In this episode, hosts Brad and Michael are joined by Ben Hernandez, CEO and Managing Director of Skytale Group. Ben shares the latest trends in health care M&A and offers insights into what to expect when buying or selling a practice. Explore the best time to start planning your sale, how single-surgeon practices can navigate today’s competitive environment, and how to prepare for life after the sale. Listen in for tips on overcoming challenges and setting yourself up for a successful transition.
Listen to the full episode using the player below, or by visiting one of the links below. Contact ByrdAdatto if you have any questions or would like to learn more.
Transcript
*The below transcript has been edited for readability.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, my co-host, Michael Byrd.
Michael: As a business and health care law firm, we meet a lot of interesting people and learn their amazing stories. This season, we are entering the sophisticated season of a business, Brad. Our theme this season is Buying and Selling a Business.
Brad: I’m feeling pretty sophisticated today, Michael, but buying and selling a business is just one season of business. For those who don’t know, what are the other seasons?
Michael: Are you just passively asking me to acknowledge that you’re wearing a ridiculous costume?
Brad: No, not yet.
Michael: Oh, okay. Alright. The four seasons of a business are the building season, that’s starting a business; the operating season – running a business; the scaling season – you’re growing a business. And here we are now, the buying and selling season.
Brad: [00:01:00] Awesome, Michael. And now, as you know, we discussed Halloween on another show, how it’s my favorite holiday, but today we’re actually in studio on Halloween day. Look how amazing we look on our costumes people.
Michael: This is now when you want me to acknowledge your costume?
Brad: Yes.
Michael: Okay. You have outdone yourself once again and your costume closet is not going to waste.
Brad: Yes, that’s true. Love it.
Michael: Okay. Well, I think you are taking your Halloween costume a little far though, this year.
Brad: I don’t know about that, but I have a great idea, Michael. Would you like to learn about this great article I was reading recently about the fascinating history of grave robbing?
Michael: Not particularly, but I know I can’t stop you.
Brad: Well, it’s incredible. Did you know that the ancient Egyptians, they used to place curses on their tombs to ward off potential robbers?
Michael: Like I would be cursed by having you as a partner.
Brad: I mean, as an example.
Michael: In theory.
Brad: [00:02:00] That kind of hurts. In the Victorian age, they invented this thing called the mort safes. There were iron cages they would place across your grave to prevent people from body snatching.
Michael: I’m still curious, like, why would someone want to snatch a body in the first place?
Brad: I don’t know.
Michael: I don’t know.
Brad: The graves they even had some where they had spring loaded guns in them, where they’d fire if you try to dig them up. Can you imagine that?
Michael: No. Yeah. That sounds like something from tort law in law school.
Brad: Yeah, it certainly it does. But we have to get more serious now people are trying to protect their final resting place. And speaking of which, have you heard this wild new development, this crazy news coming out of England and Wales?
Michael: Yeah. Really hyping it up after what you just shared was pretty crazy. What’s going on?
Brad: Well, it turns out they’re running out of burial spaces in urban areas, so they’re considering a pretty unconventional solution – sharing graves. [00:03:00]
Michael: Okay. Well, how would that work?
Brad: Well, what they say is they’re going to start reusing old burial plots after 75 years. But it’s kind of like you’re still having a roommate much, much longer. But talk about robbing you of your space.
Michael: Well, I call Winston Churchill if I’m in on this, but that is pretty disturbing actually.
Brad: Yeah, I know, right. Some people are worried about family complaining, but most experts say that it’s unrealistic to expect graves that you can use forever. They argue the afterlife should be fine with a little company.
Michael: Okay. I’m not sure what I prefer more of that or the grave robbing story, but I think it is time it is time to move on.
Brad: All right. Well, I know we have an awesome guest waiting here, staring at me for some reason. You want to bring on Mr. Ben?
Michael: You don’t know why he’s staring at you?
Brad: I have no idea.
Michael: All right. Let’s bring our guest on. Joining us today [00:04:00] is for the – is it like the fourth time?
Brad: Yes.
Michael: Ben Hernandez with the Skytale Group. He’s the founder and partner of Skytale Group. Skytale is a strategic financial and M&A advisory firm. Earlier in Ben’s career, he worked with an international banking group with a hedge fund and financial services and advisory institutions. He got his undergrad at Texas A&M, and his MBA at SMU School of Business, and we have actually also been on his podcast, Skytale Insights. Ben, thanks for being here. Michael.
Ben: Thank you so much for having me. Excited to be here.
Brad: Yeah, you can thank me too.
Michael: That was on purpose.
Ben: I still just don’t recognize you, so I don’t know who I’m talking.
Brad: You know what? That’s a good point there. We’re going to hit you really hard, really fast right now. So, I’ll open up with two very important questions. One, do you love Halloween? And two, are you afraid of grave robbers? [00:05:00]
Ben: I do love Halloween. I don’t think I’m afraid of grave robbers.
Brad: Okay.
Michael: Probably never thought to think of that.
Ben: Yeah, that was a very impromptu question. I don’t think so. I think by then I’m gone.
Brad: All right. Well, good. We settled that.
Michael: All right. Well, let’s jump in. And I know you’ve been on before, but we have some new audience members. So, talk to us first, tell us about Skytale Group, so the audience that don’t know you can get to know you.
Ben: Sure. So Skytale Group, we’re a health care focused management consulting, investment banking, and private capital firm. And really what we do within each of those is, on the management consulting side, we either help founder owned businesses, typically multi-site, who want to grow and scale. Or we also help private equity or private equity backed companies, either solve very specific issues or if it’s private equity, look at due diligence or something like that for them. [00:06:00] On the investment banking firm side, our team is licensed. It’s an actual investment banking firm, and we typically sell founder owned businesses to private equity, or we raise capital as well do some buy-side work. And then on the private capital side, we invest in either clients or companies within the health care sub sectors. We play in typically for growth capital for healthy businesses.
Michael: How many times have you had to say no to investing in something Brad asked money for?
Ben: I mean, every time. So, I think it’s been about 24 and counting.
Brad: But I have a new Halloween idea for you, so can we talk about that afterwards? It involves graves.
Ben: Yeah, we’ll diligence that. Involves graves, yeah, there could be good return in that.
Brad: Well, yes, apparently there is. That’s why they have to protect them and curse them. Now, Ben since you’ve been here and this being your fourth one, obviously a lot’s [00:07:00] changed with Skytale, so it’s very exciting stuff. This season, as you heard, we’re really focusing on the buying and selling of practice. I know you have a lot of other areas that – so we want you to put your buying and selling hat on right now. And with that background, can you really talk about what’s going on right now in the M&A market that you’re seeing left from this year and going into next year, especially, obviously a lot of our clientele in the medical practice. So, what are you seeing right now?
Ben: Right now, what we’re seeing, we’re fairly excited. In 2023, if I can go back a year, historically poor M&A market, not only in the United States, but globally. The expectations coming into ‘24 were that we were going to improve on that, and that is what we’ve seen. I would say the first half of the year was a very slow uptick. What we’ve seen though, in Q3, we have the figures back and globally in the US mirrors this between 13% and 14% more transactions, [00:08:00] and deal values more importantly are just as importantly, have gone up even more than that percentage. So, when you look at why the 50 BIP rate cut had a lot to do with it, in addition to continued expectations that it’ll continue to cut next year, and the presidential election getting behind us will help. So, ’25 is looking to be a very exciting year.
And then the other thing to note, large private equity groups had a lot of busted deals in ’23. So, they’re sitting on platforms that they need to get rid of to return capital to their investors. That coupled with a lot of dry powder still sitting on the sideline, they need to put that capital to work. So, you combine all of those things, right? Getting the presidential election behind us, rate cuts, busted deals last year that should be coming back to market, and then capital that they need to deploy. We’re looking at a pretty exciting ’25, I think. [00:09:00] So we’re advising anyone thinking about selling at all within the next 12, 18 months is to start working with your attorneys, working with your investment bank, your consultants, whomever it is to just be ready to take advantage of that market if and when you’re ready.
Brad: Are you seeing then, I know you’ve talked about this before, you have over 200 something different buyer groups that you visit with. Are you seeing them being more picky about what they’re buying right now or just because of the shift?
Ben: Right now, yes. Especially if they already have a platform and they’re doing more of the tuck-ins – one, two locations. This year we’ve seen a lot of pickiness, a lot more stringent diligence that’s being done, taking a little bit longer. It’s balanced out fairly nicely by new entrants into the market, fortunately, who are trying to find [00:10:00] that first asset. That has somewhat helped, but yes, we have seen a lot more pickiness around mandates that we have on market.
Michael: I’m curious too, I’m thinking specifically about the aesthetic market because we’ve done a lot of work together there. And have you noticed, kind of picking on this pickiness theme, a difference in how buyers are viewing the surgical side of practices, those that have a plastic surgery practice or other type of elective surgical practice?
Ben: We are this year especially, what we’re seeing is if you’re a single surgeon, it’s very difficult to find an investor because the company is so dependent on you as a single surgeon, so the question arises of, if I’m going to pay this healthy multiple, this healthy enterprise value for you, how confident am I that in x number of years, these cash flows are going to continue? [00:11:00] So there’s a lot of questioning around that. Anyone who has either multi surgeon practice would work pretty well. We do well with those. Or if you’re able to substitute some of those revenues with a combination of non-invasive, such as core med spa type services to lower your surgical mix percentage, that works well as well.
Michael: Interesting. So if a single surgeon practice was thinking I want to have an exit strategy, so I’m either going to start hiring more doctors to scale and be ready for market, or do some form of merger or combination with another smaller practice, how much time do they need to have to prove that out for it to kind of work with the buyers out there?
Ben: I think ideally what we would suggest is have at least a year to a year and a half of that surgeon coming in. [00:12:00] The reason being, you want to be able to show that you can bring someone else into your organization and ramp them appropriately. And by then, you’re also able to project a little bit more accurately what you expect going forward. I would say once you go beyond that second surgeon, so let’s just pretend academic example. If you have a fourth surgeon that’s just coming in, that would be okay at that point to go to market and try to get some credit for that fourth surgeon, because by then you’re able to tell the group, “Hey, look, it went beyond me to surgeon two, to surgeon three, here’s the expected ramp. Here are the lessons that we learned. Here are some things that we put in place to make this organization one where you can bring in any surgeon that’s quality and have them succeed.” So as you add on more, you can get some credit earlier on. But I think for that first one, at least 12 to 18 months of history.
Michael: Cool. Well, normally I ask, I’ll pause [00:13:00] and we’ll touch on kind of vocabulary words. And I usually ask Brad, but he’s dressed so bad today, I think I’m going to have to turn to you. You mentioned the word “dry powder” and you referenced “rate cuts”. Just expand a little bit for the audience that’s not in this space because those are really important factors towards your optimism of the outlook going forward.
Brad: Are you saying I can’t talk about dry powder because you think I’m going to use it as a voodoo curse on you?
Michael: Yes, Brad.
Ben: I still don’t know that that’s Brad. But really good questions. I should have defined that. Dry powder means, when a private equity group raises a fund, they have a certain amount of capital that they raise, and what dry powder means is that’s the money that they have on hand to invest, and they have to invest it within a certain amount of time in order to give that return to their investors. So when we say there’s a lot of dry powder out there, [00:14:00] what we mean is there’s a lot of capital on the sidelines that they need to put to work, and then the second question was…
Michael: Just the interest rate cuts. There was a rate cut a few months ago that they’re projecting will continue.
Ben: Yes. So the past couple years, one of the big themes was, we’re in a high inflationary environment. And what that does within the M&A space is from a lending perspective, banks are lending at much higher rates. Private equity, what they typically do when they invest in something is they’ll put their investors’ capital to use, but they’ll typically leverage, meaning, they’ll put debt on these businesses at about a three to four times rate. So, if I’m investing a million dollars, I would expect that you would see 3 million or so dollars coming from debt as well to make it a $4 million investment. That typically gives greater returns because debt is cheaper than equity. [00:15:00] So what’s happened in this environment is not only are banks charging more from an interest rate perspective, which means that if you are a financial sponsor borrowing capital, it’s a higher cost of capital, which is more difficult to get those returns, which could slow deal flow or make the valuations a little bit lower. In addition too, it makes banks a little bit more nervous to lend because higher interest rates mean higher default rates as well and the like. So when we see that 50 bips, 50 bips means 0.5% is essentially what it means. So when we see those rate cuts, now you’re in an environment where banks are more eager to lend at lower rates. And from a financial sponsor perspective, they accept that debt a lot more freely because of the lowering of interest rates.
Michael: Gotcha. Okay. So I have one more question and then we’ll let this voodoo character jump in with something. I can tell he’s getting ready to cast a [00:16:00] curse on us, if we keep talking. This is a pivot a little bit from what we were just talking about, and I’m curious for your perspective. So we’ve noticed state legislatures are beginning to consider and debate kind of the pros and cons of passing laws aimed at regulating private equities role in the health care industry. I’m curious, as States start passing laws which limit or require registration for private equity deals, your perspective on what impact this will have on the deals?
Ben: Yeah, this is a really important one. I would say coming out of the JP Morgan conference a year ago, folks were fairly nervous primarily around the uncertainty. There was the California bill that was on Governor Newsom’s desk. I think that helped a lot. So what that bill was going to do is essentially give the Attorney General the ability to thumbs [00:17:00] up or thumbs down a deal. California already had laws in place from a regulatory perspective where OHA was already reviewing the transactions which ended up being a blessing because the reason for the veto is Governor Newsom’s cited redundancy. That’s important because California typically is a leader in state regulation. Had that passed, I think you would’ve seen other states pass them as well.
I think there were six other states that tried to pass those laws, similar laws that already had laws in place that we see now kind of a tempering of that. I eventually would love your opinion on this as well, because I’m sure you guys know this a lot better than I do. So right now though, it’s not all rosy. We have seen very large funds that are always in the paper. They have gotten away from health care primarily, [00:18:00] but because of potential media scrutiny, headline risk, those sort of things, but also regulatory risk. But I think going forward, what a lot of what we’ve heard, what we expect is, States will continue to pass laws that are more comparable to what California’s already doing. But from a risk perspective I think only one or two have busted due to that, so that’s important to note is that they’re typically passed. OHA specifically are looking at the data and asking why is more needed? They think it’s fine, so that part is good news. And then I hope that as this happens, this is an interesting statistics that health care providers that are private equity backed. This one’s for you, Brad. From a revenue perspective that are private equity backed, it’s only 3.3%. So, you have to ask the question, how many resources [00:19:00] do you really need to deploy to private equity backed transactions? And some of the recent ones that we’ve seen don’t even mention private equity, but would love to – your guys’ opinion on this, I’d love to learn a little more here.
Brad: Yeah. And some of the ones that we were watching that still hadn’t passed, the deals that we were doing weren’t going to be affected at all because they’re looking at these more global hospital systems or very large health care groups that were much higher than what you typically think from probably the typical deals that we come across our desk. So I know that in some states, even if it did pass, it wouldn’t impact the market that we play in and other States it’s just a registration process.
Ben: That’s great. Like Pennsylvania, I think is only health care facilities, so like hospital to hospitals.
Brad: Yeah. Right. You have to dive into when you start going through that one, it’s being a licensed facility is what they start looking at. Well, most of the medical practices we work with aren’t going to be licensed facilities, so it’s irrelevant to what they do, [00:20:00] but of course, it does cause a pause because everyone’s like, “Oh, wait, does this impact us in this State?” And so, that’s just understanding it. It’s interesting from your perspective too, but that was more of a very high level that Michael kind hit you with. I’m going to kind of – so for audience members who are sitting there listening, going, “Okay, great, my state’s fine.” This is going to one of the biggest events of their life and you’re helping kind of shepherd them through this process. What do you do to help manage that – the client’s expectations through that, through the whole M&A process?
Ben: We do a few things. As you said, it’s important for everyone to realize this is one of the most important things that’ll happen to you as a business owner, so we take that very seriously. I think number one, before they even become a client, when we put a pitch in front of them, we try to bring it to life as much as possible. We try to also be conservative -, realistic, but conservative from a valuation perspective, absolutely. [00:21:00] But also from there are other deal terms that come up that you want to be sure that they know about. They’re going to ask you to stay on a number of years. They’re going to ask you to roll equity, as much as you can bring to life for them to prepare them, to allow them to say yay or nay on even going forward.
I think once the deal process starts, it’s important to remind our clients of that, “Hey, this is a process we’re about to go through.” And then as you go, go through the process, it’s very important to keep in communication with them. So we’re talking to them on a very frequent basis while allowing them to run their businesses, so they’re always aware of where we are in the deal process. If we get a phone call from the buyer, we immediately update them on that and what it means. I think it’s especially important if you get news that are not ideal to immediately update the client and what it means. We also like to talk about what we consider to be market, [00:22:00] which initially to them sounds like a made up word, but when you break it down, it simply means, “Look, if there are 10,000 transactions out there, it’s really difficult task for a two mile non-compete when the average is 10 to 20 academic example.” So I think just constant communication and earning that trust to where you limit surprises or some of the things that we like to do.
Michael: Cool. I may have, this may be our last question. We’ll see, we we’re starting to run up on time, but I want to kind of have you think back to an M&A deal, maybe a transaction that had some challenges to it. Just to paint a picture for the audience on what are some examples of key obstacles that you’ve faced and how you helped overcome those?
Ben: I think two that are pretty thematic depending on client, one would be when you’re selling your business, just know that anything that you’re doing during that time, you’re going to refresh the data for the buyer. [00:23:00] So one of them is, if you’re either not tracking to projections or your business lowers, you might get a phone call that the business terms may now be different. So what we’ve done in those cases is, number one, you have to answer, if you’re a declining business, where’s the floor? Because otherwise, if you think about it from a buyer perspective, it’s very difficult to value that because as you keep declining, the implied multiple goes up. So where’s the floor? Once we get them comfortable with that, we do our best to hold value at least. So if there’s a reduction in cash and or equity, some options, maybe could we take more equity and lower the cash? Or can you leave the potential for our client to reach that number and put it in way of an earnout because we’re confident that the business is going to come back. So from a totality perspective, maybe you don’t get it up front, you get it later.
So there are always levers that you can pull there, and buyers are usually fairly good at being [00:24:00] team members if they want to get the deal done. I think another one that’s happened this year certainly would be a non-owner provider who is asked to stay on and sign an employment agreement that could be viewed as a little bit more punitive. In those cases, no rational human is going to sign that without a reason. So, we try to propose solutions such as, could there be a bonus tied to that signature? Could there be some equity given up by either the buyer or a client or a combination of, or C shares? Same concept, as we’re both trying to get something done, and you have to do something that makes sense in this case to the non-owner provider. So, those are a couple of examples, Michael.
Michael: Awesome.
Brad: Yeah, and I think it goes back to, you said this earlier on, if you’re trying to scale and bring on that doc, it’s a year and a half that first doctor. And as you add other doctors, you’re kind of repeating it. This happened often is the case, [00:25:00] a senior doctor might be wanting to slow down. And I think the more that they can position themselves that look how well we can do, and I’ve cut back on my surgeries, so they don’t feel the need to be hitting at the same level, so I think that’s really helping them step themselves up for success.
Ben: Yeah. And I think you said it perfectly. I think a good way to summarize that is an ideal utopian business is one that doesn’t need you, the founder. And what you described is getting to that level, to that stat.
Michael: We’re halfway there. We don’t need Brad anymore.
Ben: Yeah, I know. I don’t think that’s him.
Brad: Cut that right there. Just don’t let that get in the podcast.
Ben: That’s going to be in our highlight.
Michael: That’s an ender. We were out of time and we had to end with one last poke at Brad. Thank you for joining us on the Legal 123s with ByrdAdatto, as always, insightful and fun.
Ben: Thank you so much Michael and Brad for having me on. I truly appreciate it. [00:26:00] Always enjoy the time with you guys. Awesome.
Michael: Well, we’ll go to break and come back with a quick little wrap up.
Access+: Many business owners use legal counsel as a last resort, rather than as a proactive tool that can further their success. Why? For most, it’s the fear of unknown legal costs. ByrdAdatto’s Access+ program makes it possible for you to get the ongoing legal assistance you need for one predictable monthly fee, that gives you unlimited phone and email access to the legal team so you can receive feedback on legal concerns as they arise. Access+, a smarter, simpler way to access legal services. Find out more, visit byrdadatto.com today.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, with my co-host, Michael Byrd. Now Michael, this season we’re focusing on Halloween.
Michael: No.
Brad: No, okay. But it is Halloween day still, right?
Michael: It is. Okay. I didn’t want to make sure when Ben left, I didn’t know if we had a time warp or anything, but we are focusing on buying and selling of a [00:27:00] business, Michael, and Ben had a lot of good takeaways, but I’d like for maybe in the last, maybe about a minute or so you can kind of a legal wrap up.
Michael: Yeah. So, one of the things that Ben talked about that he expanded on this idea of where do the single surgeons stand right now? And we have a lot of our clients who are in that role, and so they are thinking about selling and they’re finding out that there’s really not a market for a single surgeon practice. Ben kind of expanded on the why and in the sense that buyers want multiple revenue streams from a risk perspective. And so, we really have noticed in this last year, a palpable lower amount of single surgeon deals. We had a few when it was early on, and it was the gold rush to try to get acquisitions in place. And so, for those [00:28:00] out there that kind of fit that profile, our encouragement is if this is a potential exit strategy for your practice, then it’s time to start planning now, and to look at what are some scaling strategies potentially to grow and increase your revenue streams, or potentially doing a main street deal.
Brad: Yeah, absolutely. All good takeaways, Michael. So I’m going to close this out today. and we will be back next Wednesday. By the way, I do like closing this season with, first off, with Ben, kind of giving a summary of what’s going on. But next week we have another guest joining us, which will be a returning guest, David Mendel. And he’s really going to discuss to do what do you do once you have a big transaction, when you get all that money and after you sell your business? Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five-star rating and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com. [00:29:00]
Outro: ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.
