David has an educational background in accounting and finance. Professionally he has owned, operated and sold a business which experience he uses to benefit his clients. His career in banking began as an analyst / underwriter. Currently he holds the title of Vice President and Business Banker at First Citizens bank specializing in dental finance. Previously he taught and assisted in developing B475 – Financing New ventures for BYU – Idaho. David was inducted to Beta Gamma Sigma recognizing his high scholastic achievement in business school. He likes fast cars, motorcycles, greek food, and fishing. He is blessed with a beautiful wife and two sons.
VIDEO - DUwHF #1281 - David Haynes
AUDIO - DUwHF #1281 - David Haynes
Howard: It's just a huge honor today to be podcast interviewing David Haynes MBA he's from First Citizens Bank and this is gonna be amazing podcast I mean he does entirely dentistry I mean this is all he does he has an educational background in accounting and finance professionally he has owned operated and sold a business which experience he uses to benefit his clients his career in banking began as an analyst underwriter currently he holds the title of vice president and business banker at First Citizens Bank right here in Scottsdale Arizona specializing in dental finance. Previously he taught and assisted in developing B 475 financing new ventures for byu-idaho. David was inducted to Beta Gamma Sigma recognizing his heist classic achievement business goal he likes fast cars motorcycles Greek food and fishing we must be related somehow. He is blessed with a beautiful wife and two sons I beat you there I had four sons
David: Yeah we'll let you have that.
Howard: You'll pass on that one so how is dentistry doing?
David: Dentistry so my focus to kind of set the context I'm focused solely in Phoenix so you know I see things that are happening in other markets but my focus here in the Phoenix area you know with that as a backdrop that you know are from a lending standpoint it's doing very well you know the portfolio our dental portfolio is very strong, there's a lot of demand you know amongst buyers and sellers folks interested in transitioning and growing you know are generally speaking our default rates are very low you know this is a the local economy and especially as it relates to dentistry appears to be you know very strong for the time being.
Howard: Our governor what is our governor's name...
David: Ducey
Howard: Ducey, I'll pull it up he passed a law that allows anybody and who's a licensed dentist in the United States to move here it's something that dentists have been asking for and they don't like to it seems kind of weird that you graduate from an accredited dental school the United States but you can't go practice taking a state license and in other states and you know all that kind of stuff do you think that we'll have a material impact on the dental business do you think more dentists will move to Arizona to buy practices because of that or not really?
David: That's difficult to say and I should add my disclaimer so I work for the bank my opinions that I expressed they are my own right the banks of hands I'm not the bank's economist so you know these are my own thoughts but I don't really see that I mean Arizona seems to be already a hotbed for dental activity and you know there's already a number of dental schools here and folks that are in the area you know it's hard to imagine that you know that law will have a material impact on on other folks relocating to this area for that reason now it may be that you know certain Doc's see opportunities you know here because of that but I don't see it having that material of an impact.
Howard: To me what is very interesting is when the ADA which has you know their chief economist Marco Vujicic phd's from the World Health Organization when the American Dental Association landed my I couldn't believe it, he's like the best health care economist I've even ever heard of and he has him but he does some amazing work but Arizona's been ground zero for DSOs 18% of the dentists and Arizona participate in DSO while many states are a zero percent but it has the most DSO X activity so is your you do a lot of work with DSOs?
David: No, so our primary client for myself and really you know for a lot of you know local banks and local lenders is the owner/operator that has you know his own shop his or her own shop and has a desire to either expand you know grow that practice and and you know spend their career there as in as an owner-operator we do very little with large corporate groups you know there's some smaller I'll call them you know small corporate groups that have that own maybe a few practices they're kind of you know they're on a much smaller scale but for the most part we're dealing with owner users that have a desire to you know buy a practice expand their practice start a practice that type of thing and there's a tremendous amount of activity.
Howard: Which is where you know I'm dentistry this whole deal so things been a very short period of time considering that you know this dentistry started by Pear Shard hundreds of years ago but to me I only see any successes with humans is when they have skin in the game you know and when a dentist owns their office they net a hundred thousand dollars a year more when their employees somewhere else I mean I mean humans you either own your own bowling ball so you have a skin in the game when you bowl regularly and you're real good or you haven't been bowling in ten years and I I just I don't see the market where I go to school for eight years and then just become your employee have no skin in the game and we all live happily ever after, I think it's a very transitional thing so are you mostly loaning money to buy a practice?
David: We're doing a lot of practice transitions certainly we were also financing a lot of expansion there's a pretty common scenario for us is a doctor has a single office and wants to grow their practice by either adding a second location buying the suite next door and expanding their physical presence so transition piece is certainly a big a big part of it the construction the construction lending you know piece of it is also a significant play for us and we see a tremendous amount of you know demand in that in that space.
Howard: So dentaltown us 50 forms and one of the forms is practice transitions and I think it's one of the most we both have an MBA so if you have an MBA and you love business on the practice transition forms associates corner partnerships and associates practice acquisitions so if your business doing well then dentistry is expanding I mean they're you seem to have a lot of activity for wanting access to capital to expand their business?
David: Oh absolutely they're you know Arizona has seen higher valuations recently across the board you know with practices with real estate with construction costs there's just a tremendous amount of the increase in cost just across the board has been pretty strong and so you know we have a number of buyers you know that we've come in contact with that are looking for ways to facilitate that growth and that can be through a transition it can be through that like I said that construction element which is carries a lot of risk there's a lot of ways to get there but the transition side is it's certainly a big play for a lot of folks and in the supply the supply and demand at least here in Phoenix seems to be a little bit mismatched right now there's the demand appears to be much higher you know than there is supply of really good practices and what I've seen is a willingness by some doctors to look at practices that maybe they weren't originally interested in maybe they decide to buy a practice or expand and they want to pick up patients and what they're doing is possibly considering a practice that they may not have otherwise considered you know maybe it's got some sort of an issue or quark or something that doesn't match their skill set very well but they're still entertaining that because this kind of mismatch with supply and demand in the market and so what I've found or seen is that they're you know the doctors that really want to buy a practice and expand they have to be aggressive and network and kind of put themselves out there and and and try and find opportunities or help uncover opportunities to an extent on their own and then from there they can you know open some more doors potentially.
Howard: Now I'm going to give away my jaded 57 years of age I to me when there's everything you're describing is the top of the bubble I mean I graduated high school in 80 that's when the biggest bubble I saw popped an 87 Lehman's Day 2009 what you're describing is a lot you know at the top of the bubble you you see all this type activity do you think is is there a dental bubble going on do you see that?
Daivd: I would say possibly I mean it's it I look at dentistry a little bit like maybe like a government right so governments there was there's been a lot of discussion about like state and local governments you know having fiscal issues financial issues and it's really hard to kill a government right just the money the money just keeps coming in and so they can they can't they have much longer staying power than private organizations but I would say the dental industry in some ways for that fact alone is somewhat similar the money you know doesn't ever shut off completely they're not like contractors right when the economy tanks and there's a contractor that's really busy they go from busy to zero the dentist doesn't typically experience that at least it doesn't seem like they experience that extreme of a drop so is there a bubble it's possible valuations are higher you know people are borrowing more the student debt situation just I mean I see guy folks with really high amounts of student debt you know it's not uncommon to see four thousand dollars in student debt they're on income based repayment and and then they're still living there still living to the maximum that they can afford personally they're spending yeah on cars and no fine so if there's if there's a couple grand extra because they're on income based repayment they were actually advertising that loan they would have they'd have a lot less money but because they're an income based repayment they'll you know a lot of Doc's are spending well in excess of their of their means and and that that issue you know a lot of folks are counting on that income based repayment to be that debt to be forgiven after you know a period of time and and that's course gonna create a taxable event so is there a bubble it's possible I don't see I the folks that are operating on the fringe you know those are the folks will be hurt in some sort of a downturn it'll happen at some point I mean there's no question that there will be a downturn and those that are operating right to their limit from a borrowing capacity from personal and business those are the folks that will suffer but aside from that will it be far reaching into the entire dental you know into the entire dental community I have a hard time seeing that the really successful offices that have good amount of cash flow and low leverage I don't see that and I don't see that bubble popping for them.
Howard: and so the contractor in a downturn gets shut off 2-0 dentist don't why do you think that is?
David: Well the need for you know dentistry is is ongoing I mean if your if your tooth hurts you're gonna do something about it I mean and and if you need and comparing that to the contract or if you're you know if you're contemplating a large project well you can we can hold off on that right so the the human need is there and what will happen with you know with all this growth how will doctors adjust in a downturn you know what ways will they continue driving business you know that that'll be that'll be interesting to see but I think you know just that human need that always exists is does you know shield the dental industry to an extent but that's not to say that you know folks won't wouldn't suffer in a downturn again.
Howard: All I can say on the first part about living beyond your means it's to me its associated where you're born if you're if you're born in the united states you live above your major entire life the only dentist i see living below their means is that they came here they weren't born in the united states and the poor the country they were born in the better they'll do, they'll come out of a school with four hundred thousand our student loans they'll go buy an office they'll live in the office they won't have a car or a house you know they have their iphone and that's the only number they they market and they tell me oh yeah five o'clock all the born in america dentists go home and then i get a toothache a broken tooth it's mastercharge visa american express to you know and they just do so well but i'm often talked to many dentists and i'll say just I mean you're something that your vacation it was Hawaii your car you know it show me one item in your personal expenditures where you live below your means they can't mean it one.
David: It almost doesn't exist and it's a cultural fly guess to your point you know there's there's very little pride and the in the dental community you know in in in that vein of saving money and being thrifty there's not very many people that take pride and that it's more of hey I'm proud to show you what we did or what I just bought and it is kind of a cultural it is a bit of a cultural issue in terms of buying practices I mean you know these people folks will live right on the edge and you know if your credit if you're gonna try and buy practice and your credits got a hiccup or issue it's really difficult you're gonna end up paying more you know you may not get the practice somebody may beat you out that's got a commitment so you know in in terms of facilitating your future success it's it's in the doctor's best interest to live below their means not be on the fringe and and and risk you know credit issues that we're gonna pick up and have an issue with.
Howard: and I will be blunt and say the truth it is in my opinion experience that dentists physicians and lawyers attract spouses who want to live above means they almost never marry a schoolteacher who wants to go camping at the lake it's always someone who wants a Range Rover a cruise a European vacation they just attract people who love to live above their means. So probably a quarter of everyone listening to you right now is in dental school and probably almost all the rest are under 30 so when are they ready to buy a practice when they come out of school and they get financing they buy your practice right away you should they wait a year?
David: It's difficult so let me backup to your just prior comment just sent out and I'll answer this question as well but you know the talking about the spouses we see a really high divorce rate and among dentists and it is extremely it is extremely difficult for that not to impact your practice in some in some way and encircling you know also to the credit discussion about personal credit almost a hundred percent of time when somebody goes through a marital issue whether it be you know temporary separation or divorce they almost always come away with some sort of scar on their personal credit it almost always happens and so you know this issue of living within your means and and some of these issues that we see very commonly of divorce and the dental community I mean it is just such a prevalent a prevalent thing and it can cause you know it can cause some major issues as you're you know buying a practice or throughout throughout your career I have one doctor right now it just got divorced and sure enough came away with some credit issues had some things in mind that he wanted to do you know prior to this and all that was put on hold and ended up cause I mean it's just it's a mess and so there's we see that a lot it's unfortunate but I think that you know living within your means is definitely one of those ways to at least hedge some of that but anyways what was your other question I forgot...
Howard: Yeah the other thing about it means a and a lot of spouses I feel sorry for cuz they they hear the wrong message like the spouse will say well how much you charge for a crown say a thousand and and then you come home and say oh my god I need five grounds so she's thinking you made five thousand no that you charge a thousand the ppl only pays you six hundred and that you have sixty five percent overhead and so it's now it's now gone from five thousand dollars to now you netted you know eight hundred today or something and you know after all is done and said so again it's communication communication communication you're not being transparent with your financial accounting your managerial accounting and they see you go to work and come home beat up and tired and then they start seeing it's for this little amount of money and they make better decisions but there's so many spouses who are completely disconnected from the transparency so of never accounting.
David: To answer your other question coming out of school my preference is to finance folks that are that have at least a few years of experience out of school and they've had an opportunity to perhaps pay down some debt you know personal debts and save up some liquidity so they're more prepared for a purchase you know you can it's possible that somebody right out of school could find a bank to loan them money but there is just experience is that experience a couple years of experience being in office and working and that it's just so valuable and I personally it would make me nervous to finance somebody straight out of school especially if they were interested in a start-up if it's somebody out of school and they wanted to do a buy in and they've maybe got you know some experience with that you know that practice somehow maybe it's a family member if it's a related you know practice that somehow really that might be a different scenario but for the most part I think you know folks that are coming out of school just take a deep breath don't go blow the bank right away when you come out of school and start making money you know be conservative and try and you know save some money and work on those personal debts as much as you can and then you know and then go from there look just look to buy or you know take that next step whatever that is.
Howard: So I agree that you know when you come out of dental kindergarten the you know you just got a license you know and you're gonna need to practice so you know you're talking to patients cleanings exams simple crown and bridge simple endo and you like them to have one or two years of the basics before they start thinking of...
David: At least yeah absolutely
Howard: So then her next thought is I'm I'm by the way you know you you spend most your time in Phoenix but this is the fifth most populous city in the United States mean Phoenix is a huge it's a big sample and there's not a lot of weird things about it that I'm you know there's things in New York City that don't apply to Wichita Kansas but Phoenix is a pretty simple economy I think I think it's a good reflection of the country, the first thing they want to think of is should I do a de novo and start from scratch or should I buy an existing what how should she wrap her mind around that?
David: That's a good question and I'm not a huge fan of scratch starts if you've got no experience only you know a practice and you know it's possible you know that you can certainly get that you can get it done there's a lot of people that do it my preference is to see people buy something with established cash flow it's to me that risk is much lower if you've properly done your research and under written that you know the opportunity and done your due diligence you know if you've made sure that there's not an issue with that practice rewriting I much prefer to see folks go out and buy those existing cash flows that adds some level of predictability to what's going on I you know when I see when I scratch starts the type of scratch start that I prefer is one that's really an expansion of an existing practice I like there's a doctor that has a practice and they want to grow that practice with a brand new location that to me is much easier pill swallow than somebody coming out getting a few years of experience and then doing a scratch start that's just an extremely difficult situation you're going to be going from zero to a hundred and just it happens overnight you're gonna be running a business you've got bills to pay a loan to pay I mean there's there's a lot of things and let's people do it all the time.
Howard: So you're saying this I don't think she knows what cash flow means but you're saying if she buys a practice it already has a history of an amount of cash flowing in every month whereas if she starts a scratch practice de novo from ground up you have none you have nothing to base estimates of what kind of cash flow is gonna come in.
David: Yeah
Howard: This was just a higher risk because it's just it's all unknown.
David: It's all unknown and a lot of people think if you build it they will come kind of thing and and that may be true but the chances are your cost to build that out you know talk about just the construction element right if you do in a scratch start you're you've all the sudden entered the world of construction and there's only well that's assuming that you're gonna be building a place from from scratch right I mean that you could buy an existing office that had that's already built out that may be possible well let's just say you want to you know you find a nice shell that's in a new part of town that's not already built out and you want to do that and start from scratch that is you know you went from you know being in school to now all the sudden you're managing a construction project essentially and there's only about a hundred different pitfalls when you're in construction even for experienced you know business people you know the construction world I have somebody that's dealing with this right now where their contractor went bankrupt in the middle of the project that happens a lot even this good economy you know this particular contractor went went bankrupt and it causes a mess and so it only takes one or two deviations from the plan you know such as that being one of them potential issue with the contractor to really cause a significant issue and then it then that would ripple to affect personal credit so in my mind you know it's not risk-free buying a practice there's certainly risks how are those patients going to transition how are you gonna interact with the selling doctor there's a lot of things to consider but it's to me that risk is much less than it is you know starting from scratch and especially if you're going to star from scratch and have to build a space or build out of space.
Howard: Another question I asked him you know um would you say that the average price of the dental office is about 750?
David: 750 sure yeah that's not I mean that's a very common that's a very common.
Howard: I try to think of his liquidity like in Arizona if you have a 3-bedroom 2bath house to sell I mean you you listen anywhere in the valley you can unload it a month.
David: Sure
Howard: but if you're an NFL player and you just had your knee blown and you're trying to unload your nine bedroom five car garage for over a million it becomes a very illiquid asset so is it safe to say that if you're thinking about selling your dental office someday and you have a 750 thousand to a million practice that it's pretty liquid and be easy to sell but once you have like a two or three or four million dollar practice it becomes more of an illiquid asset?
David: Well talking about the practice itself no I don't think so I think there's a tremendous amount of demand right now among if you have a practice that's performing that well you've got individual buyers that are interested and that's up now that's up to maybe several million mark right 2 to 3 million maybe on high and it's your buyer pool amongst owner users gets a little bit smaller above that threshold right there's fewer buyers for that 3 to 4 main I would practice but so but I think generally speaking there's still a tremendous amount of demand and
Howard: For even the big ones?
Daivd: I think even the big ones
Howard: So would only being bought by DSO or owner operators?
David: So you're gonna see you know above that call it two and a half million mark 3 million mark you know that's gonna be that's gonna attract a lot more attention from private equity you know we have many many folks that are approached by private equity a lot of my clients of calls up say hey I'm being approached by private equity what do you think just just to bounce that off of you and that happens a lot they have a plan in place here you'll work in the practice you know it seems like a pretty sweet deal they pay a premium but it doesn't it doesn't continue their legacy you know at some point you know they lose control that practice and they really don't you know that happens in a private in a sale to another...
Howard: Imagine living in Arizona where eighteen point seven percent of all Dennis or some out of all dia so that's um yeah that's more comedy event than say if you were in Montana Wyoming Alaska or Delaware which are all at 0%.
David: Oh yeah no it happens it's it's definitely a force in the marketplace but yeah back to your that original question if you have a practice to sell let's do in that amount you're gonna have some interest just depends on maybe which segment you hit and you want to make sure that you've got the right support to find qualified buyers I mean that's you know there's a lot of folks that would be interested in a two million dollar practice finding qualified buyers that can actually afford and get financing on a two million dollar practice that may be harder to weed out than you than you think so having you know the proper support there is critical.
Howard: I know you and I both have an MBA and we see valuations very differently but the dentists you talk to you they always have this rule of thumb they always think like well my office collects a million it'll sell for a million or any of those non accounting terms techniques hold any water are there any easy rule of thumbs?
Daivd: Sure I mean there's the rule there's an easy rule of thumb I mean are there variations from that though yeah and that's where you need an expert I'm not a valuation expert per se I mean I see a lot of valuations I have to make judgment calls on if this is value it properly but I don't actually perform the appraisals so I defer to you know other experts on you know on that but there are alot.
Howard: Do you have a practice appraisal guy in town here?
David: Oh there's many, there's several that...
Howard: Do you have one in your mind that's really really good?
David: Yeah
Howard: If you do send him down here.
David: I'll send them down here, how about that.
Howard: They always say the same thing is that if your office collects a million it's worth a million I might do this I mean just think about were there's two offices that do a million dollars you'll work your butt off in one the guy take some a hundred thousand here and one guy takes some two hundred thousand don't you think the guy and the office take you know two hundred thousand has has a higher value you know yes send him down because I...
David: Well the the equipment is a factor the lease is a factor right I mean the lease is probably the number one sticking point in a transition and in the valuation of a practice in my opinion you know that's the one big elephant in the room that you can't change very easily right you can't move if you move you can have some build-out costs probably you're gonna you know you have if you want by the but there's just like a million things but you know if you have if you're paying a hundred thousand dollars on a lease and I've seen this I've seen some practices doing under a million dollars in revenue and they have a lease that cost them a heart thousand dollars a year the math just doesn't make sense.
Howard: How does that happen?
David: Well they go and they they get into a really nice building and it's kind of that if you build it they will come mentality right if we if we if we build some ops in a really nice building and an expensive part of town that this will just happen right and that doesn't that's not always the case and the lease to me is the number one sticking point in transition if you're if you're paying over market for a lease or if you're if the practice can't afford the lease that's that's in place you are that's the most difficult thing you know the supply if you're playing too much for supplies okay we can we can possibly fix that problem if you're paying you know some staff member too much we might be able to fix that problem with some ramifications there's there's a lot of things on the P&L; that you can fix the lease is probably the number one item that that can cause a problem and people are always overly optimistic about when they're looking at an opportunity they're always overly optimistic about the lease well it has this feature so we should be able to overcome that obstacle and grow this practice there's always kind of this benefit of the doubt when if you just look at the numbers it doesn't make sense and it's important to do your research I think part of doing transitions well and growing your practice well is having the right team around you right the bankers a definitely critical piece of that but having a real estate guy in your you know that you trust that you can say hey you know what do you think about this lease you know and have that least reviewed periodically having a transition person involved having an accountant involved and there's some really great dental consultants out there that can you know help advise on the practice and the operations of the practice itself those are things that I don't look at I don't get into the nitty gritty operations of the practice we look at the numbers if it works it works if there if it seems to be a match in skill set we move forward but I don't get into a ton of those details frankly and so that's where you need a good team you know surrounding you those two.
Howard: Speaking of bundling are you mostly doing transactions were Sally's buying Sue's dental office or she's also buying the dental office and the real estate land in building and when they're young they're thinking well if I'm gonna come out of AT Still I'm gonna buy a practiced I'm gonna practice from 25 to 65 I don't want to run for four years no I want to buy the land and building so is that a good idea to bundle land building practice is it two separate transactions are they two separate bankers how should she reprehend battling real estate and business?
David: The generally the same banker can can take care of that you know I do a lot of the real estate and that and the practice you know it's all part of that same discussion right so that that's usually going to be typically the same same banker if your banker can't do one or the other there's that's weird that'd be strange but I like the I like it when folks purchase real estate I think it's you know it's a great way to build net worth generally speaking when that practice is sold let's say way down the road they decide to sell the practice and they want to retain the real estate that real estate can eventually be sold to an outside investor or that can be sold to the buyer of the practice eventually and usually that's at a pretty good premium and so I like personally I think that getting into real estate when there's adequate liquidity and success within the practice I think that's a great thing. I don't like seeing it too much when there's a younger doctor buying a practice and and then immediately buying real estate that's a lot more leverage that's more cash that it requires and typically that's not feasible right so in a lot of cases the doctors are you know fairly I don't want to say lucky but they're they're getting into the practice and that's probably enough of a project buying the real estate at the same time so I like it when it's a little bit staggered right so they buy their practice and then there's a little bit of a time gap between then and when they buy the real estate that's not always possible but generally when the practice transition happens there's a long term lease there you know most banks will require there to be a lease term that matches the loan term so generally that's not going to come up immediately but in some cases they want to unload the real estate and if it's an experienced doctor that's got the liquidity then more power to you that's great you know you can you can go for it but for a younger doctor to come out by practice and buy the real estate that's a tremendous amount of debt generally speaking and that would be a little bit more difficult you know.
Howard: and I think you have a lot of opportunity again I graduated in 1980 that was the worst I've ever seen it got me 21 percent interest rates double-digit unemployment inflation graduated May 11 87 got my office open a hundred and thirty three days later 28 days before Black Monday a 25% drop and not to mention the y2k bubble and the Lehman's day 10 years ago but what happened to me I was renting but when I saw that that one-day drop of 25% it really crushed the real estate in four states it was Texas Arizona California and Florida were hit the hardest I think they had half the damage those four states so I saw a $600,000 pad be put up for sale and nobody bought nobody about so two or three years later I finally bought it for 285 I actually bought four pads and all of those the three I didn't buy all doubled back to their original gain as the financial leveraging so it's always a cycle and I'll give you another one I'm you know like in 1970 there were 10,000 micro breweries and then so what is it what's natural it consolidate to 70 and then what's natural they unconsolidated and now we're back to 10,000 so I've lived long enough to go from 10,000 to 70 to 10,000 breweries you saw them in dental supplies when when I got out of school there was a dental supply dealer in every state and then the consolidators came along like Pete Frechette with Paterson and he just went and consolidated them all up and then there was just a couple of big ones there was Paterson shine Benko Burkhardt and now you see dental supply companies just popping up everywhere I mean I think we've done five or six podcasts on dental supply groups there's one every every time you turn around. So there's these cycles and right now you've had a long leveraging up cycle which will always be followed by a long leveraging down cycle and a lot of these dsos where there's public information there their debt is considered junk debt and so with that what I see is that you know the average DSOs probably 30 offices 10m are real good 10m are okay and 10m are dogs
David: There's always a normal distribution there yeah
Howard: Yeah economic deleveraging they're gonna put all their dogs up for so I think a lot of you guys right now that are associates I think you're gonna see some bargains and you're always gonna find bargains and and financial deleveraging but what is a lot of people don't want to have a dental consultant or don't want to try to ask you they can borrow money for long because they're just afraid they know that they're that there's something wrong with their credit when someone comes to you and says I want to buy Joe's office and you say sorry what would derail it what did they do wrong is that their FICO score is that their...?
David: What did they do wrong I mean the credit we talked about that a little bit I mean that's that's probably the biggest hindrance for a lot of folks if there's a credit issue that's a really difficult thing to overcome if it's a one-time event we can sometimes wrap our arms around that right if they had some late pays you know occasionally a bank is able to underwrite around you know certain issues that are isolated you know and if there's a reasonable explanation for that but typically if there's a major credit event and so that's very difficult.
Howard: What are those?
David: Foreclosure bankruptcy yeah and
Howard: So there's dental students that come out of dental school with the bankruptcy?
David: Well we don't typically the dental student those are
Howard: Let's say they're two years out of school three years out of scale we see it yeah it's common for someone three years out of dental school?
David: I wouldn't say it's common but it happens we had a we have there's an individual I talked to recently that traveled around that had two they went to school in one location and they did a residency in another location and so they bought a house in the first location they couldn't sell the house and this was this was you know several years after the worst of the recession but the problem for them was that they got into real estate and then they couldn't find a renter they had other bills to pay and so they short sold the house.
Howard: What does that mean, she doesn't know what short sale means.
David: Yeah so they sold the house for less than what it was worth and the bank took a loss.
Howard: So a short sale is when you sell your house for less than you owe on it and the bank writes it off.
David: Yep
Howard: and then that'll be a blemish on your credit for how long?
David: That's gonna that's gonna follow you for a long time I think it's seven years is how long.
Howard: and then statutory legally they just erase it or?
David: No it when you fill out a personal financial statement at a bank usually they're gonna ask have you ever had we don't really care what shows up on the credit report have you ever had a bankruptcy have you ever had a short sale and so we will generally try and uncover that regardless you know of when the time was but typically after that seven and 10-year mark it's much less of an issue right if you if you had an issue that was beyond that point it's generally not gonna be it's generally not gonna be as significant of an issue and you'll probably find a bank that will that will finance you.
Howard: and how much how much off market activity explain what off market activity is and then is that very common in dentistry.
David: Off market activity so that is you know when to buyers and sellers get together and agree to do a transaction without essentially without a broker and involved right something there they're uncovering an opportunity without a formal listing taking place and we see a tremendous amount of off market activity here.
Howard: Really, in selling practices?
Daivd: Yep we've just completed there's there's mergers that take place we've done there's there's acquisitions there's buy ins buy outs you know of associates there's all types of activity that takes place off market I would say our production is a significant portion of at least my production and the local Arizona production is off market activity things that are happening you know without you know a broker involved now a lot of that is associate buy ins you know they think we don't really need the help right we've already know the buyer and the seller we've known each other for maybe a year to now and we work we've come together we've come to terms with you know a price we kind of know how we'd like to operate and then they just want to you know do that transaction essentially out on their own right without any formal listing process or a lot of help and they'll billing.
Howard: but the owners not personally carrying he wants you to make a contract?
David: Finance it, that's right that's right yeah
Howard: You know I'm kind of when you get old you know everything seems to be better when you were young and now in the old day if I sold you a practice in 1980 I I carried and it was always ten percent interest and what I liked about that is the owner if I'm gonna carry the loan I and I know you'll never be a successful dentist in Wichita Kansas is because of whatever I you know they're they I think they were they're better deals I've seen some deals out here in Arizona where someone will have like a 1.5 million dollar cosmetic full-mouth rehab practice sell it to some kid out of school you didn't have any of these skill sets and then lose the whole thing and so was it better having owner carry or this person's associates buying and do you like them to carry half the loan and you cash out the other half?
Daivd: I personally love owner carry I like that there's a vested interest I mean anytime that we can see that the seller has a vested interest in the success of the practice that's a good thing long transition plans you know we I generally like to see longer transition plans if there's a way to make it work right if there's enough ops and work you know if they're if they can somehow figure out a way to stay involved in the practice I like seeing that when the seller owns a real estate I like that as well that's another thing that that that owner of the building is interested in your success so those are all very good things if you compare the dental market to let's just say the CPA transition market previously in a prior life I had financed some CPA practices and in almost a hundred percent I don't know why the CPAs have done this and this hasn't translated to other industries or vice versa but CPAs almost always when they sell their practice they almost always have a seller carry note with an earn out period and so they'll say if the practice you know has doesn't perform to the expectation there's a calculation that happens at the end of year one that says we're gonna the the note amount is actually reduced by the dollar amount that the clients don't come over and so that's that's kind of an earn out cause I guess in quick summary but they they all you know CPA valuations had gone up and up and up for a long time and got to the point where I think banks were getting nervous and so to help bridge some of that gap they've started doing seller carry notes with these earn-out clauses and I like that it keeps it adds some protection to the buyer they're you know those and not every seller carry hasn't earned out right but I like that I like those features everybody's interested in the success of the practice at that point so I personally like seeing those it's not very common you know this is banks across the board this isn't just us across the board banks are lending you know higher and higher amounts for practices and this has happened over you know a period of time loan to revenue talking about that calculation there you know banks have gotten more comfortable or to overtime with higher launch revenue and lending a hundred percent of that so you know why would a seller take on that risk when the bank is willing to you know to lend a hundred percent and so will we see more seller carry notes as banks get uncomfortable possibly that that may happen but it's in the in that buyout you know that in the associate buy-in situation that's an extremely difficult agreement to to figure out in the first place and they're difficult to unwind as well you know that a lot of people don't think about you know the logistics the details in their contract on how everything's gonna work how our distribution is gonna work going forward who you know how is the how's the practice gonna be managed and so it's it dynamic and the office changes from when somebody goes from an associate to fifty percent owner and so how is that how does that all take place it's very difficult I generally like seeing the seller carry note for ensuring the long-term success of the practice.
Howard: We talked about personal divorce at the beginning do you see a lot of partners 50/50 going through divorce I mean?
David: We do see that to an extent I mean usually there's a lot of more than that we hear of people interested in a partnership they get down the road and they just can't come to terms with on the agreement and then that and that just blows up so that's the more common scenario once they've figured out the partnership and have come to terms to you know with an agreement we don't see a whole lot of business divorce at least I haven't seen that personally in my portfolio it does happen and it's messy I mean how you unwind from that we you know actually somebody does come to mind that that's going through a business divorceand essentially they're walking away from what they had and they're interested to the to the point where they're gonna essentially take nothing for what they owned previously and go out just buy a new practice on their own and so the situation can sometimes be that bad that somebody's willing to just say see ya and if I can be out let's be done.
Howard: I know dentists who would sell a partnership someone for say I'm half their practice for $650,000 and then five years later spend six hundred fifty thousand dollars in legal fees to get them out of their office and then have to pay them back the other 650 it's like know how how bad does this story yet what what other trends are you seeing?
David: Other trends you know primarily when I think of trends right now the first thing that comes out is is is real estate right I mean that's you know we've talked about that just a little bit construction real estate there is just a tremendous appetite for growth among a lot of doctors right now limited supply we've talked about that a little bit as well and so there is there's a lot of appetite you know if I were to sum it up I guess a lot up a tight for growth limited supply you know I've got there's some doctors so I'm talking to they they don't like what they see from on the market and they are and I alluded to this earlier they are calling up doctors themselves they're networking they're really having to dig in a lot more than I had seen previously to try and find opportunities to own a practice and so trend-wise that's been interesting to watch you know I'm sure that those cycles have happened you know previously but this is I run a small like a social networking group for dentists only and we'll go we'll go shooting we'd like to go to the shooting range periodically you know like once a quarter right so it's just for just for fun and this for me started as just something for me and a couple clients to just go and do and next thing you know they're bringing their friends and there's a bunch of networking happening and there's deals being put together and and so now it's kind of its kind of morphed right and what was intended to be kind of a boutique appreciation thing is kind of morphed and so there is a as far as trends go there's a tremendous amount of desire out there to to meet you know doctors to find opportunities that just aren't you know following in their laps because those are few and far between.
Howrd: So have you ever gone to the C2 tactical?
David: Yeah that's where we go.
Howard: Yes my son works there.
David: Oh really which one the one right here?
Howard: The one right in Tempe.
David: Yeah
Howard: I have four boy I grew up with five sister so I played Barbie dolls so I was 12 on I'm living proof that it's crazy and I have four boys and two of them just love elk hunting deer hunting shooting weapons and oh my god he goes out there so many times they begged him to work there so that's his part-time job at C2 Tactical.
David: That's where we go, it's a good place.
Howard: That's Zack he's the tall good-looking kid he's uh
David: and there's a thing in the dental community with with firearms I mean they love it.
Howard: Email me and I'll reply to Zach, so you and Zach...
David: We'll get hooked up are we have our we've even established the name where the red dot Dental Club.
Howard: Well I want to go down there and shoot at c2 tactical with my son Zach and there are two dental club well that makes me that makes me think right as a gate okay so you're a banker a dental banker and you hang out with dentists shooting guns are you saying a banker can add value to this type of dental transaction as opposed I mean if I want to buy a practice for $750,000 I mean is there different in buying with my visa or having a relationship with the banker?
David: Yeah the having you know I talked about the team earlier having your team set up there's a there's a doctor right now I know that's that's buying a practice or he's interested in buying practice and this this individuals done a phenomenal job at building the team up well in advance of actually making a purchase so I've been talking with this individual for probably eight months now maybe maybe seven months and we have been collecting you know we've collected some financial information on this person and I'm able to you know keep an eye out for opportunities that come up I'm not a broker I'm not here to broker practices it's not my business but I can say hey you know I heard about this go talk to this person or you know you know and and and so this person has been able to essentially do a pre-flight that's what we call you know when somebody's trying to prepare to buy and we want to run things past me we've essentially been able to do a pre fight on this individual so when they find the right practice they're ready to go and so it takes a lot of the it's a lot less scary for that individual we're able to answer a tremendous amount of questions once you get talking you'll be amazed at the number of questions that come out so in terms of pre-purchase activity I think getting involved early with the banker and the rest of that team is critical in terms of selling you know banks and myself will occasionally offer a pre-sale evaluation of the practice see how bankable that practice is so if that if that practice goes to get hit the market you know a banks already looked at to say yeah these these financials work so we'll do that for seller buyer and a lot of that's really relationship driven it takes a lot of trust for somebody's I mean these aren't formal appraisals that we're doing or anything like that this is a saying a spitballin this looks like it would work right we're not going through full underwriting so those are those are the relationship elements that you get when you establish a good connection with a banker there's a lot of other things that come up I mean there it's just that the number of issues that will come up and your banking and your dental career are it's endless and I get phone calls all the time with stuff that I never thought of before and it's like well I don't know let me go let me think about that you know and so there are just situations you know the divorce situations you know being able to kind of work that with a trusted adviser you know if that were to happen those those those conversations are very common, in terms of fraud there's a tremendous amount of fraud out there and a really good banker I mean some people view banks and bankers as just give me the rate give me the loan and we're out and then that's fine I realized there's some transactional people out there but those that take the time to kind of work through work with us often benefit we there's a practice that I was looking at recently the experienced check fraud it was internal there's somebody the office manager was stealing from the doctor and you can set certain checks and balances in place and and generally your accountant will be the one to kind of help you establish those things but we can help identify things from the banking standpoint there's products like positive payout there there's there's ways to structure your accounts that can help pick up odd transactions and you don't really get that if you don't establish...
Howard: You should have a conversation on dentaltown.
David: Yeah I mean then fraud is so prevalent we see it we see it all the time from the least suspecting people even family members and I so I can't emphasize that enough and and and and talking about you know fraud it's just it seems to be one of those things that only gets worse and worse and worse and people just came to get more creative so we've the bank has deployed tools to help combat you know these things you know and you have to have a conversation you know with a banker that knows what they're doing to say hey here's how we're set up this makes sense you know because anybody can come in just open up an account from their people some people are on their own and and some people that take the time to get that counsel.
Howard: What percent of dentists do you think today are being embezzled against?
David: Oh my gosh on some scale I would say I haven't done research on this I'm totally spitballing right now if I had to guess it's probably 20% of on some level now significant frauds I would say are probably much lower than that I would say probably in that like two percent range right but that's a fraud to some extent I guarantee you it's happening I that's my suspicion.
Howard: Every dental consultant I podcasted who's done this for over a decade or two or three just in office consulting say they find it half the time when they go into an office of course now these are offices that obviously bring it there so.
David: Yeah cuz there was something going on.
Howard: I work my butt off and I don't have any money well that's your first red flag you're a doctor in America you work your butt off you're really busy and you don't have any money hello.
David: No and there's they get busy they don't think about this they trust people way too much.
Howard: I'll say that that is the money is nothing mean you're not gonna take any money with you and you die but everyone I know it's reduced them to tears because the lady embezzling was their baby's godmother during baptism they went on family vacay I mean there just as matters of the heart they just could not believe that this the least suspecting person in their mind..
David: Oh yeah
Howard: Was the culprit.
Daivd: Well and you can you know they're establishing dual control it's an easy thing to do I mean there's some things that you can do very easily in the practice these are just common sense things these are things that you can do on your own, you don't need you don't need our help but there is technology out there I'll highlight positive pay as one of them.
Howard: Right you should do an article on that.
David: Yeah we'll do an article on that I mean these are inexpensive banking products you know no I'm no bank and us included.
Howard: What is it called?
David: Positive pay that's just one.
Howard: Is it one is that from your bank?
David: It's a pretty common term amongst all banks.
Howard: It's called positive
Daivd: Positive pay and so with somebody when somebody writes a check they indicate it in our system that that check is going out and here's the amount and here's who it's going to so what that does is when you send a check out all of your banking information is on that check right you're essentially count trusting that person with your bank account number writes right there it's not hard to see so positive pay will match up checks that you write to what hits the system so that you know so that there's never a mismatch between the two check fraud is extremely common people can wash checks there's there's just a million issues that can happen and so having you know having a system like positive pay it's inexpensive that's part of that dual control process you could establish one person could do the positive pay and operate you know so there's there there's ways to do it and it's inexpensive and it happens all the time it's just it doesn't need to so that and the other thing I will add is just I guess somewhat related is credit monitoring most a lot of doctors surprisingly don't have credit monitoring they don't know what their score is and if it takes a sudden drop doctors are target soft enough of you know fraud and at identity theft and so having credit monitoring along with some of these controls is cheap insurance you know for your personal professional life.
Howard: Yeah and my gosh override you know the the largest overhead is not even on your books I mean it's your adjusted fee from you know you say charge $1,000 for a crown but the insurance only gives you your PPO gives you a 650 so $350 out of your bank is the PPO just a fee then there's your fee that average is thirty five percent and their staff twenty eight twenty eight I see all the time supply is six percent, the last thing you need is embezzlement in your overhead I mean it's just it's just tough it's tough and it's very emotional when you find out that this person that you trust is doing that.
David: Well and often there's nothing you can do to recoup that money right it's very difficult somebody's usually gonna go to jail and you're probably not gonna get that money back and you know we've seen some folks suffer some serious personal consequences that we talked about short sales we've I've seen doctors forced to you know into a foreclosure short-sale situation because of embezzlement in the practice so it's a very real thing and it's something that you can prevent or at least you can put safeguards into to help offset.
Howard: Last question I can't believe we already went over an hour you've been very fun and informative.
Daivd: Thank you Howard, it's good to be here I feel like I'm with a celebrity right now.
Howard: Oh no but I'm just curious because I live in a jaded world because I'm a dentist with an MBA and I've been interested in the business of dentistry my whole career but what letter grade would you give dentist how informed are they when you meet up with them are they just like oh my god this is a biologist I mean he wants to talk about eukaryotes and fungi how how knowledgeable are they about this whole transaction?
Daivd: They're usually not knowledgeable at all be completely frank with you there's very few doctors that when we go to sign loan documents this is just one example that really understand what they're signing I'm always happy to explain but there's just a lack of a lack of interest there's a thought well I couldn't do anything about it even if I had a disagreement so I got us I'm forced to sign us in reality there's you know you can get draft loan documents from a bank in advance of doing a transaction and have some time to review those but the thing is that most doctors just don't understand or care they don't really understand what a commercial security agreement is if you buy a practice you're going to sign up then really understand what a personal guarantee is then understand what cross guarantee or cross-collateralization is if you own multiple practices you know or have multiple partners involved so yeah that.
Howard: We know the difference between a prokaryote in a eukaryote.
David: Yes and that's important that's important but the you know there there's a there's general that most doctors don't Lee don't understand and when we go to sit down and sign and I'll sit down and many times their spouse is on on the loan with them as well as a guarantor we're in Arizona in a community property state it's not uncommon for that to happen and I'll often sit down with the spouse okay do you understand what you're signing if you have any questions they have no idea they're just like now just show me where to sign and we'll be done here and so I you know personally I try to do my best to explain okay here's what you're saying this is what this means here's the pitfalls like what you know here's that here's the things that you don't want to do right these are some reporting requirements if it's a larger larger loan you know those types of things you know some loans will have covenants a lot of folks aren't aware that that would even exist on a dental loan and so they're you know having this kind of goes back to that relationship you know you need to have somebody in your corner that you can have a frank discussion with okay what's in here what should i watch out for you know prepayment penalties it's not uncommon to have on a on a practice loan or a real estate loan is that prepayment penalty based on the original loan amount or is it based on the current balance that could have a significant impact can you make any extra payments without triggering that prepend penance like most people have no idea and so education and taking your time to to understand what is in there can save you a lot of time and money.
Howard: Well it sounds like you know my homies well they know I know my homies well no sounds like you know that well it's kind of like sometimes I'll be talking to somebody from another country like Australia or whatever they'll say well Americans should never do that and I'm like sounds like you have been to America sounds like you haven't met very many Americans I know Americans well and I know dentist well but thank you so much for coming on the show.
David: Thank you for having me this is a blast.
Howard: I hope someday we're both what's your favorite thing to shoot at c2 tactical.
David: I don't I just give me whatever and I'll shoot it I really don't even have a preference I like a sampler though you know so just try out some different things.
Howard: someday well he'll be shooting in there with Zack.
David: Let's go do it, that'll be fun.
Howard: Alright thank you so much
David: Thank you