The Group Dentistry Now Show: The Voice Of The DSO Industry – Episode 94

The co-founder and partner at Polaris Healthcare Partners, Perrin DesPortes, and the founder and CEO of Finger Lakes Dental Care, Dr. Jason Tanoory, join the GDN Show with host Bill Neumann. On this podcast (see video & audio links below), we discover:

📈 The history and outlook of Finger Lakes Dental
📈 Who Polaris Healthcare Partners is and what they can do for your dental group
📈 Clinicians working themselves out of the clinical role and into leadership
📈 Best ways to use debt funds to grow your group
📈 Attracting & retaining associates with equity solutions
📈 Growth strategies – denovo & acquisition
📈 Outlook for the dental industry including the impact of the recession
📈 Much more

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Scaling from Clinician to CEO

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Our podcast series brings you dental support and emerging dental group practice analysis, conversation, trends, news and events. Listen to leaders in the DSO and emerging dental group space talk about their challenges, successes, and the future of group dentistry. The Group Dentistry Now Show: The Voice of the DSO Industry has listeners across North & South America, Australia, Europe, and Asia. If you like our show, tell a friend or a colleague.

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Full Transcript:

Bill Neumann:

I’d like to welcome everybody to The Group Dentistry Now Show, everybody. Thanks for joining us again. Whether you’re listening in on Google, Apple, Spotify, any one of those listening apps, or you happen to be watching us on YouTube, thanks for being part of The Group Dentistry Now Show. We have two great guests as always. Without an audience, we wouldn’t have these great guests coming in because they’d be like, “Who are we going to be talking to?” We’ve got a wonderful audience from all over the world. I think we’re in like 27 countries right now. We have Perrin DesPortes. He is from Polaris Healthcare Partners. Perrin, welcome. First time to The Group Dentistry Now Show, right?

Perrin DesPortes:

It is. Great to be on with you, Bill. We go so far back and I can’t believe it’s taken us this long to sync up the mics and everything. By the way, I don’t speak a lot of foreign languages, so depending on what those 27 countries are, this may fall a little flat, okay. Just a heads-up.

Bill Neumann:

Well, thank goodness most of them understand English, I hope. Then, we also have Dr. Jason Tanoory, and it’s also his first time as well on The Group Dentistry Now Show, so Jason, thanks for being here today.

Dr. Jason Tanoory:

Thank you for having me. I’m excited to maintain some dialogue with you guys and I’m sure I’ll learn a ton.

Bill Neumann:

Dr. Tanoory is the CEO and founder of Finger Lakes Dental Care, so we’re going to find out all about Finger Lakes Dental Care on this podcast. We’re going to get into some topics that I think the audience is going to find really interesting and helpful. We’re going to talk about early growth stages. We’re going to talk about how this inflation is affecting business today and everything in between, so I’m really excited. Dr. Tanoory, talk a little bit about your background and Finger Lakes Dental Care.

Dr. Jason Tanoory:

Yeah. Great, so I’m a graduate of University of Pennsylvania about 22 years ago. I did a residency, and then found this pretty unique place in Upstate New York to start a practice. My wife and I started it and just blessed to have it grow. After a few years, started to get the itch of maybe growing a little bit more, so we brought on some associates and some more people to help us support the patient base.

Dr. Jason Tanoory:

Next thing you knew, we were at five locations and spread out amongst the Finger Lakes and have a couple of more in the pipeline to be open here by the end of the summer, and just enjoying it. I just love the idea of just growing and growing my team and serving the community. That’s really what motivates us and kind of gets us out of bed and that’s why we’re doing what we’re doing.

Bill Neumann:

About 20 years up there now in the Finger Lakes?

Dr. Jason Tanoory:

Yeah. It’s crazy to say that, so 20 year. Where the hell does the time go? Yeah, for sure, for sure.

Bill Neumann:

Quick question before we go over to Perrin. When did you start to expand? Go from that one… Did you start at one location?

Dr. Jason Tanoory:

We did, yeah. You reach a point where you’re at some type of capacity and you have to make a decision. Do you raise fees and start to have some of the patients on the bottom kind of drop off? Do you start to get more selective with the procedure mix? These are all things that we entertained, but really at the end of the day, our vision is to charge a fair fee and serve anyone that values us, and that meant that we were just going to have an unbelievable demand.

Dr. Jason Tanoory:

To deal with that, we decided to bring on team members, associates, clinical staff, administrative staff, support services, and that’s the route that we’ve decided to go. Certainly not suggesting it’s the right route or the wrong route, but that’s just the route that we decided to go to facilitate the growth.

Bill Neumann:

That’s great. All right, Perrin, we’re going to go with you. You’ve had background. I think it’s 27 years in the dental industry. I know I met you when you were at Patterson as a manager, and I think it was in-

Perrin DesPortes:

Yep,

Bill Neumann:

… Charlotte, but your background even goes… You started before Patterson at Thompson, I think it was.

Perrin DesPortes:

Yeah, jack of all trades, master of none as we like to say. You could almost say, Bill, not to go way, way back, but I was kind of born into the business. Thompson Dental Company was a family-held dental distribution business, headquartered out of Columbia, South Carolina, and I was actually fourth generation in that business. My great-grandfather, James Perrin Thompson, started the company in 1899 of all things. My grandfather was Chairman of the Board. My father was President and CEO of the business. I joined the business in 1995, and we elected to sell the business to Patterson in April of 2002, and I like to say not for financial reasons necessarily, but due to poor equity transition planning.

Perrin DesPortes:

My father has two sisters, neither of whom worked in the business, nor did their husbands or their kids, and upon my grandfather’s ultimate demise, and he was 84 I think at the time when we sold the business, his estate was going to be share and share alike, so you can kind of do the math in your mind about one person, my Dad, running the business, operating the business, growing the business, suffering all the challenges, stress, and all of that that we all know as business owners. Business had like 400 employees and was on the run rate of about 100 million in revenue, so it was a pretty decent-sized company, but it would be really quick that he would be outvoted if somebody else wanted to get their money out and sell the business, and that would be a calamity.

Perrin DesPortes:

Patterson in the early 2000s after the dot com burst, if you think way, way back to that effect, there was no private capital going into a sleepy dental distribution company or business. It’s high fixed cost, inventory-based, just a challenging business to run, but a successful business, and Patterson was a great transition for a lot of us. I stayed on for 15 years with them. I ran three different businesses between Richmond, Virginia, Metro New York and New Jersey, and ultimately Charlotte, and had a great career. I mean, I learned a lot of things that I would not have learned in a family-held business. I always like to say that I miss the opportunity to continue working with my father and continue that legacy, but Patterson was really, really good to me for 15 years and it gave me a lot of responsibility early on.

Perrin DesPortes:

I left Patterson in January of 2017 to launch a prior venture that focused on entrepreneurial group practices, and I know we’re going to dig into that a lot today, but if you think in the early 20-teens like coming out of the housing collapse, there were a lot of people like Dr. Tanoory who were I like to say entrepreneurs at heart. Great, successful clinicians, but they desired to own more than one location, and my partners and I at the time saw the challenges they encountered.

Perrin DesPortes:

I saw it from the Patterson lens because they were customers of ours and, you know, candidly all seemed to be suffering the same challenges, making the same mistakes. There were no real resources there to guide them how to transition the business off of their literally clinical skills and into a more sustainable business. It wasn’t totally based on them. Then, if they did reach some level of success, how to transact the business because a traditional dental practice broker wasn’t equipped to do that.

Perrin DesPortes:

We launched a prior business that would help entrepreneurial dentists start, grow, and ultimately sell their group practice, and Diwakar Sinha, my co-founding partner at Polaris, and I continue that work today. Everything we focus on at Polaris comes out of my experience in dental distribution, running mid-tier and large-tier markets, honestly. Diwakar’s background is in healthcare lending, so all of these entrepreneurs like Dr. Tanoory who are using bank funds to grow, how do you do that successfully? How do you maintain growth capital? How do you execute to build a business for scale? It’s a fast-growing segment of the business and one that has still a tremendous amount of opportunity ahead of it. We’re thrilled to be in the space, for sure. I haven’t fired myself yet, for what’s it’s worth, so…

Bill Neumann:

That’s good. Yeah. That, I don’t even know how to follow up on that one. Dr. Tanoory hasn’t fired you, either. Right? So that-

Perrin DesPortes:

Yeah-

Bill Neumann:

… good he’s on the podcast-

Bill Neumann:

… so wonderful.

Perrin DesPortes:

… he’s called me some other things off-mike and off-camera and all, but never the Donald Trump you’re fired, get out of here, so-

Bill Neumann:

Yeah.

Dr. Jason Tanoory:

True story, true story.

Bill Neumann:

That’s funny. Dr. Tanoory, before we get into what makes Finger Lakes Dental Care different, so I do want to ask you that and I’d also like to ask Perrin about how Polaris stands out, you are a coach at The Dental Success Network, so talk a little bit about that if you don’t mind.

Dr. Jason Tanoory:

Yeah, so Dr. Mark Costes started The Dental Success Institute I think about 10 years ago now, and it’s a really unique coaching group in the sense that we take on clients into the group. They get vetted and they’re actually coached and mentored by other dentists, other doctors, other entrepreneurs. They’re called Black Belt Coaches, and I’m blessed to be one of them, but it’s a unique consulting arrangement in the sense that typically in most businesses, these docs who sign up for a consulting agreement are mentored by hygienists that have graduated on to consulting or businesspeople, but not clinicians. Not people that have been in the weeds and been in the whirlwind and really can live it and can relate to a lot of the struggles that some of these dentists/entrepreneurs are having.

Dr. Jason Tanoory:

I find so much joy in being able to collapse time for some of these clients and really get them to a point in their life much sooner than I got there through just intimate conversations, face-to-face on the phone, just working through everything from a balance sheet, a profit and loss statement, to trying to operationalize servant leadership principles so they can become the best versions of themselves. I find tons of join in that and it keeps me busy.

Bill Neumann:

Talk a little bit about Finger Lakes Dental Care, just the uniqueness, the model. I’d love to get, you know… You obviously have competition up there. You talked a little bit about, “Well, hey, we were at one location. Strategically, what do we do? Do we raise our fees?” You went in a different direction, so I’d love to love to hear a little bit about your thoughts on Finger Lakes and why you’ve been so successful.

Dr. Jason Tanoory:

Yeah. I appreciate the question. You know, not to sound soft, but I think so much of it is dependent on culture, and so much of it is depending on core values and what you really stand for and what you’re trying to do. I bought into that many years ago, and it took a while to get the flywheel of momentum moving, but I feel like we have a culture that is second to none.

Dr. Jason Tanoory:

We treat our team exceptionally well, not necessarily just in monetary measures, but more so in love languages and appreciation languages and really trying to create a situation where they feel a ton of fulfillment in their job and making sure they’re aware of how important they are on a regular basis, how the work that they do matters. Just really trying to make sure that they understand how important they are and make sure that they all leave for the day with a sense of fulfillment and a sense of purpose.

Dr. Jason Tanoory:

That’s really what’s, I think, helped us in terms of we have minimal turnover. We have about a hundred employees, and I’m obviously biased, but I get a general feel that people love to come to work. They really have clarity on how what they do matters, and a lot of them would take a bullet for us, so I just feel really good about what we’re developing. It took a while. It wasn’t like read a book on Friday and Monday morning you have it down. It’s years in the making, but I feel like we’re heading in the right direction and we’re starting to gain a lot of momentum.

Dr. Jason Tanoory:

That’s really what’s allowed us to kind of catapult over the last few years and open up some additional locations and recruit some other professionals that were already in jobs, not actively looking for work, but they were just looking to go from a good situation to a great one. That’s what I think we’re able to provide.

Bill Neumann:

That’s great, Jason, and you had mentioned that you’ve got two more locations that you’ll be… Are these acquisitions? Or are these de novos that you’ll be opening up or acquiring this summer?

Dr. Jason Tanoory:

One of each, so of an acquisition hopefully here within the next month or two, and then a pedo-ortho de novo towards the end of October that’s going to serve a lot of people in a community about 25, 30 minutes from our flagship.

Bill Neumann:

That’s great. We’ll touch on that a little later on in the podcast. Perrin, Polaris. so again, differentiating yourself there, which is amazing. If you look back six, seven years ago, there really wasn’t anybody that was focused on entrepreneurial dentist. You had a lot of practice management consultants, which were working with people that had one location in most cases. Now, there’s some other people out there doing things similar. Perhaps talk about Polaris and how you differentiate yourself.

Perrin DesPortes:

Yeah, and, I mean, maybe I’ll build off of what Jason started with because we’ve gotten to know Jason and Mark Costes and a lot of the people in that Dental Success organization quite well over the last year or so. Known him for a long time, but really kind of gotten closer to him, I’ll say, in the last handful of months or so. I think if you think about your typical entrepreneur who’s building a group practice, they probably worked with a dental practice management consultant at some point, or maybe several.

Perrin DesPortes:

A lot of them focus on clinic-level operations, systems and processes, scheduling efficiency, hygiene retention culture, like Jason said. All of that is super critical to running one or two or maybe even three locations, but if you’re going to build a multi-location group and if the intent is to scale it or centralize operations, that’s a completely different kettle of fish as it relates to what the consulting objectives are.

Perrin DesPortes:

We are not clinical dentists. We don’t do what Jason does. We have not trod that path, and we’re really, really clear about that. That being said, if you’re going to build a successful group like Jason has, it won’t be dependent upon your clinical skills only. It’ll be dependent upon the ability to either start locations for de novo and grow them successfully to operational break-even or cash flow break-even to net equity break-even on balance sheet, creating equity on balance sheet. If you’re going to acquire practices, it’s going be to not overpay for them and understand the revenue generation and the cost synergies that you bring to the table. If you’re going to attract associates and retain them for the long haul, you need to have arguably some methodology around which of those associates become partners in the business, be it buy-in or earn-in, or a combination of both.

Perrin DesPortes:

Then, you need to understand how debt funds are going to be used for future growth to expand the footprint of the practice. All of that that I kind of rattled off is what we do for these early-stage groups, and that’s more I’d call it maybe C-suite consulting. That’s a differentiator that Diwakar and I have had in our past in terms of leading larger groups, businesses within our prior lives to some level of growth and scale and bringing a lot of those principles of corporate America to group dental practices because building a successful group will be based on a lot more than just the founder’s clinical capabilities. I think that’s where we’re arguably suited best.

Perrin DesPortes:

Our business has two pieces to it. One is that kind of consulting side, the growth and scale side, the things that I just rattled off, and the second side is more transactional-based, which could be recapitalizing the debt and getting a commitment from a lender for growth capital to continue to grow and scale the business and/or exiting the business altogether, sell-side advisory. What you’ve seen in the last really… Like coming out of COVID and the COVID hangover, when basically all M&A activity across the globe, not just in dental and the United States, across the globe, all M&A activity basically ceased. Nobody… All businesses were shut down. Nobody knew what cash flows were, let alone how to value things accurately on a future projection.

Perrin DesPortes:

Then, we made up for a heck of a lot of lost time in 2021, and M&A activity was through the roof globally. It was a spike-the-football year for those in the M&A. We closed a handful of transactions and Polaris as well, but I think the beauty of our business is that it’s not dependent upon only consulting or only sell-side advisory. If Jason, or just as an example, were to come to us and say, if he didn’t know us, and say, “Hey, guys, do you think I should continue to grow the business? Or is this a good point to exit?” If we were only a consulting business, we’d say, “Jason, you’d be a fool to sell the business. Look at all the cash flow you’re drawing out of it. This is a cash cow. You should keep it forever.”

Perrin DesPortes:

On the other hand, if we were a sell-side M&A advisor, we would say, “Jason, you’d be a fool not to sell it. Look at the returns people are getting. Multiples are at an all-time high. You should exit now.” Polaris does both, and our analytics back up all of that, so our first answer to those types of questions from someone like Jason would be, “I don’t know. Let’s run the numbers. Let’s see what we think. We’ll tell you both sides of the story and what our best guess is. Then, let’s work toward the solution and the timeframe that best suits you based on where you are and what your needs are.”

Perrin DesPortes:

If that’s consulting, we can help you do that, and if that is this is the best time to capitalize on the business, we can help you do that, too. We have… I hate to put it this way, Bill, we’re going to get paid either way if we do our job, but we’re not decided one way or another, and that gives us hopefully a little bit better clarity around guidance.

Perrin DesPortes:

The last thing I’ll tell you is that we are analytically-driven, and Jason has experienced this. We are numbers-oriented geeks. We can spread financials and create models in Excel that make your head spin. Diwakar and I can’t do it. We pay people to do that, but that’s part of our business, and a lot of that financial clarity is what gives us better confidence around the guidance we give clients because the numbers bear out something and we usually have a forward-looking projection to that effect.

Perrin DesPortes:

It’s a financial model based around credit modeling in banking because, again, our clients are not private equity-backed groups and they are not traditional solo practices. They’re entrepreneurs who want to build group practices and typically expand the footprint, improve the profitability of those businesses, and they’re using bank funds to do it.

Perrin DesPortes:

If the bank cuts them off, it doesn’t matter what your growth strategy is, so we want to understand from a credit lens how far the bank’s going to be willing to go to see Jason’s vision to fruition or where he might bump up against a threshold that would cause him to stall outside of what he can control. I think that’s really, really important from a grounding standpoint on what we do and the guidance we give.

Bill Neumann:

Thanks Perrin. Let’s get into the group discussion. I’ve got some really good topics here I think would be super important for some of the audience to hear. Jason, and again, I don’t know your exact situation, but one of the questions is you’re a practicing clinician. How do you transition from the role while you’re seeing patients every single day to more of a leadership role? Where are you in that transition?

Dr. Jason Tanoory:

Yeah, I wish there was a roadmap to answer that question. I wish there was like a Transition For Dummies book. You know, to be honest with you, I could probably write it because I’ve made every mistake possible. Currently, I’m practicing two clinical days a week. I don’t need to practice clinically, but I love the idea of rotating in our group and just making sure that I have touchpoints with as many people as possible. That’s the main reason I do it. It’s also hard to mentor young doctors and give them advice on clinical situations when you’re not in the trenches with them. I think that’s one of the reasons the coaching group at DSI is so successful is all of the advice and mentorship we try to give is through real-world experience, not through reading a book or hearing it from someone else.

Dr. Jason Tanoory:

To answer your question, I’m two days clinically right now. It was tough to figure that out. It was tough to figure out the transition. It went from four days, four and a half days, five days. Then, you bring on the associate, and then the original mindset is, “Okay, I have an associate now. I can back off.” Then, I see it all too often is that the founding doc or the primary doc backs off too quickly and doesn’t offer the mentorship that that young associate needs. Then, that relationship unfortunately dissolves, so it depends on the situation. It depends on the facility capacity. It depends on the patient demand, but slow and steady is the way that I’ve done it over time, and we’re talking 20 years, and it was the right situation for me. There’s lots of ways to get to that finish line, but for me personally, it was slow and steady and getting to the point where I’m two days a week clinical now.

Bill Neumann:

Yeah. That makes a lot of sense, and you touched on the mentorship part of it, which, Perrin, maybe you could talk a little bit about what you see with some of your clients. Does that seem to make sense? I mean, obviously it’s working for Jason and Finger Lakes.

Perrin DesPortes:

Yeah. I… Well, he’s excellent at it. It goes without saying, and we’ve had practical experience in working with him individually and understanding the business that he’s in the process of building. I would tell you that to kind of echo Jason’s point, one of the first challenges that somebody goes through is that transition out of the chair, and dentists by and large make really healthy, personal incomes out of a successful practice. We’re all capitalists. You know, we… None of us do what we do for free, and I, like both of you, enjoy earning income and the toys it brings, or the vacations or the kids in private school and all that kind of stuff.

Perrin DesPortes:

We have this level of income that we’re accustomed to generating out of the business, and we have a standard of living on the personal lifestyle standpoint that the business feeds the lifestyle, and there’s absolutely nothing wrong with that. One of the biggest challenges when you start to replace yourself clinically is you got to pay somebody to do the work that you’re no longer doing. They don’t do that work for free, so how much business… how much additional margin income is the business generating to offset that kind of reinvestment in the practice and in the role that the founder is transitioning out of.

Perrin DesPortes:

A lot of them aren’t ready for that. They have a lifestyle that I’ll say maxed out to the income threshold that the business generates, but if you’re going to build a group practice, you’re going to be focused more on creating wealth than personal income necessarily. That’s a mindset shift, and I think it catches a lot of people out and they’re not prepared for the financial impact. We spend a lot of time with clients verbalizing that, modeling that, figuring out cost base of standard of living and the additional margin that an entrepreneur like Jason is going to have to generate in the business when he starts to pay somebody to do the work that he’s leaving behind.

Perrin DesPortes:

There is a numerical analytical answer to that, and I think we need to get close to that for a firm understanding of what the transition’s going to look like. Does your lifestyle have any buffer? Can you support a potential income drop? Or if you can’t, what’s the impact you’re going to have to make on the business? That’s really the first step out of the chair, I would say, and something that if we do our job correctly, we can minimize for a founder.

Dr. Jason Tanoory:

Yeah. Just to touch-

Dr. Jason Tanoory:

… on that, I mean, that’s such a great point, and parents use the term, and I don’t know if he’s coined it, called The Founder’s Dilemma. it’s truly a dilemma where unless things are really set up correctly, as soon as you bring on an associate to take on some of these clinical responsibilities, you will see a decrease in your income. How do you navigate that? It’s just so dependent on a number of factors. I was just on a coaching call on Friday that dealt with this issue. A senior doc has a four-operatory practice and he’s ready to bring in an associate. There’s no room for them to both to provide clinical dentistry at the same time.

Dr. Jason Tanoory:

A lot of tough decisions have to be made. If you have a facility that has seven to eight ops, if you have enough patient demand, then you can work side by side. You can mentor and be at the chair at the same time. All of these things really have to be considered before you just start hiring associate dentists. The other thing that, at least for me, you have to learn to say no to certain procedures.

Dr. Jason Tanoory:

When I went from, say, four days a week to three days a week, I started limiting my procedural mix, so all of a sudden, my hourly revenue went up significantly. When you no longer do quadrants of restorations, quadrants of fillings, you no longer take out single teeth, not to suggest that there’s not a huge place for that, but if you can train an associate to do that and then your skill set is more limited to orthodontics, implant dentistry, stuff that’s more productive on an hourly basis, you start to level out that founder’s dilemma and you can work your way around it. Those are a lot of subtle nuances that really need to be researched and considered ahead of time before you just pull the trigger and bring in an associate and throw them in the room down the hall and ask them to produce some dentistry.

Bill Neumann:

There’s some great tidbits right there, Jason. That’s great info that we have not had on this podcast before. Thank you. Let’s talk about funding. Here’s another dilemma, right? You may have access to funds, bank funding, but how best to spend that? Maybe we’ll start with you, Perrin?

Perrin DesPortes:

Yeah. I have the blessing or the curse, depending on how you want to look at it, to being surrounded by a bunch of what I call recovering healthcare bankers. You ought to see some of our group calls and how thrilling they are when you start talking about debt service coverage ratio and all this other kind of jazz that really if you’re having trouble sleeping or you need an afternoon nap, that is the call to be on.

Perrin DesPortes:

I think there are a couple of things to think through, think about, and be intentional if you’re intending to build a group practice and be intentional in your communication with a bank. Dentists are probably the best credit risk scenario for a bank that there is in the world. I mean, one, they typically make a good bit of income. Dentist solo practices are a reasonable valuation, even those that are on the high end. They produce tremendous cash flows. They have great fixed costs and variable cost structures, so a solo practice, if it doesn’t suffer the constraints that Jason mentioned earlier, can grow revenues pretty readily and drop a lot of profitability to the bottom line.

Perrin DesPortes:

The borrower for the money that personally guarantees it is going to live, breathe, and work in that business seven days a week. There’s more secure credit risk than somebody like that. They are literally going to keep the ship afloat or they’re going to die trying, and the default rates, or lack thereof, really bear that out. It’s a great, great model for a bank. It’s a great model for a solo dentist buying his or her first practice, and it’s a reason that there are so many lenders in that space that still have dirt cheap cost of funds.

Perrin DesPortes:

That being said, the game changes when you want to have two to three to four to 10 locations. A bank underwrites that credit risk profile differently than a solo practice, and so what typically happens is a dentist borrows money to buy his or her first practice, dirt cheap cost of funds, 10-year term. All’s good, and then they decide to borrow money to buy their second practice and the bank says, “Well, okay, you’ve done great on your first one. I can probably stomach that.”

Perrin DesPortes:

Then, the dentist comes back and says, “Well, I want to borrow some more money to buy number three, and I got number four teed up, too.” The bank’s like, “Whoa, whoa, whoa, wait a minute. How many days a week are you going to be working? You can’t be everywhere at once. How many days a week are you going to be working in all these practices? Who’s going to be running them? Who are the other dentists involved?”

Perrin DesPortes:

The default rates start to go up there, and that’s why retail lenders that dirt cheap cost of funds on the first or second practice start to see them… The lenders actually start to say, “Look, we’re good on one or two, maybe three, but not four and beyond.” The dentist says, “Well, if you’re not going to lend on number four or five, I’m just going to go to another lender that will,” and it’s a subordinated debt structure with higher rates and still probably 10-year terms with more pre-payment penalty structure and things like that.

Perrin DesPortes:

This is a really, really problematic way to build a business for a couple of reasons. One, you have a rising cost of capital outside of the federal fund rates, and we can talk about inflation and all of that down the road, but it’s an escalating cost of capital structure. That impacts especially if you’re going to be acquiring practices how much you’re able to pay for them. It is a cost of capital or it is a capital structure that requires constant approval to get transactions done. It’s not committed dollars for growth, it’s a, “Yeah, let me get it. Now that I’ve negotiated the deal with the seller, let me go to the bank and make sure they’ll fund it.”

Perrin DesPortes:

Nobody does that. Everybody tries to do that. That’s not a successful growth strategy, so one of the fundamental services that we provide to people in this early stage is we look at the number of locations they have, the number of banks that are involved, the total capital structure and the stack of the business, and the profitability of the whole business. We try to understand what that entrepreneur’s growth strategy is. Is it buyer build one additional practice each year? Is it buyer build three? How far do they want to go? What does the next five years look like? What are the real capital needs of the business?

Perrin DesPortes:

Usually, if the business is well-constituted, we can offer debt recapitalization services that not only recapitalize all the three or four different banks that are involved right now, get it under one note with one lender, but the lender also provides something that we would think about as a line of credit. It’s not a line of credit, but the way you and I think about a line of credit for our home equity line of credit or something like that. Like we want to build onto the house and add a pool and all that kind of stuff.

Perrin DesPortes:

The line of credit or the growth facility of the lender functions that way so that Jason and people like him can have committed capital to take down those subsequent locations and it’s like having conditional pre-approval. It’s a better way and a more secure way to grow the business into the next phase versus just saying, “God, I hope the bank’s going to fund this next location that I’ve found.” Hope’s not a strategy if you really do want to grow the business, and when we restructure debt for people, it would allow them to close every bit as quickly as a private equity-backed enterprise-level group would be. If you’re arguably more aggressive in your growth strategy or you want to move faster, it’s the right solution at the right point in time.

Bill Neumann:

I’ll asked Jason this question here. Moving on to one of the biggest issues, well, maybe it was one of the biggest issues before inflation all of a sudden started to rear its ugly head, is the attracting and retaining associates. Jason, talk a little bit about that strategy. I mean, you’ve got a de novo, you’re acquiring a location this year. What’s the strategy with those particular locations?

Dr. Jason Tanoory:

Yeah, good question, so without a doubt, that’s the number one hurdle for us to grow the way we want and the pace that we want is finding great associates. There’s a couple strategies that you can have in place. Obviously, reputation and culture starts the process of attracting them, a lot of networking. I consider myself a drip marketer when it comes to dealing with prospective associate dentists. I’m constantly in communication with prospective associate dentists, offering everything from clinical mentorship to babysitting their kids if they wanted to have a date night with their wife, so whatever I need to do to get my foot in the door.

Dr. Jason Tanoory:

Once you do get your foot in the door and once they do agree to join you, then you have to back it up with some things that’s really going to help from a retention perspective. Culture, obviously, is number one. Making sure that they’re going to stay busy, feel valued is high on the list. We’ve also really benefited from Diwakar and Perrin’s equity model, their RSU model, their earned equity model where prospective associates can become legal partners in the entity, not through this outrageous buy-in, but more so through equity earned through their adjusted production.

Dr. Jason Tanoory:

As I start to deal with more and more younger associates, you start to realize that they’re coming out of dental school with 4 or $500,000 in debt. They want to get their first starter home, which when I was that age, it was a hundred thousand dollars. Now, starter homes are $500,000, so right off the bat, they’re a million dollars in debt, and now I’m asking a prospective associate to write another check for 500 grand for 50% of a practice. It’s just not a realistic expectation, so moving to an earned equity model has really opened up the door for younger associates to become partners in our entity without any capital buy-in, although that is an option. They’re able to earn a percentage of ownership through working hard and producing great dentistry.

Bill Neumann:

Oh, that’s great. Perrin, anything you want to add to that?

Perrin DesPortes:

Yeah, I mean, I think Jason hit the nail on the head, you know what I mean? It’s The American Dental Education Association, the ADEA, had some year-ending statistics about the recent graduating class, and 82% of them that graduated had some level of what they call educational debt. It could be dental school, it could be undergrad, but the average dollar number of those 82% carrying educational debt was $305,000. I mean, that’s a staggering number, and these are not specialists. These are general dentistry graduates, and so to Jason’s point, there’s the financial impact of having to pay that off every time, but there’s also that psychological impact of not being ready to take on more debt and buy into a business.

Perrin DesPortes:

I think the earned equity models, we do two different ones, one’s restricted stock units that are RSUs that Jason mentioned, the other one’s called profits interest units. They’re both earned equity. They function mechanically a little bit differently, and one’s the right tool and the right situation, and the other’s the right tool in a different situation. We try to look at each client differently in terms of what they’re trying to achieve, what their growth strategy is, and we model it differently.

Perrin DesPortes:

The key is that in the value proposition for somebody in Jason’s position is that if… Whatever the associate has in their in mind in terms of practice ownership, whether it’s them owning a practice outright or being a partner in a business, you’re trying to think from their lens at the end of probably a 10-year period. If they went to the bank and borrowed money and bought their own practice, they’d pay it off usually over 10 years, and then they’d have a practice they could call their own. It would be valued at some dollar amount, a million dollars just say for example. You know, we’re trying to work with the Jason Tanoorys of the world to model out the economic outcome for that associate.

Perrin DesPortes:

At the end of 10 years it says, “Listen, yeah, you can go borrow your own money. Yeah, you can personally guarantee it. Yeah, you can buy your own business. Yeah, you can hire and fire staff and you can fight with the supply companies and everybody else. Yeah, you can trod the path that Jason Tanoory has already done. You can get paid last for the joy of business ownership, right? Or, if Jason can create the same economic outcome over the same period of time, wouldn’t you be better off staying on a bigger ship with a business that’s already fully functioning and profitable like Jason Tanoory’s created?”

Perrin DesPortes:

If the answer to that is yeah, then we have strength in numbers at Finger Lakes Dental. If you’re just predisposed to be the king of your own kingdom come hell or high water, then probably solo practice ownership is the right thing for you because you don’t play nice in the sandbox with anybody, and that’s okay. There’s a place for that, but in a group practice, if we can create the same economic opportunity, they can earn without actually having to borrow money or buy in and take on the risk.

Perrin DesPortes:

It’s a wonderful solution in that context. RSUs and PIUs, restricted stock units and profits interests units, are something that’s commonplace in Corporate America. Diwakar and I had them… I had them at Patterson, Diwakar had them at East West Bank and Leaf Financial, so these are commonplace in bigger businesses. We’re just the first, and to my understanding, the only group that does them and have modeled it successfully for group dental practices. It works easily well for the same primary principles.

Bill Neumann:

Equity earned versus buy-in, makes a lot of sense, especially with all the debt that clinicians have coming out of dental school now. I know we’re going to get tight on time here pretty quickly, but we have got so many great questions. We may have to do a part two to this because you guys are a wealth of knowledge. Let’s talk a little bit about growth strategies and acquiring practices. We’ll go back to Jason because, you know, he’s really doing two different things. He’s acquiring an existing practice right now, and then he’s opening up a de novo, and especially de novo, pediatric and orthodontics. Talk a little bit about the why behind both of those, if you don’t mind, Jason.

Dr. Jason Tanoory:

Yeah, for sure. We built this group based on de novo structures only, and the reason for that is I wanted to have complete control of everything, so my ego basically got in the way. It takes me a while to kind of figure it out, so I’m excited about the pursuing the acquisition path, but I have a comfort level with de novos. To go back to your original question, why do this or want to do it, I think everybody has to have clarity on what they’re really trying to do. It’s really scary when you get in a room amongst a lot of very intelligent, very successful people and you develop your strategy because that guy at the end of the bar has 10 locations, and that guy over there’s got $2 million in EBITDA. All of a sudden, you’re like, “Well, then I should have that,” and nothing could be further from the truth.

Dr. Jason Tanoory:

It’s a recipe for disaster, and ask me how I know. I feel like I’m at a point in my life where I have really good clarity with what we want to do. We have a simple… We want to grow 20% year over year and we want to do it in a very controlled way. We want to make sure that the culture and the quality of care is never sacrificed. I’ve been very, very clear with my team that as soon as I start to feel that it is being compromised, then I’m pulling the plug on it and we’ll stay where we’re at. That’s my strategy. That works for me. I know many, many other people that would not care about culture or clinical care and there’s nothing wrong with that, but everybody’s got to be able to fall asleep at night when their head hits the pillow.

Dr. Jason Tanoory:

For me, I found that the sweet spot is 20% year-over-year growth, and I still can feel like that pace is enough for me to control the culture and control the quality of care. Now, to kind of speak to the point that Perrin was making a few minutes ago, 10 years ago when I started this journey, it was all about locations. I need to have a location on that corner and that town and over here and over there, and there’s nothing wrong with that, but I’ve really come to the reality that at the end of the day, the value comes from EBITDA. I’m not suggesting that it needs to be all under one roof, but I’ve really changed our strategy to focus more on profitability, collections, EBIDTA per location, as opposed to just throwing another location on the map, just another million-dollar practice that does 20% EBIDTA.

Dr. Jason Tanoory:

I would much rather have a $3 million eight-operatory practice even if it does the same percentage of EBITDA. It’s just a lot less headaches and a lot easier to manage. Those are just mistakes that I’ve made and things that I’ve learned along the way, but that’s just hopefully a quick summary, quick answer to your question on why we decide to do what.

Bill Neumann:

Yeah. That’s great, Jason, and that answers a little bit of another question that I had was just the outlook for your business in coming years, which it really sounds like you’re looking for that 20% year-over-year growth, right? You’re going to get there mostly through de novo, but if there’s a good acquisition opportunity, then you may go that route as well?

Dr. Jason Tanoory:

A hundred percent, a hundred percent, and Polaris is a EOS traction-type office. That’s a entrepreneur operating systems that they use, we use it as well. We’ve used it for some time, and they talk about 10-year goals and Jim Collins talks about the Big Hairy Audacious Goal. I think that’s important to have that goal, but the reality is that the industry is changing so quickly and debt and banks are kind of always fluctuating that we, at least with our group, we want to have three-year goals.

Dr. Jason Tanoory:

We’re reevaluate them every three years, and we’re just charging as hard as we can for those three-year goals. It’s nice to kind of have a 10-year picture, but the three-year goal is really what drives us, and then we reverse-engineer from there.

Bill Neumann:

That leads into the next… last couple of questions here because I know you’re going to get a knock on the door in a couple of minutes, Jason.

Dr. Jason Tanoory:

Yeah, so until I get it, I’m free, and I don’t see anyone coming up the stairs, so for right now we’re pretty good.

Bill Neumann:

That sounds good, so let’s talk a little bit about what’s going on with interest rates and the impact that you feel. We’ll start with Perrin. On let’s say these emerging groups, number one, and then, yeah, I’d love to maybe try and get a understanding if we can from the patient perspective. With less money in your pocket, is it going to impact them going to the dentist or what kind of dental care they get? Maybe that’s for Jason, but Perrin, go ahead. Tell me what you think from the group practice standpoint.

Perrin DesPortes:

Yeah. It’s… These are really interesting times we’re about to enter into, and most of us have never lived through something like this probably as it relates to inflation and rising rates. I mean, I was born in 1970, and while I don’t remember it, the Carter years were not renowned for low interest rates. Paul Volcker, the Chairman of the Fed, is a name we all remember because he jacked rates strong double digits to try to get inflation under control. I don’t think we’re going to end up there.

Perrin DesPortes:

That being said, the… Our core client’s ability to borrow committed funds at a reasonable rate to execute their strategy is of paramount importance. I think you have two different aspects of the market. One, there is the M&A activity for these larger enterprise-level groups and their thirst for acquisitions and expansion going forward. The people that run the business development teams get paid to do deals. They have equity opportunities on recaps. The bigger the business gets the better typically that they do, so it depends. M&A activity to a great degree depends on the private equity group that is the sponsor and where they are… how they’re using debt funds.

Perrin DesPortes:

If they’re borrowing money from a bank, the federal funds rate that we’ve read so much about that’s going up 75 basis points and the rising rates that Chairman Powell is forecasting are going to directly impact their cost of capital structure, and we should assume that the valuation multiples they are able to pay based on internal rate of return projections are going to be impacted from that. On the other hand, you have a lot of private equity-backed enterprise-level groups that work with something called non-bank lenders. It’s still a debt structure, but it’s not from a banking institution.

Perrin DesPortes:

If they are using non-bank lenders to get their deals down and for their capital structure, those rates are probably based off of LIBOR and they’re probably already relatively high and they may not change. If they don’t change, then those private equity-backed groups are probably able to offer similar valuation multiples as we have seen historically. The way this starts to play out in the coming six to nine months, I would say, as we roll through the end of the calendar year, is going to be really, really interesting. We’ve heard from a lot of different enterprise buyers for the groups we represent. Some have zero pipeline, some have a healthy pipeline, and that’s just going to be maybe a tale of two halves in the industry.

Perrin DesPortes:

For people like Jason that are still using what I would call traditional banking and debt structure, it will impact their borrowing rates, but the idea is still that if you’re a savvy operator like Jason is, if he were doing this more from an acquisition standpoint, the ability to create equity on balance sheet at a faster rate than the cost of the debt that you’re using is still completely in your wheelhouse. That is why you do it. You don’t slow down your growth strategy based on rising cost of funds. You consider it, for sure, but it places more of a burden on you as an operator to increase or unlock that profitability that Jason mentioned before. I still think there is an unbelievably compelling opportunity in the coming years for that.

Bill Neumann:

That’s great to hear. Jason, on the patient side of things, what are your thoughts about how patients are going to react to the inflation?

Dr. Jason Tanoory:

Yeah, it’s a great question. I definitely like in any recession, whatever degree of recession you want to call it, people are going to be a little bit more apprehensive to spend money, and dentistry is not recession-proof, but it’s as close of an industry as you can possibly get. If I was giving any advice to any clinical dentist or any entrepreneurs that have dental practices, it would be to double down on the services that no matter what the economy is saying to us, people still need to have a bad tooth taken out. People still need their wisdom teeth out. Kids are always going to need braces and parents are always going to pay for it. These are things that I would encourage people to be doubling down on and get as much continuing education as you can and provide those services.

Dr. Jason Tanoory:

The 10 units of veneers or the elective Invisalign, those are the service mixes that are probably going to be put on the back burner depending on what the economy ultimately does. One thing that I want to echo that Perrin just said, so first off, everything that Perrin just said is so far above my head. That’s why I love having a relationship with him and Diwakar where I can just shoot them a text and be like, “Okay, tell me what to do here, Perrin,” because I would have to go back and listen to what he just said 10 times to really have any clarity on what he was talking about.

Dr. Jason Tanoory:

Secondly, I think there’s a strategy difference that really needs to be considered here, and I’ll give you a great example. The labor shortages, the cost of materials, the delay in materials, that doesn’t necessarily affect the acquisition model nearly as much as it affects the de novo model. A great example is I’ve got final bids on a practice that we’re considering building. The plan was to start this fall. The final bids are $350 a square foot, which is almost a third more than it was a year ago, so yes, I do… I’m not scared of the possible pending recession, but if you had to pick a strategy over the next few years, the acquisition model certainly seems like there’s less risk involved than the de novo model simply from the labor shortages and the cost of materials in the coming 12 to 24 months.

Bill Neumann:

Really, really great point. Yeah, and coming from somebody that’s only been doing de novo, you would know that better than most, so-

Perrin DesPortes:

Yeah. Can I… Bill, can I say something really quick on-

Bill Neumann:

Yeah, absolutely.

Perrin DesPortes:

… de novo? You don’t get too many opportunities to talk to people like Jason that are more committed to the de novo approach for the reasons that he is, and I think he touched on something in a prior answer of like sitting in a room and hearing that that guy’s got 10 locations and somebody else has 2 million in EBIDTA and, “Oh, I should do it, too.” I think the… You know, our first order of business at Polaris is to actually talk people out of building a group because we know how hard it is. Jason has the battle scars to prove it, but those that do decide to build a group typically go at it by acquisition because there are usually a decent number of practices that come on the market.

Perrin DesPortes:

The thought process is, “Well, it’s an existing business. It’s got existing patients and there’s some level of profitability, so even if I’m not a good operator, the downside risk feels less,” All it takes is one bad acquisition, and that’s typically from a culture and an integration standpoint to screw the pooch, really. Those that learn that lesson and live through it and can tell the story, maybe they course-correct and maybe they have a better due diligence process around culture. Jason using the word “culture” as many times as he has and having listened personally to Mark Costes talk about this from the stage, if you’re going to build a successful group practice, getting the culture right and being able to replicate culture is of critical importance. It its arguably a lot easier to do that in a de novo approach.

Perrin DesPortes:

Diwakar and I love the de novo model. If you know your numbers, if you can build a budget and on time and you know how to scale the business to a degree of operational and break-even in equity on balance sheet, de novo is wash, rinse, repeat. It can be a really, really great strategy as an alternative or a blend or an outright strategy for growth. I mean, I applaud him for going as far as he with de novos and it’s the reason that we really love it. I mean, Peter Drucker, the Dean of the USC Business School, has that quote that says, “Culture eats strategy for breakfast,” and it’s really a hundred percent true. Those of us who’ve lived through failures of culture and integration are a testament to how applicable it is. I just wanted to reiterate that point for a quick sec.

Bill Neumann:

Great. Well, I think this is probably a great place to stop. I think what I’ll do is ask Jason, if anybody wants to reach out to you, what’s the best way to do that? Email? LinkedIn?.

Dr. Jason Tanoory:

Well, as I told you in the discussion before the call, I didn’t know I had a LinkedIn profile, so probably-

Bill Neumann:

You do-

Dr. Jason Tanoory:

… have that one.

Bill Neumann:

… you do.

Dr. Jason Tanoory:

Yeah, email is probably the best way. It’s just my full name, jasonroberttanoory, edgeemail.com. Yeah, I’m more than welcome to reach out. If you’re on Dental Success Network, I can also be reached there, but I’m not a Facebook, LinkedIn, Twitter guy. That might be another podcast on personal time management that we can possibly have, but I don’t… I’m not a social media guy, really.

Bill Neumann:

… yeah, in the show notes we’ll make sure that we put in your email address there, Jason. Thank you. Perrin, how can people reach out to you or find out more about Polaris Healthcare Partners?

Perrin DesPortes:

Yeah, I mean, through our website’s probably the easiest thing, which is www.polarishealthcarepartners.com, polarishealthcarepartners.com. We looked for the longest unclaimed URL, and I think we actually found it out there. You can link to our podcast, which is called Group Practice Accelerator, off the website. You can book a call with me. I think there’s a link to our YouTube page where we have a bunch of videos and things like that. There’s a ton of content there that we’re adding to on a daily basis.

Perrin DesPortes:

If you’d like to email me directly, that is probably the best way to get me, and it’s perrin, [email protected] I’m happy to trade emails or book a call and dig into whatever situation your audience has. Thanks so much for having me on the show today, Bill. This has been great, really, and I’m sorry it’s taken us this long to get it done, honestly, but really appreciate it.

Bill Neumann:

Yeah, there is. There’s quite a bit of really great information here that what we have not had on this podcast before, so Dr. Tanoory, really, really appreciate the insights from you and, of course, from Perrin as well. All those links that Perrin shouted out there, you don’t have to memorize any of those. We’ll put them in the show notes, even though he has the longest URL. Ours is pretty long, too. We’ll stop there. Thanks to both of you, and thanks, everybody, most importantly for listening and watching us today on The Group Dentistry Now Show. Until next time, I’m Bill Neumann.

 

 

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