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AUDIO - HSP #175 - Scott Leune
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VIDEO - HSP #175 - Scott Leune
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Learn the current state of corporate dentistry, how to get huge discounts on product, and how you can follow the some of the same growth models of the big dogs.
Dr. Scott Leune has owned 11 startup practices, has helped build over 60 other startups for dentists across the country, helps manage over 130 practices through his powerful outsourcing services, has built a lucrative exit path for dentists selling their practices, and provides intense dental business training seminars to dentists and staff throughout the year. He is one of the most subscribed-to people on Dentaltown.
www.BreakawayPractice.com
8000 Interstate 10 Frontage Rd, suite 300
San Antonio, TX 78230
210-899-4500
Info@breakawaypractice.com
Howard Farran: It is a huge honor and a rare outlier. I think I get 170 podcasts, and you were 171, 2, and now 3. I'm doing 3 in a row with you because you're just that damn good, Scott. Love you to death. You're our biggest fan on Dentaltown. We did 2 podcasts with you and they were amazing. I asked you to come back for 3, and the reason I did is because I want to ... The biggest fear in dentistry, like I say when I got out of school, was OSHA. When you talk to the OSHA people, they didn't know why dentists had fear because they were saying, "Well about 3 out of 1,000 people die every year in mining. About 2 out of every 1,000 die every year in agriculture and construction."
The OSHA people here were telling me, and the government was saying, "I just looked up dentistry. It's 0.000 deaths per thousand per year. I'm pretty damn sure if an OSHA instructor spent the day doing dental offices, they'd get fired because we just had a crane fall over, a combine just ate somebody's arms off in a mine collapse, and really, you're in a dental office?"
Then HIPAA came along, and HIPAA's this other mythical bad guy. You know, some unicorn with an AK-47. That is fear, but now there is a real fear. There is a legitimate fear, and the legitimate fear is that the sovereign profession of dentistry ... We won't be a solo practitioner, we won't be a dentist. We'll all be working for corporate dentistry. Now, I want to say a couple specifics. Most dentists that are afraid of corporate dentistry and say that corporate dentistry is bad, they're incorporated themselves. When they say corporate dentistry, I think they mean dental offices that are in 2 or more states. Is that a fair assessment, Scott?
Scott Leune: Yeah I think that when we think of corporate dentistry, we think of the larger companies that may or may not be run and managed by dentists. That may not be funded by dentists. They're on a fast growth track where they're moving into areas and building a bunch of offices. It's definitely not some Joe Blow dentist from down the street whose building a second location.
Howard Farran: Also, is it fair to say, to lump all group practices. It's like when people say, "The governments so crazy. They're so inefficient." There's a difference between the jet propulsion laboratory and the post office. You just can't say, "the government." You've got 3 million people working for 100 different agencies and some are [inaudible 00:02:39]. I can't stand it when they talk about every mistake that, what's the agency that does the big land improvements and land all the big land projects like draining swamps, what is that called?
Scott Leune: I can't remember.
Howard Farran: Those who talk about their mistakes, "Like dude, they did that in the 60s. You don't think they know more in 2015 than they did in 1970?" When you say "the government" that's pretty ignorant. Don't you think it's kind of ... do you think all corporate chains are the same? Do you think some are better than others? What would you say to an associate whose a senior in high school or a senior in dental school, and they say, "I need to get a job. The 125,000 sole practitioners, they have a dental office that sits there 160 hours in a week, it's only open 32 hours, which is 19% of the week, they're not hiring anybody, and when they close Thursday at 5:00, and when they open Monday at 8:00 they don't even know how many incoming calls they had, how many were from patients not of record, that might've had a toothache, need a root canal or crown."
These dentists listening, they're not employing the 5,000 graduates. If you were a graduate and you had student loans, and you had a wife and a kid on the way, would you agree that not all multi-state, corporate dental chains are the same? Some are much better than others?
Scott Leune: I think we can say, we can have generalities about the muddle of corporate dentistry. What most corporate dental groups are doing and where the opportunities are that they seek, but if you look at one group versus another, there are dramatic differences in how they're run and the success level they have, and what types of practices they're building, what areas of the country they are at. They are definitely not all created equally, but they all do share some big tendencies. They're all kind of on the same path as they try to become more successful in this rapid consolidation in dentistry that we're seeing right now.
Howard Farran: Can you say any names? Can you be any specifics?
Scott Leune: Yeah. You've got some of the biggest in the country like Heartland, where they have what they call there novo practices, their startup side. They've also got the affiliation they call which is there acquisition side, and they're across multiple states, and they have some big strengths in regards to clinical training. The company itself is very well funded. There's a big growth track for non-dentists in the company because of how fast they're growing. They could have build a career on it. There's a lot of things that they're doing that are great. You talk to a dentist, and you also find dentists that say poor things about any group. You compare Heartland to a group like Pacific for example. Pacific has a more CAD/CAM approach they've got more got [HMO 00:05:29] more involvement. they might do more startups. they might have some version of dentists maybe owning a piece of the company, depending on how you really define that. It's a different model.
Then you've got other companies like Aspen that is branded the same, that has their benefits, but they've also got some drawbacks. They were recently sold, and they have compliance issues in most states across the country, I've been told. They're all different. You also have local groups that focus strictly on startups, or local groups or even national groups that focus strictly on Medicaid. They're all different animals, but they share some commonalities in why they're doing what they're doing, and what the heck is going on and how it's going to affect private dentists. That's really what I think a lot of people might want to talk about, is what's going to happen to private dentists.
Howard Farran: What is going to happen to private dentists? Answer your own question.
Scott Leune: Well, I think it's important to look at what we've seen in the trends. First of all these large groups have massively discounted pricing with all the vendors out there. When a large dental supplier gives a group preferred pricing, what do you think will happen to the private practitioners price? There's going to be pressures that as they lower pricing for these greatly expanding groups, they're going to have to make up that margin elsewhere. The manufacturers are going to have to and the suppliers are going to have to. That's why I think you ask any dentist, "Have your supply prices been going down year after year?" They'd all say no.
Howard Farran: It's just not fair because while they're getting discounts from the major supplying companies, they're negotiating higher revenue from the insurance companies. We're not even on the same playing field. If you're getting more money per procedure, while paying less for your supplies in lab, what up with that?
Scott Leune: That is true. At a certain level these groups are getting preferential treatment from insurance companies. Whether it be PPO insurance or HMO. Some insurance companies, they only sign with the larger groups. When I sold my practices to a large group 6 or 7 years ago, overnight one of our insurance plans went up 90% on fees for a crown, overnight. We were in network before the sale, we were in network after the sale, overnight that crown fee went up 90%.
Howard Farran: From what to what? From what price to what price?
Scott Leune: We were five something to nine hundred something.
Howard Farran: Unbelievable.
Scott Leune: That was six or seven years ago. I was scratching my head thinking, "How in the world are they not going to quadruple their money on my practice, just from that one thing?" My supply prices went down over night, my lab fees. All kinds of software costs I had, phones, everything. Emergency services, all the costs got cut. It's more serious than that though. These insurance companies are giving preferential treatment to the groups, as they should. That's capitalism at work here, but you could make the argument, that's putting pressure on the private practitioner because again, what's that insurance company going to do when they've got to pay more money to a group?
I think you ask any private dentist, "Have your reimbursement rates been going up year after year?" They'll also say, "No way, they've been going down." Just ask anyone in Washington state about Delta and they'll say, "My reimbursement rates are going down." I think what dentists don't understand is some of these insurance companies own pieces of these large corporate groups.
Howard Farran: Really?
Scott Leune: Yeah. We've got dental insurance companies that are invested into the funds that are buying and running these large corporate groups.
Howard Farran: Can you name any names?
Scott Leune: No. I can't. I have had to sign non-disclosure agreements. I've been hired by private equity groups in the past to help them analyze a potential purchase of a large group. In having that relationship with private equity groups, being brought on as a consultant to analyze these large corporate chains, I've got to see and learn a lot of things that I would've never seen or learned as a dentist. Of course, I can't name any names because in that relationship I signed a bunch of non-disclosures that I can't talk about who they are. I will tell you ...
Howard Farran: Nobody in my podcast will tell anyone. It'll just be the Howard Speaks secret.
Scott Leune: I will tell you for a fact, dental insurance companies have invested in funds that are owning dental practices.
Howard Farran: What successes are you having in negotiating an individual dentist insurance fee reimbursement?
Scott Leune: The negotiation path that an individual dentist would take is different then that of a corporate group. It's actually easier to negotiate increases in reimbursement rates as as solo dentist because you're going to the solo dentist section of insurance negotiation. When you go to the group section, you're competing against the largest groups across the country. You have 5 or 6 locations, it's really hard to get huge increases in your reimbursement rates because you're competing against guys with 5 or 600 locations. There's kind of this big step up that happens from going from solo to small group to a big group. Most of those increases are only going to be had by the big groups.
Howard Farran: Scott what I don't understand from a business point of mind, insurance companies for years would complain to me that they don't have providers in certain areas, and they've got too many providers in other areas. When dentists would say to me in '87, they'd go, "How would we do demographics? How to find a great location?" I'd say, "Just go to Delta Dental of your state or Blue Cross and Blue Shield of your state and say, 'Where are all your complaints coming from where you don't have providers?'" The insurance companies will tell you. That's Rick Workman was doing clear back in '87. He was calling, I believe it was Connecticut General and whatever and they were saying, "We don't have anybody in this town." He'd be there tomorrow, and they would give preferential treatment.
Take my office for example, since I want to make it all about me and get all of my personal gains from this interview, I'm in Phoenix, Arizona. If I signed up with you as a client and you called up the insurance companies, why would they want to give me money? I'm in Phoenix. The valley has 3800 dentists. I get it if I was calling from Eloy, Arizona, Florence, Arizona, or some place where they need providers, but what's in it for them? Why do they want to give Howard money in Phoenix, Arizona in 85044? I just don't get that.
Scott Leune: First of all, you and I don't know what type of growth track those insurance companies are trying to get on and how all those middle managers are compensated and what type of metrics they have to hit. Those middle managers of these insurance companies, they don't want to lose providers over time. Especially in areas where they don't have enough providers. It might even be in some place like Phoenix or like Dallas, Texas. They still might not have enough providers based on the demand they're getting from employers signing them up. We don't know what their track is, and in some areas of the country with certain insurance we're unable to get higher rates, and in other areas of the country with that same insurance company we can get higher rates. At the end of the day though, we have to remember, we're just talking to a rep. The rep has a lot of power on what negotiations are done. That rep is a different rep than the one dealing with the large groups.
The large groups ... Imagine you're an insurance company. You want to be able to have a large base of providers in any given market. If someone like Pacific comes to you and say, "Hey, can you give us preferential treatment on fees?" You would look at Pacific and say, "Wow. Pacific will take our PPO and our HMO, and they're greatly expanding in an area we want to be in, so let's go ahead and give them preferential treatment. Let's let them have all the HMO patients, all the cap checks signed to them on day one they open. Let's let them have higher reimbursement rates so that we can now sit back and allow them to expand our own footprint in that one general area. That's a lot different conversation than you and Phoenix saying, "Hey can you give me a higher crown fee?"
At some point the large groups are able to negotiate much better because it helps those insurance companies grow, but it's catch 22. Those insurance companies are having to pay more. I believe is one reason why they're starting to kind of hedge the bet of it. They're starting to play both sides and own a piece of the corporate group as well through private equity investments.
Howard Farran: When dentists are talking about fees, in my walnut brain, it seems like they're always focused on their crown fee. Maybe their root canal fee, but back to statistics, what fees are the 80/20 rule? What fees are the 80%? Is there just as much gravy in looking at your cleaning, exam, and x-ray fee, or does it really come down to a crown and a molar root canal?
Scott Leune: You basically run the analytics. You see how often every procedure is done in the practice, and then you negotiate for the most often done procedures, to raise the reimbursement rates for those. You could have a lot more money made by adding 20 bucks per prophy, than you could adding 50 bucks on a crown. It's a scientific process. It's measured. It's not just hoping you get a higher crown fee.
Howard Farran: What other ... Surviving it's corporate industry, then go talk supplies.
Scott Leune: On the supply side, again they've got all these reimbursement ... Excuse me, they've got all these negotiated discounts with manufacturers and with supply companies that we dentists get locked out of. These corporate groups, they don't have, typically they don't have local supply reps. The pricing that they get is so low that most of those suppliers do not assign reps to those accounts. We dentists, if we've got a local rep, chances are we're no where near the low cost that a corporate group would get.
Howard Farran: I don't even think that dentists understand what you said. I see this with Danaher, the largest dental holding corporation, publicly trading stock in the world. First they bought Implants Direct. Implants Direct is going to have a much lower cost structure by not having reps. They sell online. They could massively compete on price. Danaher also owns Nobel Biocare. It's funny how the number one complaint I hear on Implant Directs is how hard it is to get ahold of their local rep. I'm like, "So basically you want your hand held like Nobel Biocare, but you're going to buy with Implants Direct. The only secret to lower price is lower cost, and you want a rep? You're supposed to be a doctor. You're supposed to have 8 years of college. Why are you putting pressures on Implant Directs to have all these local reps when the only secret for them to sell you a lower price is to not have all this labor." Labor is 53% of the cost of the S&P 500.
If you're going to get lower prices, you wouldn't have a local supply rep. What is the value of having that rep walk into your office every week and then, why is corporate America not having that person walk in the office every week? Explain the logistics of that, the value added to that. A lot of dentists tonight listen and say, "Yeah I want lower sundries costs, but no I want Valerie to come in my office. She brings me donuts every Tuesday morning and we chat about our kids and grandkids." So what's the secret to lower sundries?
Scott Leune: The reason why the groups don't need supply reps generally is because they already have run analytics and analyzed their cost structure and their processes. They know whether or not they want to buy something if they should, if it's a good investment. They're large enough, they don't need help understanding anything. They don't need to see new products come on board at a local level. They can do it at the corporate level. Their concern primarily about controlling cost and having inventory arrive as predicted so that the practices get what they need. A local dentist is going to get more value out of a rep. They might get practice management experience, or advice. They might get new products being shown to them, they might have some grass roots campaign and try to find another associate or buyer for the practice.
All these things might be viewed as valuable, but you know my opinion at the end of the day is a lot of dentists do nothing with that value. At the end of the day, they have this person that's trying to help them, maybe, and they're not taking advantage of any of that, and they're just spending more on prices. I don't really want this to be about, "Should you have a local rep or not?" As a solo dentist, you will have a local rep. The larger groups, one reason why they have lower pricing is because they don't have a local rep, and they don't really have the need for them typically in their model.
Howard Farran: Scott, Heartland uses Dentrix don't they?
Scott Leune: As far as I saw when I was bought by Heartland, they were all on Dentrix.
Howard Farran: Doesn't Dentrix have an upper layer? Isn't there just Dentrix regular, but isn't there Dentrix is it called Enterprise, or Dentrix for multiple locations?
Scott Leune: They do have an Enterprise version of their software which is built for groups across multiple locations.
Howard Farran: Is that better? Can an individual dentist get that? Do you recommend if a dentist wanted better data to upgrade from Dentrix solo to Dentrix Enterprise?
Scott Leune: Going to Enterprise ... The reason why we go to Enterprise if we're a corporate group using Dentrix is so that we can much easier manage patients between locations. We can pull data and statistics based on regions and groups, whereas if we had regular Dentrix we'd have to log in and pull all that data out of every single server, every single location. I don't think that general dentists need an Enterprise level software like that these days. There's a lot of cloud based systems. You can even connect to non-cloud based systems, but the corporate groups, they definitely want to be able to have that data. That's why they have Dentrix Enterprise.
Howard Farran: What was that cloud system you said you like? You said you like dental Intel?
Scott Leune: Dental Intel is a metrics tracking platform, so it basically ...
Howard Farran: Whose that and where are they out of?
Scott Leune: They're out of Utah, I believe. That is a program that overlays on top of a Dentrix or an Eaglesoft, an Open Dental. They dive into the software, they pull out all the data, and then they present it to us in a very smart way. Red-flagging things that are going wrong. All the corporate groups have some version of that because that's one way they manage their locations is they have smart analytics that pull out the fires that need to be resolved. What I don't think dentists are understanding, is what's really going to be happening to us as the corporate groups grow, as our prices go up, as our reimbursement rates go down. It's really going to affect our margins. It's really going to affect what the heck happens when we try to sell our practice. It's already affecting our financing. Things are starting to go down this path.
It's a tsunami coming, and we all kind of know it's coming, but I don't think we all ready understand what it's like to get hit by a tsunami. That's what I'm really concerned about. I think we're just living in la la land as private practitioners just worried about today. "Am I going to finish and have a lunch today or not?" We're not really thinking about what is really going on around us.
Howard Farran: You know the swami, Mark?
Scott Leune: No.
Howard Farran: He's a periodontist, Mark the swami. He's been saying this for years. He's been saying for years that dentists were like, it reminds him of like they're laying out on the beach, bathing, drinking a Corona with a lime. They don't realize there's a hurricane packing 100 mile an hour winds 50 miles out to sea. He's been saying that for a long time.
Scott Leune: You think about it, it's amazing. It's the golden age right now of corporate groups being built and sold. It's amazing what they're selling for. These corporate groups are buying dental practices at pennies on the dollar compared to what they're able to sell themselves for. If you think about the value of a dental practice today, most dentists think that the value of a dental practice is based on a percentage of annual collections for example. 65% of collections or whatever it is. That's not how they're truly valued in the business world. They're valued based on a multiple of EBITAA; earnings before interest taxes appreciation and amortization. Basically a multiplier against how much cash flow the office might throw off. If there's $100,000 cash thrown off by the office after the dentist pays themselves a normal salary, then there's $100,000 of EBITAA, and maybe a practice is worth a multiple of that.
Today we're seeing practices sell for anywhere from 2-and-a-half to 5 times EBITAA. I'll do the math here, I apologize if dentists are listening to this while they're driving, they can't right it down, but I'll just do some math, here pretty easy math.
Howard Farran: It's okay because my viewers, I always get a transcript of all the podcasts, and then when you go to Dentaltown there's always a transcript. My viewers don't have to take notes and there is an issue where some people, the most prominent deal was the videos get posted before the transcripts get back, just for obvious reasons. They eventually all get put up. Sometimes it takes a couple weeks or whatever. Also Scott, if you email me any notes you wanted to add here, I know you've got 700 pages for them, but anything you want to add, we'll put those attachments on there too.
Scott Leune: Awesome. Let's look at a million dollar practice, a million dollars of collections per year. That practice might have a 15% EBITAA, or 15% cash flow, 15% margin. In other words, they're cash is flowing 150,000 a year. If that practice were to sell today it would sell anywhere from 2-and-a-half to 5 times that number. Let's just say four times that number, that means it's worth $600,000. If you look at what the large dental groups sell for, it's absolutely amazing.
In the last three years the largest dental groups have sold for 12 times EBITAA, 13, another one 13. Two of them this year have sold for 14. Two weeks ago one of them sold for 17 times EBITAA. In other words, that same practice that was worth 600,000, some group sold for 17 EBITAA. That practice would have been worth 1.7 million under that group. No excuse me, I did the math wrong. It's 17 times 150,000. That practice would've been worth 2.55 million. It's worth 6 or 700,000 if we own it, but if corporate owns it and then they sell to a private equity group, it's worth 2.55 million. You look at the numbers, you've got a corporate group coming in, they overnight lower all the costs. They can overnight, raise the reimbursement rates, they can put in call centers and management centers and training, and they can pump the market full of marketing dollars. They can build new facilities. They're buying practices for 600, 700 thousand, and they're turning around and selling them for 2 million.
Howard Farran: This is all you've ever seen on Wall Street our entire lives. If my stock is trading at 20 times earnings, and I buy your company for 10 times earnings, the instant I bought your company, I just doubled my money. I think Henry Schein has under the genius leadership of Stan Bergmann has acquired what, 36 companies in his tenure? It's just the Wall Street formula.
I want to go back a little bit because one things doctors never understand is that they always think profit is what they take home. If they're overhead ... The ADA says the average overhead is 64%, so let's say two-thirds. They say, I have two-thirds overhead, so it's one-third profit. It's not profit because it's only profit ... you have to pay yourself, your replacement costs. If I pay all my associates 30% of production, and they pay half their lab bill, then what you have left over is 15%. The 15% is profit. The doctor, what you take home is not profit. You have to pay yourself competitive wages for your area. They'll always sit there and say, "My office did a million, I took home 350, that's $350,000 profit." That's not how EBITAA is figured. Can you just be a little bit more ... Do you agree with that, or can you go into that? Don't you think dentists mix their labor costs with their profit dollars? They think they're the same.
Scott Leune: Exactly. If I were to buy your practice and replace you with an associate and were to change nothing else and assuming that associate did the same numbers as you did, how much money would I have left over? That's EBITAA. We got to pay the dentists as it is. Any buyer that's going to look at the practice, especially if it's a group buyer or a private equity group, they're going to look at it and say, "Okay, when we take this practice on and pay dentists as associates, how much money is left over?" That really is what we're talking about for EBITAA. Dentists that think of their practice as 35% take-home, or "My practice is worth 65% in collections," they're just talking about their job. They don't have a business, they have a job. That's how they're looking at it. When you have a business, when you have multiple locations, especially if you're selling to a group or trying to get a private equity group involved, and you're playing this larger game of monopoly, all of the sudden it's all about EBITAA. It's about your margin after you pay the dentist.
What's going to happen ... Imagine, Howard, imagine your in Phoenix, your practice, and Heartland's down the street, half a mile away. You got Pacific across the street. You got 3 or 4 other corporate groups all within a mile radius, and you got this booming practice that all of the sudden quits booming so much because they're out spending you on market. They're commoditizing dentistry, making it about price. You're margins are getting hit because you're supply costs are going up. You're reimbursement rates are going down. Now you want to retire. You're surrounded by the corporate groups. They're not going to buy you. They have an office right next door to you, and you're margins been hit. You're EBITAA's gone down. By that time the cost of capital is going up. Now who do you sell to? You got much less buyers to choose from. These buyers have higher capital costs, and you're profit margin's lower. What's going to happen to the value of your practice? It's going to go way down.
We're already seeing that. We have one of our dentists that we answer phones for get offered 2-and-a-half times EBITAA for one of the corporate groups. 2-and-a-half times EBITAA. It was an insult. He was insulted. It's because the corporate group is right by him. He's got ... He can't find a private dentist to buy his big practice, so he's trying to figure out what the heck to do. This is happening everywhere.
Howard Farran: Explain that because he has an illliquid asset. They teach you in MBA school, never let your money get too far from cash. A lot of dentists say, "I have a million dollar practice." You have a million dollar practice if you can sell it for a million dollars, but if you can't sell it for a million dollars, it's illliquid. Like if you own stocks or bonds, you can turn that from paper to cash in a millisecond, but when you own land or a building or a dental practice, and dental practices in rural areas are even more illliquid because not only do you got to find a seller, you got to find someone who wants to live in Illinois or Arizona.
Scott Leune: That's correct. This dentist can only get whatever the buyer he can find will pay for it. Those buyers are going to be paying less and less money for practices as the profit margin shrinks over time. There's going to be less buyers as corporate dentistry grows. It's not just the big city that has this. You look at a big city like Dallas-Fort Worth area, and you see corporate practices everywhere, but they're in tertiary markets. They're in Lubbock, TX. A group of 10 or 12 offices that's corporate affiliated is already in Lubbock, TX. This is going to be happening in most parts of the country. Whenever the buyers do have to get a loan and interest rates go up, they're not going to be able to afford to pay as much. Over time, the lack of profit, the increased capital, the increased competition, and the less buyers is all going to push the price of practices down. That's the trend. We're already seeing it today. We have to understand that.
We either have to sell while we got the window of opportunity. The golden age of selling a practice is actually right now, or we have to be able to join into an alliance of some sort that will give us all the benefits of corporate dentistry so that we can build an ark and survive the tsunami and still do okay financially. If we just sit on the sideline and watch this happen, we will watch our profits shrink little by little, and when it comes time to sell we might not get the money we wanted. Just like what happened to physicians. I know physicians that just shut their practice. They didn't sell it. There's no buyer. They just shut it, and they go work part time at a hospital. There was no one to buy their practice.
Howard Farran: Physicians can't sell their practice, in 2015, in Arizona. You can't sell your practice because any physician can open up, align themselves with the hospital and get more charts in there. There's no value in anybody ... You'll see physicians having built boards and radios and worrying about yelp reviews because if any physician opens, just from Medicaid at the low cost state level and Medicare at the federal level, the day you open you can already be booked out 90 days in advance.
Scott Leune: Yeah, that's right.
Howard Farran: You can sell your facility maybe, but not patients though.
Scott Leune: You look at the corporate groups, they're going to keep growing because they have war chest of money. We built a practice, we helped build a practice in Mansfield, Texas. A corporate group built right next to us. They built a startup practice, 12 ops, granite, stand-alone building, staffed it with 2 dentists on day 1, and are spending a fortune on marketing. I guarantee they are losing a ton of money. They look at that location and say, "We need to build something big. We need to own the area, and we can sustain losses for months and years to invest in that location because they have a war chest of money. We could never do that as private dentists. I can't go lose money for 2 months and build a 1.3 million dollar monstrosity and hope at some point it breaks even before I run out of money. Can't do that.
In the corporate chains, they got the money to expand. They can easily reduce prices. They can easily raise fees. They can easily fix all the broken things that we private dentists don't do well, and they got a ton of new grads wanting to join. These new grads have a ton of debt. I had dental students at an externship here at my company for 2 weeks during the summer. On day 1 I said, "What's your plan when you graduate?" They all said that they're joining corporate group. I said, "Why?" They said, "Because we need a guaranteed salary and seems like the right thing to do. Work there a couple years and learn some stuff, and then we want to go out on our own." Going out on their own, that's the part that doesn't end up happening so often.
These corporate groups are getting dental students left and right, so they have the dentists. They have the money. They have the infrastructure. They have the systems to keep on expanding. They're being funded by private equity. It takes out a lot of debt and puts a little bit of money in it, and then buys these corporate groups and sells them at 14 times EBITAA. A darling of Wall Street right now is getting into dentistry. This very fragmented mom and pop industry.
Howard Farran: My homeys are dentists. You're using a lot of terms they don't understand. What's private equity? How is that different than venture capitalist?
Scott Leune: Private equity is ... you might have group of people that raise money, and they raise that money by getting investors, and they raise that money by getting debt. They put all this money in a big pot, and that's their fund. Then with that money, they are going to go buy equity in private companies. They buy into a private company, and the goal is to sell and make a return. They want to flip it. It's like flipping a house, they're going to flip a company. When they buy this company, they typically pump the company full of growth in growth money, growth capital. Or they're buying a distressed company and trying to fix it before they sell it. These private equity groups are diving into dentistry because dentistry they feel is recession resistant. They feel that it's very fragmented, and it's easy to put a bunch of mom and pop's together and operate better and operate cheaper and operate faster. They're moving in, in a big way.
Just look at Heartland's growth curve. I don't know how many years it took them to get to 300 locations, but it was a whole lot of years. They went from 300 to 700 in not time once they were invested into by private equity. Heartland, as most people know was bought by a private [inaudible 00:36:41] group, actually, the Canadian Teacher's Pension Fund, a few years back, for around 1.2 or 1.3 billion dollars. They're pumping Heartland full of money, and they're growing tremendously. This is happening whether we want it to or not. We dentists, we got to know, it's going on, and we have to rely on ourselves properly so that we can sustain our profit margin, and at some point we have to understand that if we don't sell our practices during the golden age of selling, at some point we have to plan for the fact that our practice is going to be worth less money than we maybe thought they would be worth today.
Howard Farran: Answer this to the older guys because once again, I have to keep reminding you, I am 17 ... I am your father. I'm 17 years older than you. A lot of us older guys that I hang out with, 50 to 75, this is the second time we've seen this. When we came out of school, Lazzara's took orthodontic Centers of America all the way to the New York Stock Exchange, worth a billion dollars, and it all fell apart. When I ask ... There were a dozen [inaudible 00:37:48]. Is this just a cycle? It seems like in the '80s this all happened, and then pretty much all went bust. Then there was a decade, and now they're all back. Is this just a business cycle, or do you think this is here to stay? What's different about this time verses last time because older guys [I live by 00:38:07] say, "Dude, I've seen this before. They can't manage dental offices. They say a dentist can't even manage in a dental office. They can't manage it." Is it different this time, or is it just another cycle?
Scott Leune: It's completely different. First of all, the financial health of these companies is outstanding for the most part. They're very financially healthy, and they're growing at a very predictable pace. They are repeating their successes over and over again. They are much bigger companies. On top of that, back then dentists had a lower barrier of entry into owning their own practice. It was easier to good will and case acceptance and do okay as a dentist. Today there's a tremendous amount of debt load. There's more part-time dentists joining the industry compared to back then. There's all of these forces that are pushing dentists toward the corporate model. It's also much more complicated to run a practice. There's more insurance issues to deal with. There's more compliance issues you got to deal with, more liability. Everything is pointing to the corporate model of dentistry. This is not a fad or a phase, this is here to stay.
Howard Farran: Go through, I've only got you for 15 minutes, go through ... What you're doing is, you're trying to build ... You're almost like a cloud source. You're kind of like [intermediary 00:39:31]. You're saying, "You're a solo practicing dentist. You're competing with a corporate chain that has a thousand offices, and you're going to get to be that middle cloud layer to make them more competitive." What can you help them compete against corporate dentistry, and what can't you help them compete against corporate dentistry.
Scott Leune: You're talking about my company specifically?
Howard Farran: Yeah, yeah, you. The man, Scott Leune.
Scott Leune: You can view my company. My company is Breakaway Practice. You can view our company as 2 layers. One layer gives private dentists the same benefits that corporate dentistry gets, meaning all the things at lower costs, all the things that raise revenue or raise collections, and all that added support. We need compliance, and auditing, and HR, hiring, and all those types of things. We do 40 or 50 of those items in a very large scale across the country, and we do them for private dentists. In other words, dentists join in, tap into our infrastructure, that is as big or bigger than most large corporate groups, and I would argue better than most large corporate groups. They get the same [inaudible 00:40:47] power. They get the same marketing knowledge. They get the same operational expertise that these large corporate groups have. The same software and technology. We have all of that. We're basically the infrastructure of a large corporate group built specifically and custom just for private dentists.
Howard Farran: You're a metrics guy. What are metrics, I mean netting. Dentists always worry about their labor, and I say, "Dude, how much did you make last year?", and they're like "250." I'm like, "and you're complaining?" It's net income. Do you have metrics? How many basis points or percentage net income do your clients get when they use you? At the end of the day, what happens if their net income is a percent of revenue?
Scott Leune: We can lower their costs to free up 5 additional points. If they had a 15% EBITAA, strictly from lowering costs, we can raise them to a 20% EBITAA right off the bat.
Howard Farran: You're efficiencies are about 5%?
Scott Leune: Strictly on saving money. Then we've got all the other stuff that has to do with cleaning up everything that's broken in a practice, getting more patients to call, getting more appointments scheduled, getting more dentistry accepted. That's about raised revenue. That varies from practice to practice depending on how much of the stuff they're wanting us to help them with. This is all just one part of my company. It's this kind of infrastructure that is as good or better, as big or bigger as most corporate chains that private dentists tap into. That's one part. Dentist still owns their own practice. They still control everything they do. They can have as much or as little of that as they want.
We also have the other part that people don't know about. It's not on our website, but we do talk about it at our events. What we're doing is we're not just joining practices together to negotiate better and to operate better. We have this whole other part where we are joining practices to build a DSO, a corporate group. The corporate group is owned and controlled by the dentists, and the dentists keep all of their own profits. We build this corporate group with the eventual goal of selling it. Not selling it for 2-and-a-half to 5 times EBITAA like a practice is worth today, to sell it a the multiples that the large groups are getting.
In other words, we've created this path with this vehicle that dentists who do want to sell their practice in the next 5 to 7 years can join in, put their practice in the pool. They still get to manage their practice. They still get to keep all the profits from their practice. This group grows and grows and grows and then sells directly to private equity for a much higher multiple than they would normally get, and they get to keep that.
Howard Farran: Are you going to do the model like my buddy Steve Thorne. He calls every practice a Pacific Dental, or are you going to do like Rick Workman, my buddy of Heartland, where every time he acquires an office he keeps the name of the original office? They're not branding Heartland anywhere, are they?
Scott Leune: Not to my knowledge.
Howard Farran: Which model are you going to do? Some dentist throws his office into this group, is it going to be called a different name?
Scott Leune: It'll still be called John Smith, DDS. It'll still be the same name. It's the name that built the good will of the community, that built his reputation, that patients are used to seeing. That's the name that it'll be called.
Howard Farran: How many people have thrown their office in this hat, this ring?
Scott Leune: We've got about 180 practices that are going to be joining us whenever we have determined that they're fully compatible. Right now, we're going through the compatibility process. We're running all kinds of analytics on their practice and looking at how they operate, and we're trying to fix the things are broken so that they can operate in this pool as on corporate group and be valuable to a private equity group that wants to buy them.
Howard Farran: I think one of the smartest women in business that I ever knew was a lady in Utah, just absolutely copied the Southwest Airlines business model. She only used Boeing 737. She did everything the same. When she built up her [inaudible 00:45:13], she knew someday Herb Kelleher was going to want to be out in Utah, and when he got that far, he said, "Oh my god, you're perfect." She said, "I knew that all along. I designed this marriage before you [inaudible 00:45:25]" Do you already have a buyer that your trying to make that this is a no-brainer?
Scott Leune: I've already been approached by multiple private equity groups to buy, and we haven't even gotten the legalities together to even be in a position to sell. We don't intend to sell for at least 5 years. They're drooling at this kind of opportunity because we are reverse engineering the sale. We are saying, "What do buyers value during this golden age of selling? Let's put that together, but let's give all the money and power to the private dentists, but only the dentists that wants to sell."
I guess I might be rubbing some dentists the wrong the way, to be honest with you because I'm always the champion for private practices. I want the private practitioner to succeed and thrive. The reality is that this bubble is going to pop. Practice groups will not be sold at 17 times EBITAA forever. It's not going to happen. We have a bubble where private equity groups are diving into dentistry very quickly, and it's going to pop. To me, the tsunami's coming. I'm trying to build an ark so that as many private dentists as possible can benefit from it. By no means am I feeling like we're selling out to corporate dentistry. I'm trying to show a way, build a way for private dentists to be able to sell their practices at a very high multiple to a buyer who would value this group.
That's what we're building for those dentists that want to be on that side. The dentists that want to sell over the next 5 to 7 years. For the dentists that don't want to sell over the next 5 to 7 years, they can still join in our alliance and have lower pricing and have higher collections and have all the support that these corporate groups generally just save for themselves.
Howard Farran: The dentists that are throwing their office into this ring for the 5-to-7-year plan, are you going to put them all on the same management information software?
Scott Leune: Two years before the sale, we will have to standardized some things in the practice. The buyers going to want to see common financial reporting, as an example. Other things we won't have to standardize. It will depend on the market, the buyer, and logistically how well we're able to glue the practices together and run them as one large organization. There's programs out there right now, like you mentioned, Dental Intel, that's a prime example where if we want the analytics of a practice, we don't have to all have them on Dentrix because we have this overlay program that can talk to Dentrix, and Open Dental, and Eaglesoft.
Howard Farran: They're in Utah, who's the owners of that?
Scott Leune: Dental Intel, they're out of Utah. That's the company called Dental Intel.
Howard Farran: Do you know the CEO's name?
Scott Leune: There's a group of owners, and they're all awesome guys. They're really talented guys that have been in the software industry. They came into dentistry, and they partnered with a bunch of really smart people in dentistry. All the top consultants you might list, they consulted with them to build their program. It's an excellent program.
Howard Farran: Right on.
Scott Leune: We dentists, we're going to either build an ark and sell at a high multiple while we can, or we need to join together and be as efficient and productive and profitable as we can through a common infrastructure and alliance. All of us private dentists have always talked about it, even on Dentaltown. "Shouldn't we form an alliance on Dentaltown?" They've always said that. No one was doing it, so we just finally went and did it. It took us a couple million dollars, and 5 years to do it, but we now have it. My practices and other private practices can join together and have some of those benefits.
Really the point of this podcast, I think, is to make sure all of us dentists truly understand what really is happening. We even talk about the Affordable Care Act. That's having pricing pressures on insurance plans as well. There's just a lot going on in the group world, in the insurance world that's going to be affecting us dentists. It's important that we stay informed. That we know what's happening so we can prepare for it. We can expect it.
Howard Farran: California is 10% of America and Canada is the same size, are these group practices include the neighbors to our north? Is Heartland and any of those guys, is anybody crossing into 2 countries now? Has anybody crossed the border into Canada?
Scott Leune: There's one larger corporate group that is in Canada. There's a bunch of private equity groups that are building Canadian groups. That already exists. In our alliance we also have Canadian practices. Canada is doing very well when you look at it from a dentist success perspective. The groups are moving into Canada. They're moving into Australia, to New Zealand, to the UK, into Asia. This is a proliferation that's kind of started here in the US, but it is being repeated in multiple countries right now.
Howard Farran: When you sell this are you moving back to Amsterdam?
Scott Leune: When it sells, I will ... It's highly likely that I will have be part of the management team in continuing to operate and run the organization. I am building an ark that I don't get to get off of. The dentists get to get off of it, and my own practices that I might own get to get off of it, but I myself. In order to bring the highest value for our organization, for the dentists that are in the ark, I myself, and any sort of significant leadership position would likely have to stay for a good little while if they buyers are going to want to pay a lot of money for these dental practices.
Howard Farran: My belief is guys like us can never retire anyway. They found Sam Walden dead at his desk. They found Francis [inaudible 00:51:11] dead at his desk. I could have retired several times. I actually work more hours a week a now at 53 than I did at 43 because now when I don't have to work ever again, I'm working more hours than when I had to work. When I had to pay off student loans, I'm working more hours now than when I don't have any student loans. I think guys like us just love it. We just love it. We love the game. If you told me I could never pull 4 wisdom teeth again, I'd probably get verklempt and cry and have to blow my nose. I couldn't imagine not having ... If you told me I'd never lecture again, or you told me ... I think guys like us will absolutely probably have put in a 12-hour day on our last day. They'll find Scott Leune dead at his desk.
Scott Leune: I want to read a thread, Howard, on Dentaltown. This little website called Dentaltown. I want you to read a thread. I posted a thread on "Don't retire, semi-retire twice." I talked exactly how even us general dentists, instead of feeling like we've got to work until we're dying, and then as soon as we can't do anything at an older age, we then stop working and try to enjoy ourselves. It's completely backwards. There's this thread that talks about when we need to work hard and save, and when we need to work a little bit less and spend, and then go back to working hard in our prime, and then go back to working part time and spending. Never do we quit working. We just start getting more meaningful at what we do.
This whole model, work the most when you're kids are little so you don't see them, work the least when you have the least amount of health to enjoy your life, just doesn't make a lot of sense to me. I think you should go read that thread. It's a cool thread.
Howard Farran: By the way, buddy, I believe you're the most subscribed to ... I don't know if a lot of our podcast people realize, but on Dentaltown, whenever you see a post or you see someone you liked their content, you can subscribe to that thread. I'm pretty sure you're the most subscribed to dentist on Dentaltown.
Scott Leune: That's the first popularity contest I think I've won, so thank you. That's awesome.
Howard Farran: People are a big fan of your posts and your also the only person I ever brought back for a second time and/or a third time. Speaking of time, we are out of time, but I just want to say that I want to come to your course. Will you ever put one our feed. It would probably be better to see it in San Antonio, right?
Scott Leune: Yeah, you got to come to San Antonio so you can see 140 people manage offices across the country. It's awesome. We have a course ...
Howard Farran: You got to stay ... I forgot the name of it, but what is the big hotel that's on the River Walk where you walk out of the lobby, you're on the River Walk, and there are just shops and restaurants for what, a mile, 2 miles? How long is the River Walk?
Scott Leune: It's awesome. There's 4 or 5 hotels now. We always partner with those hotels to get discounted rates. The River Walk and the food and the night life. San Antonio is just an awesome place to visit.
Howard Farran: What's the hotel you partner with? What do you recommend? Which one?
Scott Leune: A great one is Hotel Valencia. We got St. Anthony Hotel. We got the Grand Hyatt. There's La Mansion. They're all awesome.
Howard Farran: Let's talk about the negatives of San Antonio. Are you sad that Mark Cuban, our idol went and bought the Dallas Mavericks instead of the San Antonio Spurs?
Scott Leune: Man, there is no better organization than the Spurs, so all the whiny kids can whine about that as much as they want. We just don't give a shit. There's nothing better than Gregg Popovich, and Tim Duncan, and San Antonio Spurs. I'm happy for Cuban of having a great investment, and if he needs to whine to try to get people into his message fine, but we just don't care.
Howard Farran: Are you a fan of his Shark Tank?
Scott Leune: It's funny. I think it's odd that all they talk about are little gimmicky products instead of big ideas and big businesses. I think it's entertaining, but I don't feel like it's something to learn from.
Howard Farran: Do you think there should be a Shark Tank for people that are pitching to VC's? All these kids in Silicone Valley pitching millions of dollars instead of coming here on Shark Tank saying, "I want to sell 10% of my company for 200,000." Do you think there should be a Shark Tank for, "I want to sell 10% of my company for 10 million dollars"?
Scott Leune: You've got all of these venture accelerator programs across the country. I'm actually part of the Telluride Venture Accelerator program in Colorado. Why haven't they just crowd sourced venture accelerating and made it an entertaining thing and have to where you can learn about these million or multi-million or even billion dollar opportunities. That would be so educational. I wish that existed. All that exists is a combination of slight reality TV with smaller deals that are a lot of time gimmicky, and at the end of the day you never really learn and understand anything from it. You just laugh at someone that's got a funny product about who knows what, a step stool for a freaking toilet. Shark Tank is entertaining. I'll flip through that just like I would American Idol. I don't really learn anything from it though.
Howard Farran: The funny thing about me is people always say, "How do you have time ..." I have 20,000 posts that say, "How do you have time for this stuff?" I look at them, the average American watches TV 4 hours a day. I don't. The only thing I turn on the TV is because to see the Arizona Cardinals. That's my weak spot. I still love the NFL. If it's not the NFL, I don't watch TV.
Scott Leune: Here's the problem. Success in life, and happiness, and health, I think has a lot to do with the habits we have. A habit we do every single day. My god we better get that one right. This once a year thing we might do, it doesn't matter, but if our habit is to go watch 2 or 3 hours of TV everyday instead of just going to bed a half-an-hour early or waking up a half-an-hour early and running a 5K every morning, or getting on the bike, or doing a swim, or whatever. We're just asking ourselves to be fat an unhappy.
We need habits. Work out a little bit. Don't go out to eat everyday. Have a date night with our wife once a week. Those little habits make all the difference. If our habit is to watch TV for 3 or 4 hours a day, and then we bitch about being unhealthy and unhappy marriage, and we don't have enough money or patients in our practice yet we're unwilling to actually spend an half-an-hour working on it. I just don't think we have a lot of leg to stand on there. I think that's a big problem we got in our society right now.
Howard Farran: You're a legend. You're a role model. You're an idol. I can admit, I want to go to your next lecture. Email me, Howard@dentaltown.com those dates or I'll go to Breakaway Practice. If you're one of our podcast viewers, always feel free, you can always contact me at Howard@dentaltown.com or go to Dentaltown.com, and see what the other 202,000 dentists are talking from 206 countries.
I'll tell you what, the reason we have 202,000 registered dentists from 206 countries is because 95% of the people just go there and lurk and read. It's guys like you, Scott, that have posted 2000 times since 2005. It's the [inaudible 00:58:27] content from real guys in the trenches really doing it. It's guys like you who make Dentaltown, not me. I literally had 0.00 to do with that. It's not called Howard town, it was called Dentaltown. Scott, thank you so much because it was guys like you who made Dentaltown what it is today.
Scott Leune: Howard, thank you so much for having me. You have changed industry with Dentaltown and the big idea and the big picture. I'm just so happy with how everything has gone with Dentaltown and for dentistry. All of us dentists would be completely different without Dentaltown. I know you hear it all the time, but I can't help it, I got to say it too, it's just amazing. Thank you for what you've done for dentistry.
Howard Farran: We should start the mutual admiration club. We'll be the only 2 members. Alright buddy, rock and roll, and good luck with everything you do. I will see you in San Antonio.
Scott Leune: Awesome, thanks a lot.
Howard Farran: Alright buddy.