you go to another country just like it with a few variables changed and after you go like do something silly and routine like tipping, okay. In this country, all you know is tipping. Well, until you go to a country that doesn't tip you don't realize what good service is. Good service is in countries that tip and poor service is in countries that don't tip, but I have no idea.
William: You were on the three ways that the dentist gets screwed. We answered the third one, which was the one on ... the first one was about going into a practice where you [inaudible 01:24:48]
Howard: Where you can't do the dentistry.
Howard: And the flip side of that is to reverse that is to go in and find the hidden value? I do molar Endo, he didn't do it. I do extractions, he didn't do them and by the way, those are the two most profitable areas of dentistry and how you have to understand profitability is go look at the specialist. Just like if we're talking about you living in America, what's the difference between America and Indonesia? When you go to a practice that only does oral surgeons, the oral surgeons who don't place implants have a 40% overhead. The oral surgeons that place implants have a fifty to 55% overhead so that alone tells you, you're not paying enough money or understanding the total cost of implants by the time you get the CBCT, all the implant equipment or whatever. Endodontists have the lowest overhead, the lowest overhead is Endodontics. So extractions and Endo is the most profitable and when you're in dental school and you tell me, well, you don't like oral surgery and you don't like Endo. Well, I don't care I'm pretty sure my ancestors didn't like staying in a cave all frozen winter eating mastodon shit, but they did it to survive, you know what I mean? I'm sure they were sitting in there and thinking, I wish I could have Domino's pizza deliver, but they didn't have that stuff. But all I want to say is, again, it was an honor. I'm so sorry I lied to you and said it be an hour and I kept you on here for an hour and a half. I find you truly amazing. I hope someday you make us an online CE course or the next time you go lecture in dental school, just film it because it's scalable. You and I don't have time, that's like I used to go to so many dental schools now what I tell dental schools you want me to come lecture to your class, Skype me in. I'm not going to fly to New Jersey for free because there's not enough days in the year. I can't do fifty-six dental schools a year. So what I've been doing is Skyping into a lot of dental classrooms and that's really fun. But thank you for all that you do for dentistry and thank you for coming on the show today and talking to my homies.
William: Oh, it was my pleasure. Thanks for having me. I really enjoyed it and I look forward to doing it again and I also would love to do a class for you guys, would be great.
Howard: Did you email him and Hogo? Well, my son Ryan just sent you and Hogo an introductory letter, like I say, it's the most scalable way to teach dental students just make an online course. And the millennials prefer to watch it online CE course on their iPad on their couch than driving down to the convention center. The driving down of the convention center that's an old time a thing.
Howard: All right buddy, have a rocking hot day.
William: Alright, you too. Be well.