Our guest today is Rob Montgomery, an attorney focused on dental legal solutions and a co-host of the Dental Amigos podcast. Rob joins us to discuss the critical legal, operational, and personal aspects of your dental practice.
The conversation dives deep into the complex world of selling a dental practice, focusing on the common pitfalls when dealing with buyers. Rob emphasizes that happiness in a sale is not always about squeezing the highest valuation. He cautions practitioners against partnering with buyers who will ultimately make them miserable for the next five years, stressing the importance of protecting the team and the enjoyable practice you’ve built.
Episode Navigation 02:50 – Discussion on the importance of the legal framework in dental practice partnerships. 06:15 –The need for proper documentation and legal clarity when bringing on partners. 15:30 – Insights into the process of selling a dental practice and dealing with DSOs (Dental Service Organizations). 28:40 – Rob’s perspective on happiness in a sale: it’s not always about the highest dollar amount. 32:00 – The importance of protecting the practice culture and the team during a transition.
What You’ll Learn in This Episode
✅ Why happiness in selling your practice is not always about squeezing the highest valuation.
✅ The risks of partnering with buyers who could make you “absolutely miserable” for the next five years after a deal.
✅ How to prioritize protecting your team and your practice culture during the sale process.
✅ What an attorney focused on dental legal solutions actually does and how Rob got into the field.
Key Takeaways
Happiness Over Highest Price: In a practice sale, happiness is not always about squeezing the highest valuation; prioritizing peace of mind is key.
Avoid Misery: Be cautious of buyers who will make you “absolutely miserable” during the required post-sale work period.
Protect Your Culture: The priority should be protecting the team and the enjoyable practice culture you’ve built.
Legal Focus: Rob Montgomery is an attorney specializing in dental legal solutions who advises on the complex operational and legal aspects of selling a practice.
Featured Discussion Topics
Selling Strategy
Buyer Caution
Legal Clarity
Legal Focus
Meet Our Guest
Rob Montgomery is an attorney focused on dental legal solutions. He lectures widely on dental legal issues across dental schools and dental meetings. He is also a co-host of the Dental Amigos podcast.
Connect with Simplify Dentistry
Website: simplifydds.com
Podcast: Available on all major platforms
Topics: dental lawyer, solutions, dentists, selling strategy, buyer caution, legal clarity, legal focus
Transcript
00:00:01:19 – 00:00:14:12
Speaker 1
Welcome to the Simplify Dentistry Podcast. Join us as we discuss clinical, operational and financial aspects of your practice. Hope you enjoy life and dare to simplify dentistry.
00:00:14:14 – 00:00:32:06
Dr. Richard Offutt
Our guest today is Mr. Rob Montgomery. He is an attorney focused on dental legal solutions. Rob lectures widely on dental legal issues across dental schools and dental meetings. He is a co-host of the podcast Dental Amigos with Doctor Paul Goodman.
00:00:32:08 – 00:00:48:22
Dr. Mustafa Shah-Khan
Welcome back to the Simplify Dentistry Podcast. We’re fortunate to have Rob Montgomery with us today. I first met Rob. There are our mutual friend Paul Goodman. When I was fortunate enough to be a guest on the Dental Amigos podcast. Rob, welcome.
00:00:49:00 – 00:00:51:16
Rob Montgomery
Thanks for having me. Excited to be on the show.
00:00:51:18 – 00:00:56:14
Dr. Richard Offutt
So tell me, tell me why. Dental business. How’d that happen?
00:00:56:16 – 00:01:01:03
Dr. Mustafa Shah-Khan
So, Rob’s, an attorney who somehow got railroaded.
00:01:01:03 – 00:01:05:01
Dr. Richard Offutt
Into into the stuff in the family business. Yeah. Yeah.
00:01:05:02 – 00:01:28:06
Rob Montgomery
Yeah. I mean, I’ve represented dentists as long as I’ve been a lawyer. And that’s for 30 years. And really, but over time, it started to become more of a priority in my practice until it became really the exclusive focus probably about 15 years ago. And so, you know, I really I like the dental industry.
00:01:28:07 – 00:01:56:22
Rob Montgomery
I’ve enjoyed, working with, with folks we love working with dentists. I mean, as a professional, it’s always nice to work with another professional. So, you know, I appreciate, the profession of dentistry. It’s it’s fun to help young dentists transition into practice ownership. Fun to help retiring dentistry and just transition out of professional ownership. And these are, you know, important transactions for for buyers and sellers.
00:01:56:22 – 00:02:27:07
Rob Montgomery
And, you know, my, my buddy Paul Goodman likes to say it’s like being involved in these deals is like being involved at the birth of somebody’s baby. So it’s it’s really an important time. And, we enjoy, being able to support our clients, in these transactions and, all the other people that work in the industry, the the CPAs, the lenders, the consultants, the brokers of realtors, we have a good crew of people that we like to work with, and, we enjoy collaborating with them.
00:02:27:07 – 00:02:35:19
Rob Montgomery
And it’s, it’s a fun network. And, Daniels, it’s a neat industry and profession to to service. And, you know, I enjoy it.
00:02:35:21 – 00:02:54:12
Dr. Mustafa Shah-Khan
So, what what are you seeing in the industry right now? Obviously, you know, our industry changes a lot. And, you know, there’s a lot going on with, you know, associates going to DSO and versus working with, you know, kind of a single doc. What are you saying? What are the the aspects that you’re reviewing the most these days?
00:02:54:13 – 00:03:13:10
Dr. Richard Offutt
Yeah. And are those are those those associate contracts, are they changing, you know, to where, you know, it used to be the guys wouldn’t do it if they didn’t have an option. You know, they wouldn’t do this. They didn’t have wanted a kicker or is that, you know, are they becoming more commoditized or is it going the other way?
00:03:13:12 – 00:03:44:11
Rob Montgomery
Yeah. I mean, I think that, that, there’s a lot to unpack here. Sure. I mean, DSLRs have definitely proliferated the, the industry. And I think unfortunately, some of that is now I will just say dental schools have aided and abetted that, you know, I’m a lawyer, so we’ll throw out some some legal jargon. They’ve aided and abetted that that process and really promoting and and the thought and the belief that there’s only one way to go that, that these TSOs have taken over the practice of dentistry.
00:03:44:11 – 00:03:55:04
Rob Montgomery
And if you don’t go to work with the DSO or you don’t partner with the DSO, that somehow you’re going to be left behind as a as a practicing dentist. And that’s just, you know, it’s we know simply not the case.
00:03:55:04 – 00:04:13:11
Dr. Mustafa Shah-Khan
Sara Irwin, you know, you said you lecture a lot of the dental schools are is that what you’re saying, that, you know, because when I came through, it was, you know, everybody was going into private practice and, you know, the dental schools were anti corporate dentists. Are you seeing that now? They’re all on board with the CEOs.
00:04:13:13 – 00:04:39:20
Rob Montgomery
I mean I’ve yet to come across any schools that weren’t really cozy with, with the SS. Well I think a lot of young associates feel like that is their only option. We do a lot of, review of associate agreements, especially for new and recent grads. And so, Richard, to answer your question, you know, over time, you know, we have seen that the provisions in those contracts are more dangerous.
00:04:39:20 – 00:05:04:03
Rob Montgomery
They’re more predatory. There are a lot of traps in there that these young Dennis don’t realize that are there. And unfortunately, some of the byproduct of that, too, is once vsos kind of get out into the the ecosystem with those kinds of agreements and those sorts of terms, a lot of, private practices, Denniston practices have adopted some of those provisions.
00:05:04:03 – 00:05:27:02
Rob Montgomery
So, I mean, I’ve definitely seen a shift certainly over the last ten years of, you know, what the tone and the and the nature and the vibe of, an associate agreement looks like and it’s become it’s become a lot, like you said, a lot more dangerous, a lot more one sided, in the, in the practices favor of that time, for sure.
00:05:27:03 – 00:05:48:21
Dr. Richard Offutt
I mean, I built the DSO and I was trying to hire and in, Charleston, South Carolina, and and the the one dentist that was kind of I, I really liked her. I thought she’d be tremendous for our practice and so forth. She had a she had some restrictions in her, her contract that were just extraordinarily punitive.
00:05:48:21 – 00:06:10:08
Dr. Richard Offutt
I mean, miles time, penalty, financial penalties. It was it was it was huge. And I’m just curious is are those able to I won my question. We do those hold up in court. And two are they getting more restrictive or less.
00:06:10:09 – 00:06:25:11
Dr. Mustafa Shah-Khan
What kind of. I’ve always thought that you know, the way contracts are, if it’s in the contract and somebody hands you the contract, they’re willing to enforce it. Yeah. Are you saying that clients are having to defend themselves against people enforcing it?
00:06:25:13 – 00:07:03:07
Rob Montgomery
Yeah. I mean, there’s certainly there are disputes over things that I never seen disputes over before. You know, in the last, you know, up until, say, 7 or 8 years ago, some of them are non-compete, but a lot of stuff really deal more with term and termination, where, workgroups are requiring people to work for a fixed term where the associate doesn’t have the ability to terminate prior to two years or three years, where the DSO has, has sent them cease and desist letters, or even sued them for not living up to that, to that end of the bargain.
00:07:03:09 – 00:07:23:06
Rob Montgomery
But, you know, I think, you know, you’re right. Stop it. I mean, the the, if somebody puts that in the agreement, they’re willing to try to enforce it. But what I say, Richard, is whether or not it’s enforceable, that just means is a judge going to enforce it. And in order to get to that point, that means there’s a lawsuit that’s been filed and the answer has been filed.
00:07:23:11 – 00:07:49:12
Rob Montgomery
There have been hearings, depositions. I mean, that could easily cost $100,000 to find out whether or not it’s enforceable and how many associates have the the resources to fight that fight. And a lot of times to like, you know, a court could say 15 miles isn’t enforceable, but 12 is. And, you know, congratulations, you spent $100,000 on legal fees to knock three miles off of a non-compete.
00:07:49:12 – 00:08:14:10
Rob Montgomery
And, you know, in a year in the making it. But I think even more so than that is, you know, what is the practical, impact of those, those non-compete? Because if somebody is looking to buy a practice or do a start up, lenders aren’t going to lend to them if what they’re looking to do is within that restricted area, regardless of how unreasonable they get.
00:08:14:10 – 00:08:33:23
Rob Montgomery
Having a non-compete that’s 50 miles, a 50 mile radius in Charlotte. Now, everybody could say, no judge is going on for that, but they go to Bank of America and say, hey, we want to borrow money for that. To buy this practice, we’ve got this crazy non-compete that everybody tells me on Facebook that don’t worry, it’s not going to be enforceable.
00:08:34:01 – 00:08:54:01
Rob Montgomery
The Bank of America says, well, come back after the judge has ruled on that. So really has the practical effect of stymieing entrepreneurial dentistry. You know, could you go work as an associate someplace else and see what happens? Sure. Can you go borrow $1 million to do a startup or buy a practice in that area, even if it’s unreasonable?
00:08:54:06 – 00:09:15:13
Rob Montgomery
Now, you know, and and they have you can’t. It’s not like you can also say like, hey, I like that end cap in that retail space for my startup, or I like this, this possible, you know, like, you know, acquisitions practice practices grossing $1.2 million. But I got this non-compete. Wait a minute. I’ll be back in a year after I’m done litigating this.
00:09:15:13 – 00:09:29:11
Rob Montgomery
Like you can’t. You can’t put those things on layaway. So again, it has the the practical effect of preventing people from being able to do things regardless of whether or not it’s quote unquote, enforceable.
00:09:29:11 – 00:09:46:05
Dr. Richard Offutt
You know, you said something very interesting. It’s the chilling nature of it. On entrepreneurial dentists dentist. They want to get out and do it. Do it themselves, start a business. They got they got a vision. And that just chills that sodium radically, I gather, is what you’re saying.
00:09:46:07 – 00:10:13:19
Rob Montgomery
Yeah, absolutely. I mean, it’s completely stymied. And, I mean, I think ultimately you have to understand that these, you know, non-compete under the law are supposed to be, only used to protect someone’s business. I mean, that, you know, to protect you from stealing somebody’s business or unfair competition in the dental industry, especially in these types of non-compete with these large groups.
00:10:13:21 – 00:10:32:02
Rob Montgomery
Really, what they are is just retention strategy. Sure. You know that if you have a bad enough non-compete, it can’t really go anywhere else. You know, that’s not what the law is supposed to be about when it comes to non-compete. Now, you know, get back to your question from a few minutes ago. Richard. Yeah. Are we seeing them change?
00:10:32:05 – 00:11:17:10
Rob Montgomery
There are there are some changes. You know, that there are states now that are starting to pass laws and they’re restricting these, these non-compete or putting in parameters. It’s not banning them outright, but that’s that’s slowly happening. So we are we are seeing some understanding, recognition of that. But again these are these are really retention strategies. And but I think even beyond that what we see is, you know, beyond just the associated employment agreement, our retention strategies and schemes that, relate to minority ownership and group practices, where we see younger dentists buying into one location of a larger DSL.
00:11:17:12 – 00:11:41:03
Rob Montgomery
And, you know, again, that that is nothing but that DSL trying to make sure that they have a dentist to be able to to to practice dentistry and see patients there. And from an economic standpoint, those deals rarely make sense for the dentist. They’re always very predatory in terms of, the non-compete, the dentists inability to transfer the interest back.
00:11:41:05 – 00:12:10:22
Rob Montgomery
They’re not they’re not there’s very little liquidity in those. And a really, it’s the ultimate, just shackling people to a practice with, with a bad, brand. And and it’s not entrepreneurial dentistry. I think this is something where I make sure it’s clear that anybody that’s contemplating this, you know, if you think you want to have and own a practice or be a partner in a dental practice, owning 10% of one location of a DSL that has 50 locations is not a big practice.
00:12:10:22 – 00:12:19:13
Rob Montgomery
The practice owner, you know, that is not entrepreneurial dentistry. That’s just signing up for, you know, basically, you know, a retention strategy.
00:12:19:13 – 00:12:40:08
Dr. Mustafa Shah-Khan
So, Rob, when you see, when you see these contracts coming out, you know, our listeners kind of go across the gamut as far as where they are in their practice careers. What are the things that you think docs should be looking at in these contracts that they probably are unaware of the implications of? What are the big bombs?
00:12:40:10 – 00:13:11:00
Rob Montgomery
Yeah, so many things. I mean, I think first off is they just have to get good representation, good legal representation. I mean, these these contracts are way more sophisticated than, an eight page dentist prepared agreement or something in a private practice, in an associate agreement. You know, we’re talking about operating agreements, subscription agreements, purchasing purchase agreements, management contracts, sub management contracts.
00:13:11:02 – 00:13:45:23
Rob Montgomery
You know, these are these are sophisticated document. So, I mean, I think ultimately people have to get these things reviewed. And the problem is sometimes they feel like, well, I’m only paying 150 or $200,000 for this. Do I really want to spend the money to have a lawyer tell me what what’s in here and what’s not? And it’s just it’s crucial because the types of things, you know, to answer your question are, provisions that may say that, you know, you can’t, that, that the, the DSO, for example, has the ability to purchase the interest back if the dentist is no longer employed.
00:13:45:23 – 00:14:17:02
Rob Montgomery
But they may not be required to, but if they do, they may be able to purchase it at a lesser amount or a lower valuation than when the dentist bought it. And so maybe the dentist bought in for $300,000. And now the DSO has the ability to buy them out at $150,000, because they’re leaving where that gets even harder is a lot of times these the buyout provisions, allow the DSO to terminate that payment over time.
00:14:17:02 – 00:14:38:23
Rob Montgomery
So it might be they’ll pay them with a five year note. Well, if somebody borrowed $300,000 from a bank to buy into this interest that is now worth 150, and it’s going to be that 150 is going to be paid off over time. When they do this deal, they owe the bank the balance on that $300,000 loan. Where’s that money coming from?
00:14:38:23 – 00:14:41:02
Dr. Richard Offutt
The. Yeah, the they owe the man. They owe the man.
00:14:41:03 – 00:15:08:15
Rob Montgomery
Exactly. They owe the man. But the DSO is not paying them to be able to pay the man. So it’s you know, you talk about handcuffs, right? It’s like that’s a bad thing. It’s just a lack of understanding. But it’s really it’s really a lack of liquidity in this, these investments. I mean, owning a 10% interest in, you know, 1313 Mockingbird Dental LLC management is not the same thing as owning stock in Google.
00:15:08:15 – 00:15:39:03
Rob Montgomery
You just don’t decide one day that you want to sell your interest and you can monetize it, you know, and again, non-compete with these things usually run with while you are a partner. And for five years after. And so even if you’re no longer working in the practice, if the DSO doesn’t want to pay you or doesn’t want to go into their pocket to cash you out, then you could continually be a member in this thing that’s not throwing off any income, not throwing off cash flow, but that is keeping you bound to this non-compete indefinitely.
00:15:39:09 – 00:15:55:05
Rob Montgomery
And a lot of times, those those non-compete and those agreements are even broader than in the employment agreements. They could be 30, 50 miles or sometimes we even see an entire state. So, you know, really talking about career defining things.
00:15:55:07 – 00:16:15:21
Dr. Mustafa Shah-Khan
So we talked, we talked to a DSO owner or founder at one point in time. And one thing in, in some of their contracts is the ability to purchase ECS. And if you purchase this many shares, it gives you the right to have hygiene revenue. Is that just kind of the handcuffs that they’re throwing in here?
00:16:16:01 – 00:16:21:14
Dr. Mustafa Shah-Khan
You buy this, you get this. But we also gotcha. Is that something that you see as.
00:16:21:14 – 00:16:24:12
Dr. Richard Offutt
Putting a sweetener on a bad, bad meal? Yeah, yeah.
00:16:24:15 – 00:16:35:05
Rob Montgomery
Yeah, absolutely. I mean, I think it’s yeah, it’s just putting people deeper into, into a bad, a bad investment. I mean, again, this is nothing but retention for it.
00:16:35:05 – 00:16:38:09
Dr. Richard Offutt
Yeah. I mean, the whole goal is to keep an A doc in the box.
00:16:38:11 – 00:16:55:14
Rob Montgomery
Absolutely. Get the doc in the box. And this is where, you know, and I have these conversations with, with our clients and it’s sort of like an They’re surprised to hear this. The DEA says are not cutting the dentist into these deals because they want to help the dentists. Like, it’s not like they want you to make more money.
00:16:55:14 – 00:17:21:09
Rob Montgomery
This is you know, these guys know how to make money. That’s what they wake up and do every day, you know. And and so this is, this is for them to be able to make more money and to retain you. And so unlike a typical dentist, a dentist deal where you’ve got a, you know, an associate agreement for a private practice or a transition of a practice from one dentist to another where it’s somewhat of a win.
00:17:21:09 – 00:17:44:22
Rob Montgomery
When we call them transitions, they are, you know, transactions where you want your legacy to continue very amicable from a professional standpoint, very cooperative in the DSO setting, the their lawyers and the groups that run these things, they want to win these contracts, they want to win these deals. So they very much are stacking the deck in their favor.
00:17:44:22 – 00:18:07:12
Rob Montgomery
So, you know, unlike I know, obviously as a lawyer, all these agreements should be reviewed, whether it’s with the dentist or with a private equity backed DSO group. But when it comes to the latter, you really have to be careful. Because there are so many traps in there that are being set up for to to win the deal, to win the relationship.
00:18:07:12 – 00:18:22:04
Rob Montgomery
And, you know, if you’re talking about a 28 year old who doesn’t really have a lawyer and is reviewing these documents on their own and doesn’t understand this stuff, and this is the first time they’ve done it, you know, the kind of system is set up to to beat them.
00:18:22:04 – 00:18:40:19
Dr. Mustafa Shah-Khan
So what about you know, I look at these things all the time. You know, there you get further down in your career and let’s say you’re the ten year doc or the 20 year doc has been practicing for a while, and now you’re looking at selling your practice. I’ve just nev never seen a DSO deal. That seems to make sense to me.
00:18:40:21 – 00:18:50:01
Dr. Mustafa Shah-Khan
To continue to stay in there. What are you saying in that? I mean, kind of from what we’re talking about, are all DSO deals bad or are you. Do you see good DSO deals?
00:18:50:01 – 00:19:10:17
Dr. Richard Offutt
So let me let me say one thing. Just just Rob, I got to say this just it’s I don’t mean to cut off what you’re saying, but let’s let me give you a cut. Me, give me, give me one time. So maybe maybe as as, in this dental space, we need to talk about dental transitions and dental transactions.
00:19:10:19 – 00:19:27:05
Dr. Richard Offutt
Maybe that is the distinguishing term. Because we all talk about all of this as transitions. And to your point that you just said, Rob, you know, these are this is a transaction, if you’re doing it with a corporate entity, right?
00:19:27:07 – 00:19:27:18
Rob Montgomery
Correct.
00:19:27:23 – 00:19:30:10
Dr. Richard Offutt
Yes. So that’s my $0.02. Go ahead. I’m so sorry.
00:19:30:11 – 00:19:30:23
Dr. Mustafa Shah-Khan
Yes. How would you.
00:19:30:23 – 00:19:40:17
Rob Montgomery
Say that this is. Yeah. We’re driving the documents. Got the same name, the same header. It’s the it’s the sale or purchase of a dental practice, but that is where the similarities stop. Yeah.
00:19:40:17 – 00:19:54:20
Dr. Mustafa Shah-Khan
No. Yeah. There’s a it’s a transition if it’s, you know, you know me buying Rick’s practice. He’s been practicing forever. But it’s a transaction where it’s, you know Rick DSO buying my practice.
00:19:54:20 – 00:20:08:07
Dr. Richard Offutt
Yeah. Yeah. I mean and there’s a reason that you spend 20, $30,000 to find the documentation to buy your. But to buy the practice, it’s it’s exactly what Rob, what you’re saying is, is they are designed to win to win that contest.
00:20:08:07 – 00:20:14:00
Dr. Mustafa Shah-Khan
So are there any DSO deals that are good for the the single doc selling into it?
00:20:14:02 – 00:20:38:19
Rob Montgomery
Well, maybe. You know, I think the good thing is, you know, I don’t want to be perceived as like anti DSO. Sometimes people say that you know, but I just I think it’s that I very much want to be on the soapbox and say no when you’re dealing with and what the lay of the land is. DSO and those groups provide probably the best possible deal for large practices and group practices.
00:20:38:21 – 00:21:04:13
Rob Montgomery
You know, if you have a practice that’s doing, you know, whatever, $20 million in revenue, it’s got $4 million of Ebit. You can’t sell that to a dentist flat out. I mean, unless it’s a super special tennis that’s got crazy resources. But, I mean, there’s no buyer pool for that. There’s no audience, you know, so a DSO can do that deal and they can pay $35 million for that.
00:21:04:15 – 00:21:25:06
Rob Montgomery
Now, you know, you still have to really be careful what you’re dealing with. You know, and these these deals are going to be documented like they’re $1 billion IPO with 8 to 10 lawyers from a big law firm working on the other side. But like, you can protect yourself, you know, if you’re working with the right team and, you’ve had the right consulting and you’re doing that.
00:21:25:07 – 00:21:36:15
Rob Montgomery
Yeah, that helped me. The the financial due diligence. Somebody is helping with the cash flow projections like in that space. Yeah. I mean that they’re they, they provide, you know, a great service to, to the industry.
00:21:36:15 – 00:21:38:20
Dr. Richard Offutt
They more or less create the market. Right?
00:21:38:22 – 00:21:55:08
Rob Montgomery
Yeah, yeah. And it is a market, you know, and that’s very different, you know, and that goes back to, you know, when you’re talking about transitions or transactions like that, it’s you know, when you’re talking about the DSO deal, it’s it’s very much a market deal. I mean, they’re buying cash flow. They’re buying a multiple of EBITDA. You know, that that’s the way they’re looking at.
00:21:55:08 – 00:22:01:03
Rob Montgomery
They’ve got they’re not talking about transitioning the practice. Right. Right is they’re buying they’re buying cash.
00:22:01:08 – 00:22:19:22
Dr. Mustafa Shah-Khan
And so we’ve had this conversation with a few different people from different perspectives. Let’s go to, you know, let’s say me, I have a $1.5 million practice, five ops, what is what should my exit be? Should my exit be finding a doctor or selling to DSO?
00:22:20:00 – 00:22:40:03
Rob Montgomery
So now that’s the deal. Where where seldom does it make sense, I think, to sell to DSO. You know, once you’re in that that smaller practice, almost invariably the, the right deal is the best deal is with is with the dentist.
00:22:40:05 – 00:22:46:04
Dr. Mustafa Shah-Khan
Because we had a transition guy tell us that he can’t sell a practice like that. I mean, who’s to.
00:22:46:05 – 00:23:05:16
Dr. Richard Offutt
To to to to to come to a DSO. Yeah. Yeah, yeah. There’s just not enough physical plant, not enough EBITDA. Yeah. And none of the you know, I’m sure by the time you get ready to quit, you don’t want to sign a five year employment, you know. Right. Yeah. So so you kind of you can’t you can’t check enough boxes to make it an attractive.
00:23:05:16 – 00:23:09:05
Dr. Richard Offutt
So I think that’s what he was telling us that day. Yeah.
00:23:09:06 – 00:23:18:03
Dr. Mustafa Shah-Khan
Yeah. But we have DSO has come in. We have some days I was coming in and saying hey that is the practice I want. Do you believe that?
00:23:18:05 – 00:23:36:09
Rob Montgomery
It’s probably not DSO you want to sell to, you know, I mean, it’s just the, you know, the better run DSO. Those are going to be ones that are looking to do better deals. And so, you know, if you want to find an emerging DSO that’s willing to do, you know, a small deal like that, that that’s a big yellow flag for me.
00:23:36:14 – 00:24:07:09
Rob Montgomery
I mean, because keep in mind, too, when we talk about selling to a DSO versus selling to a dentist, you’re selling to a dentist, you get cash at closing, right? Dentist gets loan, they pay you $1.2 million money in your bank account. Done. You know, maybe you work for some period of time, but you’ve been paid. If you sell to a DSO, maybe the purchase price is going to be those valuation is going to be, you know, $2.5 million, but they’re only going to pay 60% of that in cash.
00:24:07:11 – 00:24:27:09
Rob Montgomery
It’s not all going to be even at closing. They’re going to hold some money back and then they’re going to give you 40% of this in equity of the, you know, Bugs Bunny DSO, whatever that might be, you know, and then so, you know, even though the valuation is high and that seems like a great number, what you’re actually putting in your pocket is a lot lower.
00:24:27:15 – 00:24:46:11
Rob Montgomery
And then you’re on. Now you’ve got this risk of I hope this DSO does a recapitalization. So I get paid on that 40%, that they retained or that I retained rather. But now if you’re talking about a DSO that’s willing to do kind of a dumpy little deal in the in the context of the big DSO world.
00:24:46:16 – 00:24:48:03
Rob Montgomery
Now, is that one that you really I should be.
00:24:48:03 – 00:24:50:12
Dr. Mustafa Shah-Khan
Offended that you’ll call me a dumpy little deal?
00:24:50:14 – 00:24:55:05
Rob Montgomery
No, no. Oh, it’s it’s a it’s a DSL from a DSO trade organization.
00:24:55:07 – 00:25:15:07
Dr. Richard Offutt
Yeah, yeah. I mean it’s got to. Yeah. Minimum of that 3 or $400,000 in EBITDA or double or, you know, when we looked at it, when we were building ours, if you didn’t have that in EBITDA, you really didn’t couldn’t justify the expenses of buying it. You know, the right the the legal expenses, the, the, you know.
00:25:15:09 – 00:25:17:15
Rob Montgomery
The so if you look at, you see like this.
00:25:17:15 – 00:25:28:01
Dr. Richard Offutt
If you have a quality of earnings and equipment valuation and all the, the accounting and everything that goes with it, it’s a pretty to buy a practice is a pretty costly event for a DSO.
00:25:28:03 – 00:25:49:17
Rob Montgomery
Yeah, absolutely. And if somebody is doing that or willing to forego that, they’re doing that on the cheap. This is your partner to monetize the remaining 40%. How much confidence and faith do you have in them to be able to get that done? And all of that guys is in before you factor in what is the cost of doing the deal, which is, let’s say, you know, the Delta.
00:25:49:21 – 00:26:12:05
Rob Montgomery
Just keep the math easy. The delta between being an owner and an associate in this practice is $250,000 a year, and now you have to give them four years. You’re essentially leaving. You know, the cost of that is $1 million of what you’re forgoing. You’re still going to work every day. You still have to be the one that deal with the issue and high cost.
00:26:12:06 – 00:26:16:10
Dr. Richard Offutt
And so you still got to check hygiene. You still got to deal with emergencies. Exactly.
00:26:16:12 – 00:26:33:09
Rob Montgomery
You make $1 million, let’s say, like at that size. That’s why these deals don’t really make sense for anybody. And so people that are transacting, practices of this size in the DSO space, you know, like I said, I rarely is that good for the dental practice. And I’m always very suspicious of the DSO that’s willing to do that.
00:26:33:14 – 00:26:49:03
Dr. Mustafa Shah-Khan
Yeah. So I had a banker trying to trying to tell me that, you know, obviously it would be something that I would want to do because of what you’re talking about. The 40% that that will recap at such a bigger multiple and you’re going to get a second bite of the apple and you’re going to make so much money.
00:26:49:05 – 00:26:54:19
Dr. Mustafa Shah-Khan
How much are you saying the what are you saying the recapitalization, is that real or not right now?
00:26:54:21 – 00:26:59:13
Rob Montgomery
Very little. Certainly in recent years, you know, we haven’t seen a lot of those success stories.
00:26:59:18 – 00:27:00:13
Dr. Mustafa Shah-Khan
But we had them at.
00:27:00:13 – 00:27:15:09
Dr. Richard Offutt
One point. Yeah, I mean, I mean, that last 15 months, it’s been pencils down on on the recap world. But prior to that there was right many. Yeah. You know, if you look at the various ones, some of the specialty ones especially, yeah.
00:27:15:11 – 00:27:37:19
Rob Montgomery
But even then, you know, people are not cashing out on those. I mean, they’re still rolling a portion, you know, if not half or more of their equity into that, into that new, larger acquirer. You know, it’s not like the recap comes and checks are cut and everybody walks away rich, you know, like they’re they’re still there.
00:27:37:19 – 00:27:40:05
Rob Montgomery
Still most of the time I have to leave equity for that.
00:27:40:05 – 00:27:43:15
Dr. Richard Offutt
So yeah, there’s those rules of, of of exchanging right.
00:27:43:16 – 00:28:00:03
Dr. Mustafa Shah-Khan
You know. Yeah I guess I explain that a little bit, you know, and I talked to a lot of guys and they talk about all these scenarios, you know, and everybody assumes well the recap now I get, you know, a pot of gold and I’m gone. I’m drinking, you know, my ties. Yeah. Yeah. Explain that a little bit.
00:28:00:05 – 00:28:22:10
Rob Montgomery
Yeah. So I mean, it’s still I mean, all these groups do not recap, you know, it’s not like a given that’s going to happen. I mean, there there are groups that do it, have a track record and there’s value to that because you know, they know how to do it and they’ve done it before. If somebody says, yeah, there’s this is they’ve they’ve done two recaps that tells me this, this is a group that knows knows how to do this.
00:28:22:12 – 00:28:43:13
Rob Montgomery
If you’re talking about a group that’s a quote unquote emerging DSA. Some it’s never done one of these deals. You may be able to get a little bit more money, on the recap because you got in an earlier stage. But over time. But even then, you have to have confidence that these people are going to be able to do the recap.
00:28:43:13 – 00:29:03:15
Rob Montgomery
And it’s just not a gift. I mean, the majority, the DSA is that we see with we don’t see them ever making it to to a recap. And the groups are just like anything. They’re good businesses and know how to do this. They’re a partner that there’s you know, when you leave 40% of your equity in your practice with them that you’ve got a good chance of getting paid.
00:29:03:15 – 00:29:17:18
Rob Montgomery
You may have a nice cherry on top with that, but the smaller ones that don’t have a track record, you don’t. And I, I always like to tell clients that you have to like the money in the cash that you’re walking away from the table with.
00:29:17:19 – 00:29:19:03
Dr. Richard Offutt
At, at the closing.
00:29:19:03 – 00:29:20:19
Dr. Mustafa Shah-Khan
The front end cash. Yeah. Right.
00:29:20:23 – 00:29:21:17
Rob Montgomery
And if you’re.
00:29:21:17 – 00:29:23:05
Dr. Richard Offutt
Happy with that number.
00:29:23:07 – 00:29:40:14
Rob Montgomery
Right. Exactly. Return and and if it and if you know the recap comes in or some home run down the road, awesome. But you are happy with that number. If you’re not happy with that number, if you’re doing a deal solely based on what you hope is the upside in the future, that’s really risky to Rob.
00:29:40:14 – 00:30:03:09
Dr. Mustafa Shah-Khan
Here’s a scenario that I hear people talk about now a lot. They’re like, let’s five of us, six of us get together, let’s normalize our values, and let’s kind of come together as an entity. And then let’s try to take that and sell it to somebody. Is that just Dennis thinking that they’re smarter than people and and it’s foolish.
00:30:03:11 – 00:30:05:21
Dr. Mustafa Shah-Khan
Or is that is that a real thing?
00:30:05:23 – 00:30:30:05
Rob Montgomery
Yeah. I mean, it’s such a challenging thing. You know, I know there are groups that that try that, it’s challenging just culturally bringing all these practices under one umbrella. The problem that I see, the biggest problem or to actually, you know, it’s obviously figuring out what the relative valuation is. What is your practice? What is your interest worth?
00:30:30:07 – 00:30:52:05
Rob Montgomery
That’s obviously something that needs to be negotiated. It’s important. But, you know, with that, even in the bigger risk for me is when you bring all of these people together, all these, these practice owners, for the sake per sole purpose of doing a deal. If that deal doesn’t get done, how does that thing get on? Well, sure.
00:30:52:05 – 00:31:10:03
Rob Montgomery
And what and what does that look like? We’ve seen some situations where it’s not it’s not good watching those things be unwound. So it’s sort of like, okay, we’re going to try to get this up, and if it doesn’t get off the ground that it’s the whole thing’s going to just go up in flames. It’s kind of a typical thing.
00:31:10:03 – 00:31:14:06
Rob Montgomery
So that, that, that is I think I think it carries a lot of risk.
00:31:14:06 – 00:31:40:06
Dr. Richard Offutt
You know, Rob, I, I’m familiar with a deal here in our town. Where. What? They’re for practices. Where? Say, let’s just hypothetically say each practice has. So they were orthodontic practices. Each practice has, you know, $700,000 in EBITDA. And they might get they might get seven times on that, 6 or 7 times on that back in the go, the got kind of the golden window time.
00:31:40:08 – 00:32:05:02
Dr. Richard Offutt
Well what they did is they, they said okay, we’ll deliver. We’ll deliver $2.5 million worth of EBITDA, but pay us all on the different multiple. They never did the combining practices thing and value equal, the equaling out who who’s what’s worthwhile. They never know. You had you had 550 in EBITDA. I had five. You get paid on your 550 multiple.
00:32:05:02 – 00:32:15:04
Dr. Richard Offutt
I get paid on my five. But the four, all of us collectively are bringing a bigger number to the table. So we are all getting the higher multiple. That was how that worked out.
00:32:15:09 – 00:32:19:15
Dr. Mustafa Shah-Khan
So why would somebody do that, especially if the systems aren’t the same?
00:32:19:17 – 00:32:28:22
Dr. Richard Offutt
They never combined the practices. They were always going to be individual practices. They just, they, they just, they just for the, for the purpose of selling.
00:32:29:00 – 00:32:54:09
Dr. Mustafa Shah-Khan
So why would it is why would a DSA want that. You know, because you would think that they want kind of you know, systems and, and uniform practices and that it is an actual group because now you’re able to, put efficiencies on, with your opera, I guess I, I have a hard time. People have brought this to me before, and I have a hard time understanding why that makes sense to anybody.
00:32:54:10 – 00:32:55:05
Dr. Mustafa Shah-Khan
Yeah, well.
00:32:55:05 – 00:32:57:06
Dr. Richard Offutt
It’s just that to get the higher multiples, the only.
00:32:57:09 – 00:33:00:11
Dr. Mustafa Shah-Khan
Yeah, but will they get the higher multiple?
00:33:00:13 – 00:33:23:08
Rob Montgomery
I mean, I generally I typically don’t see that I haven’t seen that happen successfully for that reason. I mean there’s a reason why they pay lower multiples for lower EBITDA because it’s a smaller practice. And all the things you guys are talking about, it’s sort of there aren’t there’s efficiencies. You don’t have the same systems in place. You don’t have the same financial you same kind of accounting and bookkeeping.
00:33:23:08 – 00:33:31:04
Rob Montgomery
You know, it’s it’s a lot more work to for the DSO to do that. And I don’t know why. I don’t know why they would either.
00:33:31:06 – 00:33:45:03
Dr. Mustafa Shah-Khan
Rick and I were talking about this earlier today, you know, in the heyday of stacking EBITDA, you know, you stack EBITDA and you kind of kind of sell it and you make a ton of money. Is the stacking EBITDA era over?
00:33:45:05 – 00:34:08:01
Rob Montgomery
I don’t know, you know, I think I don’t think of any year. And again, we’re talking about a market with this kind of stuff. And unlike the dental, the dentist, the dentist deals that will always happen. These deals very much are market driven. They’re market driven from a structure standpoint. The market driven from, a multiple of EBITDA standpoint.
00:34:08:02 – 00:34:29:03
Rob Montgomery
So, you know, I’ll never say never with any of this stuff. Sure. It just it it’s very cyclical. So, so maybe, it, it comes back, but, you know, as you said right now, you know, this, this things have definitely cooled in the last 18 months in that space.
00:34:29:05 – 00:34:48:19
Dr. Mustafa Shah-Khan
Rob. What? Yeah. I’m for the simplified dentistry, audience. You know, simplified dentistry kind of caters to what we call the experienced and aspirational entrepreneurial doc. You know, what’s your advice for the entrepreneurial doc right now who is looking to kind of expand what they’re doing?
00:34:48:21 – 00:35:10:17
Rob Montgomery
I think, you know, if you’re an entrepreneurial doc, you know, one of the things that you want to really try to do, if you’re trying to grow your your business, is to try to replace yourself as much as possible. I think, you know, my successful entrepreneurial group practice owners are not chair side dentists, unfortunately, you know, and if you like to practice profession, that’s great.
00:35:10:17 – 00:35:37:08
Rob Montgomery
But if you want to try to grow, a multi-location business, you really it’s it’s very challenging, if not impossible to have a foot in both of those worlds because they just don’t they don’t jive. So, you know, really trying to replace yourself clinically and then also to try to get good help from, from a business standpoint, CFOs, other outside people that can help you, get to that next stage.
00:35:37:10 – 00:36:01:19
Rob Montgomery
I mean, I feel like a lot of times and more, they’re more younger docs, that are considering, large practice transitions now than, than ever before just because there’s a the numbers are there that there’s a great reward with those. But, you know, we have clients and I think there are really good places that have businesses that are well-run practices that are well-run.
00:36:01:19 – 00:36:36:12
Rob Montgomery
They’ve got good administrative help. Corporate, structure. Good, good. Financial, consulting. Good. Clinical, staffing. And, you know, they’re able to run their business a little bit more absentee. And so, you know, if you can get yourself to a place like that, you’re kind of like your own DSO. You know, you’re the DSO of your own practice, and you can make money doing that without having to basically give that cash flow to a DSO because, again, DSO do not do these deals to lose money.
00:36:36:12 – 00:36:57:19
Rob Montgomery
So, you know, if they’re doing one of these deals because it’s a it’s a good deal for them. And generally what’s good for them is not as good for you, but if you’re in the situation where you have the ability to put together a good business, and that you can, then it’s something that you can sustain that growth because you have a good team.
00:36:57:21 – 00:37:05:16
Rob Montgomery
I think that’s something that that you should consider. And that’s an advantage that the dentist has over a non dentist. As you’re growing a group practice like that.
00:37:05:18 – 00:37:20:21
Dr. Mustafa Shah-Khan
As kind of we get, later on in our careers and the 20 year doc, from a legal perspective, you know, what? Should a 20 year doc be getting in line, before they start transitioning, transacting, whatever it is.
00:37:20:23 – 00:37:46:21
Rob Montgomery
Really depends on the size of the practice. You know, whether we’re talking about a large group that’s going to be selling to a DSO or if it’s a practice that’s going to be more of a candidate for a sale to, to a dentist or to the associates. I think it’s important to start working with a good consultant or broker, in advance of, being ready to transition.
00:37:46:23 – 00:38:09:16
Rob Montgomery
Get your your books together, get your financials together, try to cut overhead, make your practice more valuable. Leases are important to real estate issues. What is the transition plan? You know, where are you going to if you own the real estate? Or are you going to sell that to the buyer, or you’re going to sell that to a third party group?
00:38:09:18 – 00:38:42:14
Rob Montgomery
And, if you at least the space what do your assignment provisions look like? You know, we’re in our transition world, I’ll say the the number one deal killer is an uncooperative landlord who refuses consent to transfer our lease to a purchaser of the practice. So. And unfortunately, that’s something that can always be or should have been addressed in the lease when it was signed, where there would be good assignment language that doesn’t require or allow the landlord to have a seat at the table when you’re looking to transition your practice.
00:38:42:14 – 00:39:03:19
Rob Montgomery
So as you get into renewal and option terms and exercising renewal terms, you want to make sure that that you’ve got at least that’s going to be transferable and is market in. It’s going to be something that’s not going to cause either, you know, stymie your ability to transition the practice or, you know, could lead to, having to sell it for less.
00:39:03:19 – 00:39:27:12
Rob Montgomery
I mean, again, if we’re talking in the, in the DSO world or even the informed strategic buyer world, you know, where people are buying a practice not based on a percentage of revenue, but on a multiple of EBITDA, or they’re looking at the profitability. And if you’ve been in this space for 30 years and you’re paying $10 a square foot more than what somebody just walks off the street, who’s a new tenant?
00:39:27:12 – 00:39:48:04
Rob Montgomery
Because you’ve been auto renewing your lease every, you know, every renewal term. And it’s been increasing by 3%. Well, you know, that’s a hit on your EBITDA. And, you know, if you’re selling for a 6 or 7 times multiple for every, you know, if it’s you’re for paying $100,000 a year, too much in rent over market, that might be costing you $700,000 a year deal.
00:39:48:05 – 00:40:05:19
Rob Montgomery
So really getting the lease kind of teed up, and also say making sure that your associate agreements are nailed down. You’ve got good non-compete that are transferable and assignable to purchasers of other practices. Something else that I think is is important from a planning standpoint.
00:40:05:20 – 00:40:08:17
Dr. Mustafa Shah-Khan
Biggest mistake you see a dental client making.
00:40:08:19 – 00:40:46:19
Rob Montgomery
DIY, buying this stuff, you know, not not realizing kind of what what they’re dealing with in their their need for good, legal support, and good financial CPA support. And, you know, a lot of these things, these deals really do begin and end with, with the financial aspect of it. You know, so working with somebody that can help you with the cash flow projections and show you what these deals really mean to you so that, you know, before you do the deal, what it’s going to look like, instead of finding out six months later, you know, it’s like taking what’s behind door number two, you know, and a lot of people do that,
00:40:46:19 – 00:41:14:22
Rob Montgomery
you know, especially in the larger practice world where you, you get these these offers and lies and these unsolicited offers from, from large groups. Your practice has been found to value your practice of $15 million. You know, people think, well, gee, I’m rich. You know, I don’t even need to have those numbers. Look at what could possibly go wrong with $15 million a whole lot, you know, and I could talk about stories and times of, you know, what those deals really look like after somebody crunched the numbers.
00:41:14:22 – 00:41:36:14
Rob Montgomery
But you need to to go through that step. And, you know, regardless, I mean, we could we as lawyers can do the greatest legal work ever, have the greatest contracts of all time. But we can’t make a bad deal. Good and a bad deal is is flawed from a structure or just from a financial standpoint that it wasn’t wasn’t something good to begin with.
00:41:36:14 – 00:41:46:08
Rob Montgomery
So, I mean, I think people that skip steps, they try to do it on their own or they cheap out when it comes to these things or the people that have problems after the fact.
00:41:46:10 – 00:41:57:10
Dr. Mustafa Shah-Khan
As we wrap up, I’m asking a couple loaded questions. Rick brings you a deal from this buyer. Who is the buyer that you’re like, I know Rick’s going to do fine.
00:41:57:12 – 00:42:15:01
Rob Montgomery
It all depends what Rick wants, you know, and what Rick’s goals are. If Rick is, you know, somebody that wants to still be able to run his practice like he did, like he has for all the years that he’s owned it. There are certain groups out there that will we’ll let him do that or require him.
00:42:15:02 – 00:42:17:07
Dr. Mustafa Shah-Khan
And you won’t tell us who those are.
00:42:17:09 – 00:42:18:00
Rob Montgomery
What’s up? I’m sorry.
00:42:18:01 – 00:42:20:02
Dr. Mustafa Shah-Khan
I won’t tell us who those are.
00:42:20:04 – 00:42:38:18
Rob Montgomery
They’re devil. It depends. You know, they they vary in region and they vary with with specialty. There’s just so many of these out there, but it’s really it’s working with people that understand what these different, DSO hos and models are and seeing what your objectives are. I mean, there’s no right or wrong answer is no. Like one size fits all for this stuff.
00:42:39:00 – 00:42:54:05
Rob Montgomery
It’s really it’s personal. What do you want? What are your goals financially? What are your goals professionally? Do you want to do you want somebody to take all this stuff off your hands? Or do you still want to still have a hand in it and still control what happens on a daily basis? You know, it really it depends.
00:42:54:05 – 00:43:14:16
Rob Montgomery
But if you you can’t tell what that is just by looking at the letter of intent. This is where working with a really strong, transition consultant or broker adds value, you know, and nobody wants to pay these guys because it’s like, why did I pay them 8%? I can do this myself. Somebody sent me to sell. Oh, I you know, they didn’t they didn’t find this person.
00:43:14:16 – 00:43:36:04
Rob Montgomery
I, I can just sell to them and save that thing. You know, they’re the people that oftentimes are unhappy after they’ve done these deals and they find out who they partnered with because happiness with these things are not always like squeezing the highest valuation or the most dollars out of this. If you’re gonna have to work someplace for the next five years and be absolutely miserable.
00:43:36:06 – 00:43:46:19
Rob Montgomery
When you used to have a practice that you enjoyed with the team that you enjoyed, on a, on a regular basis. So you have so much of that. It’s it just depends on the individual.
00:43:46:21 – 00:43:56:09
Dr. Mustafa Shah-Khan
Last question. Somebody brings you a deal from this buyer and you’re like, you got to run from that buyer, do you? Who is that buyer?
00:43:56:11 – 00:43:59:04
Rob Montgomery
I’m not going to say I mean.
00:43:59:06 – 00:44:04:07
Dr. Richard Offutt
That’s opening a can of worms, and you don’t want to even go on in there. You get away.
00:44:04:07 – 00:44:05:19
Rob Montgomery
My saying in that pain.
00:44:05:20 – 00:44:06:20
Dr. Mustafa Shah-Khan
Lawyer getting sued.
00:44:06:20 – 00:44:12:08
Dr. Richard Offutt
Now probably. Okay, we’ll probably cut that question out of this.
00:44:12:10 – 00:44:24:06
Dr. Mustafa Shah-Khan
Well, thank you very much for, spending some time with us. We really enjoyed it. You know, obviously look forward to collaborating with you and, Paul, a little bit more as we kind of move along. And, thank you for your time.