Join Brad and Michael as they kick off Season 18 of the Legal 123s with ByrdAdatto! In this episode, we share the story of two dedicated doctors looking to combine their small practices to boost profits by selling to private equity. While merging practices may seem beneficial, superficially doing so can create serious risks that threaten the deal. Tune in to learn how to legitimize your merger by fully integrating the business and clinical sides of both practices, maximizing your chances for a successful sale.
Listen to the full episode using the player below, or by visiting one of the links below. If you have any questions or would like to learn more, email us at info@byrdadatto.com.
Transcript
*The below transcript has been edited for readability.
Intro: 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, with my co-host, Michael Byrd. Now Michael, today we launch Season 18.
Michael: Brad, our podcast is now eligible to vote.
Brad: Oh, you know, and we’re in the prime election season, and we definitely do not want to take this podcast down political rabbit hole.
Michael: Agree.
Brad: We should focus on how in certain parts of Louisiana, our podcast is eligible to drink legally.
Michael: I don’t think our podcast needs to drink, but it is nice to know that there’s a place.
Brad: Yes.
Michael: Okay. All right. Well, let’s get started. As a business and healthcare law firm, we meet a lot of interesting people and learn their amazing stories. This season, we’re entering the most sophisticated season of a business, and [00:01:00] Brad, I know it’s a little complicated. Sophisticated means fancy.
Brad: Oh, thanks.
Michael: Our theme this season is, buying and selling a business.
Brad: All right. Well, Michael, for those who don’t know, buying and selling a business is just one of the several seasons of business. What are the others?
Michael: We have the building season, starting a business; the operating season, running a bus business. We just finished the scaling season, growing a business, and here we are in the buying and selling season.
Brad: Yeah. And before we start today’s show, you were kind of telling some stories about the Paris Olympics that you wanted to share. I do feel like the Paris Olympics was pretty legendary for a number of these storylines that came out of it.
Michael: And don’t worry, I’m not going to talk to you about all the cool tennis storylines, but there was many of them. I read an article about an athlete’s level of sacrifice that may [00:02:00] be unparalleled in an athlete’s quest for an Olympic medal.
Brad: Are you talking about the Australian break dancer who sacrificed her dignity to participate in the Olympics?
Michael: No, Brad, though you do have the right country. And part of me wants to go down this rabbit hole, cause it’s so funny, and the other part of me wants to tread really carefully because I’m afraid that you’re going to start demonstrating, and no one needs to see you do the kangaroo pose.
Brad: I don’t know…
Michael: So, Brad, give some context of what happened with the Australian break dancer for the audience, the few audience members who did not watch it or did not have social media.
Brad: Yeah, and for those who did not see the videos, “Ray Gun” or Rachel Gunn is a 36-year-old Australian “break dancer”, who competed at the 2024 Paris Olympics. Her performance at [00:03:00] the break dancing competition that went viral, probably not for the way most Olympians do. Gunn, a college professor, or again, “Ray Gun” as known in the streets was not the most talented dancer, but I think she was very creative.
Michael: Yeah. I mean, she’s not just a college professor. She actually, I guess, studied dancing.
Brad: She’s a PhD in cultural things, and so break dance was something she studied.
Michael: Yeah. Okay. Well, my story is about an Australian hockey player.
Brad: Okay. There’s a lot going with that statement. First, hockey is a winter sport, Michael. Second, I would be shocked to learn that Australia even plays hockey.
Michael: I should have clarified, this is men’s field hockey that we’re talking about.
Brad: I actually knew that was an Olympic sport, but I did not follow it. So what happened?
Michael: So a player named Matt Dawson broke [00:04:00] a finger on his right hand during training just a few weeks before the Olympics. And the surgery would’ve taken months for recovery.
Brad: All right, so who hasn’t? They probably just, my guess is he’s taped it up and played through the pain?
Michael: Well, apparently the break was so bad that when he got back to the training room and he saw it, he passed out.
Brad: Yeah.
Michael: Okay, so taping it up was not an option. The other part of it was Dawson was 30, so he was thinking his Olympic dream was over. Australia had won the silver medal in the Tokyo Olympics, and Dawson was on that team, so he was ready and thirsting for gold.
Brad: Okay. Well, this would be a really weird story if you told me that he did quit because of that. So what did happen?
Michael: He had his finger amputated. So that he could go back on the field in a matter of days.
Brad: Okay. I’m looking at my fingers right now, just hearing about that…Kennedy’s off camera shaking her head. [00:05:00] Well, I did not see that happening at all.
Michael: Well, apparently the coach didn’t even see that happening. The coach was interviewed and he said something along the lines of full credit to Dawson, but he’s not sure he would’ve done it himself had he been in his shoes.
Brad: Yeah. Since I didn’t watch one field hockey game, much less actually know the outcome of the story of Dawson, I’m now interested in knowing what was the outcome and how did it work out for the nine finger guy.
Michael: Well, I guess it depends on your perspective. He did play in the Olympics, so check that part, Australia failed to win a medal, so uncheck on that part. But I do have a question for you, Brad. Would you have done the same thing for a chance to compete in the Olympics?
Brad: Nope. How about you?
Michael: Well, that’s not a fair question. I mean, these hands are made for typing.
Brad: Yeah. Not just any typing, state winning typing, people.
Michael: Now you understand..
Brad: [00:06:00] Yes. Sorry, Michael, let’s jump into today’s story before we lose the audience, so let’s get going. Okay.
Michael: Our client in today’s story is a plastic surgeon in Texas with a solo practice. We will call him Dr. Matt.
Brad: I’m going to assume, but I’ll just say it. Why Dr. Matt?
Michael: This is an ode to Matt Dawson. I figure he needs a little shout out since he has no gold medal and one less finger.
Brad: Although not a gold medal, I’m sure Matt will feel a lot better knowing that he was referenced in highly regarded legal health care podcasts in America. And believe it or not, I actually know a few Australian fans who listen to this, I’m wondering if they know Matt.
Michael: Well, maybe so. Matt, if you’re listening to the Legal 123s with ByrdAdatto, yes, we are talking about you. So, Dr. Matt, not to be confused with Matt Dawson had his own small and stable practice. He provided cosmetic surgical services and [00:07:00] had a nurse who helped him with medical spa type services. Dr. Matt did not have a separate med spa, he just kind of ran it all through his small surgical practice.
Brad: In the field of cosmetic medicine, when someone’s starting off, this is pretty common for a small medical practice to office to ride variety of services under one roof. This allows these practitioners really to create this diverse atmosphere for the patients, all these cosmetic treatments, but even including minimal invasive procedures, which you were kind of describing, and other types of aesthetic treatments.
Michael: So, Dr. Matt was living his life had his own little small business as busy as could be, and he kept hearing about the wave of private equity acquisitions happening in the plastic surgery world.
Brad: Yeah. And it’s kind of funny, we’re recording this episode in 2024, but in 2020, during Covid it really was the first time our phone started ringing where private equity started trying to understand, tell us more about [00:08:00] cosmetics, but more importantly, tell us more about plastic surgeons. And we started seeing the accelerant happen since 2020. So it’s definitely a different world. You know, someone listening to it right now is like, of course there was private equity, but just a few years ago it was not heard. There was none for plastic surgery.
Michael: Conversations have changed dramatically in the last several years. Well, Dr. Matt was experiencing some FOMO, or for those who are not streetwise, fear of missing out. So he was having some FOMO because he had come to understand that his practice was probably too small to garner interest from private equity.
Brad: You know, I think Matt, the field hockey guy was having FOMO too. But Michael, I’ll let you explain this – why would a practice be considered too? Like, what would it be for them to be considered too small?
Michael: So this may sound a little bit like oversimplification, but essentially when private equity’s looking to buy [00:09:00] a practice, they’re looking to buy a profit stream. So leftover cash flow after everyone’s paid, including reasonable compensation for the doctor, and then they want that profit stream to be diversified. So when you have that source of revenue coming substantially from one person, in this case, Dr. Matt, the risk is often too great for them to consider investing. And so just having a little tiny bit for your nurse that’s doing some injectables doesn’t move the needle enough often to attract that kind of attention.
Brad: This is starting to feel like an episode from last season where we’re focusing on scaling. So was Dr. Matt thinking about scaling?
Michael: Great question. Did I say that out loud?
Brad: Oh, yes. Put that on a loop Kennedy. Just anytime he asks.
Michael: Yeah. So scaling would definitely be a consideration that you would think of. I mean, [00:10:00] this is where he is. He wants to be attractive. And so, you can scale, build your practice up, diversify your revenues by hiring other surgeons or maybe even other providers. So yeah, it would’ve been a good potential strategy.
Brad: Okay. Based on this word, I’ve heard you say “potential”, I’m guessing that was not the route that Dr. Matt followed.
Michael: He did not, Brad. He could not figure out how he would make the time to spend on the business to grow. And to give you some perspective because I could feel this, when we had the conversation. It was always hard to get a call scheduled with me when he had these questions because he was just going from meeting to meeting, patient to patient all day every day, super busy. And so actually, running his practice was – just doing the routine things [00:11:00] was a task that was really difficult. And so the idea of adding to that, he just couldn’t quite get his arms around that.
Brad: At first when you started talking about getting on calls, I thought it was all your fault, so I’m glad that it’s his fault, is what I’m hearing. But no, I mean, that’s a big issue for most either, you know, I can say for physicians, but a lot of startups is that you’re so busy at your craft, in this case being a surgeon, that you don’t have time to even think. You’re so caught up in the force itself that you’re just – that time sucked. There’s only, again, last time I checked, 24 hours in a day, seven days in a week. Again, unless there’s something I’m missing. But generally speaking, that makes it really hard to make that commitment for that physician to do anything but show up and work and keep the business open.
Michael: Yeah. I mean, he would even answer, you know what? I don’t even have time to go figure out how to find another surgeon, much less all the things that go with that. Dr. Matt had a good friend in Nevada who is, in similar circumstances, they [00:12:00] had done their plastic surgery training together, and we will call her Raygun,
Brad: Excellent reference to our Australian, another Olympic reference I love, actually two Australian Olympians. I like it. So I guess where’d you get this name, Michael?
Michael: Mostly laziness. We talked about her in the opening, and she also participated in the Olympics. She might have gotten a participation medal.
Brad: She may have. So we don’t have a break dancing plastic surgeon. I really got my hopes up here though.
Michael: No, Brad. Raygun had a similar practice to Dr. Matt and a similar sense of FOMO on the whole private equity thing, and they were at a medical conference and had an idea.
Brad: They wanted to learn how to break dance.
Michael: Okay, Brad, enough with the break dancing. It has nothing to do with the story. They thought they could join their practices together, and that this [00:13:00] would make them attractive to go to market and sell to private equity.
Brad: Michael, I got my hand raised over here. How was this going to work with one practice in Nevada and one in Texas?
Michael: Well, and that’s like the most common brand strategy for scaling a business. Well, they would brand themselves under one practice name and they would unify their website, but essentially, they would keep running their practice separately. They probably understood that there might not have been a huge brand synergy there with having one single location in Texas and one single location in Nevada. But their theory, Brad, was that now they would be two, and two is more than one.
Brad: Yes, I learned that on Sesame Street.
Michael: Okay, two primary sources of profit production, and this would reduce risk and make [00:14:00] them attractive and even obtain a higher valuation with private equity. We at the office have been calling this the Band of Brothers strategy.
Brad: Yea and for audience members just trying to keep up with this, it’s pretty common when you have these groups that are out there that are like, “Hey, I’ve got this really good thing and you’ve got this really good thing, why don’t we find a way to come together to grow that?” I know we can talk about – last season we talked about joint venturing. We’ve kind of talked a lot about that, but this is a little bit different because they’re trying to come under one single entity and it’s a little bit different than what you think.
Michael: Yeah, and really, their whole impetus is to go to market together. And so, that’s the part that we will explore a little bit more is, can you just kind of throw two things together and go to market? And so, why don’t we do this, Brad? Why don’t we go into commercial and on the other side, explore the [00:15:00] issues that go with this Band of Brothers strategy and learn what happened with Dr. Matt and Raygun and no break dancing.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto, with my co-host, Michael Byrd. Now Michael, this season our theme is Buying and Selling a Business. In this particular story, there’s a lot of things happening and you reference this at the end talking about this kind of [00:16:00] a Band of Brothers strategy where two or more small practices unite to sell under a one bigger umbrella as their theory. Michael, before we dive into our discussion, you know, does the Band of Brothers theory or strategy actually work?
Michael: Well, generally, no, as a general rule. So there are two major obstacles to this working because at a high level, private equity will see right through this strategy, and they will often treat them as two separate small practices for purposes of determining value and risk, which go hand in hand.
Brad: Well, why do they tend to disregard it? Like, what does private equity see? They’re like, no.
Michael: Well, that kind of brings us to the second obstacle, which is really the core obstacle – integration. Just to kind of take a step back, when private equity’s [00:17:00] plan when they’re acquiring practices?
Brad: To make money.
Michael: Yes, Brad. I’m going to go a little deeper.
Brad: Oh, okay. Sorry.
Michael: Yeah, they’re trying to acquire them and integrate them together because this gains efficiencies, which Brad is another fancy word. It is a fancy word of that it is economies of scale, if you really want to act like you’re smart.
Brad: You said this was going to be sophisticated in the beginning of the podcast. This has been amazing. I’ve learned all these big words.
Michael: So if in a situation like these, the Band of Brothers example that we have right now and many others, if you have two practices that essentially are operating independently other than maybe the branding and a couple of other things, then PE when they buy them, are still going to be integrating two different practices as there’s no prior integration that’s happened that would make their job any easier. In theory, if the Band of Brothers strategy [00:18:00] included a full level of integration of the practices, it would work.
Brad: Yeah. And audience members, Michael keeps using this word integration. I think we need to kind of dive a little bit deeper into that. Integration with two medical practice two or more can range from really basic collaboration to full operational unification. The closer practices get to this full integration, the more streamlined and efficiencies that they will build towards their operations, ultimately, hopefully, obviously benefiting the patient care, the business performance, and in your example, the making it sexier – private equity. What I think Michael, maybe taking a step back, there’s both the clinical and there’s the business side that when it comes to a good integration, you should kind of focus on.
Michael: Okay. Well let’s start with kind of give us the top three aspects of clinical integration.
Brad: So for a clinical integration, it’s all about alignment of medical practices to [00:19:00] operate in a cohesive units, like improving quality care patient outcomes. So the very first compliant aspect we typically look for is, are they under one tax ID? Practice operating on a single tax ID can signify higher level integration where the practice is functioning as “one legal entity”. This simplifies billing, compliance, tax supporting a lot of things that we’ll talk about on the operational side.
Michael: Yeah. And then the benefit of this level of integration allows for unified contracting with insurance companies, streamlined financial management and potentially better reimbursement rates.
Brad: Yeah, absolutely. And so that’s again, going back to each step, so good job, Michael. So the next piece, just like having one tax ID, we also would like to have one EMR, one electronic medical record system. So that’s our next major takeaway – using this same single EMR system allows, again, practice to ensure that all the [00:20:00] patient information is being centrally stored, accessible to all same providers. Again, we’re talking about streamlining the care coordination. And this integration reduces the duplications of tests, improves communications between the providers, enhances the overall patient experience by creating a more consistent and again, continuous caring process. And one more thing I want to add to that, Michael, is again, going back to when private equity comes along, they see one tax ID number, and here’s one system we’re already utilizing together.
Michael: Yeah. And then if you’ve got a fully integrated practice – going to your point of the EMR, you’re going to have doctor’s ability to seamlessly share best practices and talk about things that are not working. And that aligns with part of PEs what they’re looking to do on the clinical integration side of it.
Brad: Correct. And Michael just jumps ahead audience members because I think he knows where I was about to go, [00:21:00] is that it allows sharing of best practices which helps, again, from clinicians; they can collaborate. They can really share, again, best practices, standardize certain cares and protocols, they can implement evidence-based guidelines. This should all lead to basically more importantly, higher standards of care, reduce variabilities in how doctors and providers are treating people. More importantly, improve patient outcome, which I think from a private equity perspective or just in general also is it develops this culture of continuous improvement innovations inside this practice, allowing basically duplication in the sense of more and more individuals know how to do the same procedures.
Michael: Well, that’s a lot more than just putting the same name on the door.
Brad: A little. Just a little.
Michael: Yeah. Because under the Band of Brothers strategy, there was going to be zero clinical integration, so it’s really paints a deep picture [00:22:00] of what a full integration would look like.
Brad: This is the top three you have,
Michael: Of clinical, right? Well, that begs the question, Brad. Talk to us about business integration.
Brad: All right. Audience, so as much as clinical integration is important, so is business integration. So for business integration focus, we really try to find a way to unify operational aspects of the practice to maximize efficiencies and obviously reduce costs. Obviously, the more you’re doing, the better in lowering your cost, the better things are for you. The main ones are going to be accounting, marketing, HR, and staffing, so I’ll jump kind of into that. A single accounting department can manage all your financial transactions, the budgeting, reporting so that again, that centralization helps simplify your financial management as we see hopefully to done correctly, reduces your overhead costs, ensures some consistency in these financials. And actually more importantly, starts allowing for more accurate financial forecasting and [00:23:00] resource allocations between the different locations.
Michael: Okay. I think Kennedy was giving me a signal too much, Brad.
Brad: I thought she was saying more…
Michael: Brad, I was telling her not to make you feel bad, so I was trying to just do it on the down low, but let me talk for a minute okay, let me jump in on marketing.
Brad: You do love marketing.
Michael: I do. A unified marketing strategy promotes both practices under a single brand or aligned brands, and just pause, going back to our story. I mean, they really weren’t going to be doing this. They were kind of going to be under one umbrella, but not really going at this level. So you’re leveraging the combined resources of having both practices together for advertising, social media, community outreach. And this integration it does end up actually enhancing brand, brand recognition. It can broaden the market reach and attract a larger patient base. [00:24:00] It also allows for more cost effective marketing campaigns and consistent messaging.
Brad: Right, because if you’re pulling your money together, you can obviously enhance the website. You might be able to enhance your social media accounts. So again, I understand that piece. So, up next is everyone’s favorite, human resources or HR as it’s known on the streets. Again, you’re trying to centralize and you’ll see a theme, centralizing things. In this case, centralizing the department that manage recruitment payrolls, benefits, compliance, employer relationships. Again, this is all being done by one organization, but multiple locations – in this case, two different practices. This can ensure consistency in policies which hopefully will help be more consistent on how you work through the labor laws, and hopefully understand more about employee satisfactions and better benefits, training programs, all the things that you get when you have a back office really focused there,00:25:00] which sends us to our next aspect, which is probably one of the most important aspects, Michael, is staffing.
Michael: Yeah. I mean the staff can be shared between practices and believe it or not, even in our crazy example of Texas and Nevada, with the ability to work virtually, there can be in theory efficiencies that are gained by that. So with a flexible workforce, there’s all types of things you can do to gain efficiencies on that front. This allows for you to optimize your staffing levels. It reduces the need for temporary or part-time workers, and can enhance employees skills because they’re exposed to different environments, and so it improves the service coverage and can reduce labor costs.
Brad: This feels like a lot different than what you described the Band of Brothers. That’s a lot of work, Michael.
Michael: If the Band of Brothers [00:26:00] did these things, it would have a better name.
Brad: Yeah, fair. And going back to our story, since we did take a little bit of a detour, what happened to break dancing Raygun, and nine finger Dr. Matt; did they try this or did they get shut down by the private equity? Like, what route did they go?
Michael: He learned to break dance with nine fingers, Brad. It was amazing. No, I’m just kidding. They actually suffered Brad from the third and most common obstacle to the Band of Brother strategy, distraction. Dr. Matt and Raygun did not end up taking any steps towards integration, even the superficial one that they were talking about. Because they couldn’t find the time to talk. They’d get excited whenever they did talk, and then they’d get too busy to do anything about it, and so eventually the talks just fizzled.
Brad: Yeah. And audience members, physician mergers although [00:27:00] they’re more common over the years, and especially with the health care practices with mounting pressures, improve efficiencies and reducing costs and higher quality cares, or getting reimbursements paid differently – and they’re complicated. When you’re trying to merge two or more medical practices, it can feel overwhelming at times. And especially to the physicians who are already, they’re stretched thin based on your story even today. And they have so much clinical responsibility already. For a merger, really to work, the physicians really need to, in this case, buy into the process that their end goal is important, and there is a way to get there from alignment. And the second thing I kept thinking about, is to have the successful merger, the physician cannot do it alone. They need certain key staff members to be part of that process, which means at some point they need to have some buy-in from their office managers. And finally, they’ll need to bring just a giant big bag of patients. We have seen these deals. [00:28:00] I mean, we had a deal that we got brought into that they had been talking for years before we even showed up. And by the time we showed up, they still took almost two years to finally get the thing done because they just weren’t focused on it. It wasn’t that important to them, but eventually they, it did get done.
Michael: Okay. Very good. Well, that’s a lot to process. We’re getting towards the end, Brad. Do you have some final thoughts for today?
Brad: I mean, with physician mergers often there’s many benefits to it, right? But it’s complicated. It’s time consuming. And there’s often situations where the attention to the details, the physicians can barely manage their own time. So they just get, as you said, distracted. By recognizing these challenges and bringing external experts into it, bringing your staff into it, formalizing the teams to really take different phase approaches of being like how to eat a whale, one bite at a time, kind of concept. [00:29:00] The closer you get to that full integration, the greater ease and success you’re going to have. And ultimately, this allows physicians to focus on what they do best, hopefully providing excellent patient care, while the operational details of the merger are handled more efficiently. Michael, what are your final thoughts?
Michael: Well, Raygun and Dr. Matt actually could have taken a few lessons from their alter egos. So Raygun and Matt from Australia, they showed commitment and sacrifice.
Brad: Oh, they did.
Michael: Now, Raygun might have sacrificed her pride a little bit, but her commitment was that, even though she didn’t know how to break dance, she got out in front of the world and did it. And Dr. Matt, I mean, what more can you say about nine finger Matt?
Brad: That’s right.
Michael: They did have that commitment sacrifice. Raygun and Dr. Matt, on the other hand, we’re too distracted [00:30:00] to zero in and focus on executing on their Band of Brothers strategy.
Brad: Well said, again, Michael. And Michael, guess what? Next Wednesday, we are back to discuss the importance of learning about the who’s buying your practice. 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.
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 [00:31:00] not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.
