Ken: All right. Welcome back to The Bottom Liine. Today we’re going to talk about private equity. What do you, as a specialty practice, need to know about private equity? What are the pros and cons? All that good stuff. So joining us to talk about this is Danny Ketola.

He is with Flagship Specialty Partners. Danny, do you mind introducing yourself real quick.

Danny: No. I’m Danny Ketola. I’ve been… background’s in accounting, but I’ve been working in oral surgery since 1999 and kind of got into it as a fluke and started with a small practice. We built it from 23 employees up to about 230 employees, and during summer, 2020, after we’ve been approached by a lot of private equity partners, we decided to look into it and we formed a platform.

End of 2021 and since then I’ve moved into business development and I’ve been doing that ever since.

Ken: Awesome, well, very, very glad to have you here today. Charlie, you wanna say anything? Or just jump into it?

Charlie: IBITDA, a myth? Just kidding. I love finance terms. No, you go ahead, Ken. I’ll get us off track.

Ken: Yeah. Let’s start very basic, and then we’ll dive in. So let’s. Let’s assume you’re a specialty practice owner or provider. You’re not from the business world. What do they need to know about private equity? Just first and foremost, what’s kind of the summarization of why they should even consider?

Danny: When I go to talk to people, I tell I tell people, regardless of how you feel about it, you have to be educated on that. Because if something is going to fundamentally change your profession, you don’t need to put your head in the sand. You need to go out and you need to learn about it doesn’t mean you have to do it, but you should learn.

Learn about it. I’ve had some surgeons tell me, Oh, you know what? I’ll be ready to sit with you in five years. And I tell them, I said, That’s like getting a financial planner when you’re 60. It doesn’t make sense. You need to get one now. Learn about it. Learn the pros and cons, look at your options, and then you move forward in a way that’s best for you.

But everyone should learn about it. Even if you’re not in medicine. Yeah, you should learn private equity because it’s everywhere.

Charlie: It’s everywhere. We we you know, we’re in a number of specialties. Oral surgery, obviously, dental, aesthetics, orthopedics, derm. Several more in the list. Literally, every single one is having a lot of private equity action. So I agree. I agree with that. Got to be educated because it’s already here.

Danny: It’s crazy. My wife and I sold our house last year, moved into a rental, and we never met anybody. All we did was we went online. We called in a first maintenance request. I asked them, I said, How many homes do you have? They said they have like 50 or 60,000 homes. And what they’re doing is they’re buying homes.

And then once they once they they have a good density in a market, I think they probably overpay for a couple so it raises their balance sheet. And then driving down the street, look and if you notice where there’s some new developments being built. Sometimes they’ll say homes for rent, not for sale for rent. That’s private equity money coming into the into the industry.

Charlie: Bingo.

Danny: It’s in ice cream. It’s in everything.

Ken: Is it? Is that private equity? Is it increasing? Is it on the rise or is this just kind of always been part of business?

Danny: It’s always been part, but it’s definitely on the rise. If you want a good audiobook to listen to, there’s an audio book called The Private Equity Playbook. It’s a pretty easy listen. You may want to listen to it a couple of times, but it walks you through the process and how and why it works. When I first heard about, you know, back in the 2000s when dentistry was first getting into this, you know, what they do is they take EBITDA or earnings before interest taxes, depreciation and amortization.

They’re essentially buying your net income. Then they consolidate it and that can sell it for a higher multiple. And at the end of that, someone’s going to get caught holding the bag. But that’s not true. They will learn to partner with other other specialties or other industries, and they will continue to grow it. So there’s pros and cons in it, and that’s why you should look into it and just weight it and compare it to your situation.

Set up what works for you.

Charlie: That’s cool. I think I might listen to that book myself.

Danny: It’s easy to put it on to if you’re young, you got good ears, you can put it on two or three times speed and you can you can roll that.

Charlie: But I do. I listen. I listen to music too loud, Danny, So I can still hear for now. So I’m going to have to do it quickly.

Danny: Okay.

Ken: So if there’s pros and cons to it, it sounds like we’re sort of hinting at that it might not be for everybody. Is that is that accurate? Is this something that people need to be? Are they are they not competitive if they’re not talking to private equity?

Danny: Oh, no. I think they’re competitive. It’s like getting married, you know. Is that right for everybody? Yeah. You know, maybe. Maybe not. Depends on their age. Depends on where they’re at. Depends what they want out of life. And then if you do decide to get married, which is, you know, getting in private equity partners, no different than having a marriage or another partnership.

So a lot of people only look at the money. And I tell people there’s two parts of that. One is the money side. If that’s the most important part, to you. Then look at the money and a lot of times they’ll take financials and a lot of due diligence to get into it. But look at it and then if you decide it’s something you want to do, then you go look at the quality of life part of it.

If quality of life is the most important. I tell people, Look, I don’t even need your financials. Let’s go down the quality of life road and see if it’s something that you would like. You know, if you have less management, you’re debt free. You can take a vacation tomorrow and everything will be taken care of for you.

So it really frees up and gives you less stress. But, you know, a young surgeon or someone coming out of school at 35, they’re ready to conquer the world. You know, it may not be right for them at that point. And then like with any investment, it’s essentially an investment. You know, is there risk to it? There is risk.

That’s why you want to choose the right partner. So good example, I’ll use Liine as an example. They’re they’re great company. They’re up and coming. They can say, you know what, we’re going to stay by ourselves because we can control internally what we do. And we’re just going to continue to build customers. Or they can say at some point we want to get another partner that can bring resources and different value and different services that we don’t have to grow it much bigger.

Which ones? Right. It depends. Their risk by staying small can be minimized because they control it, but they can also minimize risk by going with a private equity partner in case the COVID comes again. Yeah, it’s been scary for everybody. People that got through the COVID probably say I don’t have to go through that again, but it’s different for everyone.

You just got it. You just got to look at it.

Ken: Mm hmm.

So you sort of hinted at what are the pros and cons? Is there any kind of is there any more pros and cons to this that you’d want to make kind of the balance sheet of what’s what’s good about this? What’s the drawback?

Danny: What are the pros to me and specifically to oral surgery? One of the biggest pros is the oral surgeons, and the specialists need to band together. You know, and I think it’s important because we like the camaraderie, we like to have broad scope, but there’s a lot of pros. Money can certainly an income can be a big pro because if you if you calculate out staying private for the next ten or 15 years and take your after tax dollars and total that up and then divide it by the number of years, you can do the same thing by going to private equity and look at your after tax dollars and you’re going to get a lot of tax advantages because you’re going to be that’s going to be a capital gains tax rate instead of ordinary income.

So if you compare your after tax income staying private compared to private equity, you’re going to make far more money with a private equity company as long as everything works out. And that’s that’s why you got to choose your partner.

And then it depends how much money you want to roll forward. Be like if you’re going to say if it was 1995 and you had $1,000, you could invest, you could throw in an Amazon or you could throw it in Duke Energy. Duke Energy’s probably really safe bet, you know you’re going to make money off that. Amazon probably wasn’t a good bet necessarily, but if you had, you had made a lot of money, especially if you didn’t take it out, you just let it roll the entire time.

So it depends whether people keep the money in or they take it out. And timing is always important because it’s essentially a stock of private stocks.

Charlie: Or most of the when when, you know, a practice owner gets the deals that they get. Is that is it usually there’s a lot of optionality and how much money you want to take off the table today and then how much you want to keep in as sort of an investment. Is that is that do they have a lot of options there or what does that usually look like for a practice owner when they engage with private equity.

Danny: Then have some options. You know, we we like we definitely want people to roll in. Say you’re 65 and you’re looking to partner. You know, they say the only money guaranteed is is the money on the table, which is true. But if you get someone like us, we’re on a really good path. We feel like we’re going to recap soon.

So we think that every day that goes by, the more we grow that, the lower that risk is. So, you know, it just all depends..

Charlie: When people are concerned about, I guess. Do you think the biggest fear for practice owners is the risk of the investment, or is it usually more like lifestyle or more like losing control? What do you think people are most afraid of?

Danny: You know, a lot of people just don’t like change. But yeah, I think most people are afraid of losing control. And that’s one thing we absolutely don’t do. We really want to come in and support practices. We don’t we don’t get in the business of dictating care. We only want to make sure we we can support it to bring about better care.

Now, we’re not we’re not clinicians. We’re here to help.

Charlie: Yeah. Yeah. Interesting. I would have. I would I guess the same, you know, the same thing there.

Danny: What was the question you asked before? I don’t know if I answered it completely.

Charlie: No, I think you did Just, I just basically like there is an option of, you know, you can either roll roll some of your money on the table and investment. Yeah.

Danny: If you’re 65 people want to roll less. Yeah, yeah. They have the money, they hit retirement, they say I’m good regardless of what happens if you younger you buy one a more so people that you don’t want to roll as much as you possibly can when you’re young, then you need to rethink it. It’s kind of like getting a prenup because that’s where the real money is made is when you roll a fork because you’re getting a 30, 50% return year after year and you’re getting that at preferred tax tax.

Charlie: What’s the usual? Is there a is there a normal kind of timeline? Obviously, it varies. But, you know, a new platform is put together and, you know, initial practices come in and then some of the practice owner, former practice centers are, you know, keeping some money in as an investment. What’s the typical timeframe of when they would, um, you know, when the when the platform is bought and there’s like a big liquidity event or something, is there kind of a norm there?

Danny: So yeah, that, that audio book I told you about explains it. Yeah. When people that there’s a fund of money and they typically the lifespan is ten years so a private company will get this money they may spend a couple of years looking for the right industry, the right partner. Once they do, then they will try and give it maybe a 5 to 7 year lifespan, because then then they need to return that money.

And the ten year funds typically will have extensions where they can extend it another year or two. But, you know, I would think most performers you look at are going to be on a five year basis.

Charlie: Got it.

Danny: And then and then if you’re coming on to a platform, you want to look and see what stage they’re at. Are they halfway through it? 80% through it. They just started. You know, that’s a that’s an important question to.

Charlie: Yeah, it’s and it’s still always risky but it I don’t know this is kind of my gut feel of just some of the ones I’ve seen in different specialties. It seems like most of them turn out to do pretty well, like it’s not very common that a platform would just tank. Is that a fair statement?

Danny: It is, yeah. I mean, you look at it, you got a lot of smart people who have been in investment banking for a long time. Right. As you get more players in the field, though, and you may have some that fail. When I first started, I knew the practice of went with the first platform in Austin, Texas, back in 2017 when I went to a meeting, I think it was last last year in Charleston, there were about three other competitors there with us.

This this last year there’s seven. That’s just the world. And they’re starting them almost almost every day. So an interest rates going up and people just starting platforms. I do think some people could get in trouble because their interest rates are high, multiples are up again. That’s why you want to pick the right partner, ask the right questions.

Charlie: Yeah.

Ken: You keep mentioning this, pick the right partner. Obviously that’s super important. So how do they know who is the right partner?

Danny: How do you know who the right partner in life? And yeah.

Charlie: I tell you it, Danny, you know, you know, if they’re the one.

Danny: You know, emotion is part of this. And they do play on that because some people will, Yeah, you’ve got to make a decision. You know, capital gains rates are about to change. Biden’s coming in office, they’re going to go up. You got to go, go, go. Someone told me a long time ago, there’s always good deals to be had, so you never really want to rush it.

And as far as but when you know, there’s no reason then delaying it either, you might as well go forward. You’re just you’re just getting money away at that point. I think the right partner is it depends on who you are and what you want out of it. You know, people have different focuses. You know, it goes back to I think there’s there’s money focus in order to like focus and in both of them should deliver some on both of those.

But you want to say to your surgeon and your biggest fear is that you don’t want to give up clinical quality or say you want to do broad scope. You know, that’s where we think flagship is a lot different. We don’t think we know we’re a lot different. We do broad scope of oral surgery and some people that want to do broad scope oral surgery may get with another platform and they say, you know what, All we want to do is teeth and titanium.

We all want to do autism that they will do on total drug replacements, that enforcement that do something maybe they don’t want to do, or they fought for some of the supplies maybe they don’t want to use, which we don’t do that we let the doctors deliver the care as they see that. And we we support them in the supplies that they they need to use.

Charlie: What about the like the EHR. or is it, you know, do you think all these platforms, as they bring on practices, are always going to try to streamline that into one, you know, system? I mean, there’s a lot of advantages that is that realistic?

Danny: What you’d be surprised, you know, when we when we first started looking at this, we had about 80 companies request our information which which was shocking that there’s that many people wanting to look at us. But that’s awesome. We whittled down to about eight and some platforms they have no interest in. Can consolidating services like EMR and stuff like that.

But we believe that we need to have consolidated structure. We need to have someone our practices all on the same services like, like wine. We want all of our practices to be on the line so the office managers can be trained on how to use it. And it’s a it’s a never ending process because it’s a tool, right?

It’s a really valuable tool if you use it. It’s an expensive tool if you don’t use it. So we want to be able to build training within the organization. And if everyone’s using a different software, it’s hard to get good trainers right where everyone’s using the same software. We can get good trainers and we can have people that are more competent, more proficient.

We just have to when we switch people, we have to time it right and we have to make sure we’re not disruptive to them. Delivering care.

Charlie: Makes sense. Yeah. I mean, I think everybody’s always wary of changing their main systems. But I mean, if you’re if you’re going to get into one of these pilot, so many advantages for you, the practice as well, because the support that you’re going to get from the folks that can help you is much easier, right? If everyone’s got the same stuff, I would imagine.

Danny: And we bring in the support team, we’ll bring in trainers, will prep everyone good, We put them through training in. It’s I’m not saying it’s it’s a walk in the park, but it’s after a week or two you’re you’re going to go Yeah. And then you can get better you know KPIs and data out of that because we do want to have data to help answer the questions and drive better patient care.

Charlie: I’ve noticed a lot of the platforms will have really awesome swag like quarter zips with their logos. I think you’re wearing one. Is that a required element of the transaction.

Ken: Is If so, I want to get involved with.

Danny: This. You know, these things just start showing up on my desk uniform.

Charlie: So Peter Miller is making a just an unbelievable amount of money on private equity swag right now.

Danny: You know what? That’s the subject. My wife went to school with. I think his name is Tom Knight, and we started in East Carolina.

Charlie: Right.

Danny: East Carolina classes with him.

Charlie: That’s awesome. That’s cool. They I think I told you they used to be below our office, but they moved out, so I should have made better friends there.

Danny: You know what Someone’s got to train them to make to be able to make better relationships, right?

Charlie: That’s right. That’s right. Ken, I need some. What else? What else do we want to dive into here again?

Ken: I guess we’ll do one more question just because we try to keep these kind of short. But are there any, Lynn, any landmines or giant mistakes that you see repeated over and over again, anything that really devalues.

Danny: Longer and when in just in general or.

Charlie: Related to assessing if if you know, if you’re the practice that may or may not want to get involved with a PE backed group.

Danny: Yeah, I think I don’t know if there’s really landmines, but I think if you are going to look at it, you want to be open and share the information and it really walk through and give give people the time like we want the doctors to walk us through their information because we want to make sure we understand what we’re partnering with and we want to make sure we give them all their value.

And sometimes that said, they are running a perk through the practice and we’re not aware of it, then we can’t give them the value or, you know, we partner and then six months down the road we find out and give, you know, yearly bonuses. And we weren’t aware of it, which, you know, we don’t want any surprises like that.

So no big landmine, just the decision.

Charlie: I think the biggest thing that I’ve taken away, again, is just the education. You know, if you if you haven’t taken the time to understand what that’s what this is all about, and then you’re having conversations with, you know, a platform about partnering and you have no clue what’s going on. Like, you’re just that that’s going to be you can you could make a poor decision because you don’t understand what everybody’s talking about.

So I think in today’s point, regardless of if you end up doing it, this is this is happening right now and you’re just you’re just going to be way behind if you don’t learn about it.

Danny: I think if there’s a landmine, maybe maybe rushing things again, you don’t you don’t want to drag on too long. And and there’s a couple of doctors I’ve been working with and it dragged on for a year or more they want to do, but they just can’t quite make the decision. On the other hand, you don’t want to rush and and not look into it as much as you may need to to make sure they’re not, you know, the platform you choose is going to deliver on what you want and what you need and what you think you’re getting.

Yeah, that’s why I tell people I approach when I talk to people, just like a doctor’s talking to a patient, they present treatment options and that’s how I try to approach it, is I want to educate them. I want to educate them on everything that I can as far as what their options are going to be and the experience I have since I started in 1995, I worked with over 100 residents running through the practice.

I work with over 20 fellows, so I want to talk to them about their options. And then at that point, I don’t care what they decide. What’s frustrating is when people make a decision without having the information. So and I don’t pressure people, I let them go at their pace. You know, everyone’s a little bit different. They want to fast track it.

We’ll fast track it if they want to listen to it and they want to let it soak in, I’m ready to happy to let it soak in. They want to bring their spouse. I love to have spouses join us because then they can talk about it because it’s a joint decision.

Charlie: I think that’s really smart. That last part especially that you said. I mean, it’s a it is a big decision. And so I, I, I think that that’s all I think that’s also good for the platform, too. If you’re you learn a lot about the person that you’re partnering with if you meet other people in their family.

Danny: Yeah.

Charlie: That’s cool.

Ken: This has been great. Danny, thanks so much for joining us again. I like to tell people where they can find you or find Flagship.

Danny: Yeah. My email is dketola. That’s d k e t o l a at flagshipsp dot com. Or you can Google me and I’m sure there’s a way you can you can find me through LinkedIn or something like that. But anyone who wants to get educated on the process- happy to talk to you.

Would love come see or jump on a phone call.

Charlie: Yeah.

Ken: Cool. Thanks a lot. Danny. Charlie, any final thoughts?

Charlie: No, that was that was great. I think it was just such a timely conversation and, you know, get educated. Everybody learn about this stuff, whether you call it Get out, get it, Danny or the book. What was the name of that book that you mentioned? Again, the Private Equity Playbook.

Danny: Private Equity Playbook.

Charlie: That’s right. That’s right. I recommend listening to that because I. Sure. I’m sure going to do it.

Awesome, thanks for being on Danny. Enjoyed it.

Danny: All right. Thank you, guys. Have a good weekend.