In this episode, hosts Brad and Michael share how a plastic surgeon’s eagerness to sell his practice backfired when he announced the sale to his team too soon. This caused key staff to leave and the deal to collapse overnight. Learn when and how to communicate the transition to your team, so you can retain top talent and keep operations steady post-sale. By following these best practices, you will ensure a smoother sale process and maintain the confidence of your team every step of the way.
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, with 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’re entering the fancier season of a business, Brad. We’re in the buying and selling season.
Brad: Yeah. And those who are hearing this for the very first time, Michael, that’s just one of four seasons. What are the other ones?
Michael: Yeah. We have the building season; starting a business, the operating season; running a business, the scaling season; growing a business, and then where we are now; Buying and Selling.
Brad: Awesome. You’re up to bat. What do you got for me today?
Michael: Do you remember the movie, There’s Something About Mary?
Brad: First, I’m so proud of you, [00:01:00] Michael, for really bringing in the beginning of the show, with movie talk. I approve. Second, I’ve seen that movie so many times in college, I probably can mute it and do most of the quotes.
Michael: Same. I read an article recently that actually had nothing to do with the movie but I instantly thought about the movie. It made me remember the scene where Ben Stiller had picked up a hitchhiker.
Brad: Yes, and he was carrying a bag that was clearly a dead person. That had been the whole setup of the movie about how hitchhikers were serial killers.
Michael: Yeah. The car ride started to take a turn when the hitchhiker had shared his business idea, and the whole premise was based on a personal workout video called ‘Eight Minute Abs,’ and his business plan was to create a video called ‘Seven Minute Abs.’
Brad: Right. Yeah. It was a great scene as the hitchhiker talks to him about the ‘Eight Minute Abs’ and tells him [00:02:00] it should be ‘Seven Minute Abs’ because seven is the key number here and he starts going through 7/11, 7 drawers, seven minutes. He goes on and on about the number seven. What movie or business article did you read that has to do with this?
Michael: As I said, it had nothing to do with it but I guess the number made me think of it. I don’t know. But it struck me when I was reading about a country that’s trying to do the opposite of trends in workplace culture. I read an article that Greece recently made a bold move by introducing a six day work week for certain businesses.
Brad: Yeah, I read that too. And I’m sure all our employees are hoping that we don’t get any new ideas. Kennedy’s nodding. I can see. We have one vote so far, “no six days.”
Michael: Okay. Well, the rules are in place to try to boost the Greek economy. It extends the typical 40 hour work week to 48 hours for private businesses that provide [00:03:00] around the clock services.
Brad: All right. Well, how are the Greek workers responding?
Michael: It’s not as big a change as you would think. This actually surprised me, that of course, the labor unions are up in arms. But the Greek workers already log more hours than basically any other country; all the other EU nations and more than kind of the traditionally recognized overworked Japan and United States.
Brad: Okay. Really? That’s a crazy shift. Do you think it’s something that we’ll ever see happen here in the States?
Michael: According to the article, almost one third of US businesses are considering cutting their work week down from the traditional 40 hour week. So I think there’s a lot of momentum going the opposite direction. I don’t see it reversing.
Brad: Yeah. I’m sitting here thinking about all those professionals in the M&A world who like basically work eight days a week. So they might like this; it might give them like vacation or something like that.
Michael: Yeah. It’d be like their version of a four day work week. Well, it’s [00:04:00] funny you say this because I actually also read an article last week about the big Wall Street banks, and they’re trying to manage the kind of burnout factor of their eight day work week basically, and implement rules to manage their schedules, and I didn’t realize this. Many of the banks already have a “safe period” – I’m putting this in quotes – where an employee cannot be forced to work. It struck me that one of the safe periods that’s recognized is basically from Friday evening to Saturday morning.
Brad: Oh, yeah. That makes a lot of sense. That’s the safe time. They may end up moving to Greece before it’s all over though.
Michael: True. Well, I’m also just making a note that if we ever open a Greece office that I don’t want to work there.
Brad: Yeah. I don’t think anyone on our team would want to be there in that position. What does this have to do with today’s show, [00:05:00] Michael?
Michael: Do you want me to stretch it or admit that this does not have a strong connection to today’s show?
Brad: Well, what I’m really sad about Michael, is I really thought we were having movie talk in the beginning and we’d bring movie talk into this show. So let’s just get in this story since you’re such a disappointment.
Michael: Well, I may have a little nugget for you. So our main character today is Dr. Wolf. He is a financially savvy plastic surgeon from the Midwest.
Brad: All right. I’ll buy it. Why Dr. Wolf?
Michael: Because before he became a plastic surgeon, he actually worked on Wall Street. This guy knows his way around numbers.
Brad: All right. Well, I’m also assuming that you’re taking his name from the movie, The Wolf of Wall Street. Also, this is actually very unusual as most physicians do not have any formal business education or training prior to actually starting their medical practice.
Michael: You’re right. And Brad, you notice that I had a little other movie reference in there. So you should be happy. So [00:06:00] Dr. Wolf is financially sophisticated for sure, but there is a bit of a downside. His personal touch with his employees was not exactly the greatest.
Brad: Yeah. Sounds like someone who is maybe advocating for the six, seven, or eight day work week.
Michael: Yeah, you could be right. So anyway, back to the story. Dr. Wolf’s practice, we’re going to call EBITDA plastic surgery.
Brad: Oh, wow. I think we do have our first vocabulary word of the day. Please define EBITDA.
Michael: This is a big finance term. It means earnings before interest, taxes, depreciation, and amortization, and it’s used as a measure of a company’s overall financial health and performance. In the M&A world as we’ve talked about on prior episodes, this is the marker that helps determine kind of the purchase price or the valuation that private equity will use oftentimes. So you’ll [00:07:00] hear terms like, “They sold for six times EBITDA,” or some other multiple.
Brad: Got you. Now, that makes more sense. Thanks for explaining that to the audience.
Michael: So Dr. Wolf was so focused on the financial performance of his practice that we feel like we can only capture it by naming it after his favorite word.
Brad: Got it. Yeah. So what kind of services was Dr. Wolf’s practice offering?
Michael: The practice focused on body procedures. They did a lot of liposuction. That was their biggest money maker. They did some tummy tucks, they did some breast work, but no facial plastic surgery. They had kind of a “non-invasive side.” They had a separate laser center for non-invasive treatments, and then they started to expand it into some traditional medical spa offerings like injectables.
Brad: Yes, and if I remember correctly, we were discussing off [00:08:00] camera, Dr. Wolf’s laser center had grown quite a bit, right?
Michael: Yes. They scaled to two locations. They opened a laser center in Texas and then they opened a second laser center in Florida.
Brad: Yeah. Last season we were concentrating on scaling and so expanding different states really does have its own set of challenges.
Michael: Yeah, absolutely one of the main hurdles for Dr. Wolf was staffing. Both the Texas and Florida locations had similar setups with multiple nurse practitioners, physician assistants, and registered nurses to handle these injectables and laser services. So kind of keeping them appropriately after finding and retaining talent was one of his challenges he faced when he was scaling these up?
Brad: Yeah. We talked about this the last season, but there are challenges. Scaling a medical practice is different especially in [00:09:00] different states involved because you have to obviously navigate the complex landscape from a regulatory perspective. Insurance, staffing, technology, logistics, all those can really add some complications to it. A successful practice really will have to do some significant planning, actually. Invest in time again on our compliance and operational capabilities to really ensure that – obviously they need effective patient care – but also business is sustainable.
Michael: Right. Although the staffing in terms of kind of the people were similar and their licenses, there were differences in the two locations.
Brad: Okay. I’m assuming when you say differences, maybe not the same services.
Michael: Yeah, the mix was different. Texas was heavy and really reliant on the laser services. Florida was kind of the opposite. It was really heavy on injectables.
Brad: All right. You’re talking about heavy. So, how heavy on the injectable services?
Michael: They accounted for 75% of the revenue in [00:10:00] the Florida location, and it really came down to three kind of rockstar injectors. They were high performers and from an everyday perspective, Dr. Wolf loved that.
Brad: Yeah. Well, that’s a really high proportion of your practice then.
Michael: Yeah. And did I mention their names?
Brad: No, you did not.
Michael: Okay. We have nurse Kardashian, Ms. Jenner, and Nurse Hilton.
Brad: Yeah. I know we’ve used Ms. Kardashian as a character name in other podcasts before. I’m guessing these other individuals maybe have like a very large presence on MySpace or those other socials out there.
Michael: Yeah. I don’t know that they’re big into MySpace, Brad. I know that’s your big social media channel, but yes, they had big followings on social media. These injectors as I said, they were the bread and butter of the [00:11:00] Florida clinic.
Brad: So what happened next? I’m assuming because we’re in the buying selling season, that Dr. Wolf decided to sell.
Michael: Way to use your context clues, Brad. We’re in the buying and selling season, he’s named Dr. Wolf, EBITDA plastic surgery. It’s amazing. So, yes…
Brad: I get a star for that?
Michael: Kennedy, please give Brad a half of a star because he only mentioned the season. He didn’t mention the names as his context clues. But yeah, I’ll reserve the other half for you, later maybe. Dr. Wolf decided it was time to go to market. He brought in an old finance buddy, and we’re going to call him Mr. Swagger, to help him with the sale.
Brad: I was hoping when you started to say Swag, I was hoping like Schwarzenegger, but Swagger, okay. Why the name?
Michael: Kennedy, please give me back that half star. So, Mr. Swagger [00:12:00] had zero experience selling medical practice, Brad. But what he lacked in experience, he made up for in confidence. He acted like he was in charge the entire time.
Brad: I think Schwarzenegger would still work here. I’m sorry, but I’m going to rule against Swagger, but okay. If we’re in a red flag season, I think while you were talking, I definitely want to ding you first for taking away my star, but second, that’s pretty bad. So what did they do?
Michael: So, Mr. Swagger, to be fair, was really smart with numbers just like his old buddy, Dr. Wolf they did make a few mistakes. They didn’t hire counsel at first so they just kind of were focused solely on the business, focused on the numbers. But he did a pretty good job as it relates to the numbers. Mr. Swagger did a quality of earnings analysis before going to market to help kind of establish their position.
Brad: Oh, wow. I think we have another vocabulary word. It’s a word that our private equity friends like [00:13:00] so much, I think they have tattooed “QoE” on their biceps. So what does that mean?
Michael: Yeah. So basically what it is, is an audit to make sure kind of the reported earnings of a company are accurate and sustainable. They’re really taking a deep dive into the financials and trying to kind of clean it up for any one time events or unusual events. We’ve talked about this in other episodes. Oftentimes when someone’s selling, they’ll preemptively get their own QoE done because buyers are always going to do a QoE as part of the due diligence process. And it really helps – the buyers when they do this, understand the true profitability of the business.
Brad: Yeah, I always think of it as they’re pressure testing their actual numbers to make sure that there is something. So it makes sense they did that. So how did the sale go?
Michael: Well, they found a buyer, Brad and [00:14:00] Dr. Wolf signed an LOI. This is not a mistake. He signed it for a valuation of nine times EBITDA, which is a really big number. And I’m sure that Mr. Swagger had a little extra pep in his step when they got that signed.
Brad: I’m sure he did. That’s an interesting number. And I’ll say this for those hearing why Michael’s, I guess voice raised when he said nine times. The sale of medical practice, typically they generate a buyer’s – There’s a lot of factors that go into this. Obviously, we were talking about pressure testing their financials, and we were discussing selling multiple locations. That’s also a factor. But in this case, what we normally see is somewhere between five to 10 times EBITDA. The reality, the range is obviously reflected of the market dynamics; what are they paying for at the time? And then clearly the financial and operational health of that practice. So obviously that compression they did with the QoE actually [00:15:00] helped a lot.
Michael: Yeah, for sure. It was on the high end of what you see typically in deals, which is reflective of a healthy financial picture. So what’s interesting, Brad, is that as I said, they didn’t have counsel involved early on and so we were hired after the LOI was signed. And believe it or not, things started to unravel before we even started.
Brad: What happened?
Michael: Dr. Wolf told his team about the sale at about the same time he hired us, unbeknownst to us. Announced it, and the entire staff at the Florida location quit.
Brad: All of them. Okay. And they just did – We’re on the LOI phase and there’s so many steps that happen in a typical deal that seems way too early.
Michael: Yeah. I mean, we had a signed LOI and they hadn’t even had a kickoff call yet. The ink wasn’t even dry on hiring us. [00:16:00] So yeah, nurse Kardashian, Ms. Jenner and Nurse Hilton all left together to join a local plastic surgeon, and their premise is they wanted nothing to do with private equity. They were afraid of how it was going to affect their practice. And because they were such kind of powerful figures in that location, the rest of the employees ended up following them.
Brad: Yeah. That had to be a huge shock to the Dr. Wolf and Mr. Swagger.
Michael: Yeah. And probably not surprising, two weeks later, the deal collapsed.
Brad: Michael, we’ve got a bleeder.
Michael: Way to bring There’s Something About Mary back in. You’re welcome. Alright, give that star back to Brad. I think this is a great spot to pause for a quick commercial break. When we return, we can dive into the legal implications of what went wrong.
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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, for those not listening, this season, our theme is buying and selling in business. We’re talking about stories and client problems that happen in the buying and selling season. And today, we’ve been talking about Dr. Wolf, a financial savvy plastic surgeon who scaled those business across multiple states only for things to kind of fall apart. I’m not sure if it’s helped that Mr. Swagger was involved or not involved, but the moment he announced that he was selling his practice.
Michael: [00:18:00] That’s right. Brad, Dr. Wolf’s story is a prime example of why timing, team, culture, and communication are so crucial when you’re entering into a sale transaction.
Brad: Yeah. And just for a recap, Michael. Maybe can give some of the key components of the story for our listeners because I know we’re going to go deeper dive in the analysis.
Michael: So let’s reset. Dr. Wolf had was a plastic surgeon. He had scaled his plastic surgery practice really focusing on the non-invasive side by opening laser centers in multiple states. He had opened in Texas and Florida in addition to his surgical and combined laser center in the Midwest. His Florida clinic was particularly dependent on three top injectors; Nurse Kardashian, Ms. Jenner and Nurse Hilton, and they generated 75% of the revenue of that practice. Dr. Wolf, as we discussed, felt that the market timing was right [00:19:00] and decided to sell the business. He brought in his finance buddy, Mr. Swagger to help facilitate the sale. As it relates to kind of the blocking and tackling on the financial side, they really did a great job of going to market and creating demand, and ultimately signing a letter of intent for nine times EBITDA, which is, as we discussed, a really large multiple. Problems arose when Dr. Wolf told his team about the sale. The staff at the Florida Clinic, all of them, including these top injectors, quit and the entire deal fell apart two weeks later.
Brad: Yeah, and audience members, when we hear these stories, I actually remember this pretty well. I remember us getting it going because we had the LOI rolling and we’re going to get the call going. The next thing I know I was talking with one of our colleagues about it and they’re like, “Yeah, the deal died.” I’m like, “That’s the fastest I’ve ever seen a deal die, ever.” And obviously, it’s a significant turn of events [00:20:00] that happened here, underscoring how critical it is in each phase. We’ve talked about this phase in another one, but it’s critical to our listeners; it is the importance of understanding your team and culture especially when entering into a sales transaction. So Michael, let’s dive deeper into that. Why is a team so critical to a deal?
Michael: Yeah, Brad, I mean, the team is the lifeblood of any business. And especially in the service industries like health care, I mean, they are the ones creating the revenue. So buyers are not buying the name or building. They’re buying the production, the expertise, the relationships, and of course the operations of that location that the team delivers. So continuity of staff is a huge factor in the buyer’s decision to move forward with a transaction. If key personnel leave, especially high revenue generators like the ones in our story, the value of the deal can evaporate overnight or just [00:21:00] make the whole deal go away.
Brad: Yeah, that’s right. And I think many sellers underestimate how much trust they have to have built not just between the buyer and the seller, but between the seller and their actual team. Employees, they need to feel secure about their future. And if they’re going to stick around post-closing, that’s going to help kind of get them there. So what are your thoughts on why the team culture is also important to the buyer?
Michael: Well, we’ve talked about this also in other episodes, so let’s take a step back. I mean, we know that private equity is number one on the list, it probably still is the financials. I mean, you do the QoE, they want to make sure that the numbers say are true. But really shortly behind that are two big factors that make or break deals; compliance and the team. Buyers want to know as it relates to the team that when [00:22:00] they’re acquiring a business, they’re acquiring a business with a stable positive culture because that can impact everything from employee retention to patient satisfaction. So a toxic or uncertain culture can lead to high turnover which is not good for the predictability of future revenues and lower morale. So in Dr. Wolf’s case, there may have been an underlying issue with team morale that went unnoticed until the sale was announced. A strong engaged team creates a smoother transition. There’s that trust built up that you just referenced. And that’s what buyers are looking for. They want the practice to keep performing at the same level at a minimum, and they’re actually expecting and projecting it to be better after the transaction.
Brad: Totally agree on that piece. It’s a huge issue and it leads to another important topic that every [00:23:00] employee loves us to talk about and every employer loves us to talk about; non-competes. Now Michael, do you know if Dr. Wolf’s Florida location had non-competes in place?
Michael: Well, unfortunately, Brad, the answer is no. There were no non-competes for the injectors at the Florida location, which meant they were free to leave and take their talents and their patients elsewhere.
Brad: That statement reminds me of LeBron James quote when he was leaving Cleveland the first time, “I’m going to take my talents to South Beach.” So I guess they maybe did the same thing. It’s a tough lesson to learn. I mean, non-competes can be critical tool in transitions like this and transactions like this. If Dr. Wolf had non-competes in place, his injectors would not have had the ability just to walk away and freely join a competitor down the street, down the block as easily.
Michael: Yeah, exactly. Non-competes are designed to protect the buyer and [00:24:00] the seller by preventing these key employees from jumping ship and then of course, taking the business with them. In M&A transactions, non-competes can also help kind of retain value in the business post-sale because it ensures the buyer isn’t left kind of holding the bag or taking on the risk that the employees will leave. They have some level of legal protection.
Brad: Yeah. And as of this date while we’re recording, there’s probably going to be some questions, “Well, I heard the FTC got rid of it. There is no more non-competes.” That’s not actually exactly correct. So for those not familiar, the Federal Trade Commission, its job is to enforce federal competition and consumer protection laws to protect or to prevent anti-competitive, deceptive, unfair business practices. So taking a step back in January of 2023, they published this rule that basically says that non-competes are anti-competitive basically. [00:25:00] Then in May of 2024, they published in the federal Register the rules. And as of September 2024, the final rule banning most non-competes – I won’t go through all the details – was scheduled, I use that word purposely to go into effect. However, as you can imagine, lots of lawsuits were filed…
Michael: Within three hours.
Brad: Yes, saying the FTC really lacked authority to be able to do this and that these types of arrangements, non-competes is contractual and therefore should be with the states. So there’s a case called Ryan LLC versus the Federal Trade Commission. In that particular case, a federal court has agreed with the plaintiff, Ryan LLC, saying the FTC had exceeded its statutory authority and that the FTC’s rule was arbitrary and capricious and otherwise not in accordance with their ability as an agency to do certain things. Therefore the law is [00:26:00] unenforceable and unconstitutional. So as of this moment – I obviously can’t going into the chain of appeals – the non-compete law that was supposed to go in effect nationally in September is at this moment not in effect.
Michael: Yeah. So it’s back to what it has always been, which is state law. And we should note as kind of a plugin to the story that Florida does allow non-competes. So this was really more a matter of bad planning by Mr. Swagger and advising and Dr. Wolf and kind of how he was setting up to protect his practice. But another critical factor that we’ve touched on is timing, specifically the timing of when do you tell the team about a sale? So Brad, when is the right time to let your employees know?
Brad: Number one, not the day you sign the LOI.
Michael: I think we all agree with that.
Brad: Number two, not [00:27:00] after the day you close. Those are probably the two bad ones. But it’s a tough one and seriousness about when we were in these panel talks with people there is no one size of fits all. Generally speaking, earlier the information to these certain key employees, the better. So, if you have certain people who will be helping you with this transition, you want to bring them in earlier, and especially if they’re part of the idea that you’re going to succeed post-closing. So if the business to succeed, you need these certain key employees. Hopefully as you were elaborating earlier, if you’re building up trust and you’re transparent with these employees, that will help kind of minimize the risk or alarming your staff and how they react. If you’re too early, then obviously that’s unnecessary. In case this Dr. Wolf, he was way too early with it and unfortunately experience what happens when your staff jumps. I know that when we have conversations in this and have panel talks, some people are like, “At [00:28:00] least six weeks or eight weeks before closing is when you start having those kind of conversations with your team.” I know of people who have done it much earlier, but again, it has to do with that transparency and the trust that you’ve built up your team.
Michael: Yeah. I mean, to your point, we’ve had some clients who have had a team in place with a lot of trust and they actually know when they make the decision to go to market and everybody’s kind of on board early, early on. But you want to be careful. The trust has to be there. And I do that six to eight weeks does resonate as kind of a sweet spot, but to your point, it has to be kind of dialed in based on the relationships and the circumstances of a particular practice. It’s a delicate balance. Brad, final thoughts?
Brad: When planning to sell a medical practice, obviously it’s important to handle communications with your employees thoroughly and in this case, strategically. Generally giving employees notice about pending sale [00:29:00] should occur at appropriate time, as we talked about with careful considerations of these various factors. Only the seller will really know what is best on from a timing perspective. Once you do give notice, be prepared to clearly articulate the challenges that you’ll see. So why you’re selling, why is the sale important for the practice and what impact it will have on employees. Anticipate that they’re going to ask you changes to management, operations, their salaries, other things of that sort. What happens to their contracts, what happens to their benefits, their retirement plans; all these things that may be affected by the sale. Handling these aspects can help lead to at least a smoother transition and maybe mitigate disruptions and obviously, hopefully more importantly, as you said earlier, maintain the culture, the morale of the staff during this entire process. What about you, Michael? Final thoughts?
Michael: We have to acknowledge financial returns [00:30:00] and they are important. In fact, they’re the most important consideration. But there are other critical issues to safely navigate a sale. We talked about this earlier, their compliance and team. We saw today what happens when you do not have a strategy developed to keep your team in place.
Brad: Well, Michael, guess what? That’s it for this week. Next Wednesday, we’ll discuss another M&A show discussing understanding who holds the cards and negotiations. 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.
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