Considerations When Selling Your Dental Practice to a Group Practice

The Transcript

Art Wiederman, CPA: And hello, everyone, and welcome to another edition of the Art of Dental Finance and Management with Art Wiederman, CPA. I'm your host Art Wiederman. I was going to say another scintillating edition. So this will be scintillating because I just mentioned that it's going to be scintillating folks.

And today's topic, I think, is very, very relevant to a lot of dentists. Now, you know, we talk about taxes and we talk about metrics and we talk about insurance and investing. And but, you know, one of the things we also talk about on this program is transitions. And in transitions, there's different ways you can transition your practice. Like I'm a dental practice broker. And if you were a single dental practice doing a million dollars, you could hire me or another broker or do it on your own and sell to another individual dentist. That's one way to do it.

Another way to do it is and this is becoming more and more prevalent in dentistry is to sell to larger groups. Now, you know, many of you think of the larger groups as Heartland and Pacific Dental and Aspen and those groups, but there are many, many really good quality, smaller group practices than those. They own, I think they all own somewhere close to, if not over a thousand practices. Our guest today is the CEO of one of these high quality group practices. His name is David Lohmann. He is the CEO of Apex Dental Partners and they own twenty seven practices in excuse me, in Colorado, Oklahoma and primarily Texas.

And what we're going to talk about today, folks, is the all the things you want to know, why would you sell to a group practice? What are the advantages? What are the disadvantages? What can you expect? How is it valued? So we're going to get to all that with David, who is a really, really smart guy, and he'll have some really good information. I'm very excited about what you're going to hear today.

But first, let me give you some information. First of all, please go on to our partners website, Decisions in Dentistry magazine. That's www.DecisionsinDentistry.com. And they have amazing clinical content. They've been on top of everything during the pandemic and they have over one hundred and forty continuing education classes that you can purchase for one very, very reasonable price. So go on to their website, look at their articles or content if you're not subscribing to their magazine. I think they have. Oh my gosh. I think they have seventy or eighty thousand subscribers. Shame on you. You should be subscribing. You should subscribe to them.

If you are not working with a dental CPA firm, you should be doing that again. Shame on you. But I'm allowed to say that and I am a founding member of the Academy of Dental CPAs, which is twenty four CPA firms across the United States that represent over 10,000 dentists. And our firm Eide Bailly. I'm a dental director at the CPA firm of Eide Bailly. That's like the Ides of March E I D E. And then Bailly B A I L L Y. We work with about 800 dentists in our firm in our different offices. My group works with about three hundred in Tustin. So if you're not working with a dental CPA, go to our website, which is www.ADCPA.org.

One thing I've been talking about and this podcast will air more than likely sometime in June if whether you have filed for forgiveness or not for your first PPP loan. The Congress changed the rules on December 27th of last year. And you can now apply for what's called the Employee Retention Tax Credit. And that's a credit that's up to five thousand dollars per employee. If you had either a greater than 50 percent reduction in your practice, most likely in the second quarter of twenty twenty, or you were subject to a government mandated shutdown. And that does not mean ADA shut you down or that does not mean CDA recommended that you're shut down. This is a government mandate. Some states have them. Some states don't.

But if you had the 50 percent reduction and a lot of our doctors did because you guys were shut down for eight to 12 weeks, we are getting tens and in some cases hundreds of thousands of dollars in Employee Retention Tax Credit for twenty, twenty and for twenty twenty one it's even more robust. So if you are interested in that, you can go to our YouTube page, Eide Bailly YouTube and see the webinar that Jim Donovan and I did on March 10th. Or you can just call me at six five seven two seven nine three two four three or email me at awiederman@EideBailly.com. If you have any interest in that, and even if you file for forgiveness, folks, you can still get a nice credit. It just depends on what you put down on your forgiveness form.

And we are doing our monthly webinar series, our next webinar. And again, if you don't get to them live, you can see them on the YouTube page. Our next one, we've got Mark Johnson on student loans and Gary Takacs on insurance dependents coming up in the next two months. Go to www.EideBailly.com/dentalseries.

All right. So let's get to our topic today. And again, my guest is David Lohmann. David is the CEO of Apex Dental Partners. As I mentioned earlier, Apex owns 27 practices in Texas, Oklahoma and Colorado. Their corporate offices are in Dallas. And David is a graduate of the University of Oklahoma. And then he also went to the Kellogg School of Business for his advanced degree in business at Northwestern University, which means that he is much smarter than I will ever be. So, David Lohmann, welcome to the Art of Dental Finance and Management.

David Lohmann: It's great to be here. I appreciate you having me today.

Art Wiederman, CPA: So, David, we were talking before the recording. You're a you're a huge OU fan. And I had mentioned that my partner for thirty three years in my CPA practice is a young lady named Lauren Chamberlain, Lauren Chamberlain's mom, Pam. So when I told her so, I asked you like, so who do you like? Who do you know in Oklahoma? Oh, Wilt Chamberlain is the one. So everybody knows Lauren So I guess if the podcast goes well, we can get you maybe introduced or an autographed softball maybe. What do you think?

David Lohmann: I appreciate that. I'll definitely take you up on it.

Art Wiederman, CPA: There you go. So, again, the purpose of our episode today, folks, is to give you some really good quality information about how if you are thinking about transitioning your practice and you're thinking about looking into groups, David has a lot of great experience in this, not only from what he does with Apex, but his prior life and just knowing the industry. So we're going to get into all that today. So, David, first, tell us a little bit about your journey. Where did you start off? I know you went to Oklahoma and Northwestern. How did you start your career and how did you form Apex? And tell us a little story about that.

David Lohmann: Yeah, you bet. So I started my career in finance, actually, so I don't come from a dental background, not a dentist myself. However, my wife, Layla, is a dentist. And, you know, a lot of what's the genesis of what we've built Apex around has entirely been based on her experience kind of going through dental school, coming out of dental school and really those first two to three years of her career. So while she was in undergrad, she worked as a dental assistant for a wonderful, wonderful dentist and ultimately became a mentor of hers and, you know, really went to dental school with this private practice career in mind. You know, the traditional name on the door, solo practitioner, really practice geared entirely around that doctor.

And when she came out of dental school, the truth is, is that the industry was changing. The economy was in a tough place. Private practice just wasn't growing at the same rate that it had historically. And I think the number is 50 of her, 54 dental school classmates went to work in a non private practice setting. So that's a number of different situations. But importantly, just non private practice.

Art Wiederman, CPA: And when did she graduate?

David Lohmann: In 2011.

Art Wiederman, CPA: I've been hearing that, too. I talked to the folks at USC and UCLA in our neighborhood and we're hearing we're hearing that, too. So go ahead.

David Lohmann: Yeah. And, you know, candidly, I think that the concept of going to work at, you know, group practice was relatively young at that time. DSOs were, you know, Heartland existed. Some of the larger ones were certainly out there. But as an industry, you know, a lot of young dentists just weren't familiar with what those groups were. And, you know, I think the concept of starting her career there was initially a bit devastating. It just, you know, rightly or wrongly, it wasn't what she envisioned.

You know, she started her career with a very large dental organization in a practice here in Dallas and, you know, was there for two years. And I would tell you that over those two years, a couple of things kind of evolved. One was she realized how really as a young dentist coming out of school with, you know, kind of no business background, how ill equipped she was to kind of manage the business side of the practice, it wasn't it where her strengths were. That's not the case with all dentists by any means, but it wasn't her strengths. And more importantly, it wasn't what her interests lied. And it was she was truly the, you know, kind of the patient, the provision of care aspect of dentistry that interested her most.

You know, the particular group she was with just simply had a different model we'll jump into that, I think, during this podcast of, you know, the wide array of different group models out there and how there truly is an option for every dentist looking for that broader support. But what we did realize is that as we kind of as I followed her early career, obviously closely, what we believed there was a place in the industry to combine the values and culture of private practices with the resource of a much larger dental organization.

So in 2014, my partner, Matt Hale and I, on the business side, my wife on the clinical side started Apex Dental Partners. And while we have grown significantly over those seven years, we've really stuck extremely closely to that original model. Our supported network is comprised primarily of larger, more mature practices and major metro plexus. And as you mentioned today, we support about 30 practices and 50 doctors across Texas, Oklahoma and Colorado.

Art Wiederman, CPA: And so let's kinda get into some of the different things I so much want to talk about. So you said you own about 30 practices. So what is the most common profile of a dentist who is looking to sell to a group like yours? What are you looking at there?

David Lohmann: You know, this is a more difficult question than probably you think, and only because today there are because the industry has evolved so much. I think most people probably think the answer is it's primarily that dentists that's later in their career looking for retirement transition solution and really looking for an option to kind of sell and ultimately transition out of their practice. But I would tell you that we, as a relatively small organization in kind of the broader dentistry landscape, we have had doctors join us at truly every kind of decade of their professional career. So 30s, 40s, 50s and 60s and 70s.

And, you know, I think the one thing that is consistent is that people are looking for change. People are looking for something different than the way they're practicing currently. And we can get a little more into that. But I think for your listeners, the really exciting part of where we are in dentistry today, that the industry is changing rapidly. That's on the technology side. That's on the marketing side. It's on the dentistry side. And I would tell you that more now than at any point in history there are truly more options out there. There is a model that fits any dentist, any practice and would really just encourage dentists to kind of learn more. It's not saying by any means, it's a fit for everyone. But if you are looking for that support of the larger organization, I truly believe there's one out there for you.

Art Wiederman, CPA: And I know there's a lot of reasons, David, that I hear and especially in the pandemic. I mean, I have doctors who are in their 50s and 60s and 70s who were saying, you know, I came back to this and I got to do all this PPE and I get to wear all this and I got to dress like a space like I'm going into space to do dentistry and I got to buy all this equipment. And patients are worried and every single patient is telling me their covid. This is not what I signed up for. And some of them are saying, you know, maybe it's time for me to transition out of the management part. A lot of them don't like the management part of it. So give us some reasons that you get from people. Why do they want to look to talk to you?

David Lohmann: You bet. And I think that the really the true answer is that the reasons are so personal and so different for each dentist. But, you know, I think if we look across the literally hundreds of conversations we have each year, the you know, the 50 plus doctors that that are in our group, I kind of break that down into three buckets. And, you know, I think the first is financial, whether that is kind of ultimately a retirement transition solution or kind of more wealth diversification. And as you mentioned, the pandemic kind of highlighted for the first time and maybe the last decade to business owners that there's risk in this world. We've been living in a really good business environment.

And I think for a lot of, not just dentists, but small business owners as a whole realized that, you know, when you have the overwhelming majority of your wealth tied up in a single asset, that is also your kind of income source. That's a lot of financial concentration. So I would say the first book. It is financial reasons that a doctor might explore affiliating their practice with the group.

I would say the second is, again, you mentioned it, but it's really the support. It's that dentists who is stressed who is, you know, feels like they're stretched too thin. The word is probably or the phrase is probably overly used, but it's that work life balance. It's that dentist that is looking to give up the administrative burden that's associated with practice ownership. And I think that if there's one thing that groups do exceptionally well, it is providing that kind of business support to a dentist with strong clinical background.

And then I would say the third kind of bucket and we see this primarily, I think, with younger doctors who are joining groups, is its growth. Many of these doctors feel like they've got more that they can provide to that they can offer to this industry, to their practice that there's a growth that they just haven't been able to hit. They were growing rapidly for a point in their career and have really plateaued and are looking for the support, whether that's marketing, whether that's leadership, whether it's just a little more maybe business focus to help them take their practice to that next level. And again, the nuances within those are specific to the doctor, but those are really the three that we see most common.

Art Wiederman, CPA: And you know what's interesting is because, again, I've been working with dentists for almost thirty seven years, David, and I just see, you know, when they come into our office and I'm doing their planning sessions, I talk to them about their practice. I say, well, what are you doing for marketing? Well, I'm really not doing anything. I said, OK, so let's look you up on Google. All right? Because my my one of my good friends in the industry, Gary Takacs, as he talks about, he says, what's the most what's the number one search engine out there? And the answer is Google. And then he asks, well, what's the number two search engine? And the answer is, who cares?

So basically and what I'll do is I'll take these I'll take the dentist and I'll go let's Google let's say they're in a city of Lakewood, California. Let's Google dentist Lakewood or Lakewood dentist. And it is amazing to them how they don't show up on page one, two, three or four. And I go, if you're not in the first two or three, you know, it's you might as well not be on the Internet. And it's all about reviews. But I would think that, you know, working with a group on marketing, I mean, you've got marketing, I'm going to guess, down to a science. And you know how you do it the different ways you do it. And then technology. And also, don't you guys offer a lot of training as far as, you know, clinical training? Because, you know, we want these dentists to be the best clinical dentists that they can be. So all these things, talk a little bit about that.

David Lohmann: Yeah, absolutely. And I think this is part of where we have found that a lot of dentists are hesitant to admit that they're struggling with parts of their practice, that in many cases that doesn't show up in revenue. You know, they're quite successful at the top line. It's that they feel I mentioned this industry is evolving. It's really business as a whole. Marketing has become more and more complex. You know, some of the dentists that are later in their career probably listen to this podcast. You know, they started at a time where in many states marketing your dental practice was actually illegal.

You know, there were restrictions on the size of the sign you could have outside of your practice. And now truly, you know, if you don't have a website refined SEO process to drive traffic to your website, you're not driving patient reviews, right or wrong. In many cases, you're getting left behind. Someone else's is attracting kind of a disproportionate share of those new patients. And anybody listening here knows that, that really new patients, is the lifeblood of a practice.

So, you know, beyond marketing, it's you know, it comes down to it to a limitation on mindshare. As a dentist, as a practice owner, you're expected to be an expert of everything. You know, you're seeing patients chair side probably eight plus hours a day and then you get to start the other half of your job. And that's, you know, dealing with staffing issues that came up throughout the day. It's paying bills. It's doing working with you may be on the other side and on the accounting piece. It's making sure your supplies are ordered. It's just a lot of hats that the dentists have to wear.

And as you said, this industry becoming more and more complex on the compliance side, on the regulatory side. And again, I think that's where groups have really stepped up and said, look, we can build through scale, we can build true subject matter expertise that, you know, for most practices single and even maybe one or two practice groups, it's really hard to have dedicated resources that focus on all day, every day on your new patient acquisition platform, your marketing platform, your benefits, your payroll, the technology side of your business, all things that I think take a back burner in many cases, but are really, really important to a practice's overall success.

Art Wiederman, CPA: Exactly. And so when you're looking at a practice, I mean, I'm assuming from our conversations that you're at twenty seven. You're looking at growing right?

David Lohmann: Absolutely.

Art Wiederman, CPA: OK, what are you looking for? In other words, we've talked about why the dentist might want to come to a group and you gave three buckets, the financial, the management and the quality of life and all those things. But what are you looking for? In other words, you're not going to buy every practice that gets in front of you, right?

David Lohmann: That's right. And I think that the most successful outside groups, but really businesses as a whole across industries are those that have a model, a business model that stay disciplined and stick to it. And regardless of what segment of the industry, you know, you fall into, you look at a grocery, you've got Wal-Mart up to Wholefoods, and they're really targeting different segments of the general population. But they stay true to that, that kind of business model and have each carved out massively successful niches.

And I think dentistry is absolutely the same. And again, is the you know, the group landscape in this industry has continued to grow and continue to evolve. There's truly models out there for everybody. And what different groups are looking for varies based on that model. But, you know, let me speak to this a little bit. We are primarily general dentistry focused. We have some pediatric practices in our group, but as a whole focused on general dentistry versus some groups that are multi specialty. We've really seen an emergence of specialty focus groups, whether it's oral surgery, ortho or endodontic groups.

Art Wiederman, CPA: I dealt with all of them. We have specialty clients that are talking to all of those food groups, if you will.

David Lohmann: Absolutely. And I can talk a little bit about general dentistry broadly and specifically at Apex, what we look for. So, you know, the first is it's just a reality of the world. Most groups look at kind of a minimum financial size, and that is groups that are devoting tremendous resources to support you and your practice. And you know what they bought at the end of the day, it's got to be profitable. And so, you know, I would guess that most groups from a stand alone basis are looking at your practice operating at standalone and I mean that versus potentially merging practices together to create larger kind of group practices, which, you know, we found tremendous success in as an organization. And I think the doctors have found tremendous benefits in practicing and kind of these larger group settings.

But for a lot of groups, I would guess that there's probably at the very kind of, you know, high level and nine hundred thousand of collections or a demonstrable path to near-term growth that they're looking for in a practice. Now, if you are not at that level, that does not mean there's not a group out there for you. I truly am speaking kind of in generalities, so I'd encourage you to look out there, look at your options, contact us.

Even if Apex is not the right fit for you, we're not operating in your area. We are always happy to have a conversation and talk with you about the options that we see out there. So the first is kind of size. The second, I would say, is kind of geographic focus. Most groups are not truly kind of national groups out there know there are some that are in, you know, maybe thirty five or fifty states. But the overwhelming majority of groups are kind of hyper regional groups, if you will.

So is a group operating in your part of the country? Are they growing in your part of the country? The kind of tangent on that is even within that geographic region, what is their focus? Is it urban? Is it suburban? Is it more rural? So on a lot of these it's not about whether or not your practice checks a box to be interesting to a group. It's whether or not you find a group that truly values what you have to offer. And again, I truly believe there is a model out there for every dentist today.

Art Wiederman, CPA: So if I'm a dentist out there and one of the things that I've talked to, I talk to lots of young dentists, I talk to them in dental school, I talk to clients and you hear about groups and you hear, oh, my God. Well, as soon as you go to work for that group and you work back, they're going to tell you what lab to use and what supplies to use and what burrs to use and what gloves to wear. And they're going to and it's all about production, production, production. I'm guessing that that in a good quality group practice like yours that the dentist has pretty much full, you know, the full ability to give patient care the way he or she feels like they should give patient care. Talk a little bit about that and what a dentist should be looking at when, you know, what are they going to you know, when they practice on their own, they do whatever they want, OK? Now they're working with Apex or another group. What should they be questions they should be asking things like that. And how do you guys do it?

David Lohmann: Yeah, great. Great question. And probably the most important thing that we're going to talk about today, and that is truly identifying if you are exploring group options, the group that's right for you. So I would start with philosophy, understanding what the group's general philosophy is, both from a business perspective and really importantly to the specific question, a clinical perspective. What role does the doctor play both within the practice, within the broader organization? And I think a tangent on that to give you kind of insight into to truly what that looks like is to inquire what their average doctor tenure looks like.

For a doctor who's looking to kind of sell their practices as a retirement transition solution, it's two years and I'm out. Maybe this matters most or maybe this matters less. But I would tell you that the overwhelming majority of conversations we have with doctors, regardless of where they are in their career, they're looking for a longer term partner here. They're not looking for kind of a short term transition solution. And so I think that's really important.

Next question is, what does this mean for my team? What is what benefits would my team pick up as being part of a larger group? How does this impact their pay? You know, things like that. Again, these are the people who have allowed you to be successful for years and years that your support staff. So make sure that you understand how joining a larger group impacts them. You mentioned it. And to me, I think what is the group's approach to clinical decisions? That's labs, supplies. I would say that just like this is not necessarily specific to groups, I think it's the reality of working either for somebody or with somebody as a partner, even in private practice. A lot of private practices are going to tell you, if you're an associate doctor, what labs to use, what supplies they're going to order and in groups take different approaches.

We, as at Apex, take a different approach personally. It works for us, you know, but I think it's important to understand what that approach is. And for us, lab supplies, those are clinical decisions. And one hundred percent of clinical decisions stay with our doctors.

Art Wiederman, CPA: Now that doesn't mean that as a group, because one of the advantages of being in a group, David, is, you know, you've got some buying power, right? I mean, a person that owns one practice isn't, quite frankly, going to have the buying power of a group that owns twenty seven or 50 or 100 practices. So you might say to the doctor, no, doctor, you know, we've got a good deal with this company. And as long as they have the materials and supplies that you're comfortable practicing with, you can go ahead and use them. So what is it that's going to tell you to pass on a dental practice? I mean, how many practices a year do you guys look at to I mean, do you look at a lot?

David Lohmann: We do. And I think most groups are probably in the same bucket. So we probably evaluate one hundred plus practices a year. And you can tell by the number that we have affiliated over the years is that we are extremely selective. We stay disciplined to our model. Importantly, we take the approach that when you're entering into a partnership, we think of it as a marriage. We want it to last long term. We kind of make the joke that it's never wise to enter into a marriage hoping to change the other person. So we spend a lot of time focused on, you know, the person up front making this, making sure this is a person who, you know, not only do they share Apex values, but do we align with how they have built their practice over the years.

We look for opportunities where we truly believe we can add value, help take that burden off a doctor, help make them build upon the success that they've achieved to date and really take some of that weight off their shoulders. So for us, it starts with is this a person we want to be in business with? I think probably a lot of people think it's more financially driven, but we have passed on many really, really large, profitable opportunities because it wasn't a person that we thought long term fit the Apex culture.

And I think truly, you will see that among most groups out there that they have, you know, kind of a profile that they've been successful with, that they've had long term successful partnerships with and are really focused on ensuring that it's a long term positive relationship. So for us, it's about it starts with the person.

I would say second is payer mix. Now, this may be lower on the list for certain groups. But, you know, we have a very specific model in which our practices are either entirely fee for service or PPO driven. So no HMO, no Medicaid. Again, there are groups out there that on the other side are entirely Medicaid focused groups, and they do it extremely well. So it goes back to finding a group that values your payer mix and ultimately can offer you the most value for that in terms of purchase price.

Art Wiederman, CPA: So I want to take a second and guess this is again, I don't get anything for having someone like David on. This is not a promotion for Apex. This is someone who's obviously very knowledgeable and smaller groups could be a fit for you. And it's like anything else, you need to look at the opportunity and say, is this a fit? David needs to look at it and say, is it a fit? So, David, if any of our folks anywhere in the country have questions about it, I'm thinking about going to a group and I've got this. You indicated you'd be happy to chat with them, right?

David Lohmann: That's absolutely right.

Art Wiederman, CPA: So why don't you go ahead and give out your contact information, your phone number and your email, and we'll make sure we put that in the show notes. I've got your email. What's a phone number that they can reach you if they want to call you?

David Lohmann: Yes. So the best way to reach us is two one four seven zero four zero seven two zero. OK, and for those of you just looking for maybe a less kind of committal way to reach out again, we understand that each person is at different places of kind of exploring transitions. So I would encourage you to visit our website. It's www.ApexDP.com That's D and Dental and P as in Partners dot com. And you can reach our affiliations team at affiliations@ApexDP.com.

Again, that's a group that will be happy to have conversations with you regardless of where you are in your kind of research period of understanding whether or not a group or Apex specifically might be the right fit for you. They're extremely knowledgeable. They talk with a lot of dentists each and every day. And, you know, we've really built this company around being a resource for dentists. Whether or not Apex is ultimately the right partner. We want to be helpful. We're excited about where this industry is going. We're excited about the opportunity that still exists here. And I truly want to be value added.

Art Wiederman, CPA: No, and you're right. And I'm excited about where dentistry is going to coming out of this pandemic. I mean, I remember in 2008, David, the dental profession came out and they were down five, 10, 15 percent, but they came through it. This pandemic, you know, they had to shut down for eight to 12 weeks. We were very lucky that a lot of our doctors got PPP loans, which a lot of them were able to bank the money, which is kind of nice. And they got other guidance. We have the ERTC and all this stuff. And dentistry is always just been so resilient and able to, you know, and it's all about caring and trust. And as long as doctors you're looking at a group, if that's the way you decide to go where, you know, you're probably going to want to work there.

That's one of my next question is coming up is about do you want the doctors to work? But if this is a place you want, you know, maybe you're forty five fifty and you want to travel, you want to not have all the headaches and worry about, oh my God, I've got to do a new website and I've got HR issues and what do I do with this one employee that's driving me crazy. You know, you can look at this.

So I guess the next question is you know, let's say I have a dentist who wants to sell to a group practice like you or somebody else. Are large group practices being aggressive out there in the marketplace, contacting individual practitioners. I mean, it's not like the MLS in real estate where if I want to go buy a house in Dallas, I get a broker. I look on the MLS and there's a house. It doesn't quite work that way. Dentistry. So what should somebody do if they want to start exploring? How do they find you guys?

David Lohmann: Yeah, and I think that's a great point, is that, you know, I wouldn't sit back and assume that if a doctor or if a group is interested in your practice, that you'll hear from them. In fact, quite the opposite in many ways. I mean, just the dynamics of dentistry make kind of outward marketing more difficult. You know, we would never cold call a practice or just show up looking to speak with a doctor.

I think we're extremely conscious that most doctors are afraid of how their staff will react if they find out they're exploring different transition options. And we always want to be, you know, extremely respectful of the impact of exploring options, what exploring options has on a doctor, and so, you know, we do we have direct mail marketing effort, we do some digital marketing, but I would encourage all dentists to do their research. There's a number of places out there that you can look for, lists of groups active in your state. There's a lot of information out there on different groups. I would encourage you to do as much of that work on the front end and then have some calls, have some meetings.

That's what we do. Our job is to help, you know, educate doctors on our model, how we're different, how Apex might be the right fit or another partner might be the right fit. So, you know, I think every group out there is always open and excited to be having those conversations, even if they're preliminary. So and don't wait. This is probably the number one. I don't know that one of the hardest parts of my job is, is telling a doctor that we're not going to be the right fit because they've waited too long. You know, they as they wound their career down, the practice declined. It's no longer something that's a fit for our model. And I think every group has had that conversation. So, you know, encourage you to start at least your research early and, you know, make sure you're in the driver's seat of making the decision on when the right time is to transition your practice.

Art Wiederman, CPA: Yeah. And yeah, if you wake up one day and you can't move your right arm, that's not a good time to start calling dental groups folks in any negotiation. And I teach this to clients and young dentists all over the place. In any negotiation, you have to look at what your leverage is. And if you are forty five years old, healthy, you'd like to make a change like David was saying, then you've got leverage because if you go to Apex or another group and they make you an offer or something, you know, you don't have to sell to them. So that's leverage.

So let's talk about. First, I want to talk about valuation, because the dentists are all going to want to know. Now in Southern California, which is the world I live in, we look at valuing single practices. We look at a couple of different factors. And I've talked about this on the show before, anywhere between two and two and a half times the true net profit after we had back depreciation and interest and amortization. And, you know, my goldfish that I'm paying. I mean all the stuff that goes through and what have you. And that's a whole 'nother show. We've talked to the bankers about that.

And in Southern California, seventy five to ninety five percent, ninety five is a little high, of the prior 12 months gross receipts. And the pandemic is not really taken into account because that's not a real period. So we look at those and that's how we usually value. Now I know that there's EBITDA and different ways to value practices. And David, dentists here, oh, wow, if I sell to a group, I'm going to get 12 times gross revenues. I go, yeah, well, good luck with that. Tell us when you're looking at maybe how you do it, how do you look at valuation? I mean, do you have a formula? Do you have a way you do it? How do you do it?

David Lohmann: Yeah, so great question. And I think that historically, a lot of us have kind of been directed towards this percentage of revenue, percentage of collections, as you mentioned. And that is truly a great kind of, you know, hey, if all I'm looking is at a very high level for estate planning reasons of roughly what would my practice be worth, I think that's a good place to start. I think the reality is, is that when you look at something based on revenue, it really ignores the nuances of the practice. And for doctors especially, who have run a business, a really well-run business that's highly profitable, basing something off revenue probably understates the value of their actual practice.

And so, you know, I love that you mentioned this. This multiple of net, you know, that is a metric. I think if you look back 20 years, that was more common in the industry. It's moved more towards doctors at a high level, looking at a percentage of revenue. But most groups are really basing it on that kind of original. We do look at EBITDA, but effectively, it's the same metric as a multiple of your net. It just EBITDA takes into account the doctor's ongoing compensation. So it's really this six one half dozen to another. It's just the multiple gets bigger. It's not that the value is no different, but the multiple is slightly larger. If you're looking at EBITDA versus, you know, like you said, a two and a half times net.

So for those of you on here, you got you may have covered this a lot, but EBITA is earnings before interest, tax depreciation and amortization. It's sounds complicated at a really high level, it's revenue minus your practice overhead, minus ongoing doctor compensation. Right. And you know, that's really what most groups and really most businesses across all industries are valued on. It's a proxy for cash flow and a buyer, whether it's a group and individual buyer or if you're listing a practice, you're doing an analysis for that buying dentist to understand what is the cash flow of this practice going forward.

Can it cover my note? Can it provide the income I need as a solo doctor for my family, if it's a group to cover the resources you're committing? And that's really how we look at valuations. But, you know, I think it's ultimately any practice is worth what somebody is willing to pay for it. And I think there are certain dynamics of a practice that makes, you know, whether that's location, whether it's opportunity for growth, whether it's initial size. There are nuances that value some practices over others. And I think that's really where either engaging someone like Art or, you know, working directly with a group, if that's the route you choose to go, could really help you understand where does your practice fall in that range.

Art Wiederman, CPA: So, yeah, and that's right. And, you know, you're going to come up with a valuation. So let's say you talk to Art Wiederman DDS and you come in, you're like my I have a six operating practice. I'm doing one point three million. It's a profitable practice. We have, you know, philosophies that align and everything is good. You like us, we like you. And then we go in and make a go and make the offer.

So is, you know, when I sell a practice most all of the time, it's a cash deal. Now, whether it means that the buyer is coming up with one hundred percent cash, that happens every once in a while. But most of the time they go to the banks and they will get a loan and they may get a loan for one hundred percent. They may get a loan. The bank might only loan 80 or 90 percent. They'll put their own cash back in. There might be a small seller note.

How do you guys do it? In other words, you know, I know that some groups, David, offer equity in their groups. I know that some groups hold back money for different reasons. So if I come to you and let's say you told me, we agreed that I was going to, but I would just sell my practice to Apex for a million and a half, by the way, I want a million seven. But we'll talk about that later. No, a million and a half is a fair price. How is that going to work? Is it different in every deal? Is most of it. Do you have a certain formula? Is it all cash, you hold back? Is there any, how does that work?

David Lohmann: So it's probably different for each buyer. But I would say at a high level, you're absolutely correct. So the difference is in most of the transactions that you mentioned and kind of where dentists is listing their practice, selling to another dentist and there's probably either zero or at most a pretty short term transition, you know, and then you're out. Those are primarily full cash, full cash at close type transactions.

For most groups, they place tremendous value on that extended transition of the selling dentist. Maybe not all, but I know we certainly do. We look for a minimum of a two to three year commitment from that selling doctor. And, you know, our deals are all structured the same. So we structure each of our affiliations as seventy five percent of the purchase price due at close. Twenty five percent held back in the form of a seller note that's paid out over those two to three years depending on the commitment. We specifically don't have contingencies on that note, some groups, it's tied to your production going forward. Other groups, you know, it has different kind of almost burnout type features where it's based on the performance of the practice after close.

We specifically only have the note contingent upon you continuing to practice during that transition period. It's really designed to align incentives, ensure that there's a smooth transition of the practice, that ideally we'd have really long term relationships with all of our donors. But we're also aware that, you know, some dentists actually are looking for a retirement transition solution. And when you've reached that point, you've absolutely earned the right to, you know, to be in control of that timing. So, you know, that's how our deals are structured.

Within that seller note, we do have an option for dentists to take a portion of that seller note in the form of equity in the management company. And this is when dentists hear about taking equity in a group, I think there's two ways in which that comes. It's typically either kind of equity at the practice level and the other is equity at the management company level. Both have, I think, pros and cons. And you should just really understand which one fits what you're looking for and more importantly, that you understand the mechanics of how kind of a future value is realized in that equity.

Art Wiederman, CPA: And it's also important and I don't know what your future plans are and you know, we're not going to get into what Apex's future plans are today, but there are groups that form and they buy a bunch of practices and they basically merge up. In other words, they might have they might start with 10 or 20 practices and they acquire and they get to 50 and then they're going to go to private equity or they're going to go to a larger group. They're going to do that. And it's important to probably it's important to any group you're talking to ask them, you know, what's your endgame?

Because if you come and you talk to David Lohmann and his team and you really like what they're doing and 18 months later and you want to work for five years, 18 months later, they sell to ABC Dental and ABC Dental is you know, you have to throw up every morning before you go to work. I mean, that's not good. So it's appropriate to ask those questions David, isn't it, in the interview process for a seller?

David Lohmann: Absolutely. And I think that's regardless of whether you're taking equity as part of that deal or not. Obviously, it's even more important if you're taking equity. But again, you know, we are looking for long term relationships with every doctor, whether that's a selling doctor or a doctor who joins us out of growth. But, you know, it's really important that everybody's oriented around long term plans. And, you know, I think that you mentioned that there's kind of two, look at the end of the day, regardless of any what any business looks like or their investor group looks like, investors tend to want money back at some point. And I think that's important to realize.

Art Wiederman, CPA: Is that how that works?

David Lohmann: Exactly. Exactly.

Art Wiederman, CPA: And I thought it was like all free money and they just do whatever they want and it it's not a big deal, you know.

David Lohmann: That would be nice for sure.

Art Wiederman, CPA: That would be the easier, right?

David Lohmann: That's right. And but I think it's important to understand, you know, if I see a group, but if even a an individual comes to you and says, look, we're going to put ten of these together and flip it and we're all going to get rich, I would have real concerns as to what the long term kind of business model looks like in that approach. It probably dictates the way that they make decisions that, you know, they may be making decisions that make sense short term financially, but, you know, limit your long term growth as the practicing dentist, you know, where other groups, you know, if they're more long term oriented.

I think that, you know, as private equity has become more and more active in the dental industry, there's a lot of concern among dentists of what that means. To some, it reflects opportunity and excitement. To others, it's a scary kind of boogeyman. And I think the reality is understand that really private equity is simply a financial buyer. For most practicing dentists and really any person that whether at the support level or at the practice levels in an organization bringing on a private equity buyer likely has very little impact on kind of the day to day operations of how you go about your day.

It's truly, you know, it's returning capital to one set of investors and replacing it with another and really starts the clock on kind of that next phase of growth for most organizations. So I would say, look, it's certainly not in every group and it may not even be the right fit for you, but don't be afraid to ask the questions and truly understand how kind of that long term plan aligns with your long term plans as a practicing dentist.

Art Wiederman, CPA: Yeah, that's really, really good advice. So I want to ask another question. So I'm counseling my client, Dr. Wiederman, who has a million dollar practice. He's netting three hundred fifty thousand a year. Now, folks, remember what you net for tax purposes and on paper isn't necessarily what you really net, because I think I've mentioned David, one of my clients years ago told me about how they have expenses in their business called businal expenses. I said, so what's businal, he said it's a combination of business and personal. I said, oh, this will be interesting. Tell me about that.

So the fact is, doctors, if you are running fifty, seventy five thousand dollars a year through your practice and going, you know, stuff that may be on the on the cusp of being deductible, not deductible, I don't necessarily think that Apex or any other group is going to allow you to do that. So maybe you're making really four hundred thousand your practice.

David, what would a dentist. So you're going to go ahead and you're going to buy my practice for, I don't know, eight hundred, nine hundred thousand. Whatever you're going to buy my practice for. You're going to write me a check for seventy five percent. You're going to kind of pay me the rest on a note. Or maybe you're going to give me, whatever you're going to do. So am I going to still make that four hundred thousand dollars? What's the compensation formula?

And doctors, it's really important that you understand that if you sell your practice, whether it be to another dentist and work backwards or to a group, I'm guessing they might not make as much money as they were making as an owner. Does that make sense, David?

David Lohmann: You know, it does. But I think there's a couple ways to work that. Yeah, we spent a lot of time kind of helping doctors understand that financial picture going forward. And I think, you know, we have seen a lot of doctors go, well, I'd be better off working three more years. And in a spreadsheet, that's always going to be the case. That's just the way math works.

What that ignores is kind of the risk. It ignores the burden. It ignores all the kind of the intangible reasons that a doctor might look to partner with a group. So, you know, we talk to doctors a lot about if you think about as a practice owner, the income that four hundred k in your example, Art, you're really being compensated for wearing three hats. You are the doctor. So part of that four hundred thousand is what you're earning chairside effectively. Part of it is you're the manager. Even if you have an office manager, you're ultimately the manager of your practice. In the third is it's a return on the initial equity that you invested when you bought that or started that practice.

So there's really three hats you're wearing. And by affiliating with a group, you're giving up two of those three. You're giving up the equity investor hat and the manager hat. Now, they are not a third, a third, a third. I would please don't hear that. Your income's not going to decrease by two thirds or certainly shouldn't. But you're right. There is, you know, part of that income that you're giving up, and that's effectively the return that the buyer looks for on the investment they're making in your practice.

However, I think if you don't do the second part of this equation, and that is what can I do with the equity that I took out of my practice, I'm sure Art and his colleagues would be happy to help educate you on different kind of investment structures or estate planning structures through different parts of their firm or maybe sister firms. But, you know, I think it's really important to understand that, look, if I'm taking a million dollars of cash out of my practice, that, yes, the income I earn year to year in the practice is likely to go down because now I'm only functioning as a dentist. Now I say only it's a huge and important role within the practice. But you really given up those other two hats.

But what is the income I can earn by investing that million? And when I spoke earlier to one of the reasons a doctor looks to join a group that's both estate planning, retirement planning, but it's also younger doctors that are younger in their career are saying, look, I've got this equity I've built in my practice. I'd like to diversify it, whether that's investing in real estate, whether it's investing in startups or small businesses, whatever's of interest to you. But it's really taking that equity out and giving it an opportunity to grow. So if you ignore kind of that that passive income component or the opportunity you have to build on that million, you're really ignoring part of the equation. I think when you put that together, a lot of doctors realize that the lost income is extremely minimal up front.

One thing, one more thing Art and I'll let you talk, but one of the beauties I think, that a lot of doctors realize is that with support, with one hundred percent of their kind of mindshare focused on that operatory, you know, they see their treatment acceptance go up with the marketing support. They see the opportunity for production to increase through new patient flow, with staff training support and additional resources for the practice, whether that's your facility technology, all of those things give doctors an opportunity to actually grow their practice.

And I think they see that the gap that's over time between what they're earning pre joining a group and post joining a group, you know, actually becomes negligible. And we have a number of doctors who truly earn more with Apex today than they were taking out of their practices as a practice owner.

Art Wiederman, CPA: So do they get, let's say they come in and the practice is doing a million. And what you just said happens is that they're happier, the stress is gone, their case presentation is better. You give them some training, their revenue. So now this practice is not doing a million. It's doing a million six. Do they get rewarded a share of the additional profit once they've sold you and not only your group, but in other groups that you've seen?

David Lohmann: Yes. So this is I think there's two pieces, two answers to this question. So the first is, if you are taking an equity component specifically at the practice level, you would directly see some increase in the value of that equity. If you are taking it in the management company level, it's less direct, but you have to assume that if the company you've joined is enabled that growth in your practice, that they're likely growing the overall organization in a similar way. So there's an equity growth component to this that I think is really important.

The second is, is kind of OK, but what's the cash kind of participation, the annual cash participation in that growth? And really for doctors, they see that in two fold. So the first, well within Apex, at least. Within Apex, we have a practice growth incentives that is specific to our doctors. So they share in kind of this bonus pool for year over year total practice growth. It's really designed that some of that growth comes in hygiene. And while that's not how our doctors are directly compensated from a regular compensation formula, it's important that they're supportive and in share in that upside.

And the other side is you have to assume that a million to a million six in this example, that the overwhelming majority of that most general dentistry practices are about seventy five percent doctor production versus twenty five percent hygiene production. So you have picked up your kind of compensation formula on that's four hundred fifty thousand in this case. And that's something that I'm happy to jump into, of how our compensation formula works for doctors. But in general, I think most groups compensate their doctors on either percentage of net production or collections, which they're effectively the same at the end of the day. That's right. That's right.

But and so it's really, you know, you have the opportunity to grow your income. And I would say that as a group, we only make money if our doctors make money. And so incentives are one hundred percent aligned to help you grow your practice.

Art Wiederman, CPA: Right. So a couple more things before we put a bow on this, David. And the information is great. Just folks, think about it. I use this I've said this on this podcast for two and a half years now. Seventy five percent of any major decision that you make in your life, whether it's getting married, buying a house, buying a building, buying a practice, selling your practice to a group is in your gut. And if it doesn't feel right and it doesn't smell right and you're being pressured and then you shouldn't do it.

But so, David, let's say that we wanted to come into your group. You've got 50 doctors and not all 50 of them have sold their practice to Apex. But some of them have, right?

David Lohmann: That's right.

Art Wiederman, CPA: Right. So would I have, would Dr. Art Wiederman have the right to pick up the phone and call Dr. Jones in Dallas who sold his practice to Apex three years ago to say, hey, Dr. Jones, you know, I'm kind of thinking about doing this. How's this working out for you? Is this a good idea or are these good people or am I going to end up in Iceland somewhere? I don't know. Does that, do you allow that? Do you encourage that? How does that work?

David Lohmann: Yeah, not only do we allow it, it's truly a requirement for us, for affiliating doctors. We, you know, we're big believers. Again, it goes back to we want every person who joins Apex, whether that's a selling doctor, whether that's a doctor who joins us as an addition to a practice, well that's a dental assistant. We really talk about your time with Apex as a career, not a job. I know that's probably not, you know, as big of a nuanced approach to many of your doctor listeners. But I'm sure many of them kind of understand the difference. They've hired staff and where a lot of staff today may look at as a job rather than a career.

And so it's really geared around this long term orientation. We want doctors to be with us for the remainder of their career. And so, you know, we think it's really important that expectations are aligned up front. You know, no transition is one hundred percent smooth. You know, if a group tells you that it is they probably haven't done enough of these. Are you sure you've seen this. But the reality is, is that every transition is different and it's different because, you know, the emotions behind a practice transition, and ownership transition is incredibly emotional for that doctor. It should be. This is your baby. You've built this.

And if you're partnering with the group for, you know, to build upon that legacy, you know that that transition is going to be an emotional one. And so we really encourage doctors. We start with three typically and say, here's three. If you want more, call more. We've had doctors call ten or fifteen of our doctors, but we require that they speak with a couple of them and ask the hard question, how was the transition for you? What were the pain points? How did your staff react?

Again, I think it's really important that a doctor hears that, hey, when we hit a roadblock, Apex was really quick to take a partnership approach to resolve the issue and to make sure that things got back on track. And I think that is what you should look for when you're talking with dentists is not was it perfect because the answer is it wasn't. It won't be. It's you know, when an issue came up both through the transition or perhaps later in the partnership, what was the approach taken to resolve that issue?

And, you know, I think the fact we haven't talked about it, but we have almost no doctor turnover in Apex. We for the first time. It's something is probably the fact that we are most proud of, you know, those doctors with the kind of transition commitment, the overall majority of our doctors are well past their transition commitment. And I think it speaks to the partnership approach we take both on a day to day, but also just, you know, how do we approach, you know, issues, growth, you know, making sure incentives are aligned and everybody winning in this partnership. And those are the things you should look to talk to existing doctors about.

Art Wiederman, CPA: Really, really good advice from you. And I think I think I'll say we're recording on a Tuesday. So Tuesday is my good advice day. Wednesday, not so much, I should say. Anyway, last question and then we'll wrap it up. If a doctor wants to sell to a group and they don't want to work back, will you consider that or is that a requirement?

David Lohmann: You know, we will, but the situation has to be specific. Now, look, there are probably groups out there that have no issue with that approach, but we find so much value. And I think truly part of the value that we ascribe to a practice in financial value in terms of purchase price is about the person. I spoke to how important that is for us in both, you know, what attracts us to a practice and in some cases scares us away from a practice is the person.

And so, you know, we will as a whole, we look for an extended transition. We have affiliates and practices where for health reasons, for age, just I didn't start early enough. And that's absolutely not available to me. We have done those deals. And but ultimately, we are looking for a smooth patient transition, a smooth staff transition, you know, and the I would say more abrupt that is from a doctor, the less smooth or confident we can be.

So long way of saying we will and encourage every doctor to at least have the conversation. And if that's truly something that is a must have for you as a kind of a shorter term transition. But as a whole, we do look for a more extended commitment.

Art Wiederman, CPA: David Lohmann of Apex Dental Partners, thank you so much for your time. One more time, why don't you give out your contact information, how folks can. If anybody in the country has got a question for David, again, David's been kind enough to you know, if you're in Maine, he'll answer a question. If you are in Texas, Oklahoma, Colorado, and you're, this is a you know, this like all my podcasts folks, this is a call to action. If this is what you're looking for. If it's not, then you got some information. Put it in your back pocket, maybe three or five years from now you take a look at it.

But if it's something that this podcast hits you right between the eyes right now and says, gee, maybe I should look at this, you know, if you're in Oklahoma, Texas or Colorado, give David a call. If you're anywhere else in the country, you have a question, he'll be happy to answer it. And how do we get a hold of you?

David Lohmann: Yeah, and I would say that, look, we're actively looking to grow in those three states as well as Missouri and Nebraska. And candidly, we have pursued kind of opportunistic, so great practices, great people in markets that we might not otherwise be in. We're always happy to go around great people. So don't let that be a reason you don't reach out.

Art Wiederman, CPA: Give out your information. Then I'm going to make a smart comment.

David Lohmann: OK, www.ApexDP.com is our website or you can reach us at affiliations@ApexDP.com.

Art Wiederman, CPA: Now you said you're thinking about Nebraska now. You did say you were an Oklahoma guy, so you're going to open practices in Nebraska. You're the CEO. How's that going to go over? You know.

David Lohmann: We've navigated the landscape in Texas, which is probably the more current rivalry. But you're absolutely right, that football rivalry may cause us some problems.

Art Wiederman, CPA: So I went to the, so I'm not a USC graduate. And folks in the east, that's not South Carolina. That's University of Southern California. Go Trojans. I did not go to USC. I went to Long Beach State. But our football program was we're undefeated since 1993 when they disbanded the football program, but I went to the USC Texas game in Austin. I'd never been to Austin before. I went with 105,000 of my closest friends. I think the Texas band has about twenty thousand members. I really feel like half the friggin stadium. And I have a picture of the USC marching band. There might have been 20 or 30 of them. They were sitting up like five miles high. Nobody could see them and you can't hear them. So, yeah, I know how Texas works.

And then Matthew McConaughey, he is doing his hook them horns and the governor of Texas is on the big Jumbotron, hook em horns. And if they ended that game after about 13 minutes, we would have been in really good shape. But it went an hour. And that's the way it goes.

But anyway, David Lohmann of Apex Dental Partners, great, great information. Really good food for thought for today. So hang with me until I take us out of the podcast. And folks if you want to get a hold of me at my office in Tustin, I'm at six five seven two seven nine three to four three. My email address is awiederman@EideBailly.com.

Go on to our Eide Bailly YouTube page and we have all of our webinars that we've done for the six local dental societies in Southern California. Go to our, you know, log on to Eide Bailly, all the webinars are on there and you'll be able to find them. If you want to register for our webinars, email me. And if you're looking for great magazine, Decisions in Dentistry, great clinical content, basically www.DecisionsinDentistry.com. If you want a complimentary consultation with a member of the ADCPA or our firm Eide Bailly, which is a member, go ahead and fill out the form on their website. And if you're looking for a dental CPA anywhere in the country www.ADCPA.org. So go Sooner's, right?

David Lohmann: That's right. Thanks for having me Art.

Art Wiederman, CPA: No problem. David, thank you so much. And ladies and gentlemen, I am again honored and privilege to serve the dental profession and have so for almost now thirty seven years. And it's just been it's great. And I get to meet great people like David Lohmann and his group and other folks that I've met along the way. And I will go back to my five word saying I've been saying ever since March 16th of twenty twenty. Failure is not an option, folks. And I am so happy to say that lots of my dentists have come through this pandemic, probably the worst twelve months, fourteen months of your professional career and most all of you are still standing. You're thriving, you're flourishing.

A lot of my doctors really got an opportunity to do something that they've never had a chance to do, which is to sit there and think they're not going to work there at home. There's only so many episodes of General Hospital one can watch, you know, and they really put a lot of time and effort into their practices. So I would encourage you to continue to do this. Dentistry is wonderful.

So with that said, folks, it's always a pleasure. Always an honor. Please tell your friends about our podcast. It's growing in the thousands. And we're so honored to have you listening. With that said, this has been Art Wiederman for the Art of Dental Finance and Management with Art Wiederman. We'll see you next time.