Dr. John: Hey everybody, welcome to this first edition of Spark Strategic Thinker. This is a weekly message to spark your mind. And, I’m Dr. John Meis, I’m here with Heather Driscoll. How are you doing, Heather?

Heather: I’m doing great Dr. John, how are you doing?

Dr. John: I’m doing fantastic. I thought we’d start out by saying a little bit about Spark, who we are and what we do. And, Spark’s intention really is to help small dental groups get that consistency and reliability in reaching their goals.

Heather: I think that’s a great idea. One of the things we hear often is that inconsistency really kills performance, so the more consistent and predictable things become certainly the better off everybody is in the long run.

Dr. John: So, who we work with is ambitious practice owners. These are people that want to see their practice grow. They want to continue to improve, to better their best, people that really want to go for it. And, those are the kind of people that are in Spark.

Heather: And, what we do for those people is create an environment where they can refocus their vision and really maximize the potential - their own individual potential, but also the highest level of leadership that’s ultimately going to help them to reach those professional goals.

Dr. John: What we see consistently in organizations like this is that as they grow, they run into periods where they feel isolated, where they feel like they just don’t know what to do next. They’re kind of tapped out of creativity. And, when they have that, and the complexity that goes along with that, their confidence begins to drop. When their confidence drops, that’s when people start to pull back on the reins of their growth and that inconsistency starts.

Heather: Definitely.

Dr. John: So, we have a story about 2 practices that sold, and every group practice is going to sell at some point in the future. It may sell from “these owners” to “these owners” within the group. It may sell from “these owners” to “these owners plus someone outside the group”. There’s always going to be a transaction. Nobody lives forever, so these are always sold. And, we think that if we run our practices as really sound businesses, we drive up value. We think there’s no better way to drive up value than that. So, I want to tell you a story of 2 groups that sold in 2017, one in South Carolina, it was a 5-practice group and it sold for 3.5x earnings. Very unusual in that it was lower than typical for some very good reasons. We also learned of a practice, a 5-practice group in Texas that sold for 19x earnings. So, what’s the deal? It’s kind of confusing, isn’t it? So, when we saw this over and over in the transactions that we were following, and in the transactions that we were involved in, we began to see some patterns as to why there were big variations in valuations. So, we’ve developed the Enterprise Value Matrix and it really is just outlining what those drivers are that drive up value from practice to practice. We organized these things into 4 quadrants: Cultural, Financial, Process, and Personnel. And, when we looked at what made a big difference between one group’s sales price and another, it always fell into one of these 4 quadrants. So, let’s talk about the Cultural Quadrant first, Heather.

Heather: Alright, so this is certainly one of my favorites and can often be minimized in a lot of different ways. What we find is that as small groups grow, sometimes their growth is really dependent on rock star performers that have kind of perpetuated the performance and the growth. But, this is not necessarily the best strategy for ongoing, consistent, profitable growth moving forward. So, often we work with the CEO on their own individual skill sets, helping them clarify and focus on what their mission, vision, and values truly are so that those can be defined, articulated, and communicated throughout the organization. Often what we’ll see is that the people who were kind of “in it from the beginning” are good stewards of what they believe the culture should be, but as the organization continues to grow, if there isn’t real clarity and definition on how we make decisions, how we hire, develop, and retain key team members, or even clarity on how we’re planning to grow, people will kind of start to create their own plans. And, sometimes those with the strongest voices win out, even if they aren’t completely aligned with the vision of the original founder.

Dr. John: That’s so true, and that’s why having a strategic planning process is so important. It allows everyone to get clarity on where they’re going, what their role is, what the timeline is, and that’s one of the key things on getting that consistent growth is having a great Strategic Plan. Part of that Strategic Plan is, “what does the ownership structure look like?” Ownership structure for most small groups changes over time, from usually a founder/owner to founder and additional owners. And, how that structure is created is so critical to the eventual value of the organization. It’s such a critical piece. That is one that we have seen several times be set up in a way to begin with that made for a very, very difficult sale at the end. The next quadrant is the Financial Quadrant, Heather, and this is the one that everybody focuses on, isn’t it? Because the biggest driver of enterprise value really is EBIDTA, but there are other things in the Financial Quadrant that have a profound effect, isn’t there?

Heather: Absolutely. The one I would say that comes to mind for me on a daily basis is meaningful data, the ability to manage and make decisions in a more unemotional environment really tends to be key. So, often the things that have potentially helped lead to growth can ultimately end up being a value-detractor if you’re not careful. Having great transparency in everything from day-to-day operational performance to individual doctor performance to hygiene team performance to overall profit and loss statements to overall financial wellbeing. And, not just the clarity and transparency of reporting, but really making the data available to those who are leading each of the locations every day. Do they understand the cause and effect? What happens at the practice level day after day, month after month, year after year, whether we like it or not, could ultimately end up having a pretty big impact on the overall value of the enterprise.

Dr. John: Absolutely. And, what can’t be measured can’t be managed very well. So, those reporting structures are super important. Capital structure is very, very important as valuation methodologies evolve as the organization grows. At some point, that average cost of capital is going to be a significant piece of your valuation formula. So, how is our capital structure set up? How is it set up for today? How is it set up to evolve as time goes on? These are big, big items on driving enterprise value. Let’s move to the Process Quadrant, Heather, and this is one area of your expertise, so why don’t you talk us through this a little bit.

Heather: (laughs) Yes, it definitely wouldn’t have started out as my area of expertise, and really had to be conditioned for myself as an individual, because I tend to be a little bit more creative. And, I think creativity is good as long as there’s some way to make that repeatable, predictable, and consistent. So, the one thing we find with smaller group practices is that they’ve had some really high-performing people who have ultimately helped launch their performance. But, what they haven’t necessarily done quite so well is document how they’re doing it. Then we need to get that across to all of your locations. So, while I’m not a big fan of standardization just for the sake of standardization, anything that adds value to the patient experience or creates a level of ease in the hiring and on-boarding of new team members or creates more predictability around patient care and outcomes, certainly that has a very positive impact on the overall organization. So, everything from how we answer the phone and schedule patients to how we maximize capacity to succession planning to ongoing retention of team members, realistically there should be at the very minimum an aligned focus and plan on how these key processes take place. Even better, if it makes sense to have some form of documentation (checklists or scripts), all of those things come in very, very handy as you’re trying to grow and scale.

Dr. John: As we identify processes in an individual practice, we use a model called the Practice Success Loop which identifies the 12 profit blockages that practices have. If we can have the right processes in those 12 areas, we know we can drive profitability up, we can drive consistency up, and we can drive the patient retention and team retention up just by having a well-oiled machine. Now, the Personnel Quadrant is always the most challenging, isn’t it?

Heather: Absolutely. I think often small groups are created with a lot of good intention and some grit. And, as things start to grow it’s really important to start developing that key leadership team, the management team, really defining who’s responsible for what. Ultimately, how are they going to have the bandwidth to keep up with the growth? We’re lucky to work with all kinds of great dental groups, and I’d say one of the key elements that can stifle growth is the ability to have great team members and leadership. We often say, “there are lots of dental practices to be bought, and they’re certainly easier to buy than they are to run.” So, just making sure that you have a consistent approach to attracting the right people and retaining the right people. And, once you have them on board, making sure that they have really clear development paths. I think more often than not, really great people are looking for opportunity. If they can see through your Strategic Plan and your focus areas that their future can be really bright with you, often you’ll get some really great talent at a smaller level just because they’re excited and interested in being a part of a growing organization. But, all of that has to be really clear. Maybe not each individual step as to how you’re going to get there, but the idea and the vision is very attractive to high-performing people.

Dr. John: Yep, and how do we continue to raise the capabilities of all the people that are in our Personnel Quadrant? We’ve seen practices that really outgrew the management team because the practice was growing rapidly, but the capabilities, skills, knowledge, and wisdom of the people working there weren’t growing. So, for some of the leaders, the organization really left them behind. So, how do we set this up so that we prevent that from happening? So, this is a chart from the Riley Databases, and this is showing historical US Middle Market M&A Activity. This is general markets. This isn’t just in dentistry. But, it’s showing the ups and downs of valuations based on a multiple of earnings. You can see that this goes up and down with the market, it goes up and down with interest rates, it goes up and down with many factors. And, some of those factors are under our control and some of those factors aren’t. So, when we look at valuation escalation, we look at some of the things that we talked about on this Enterprise Value Matrix and you can see that each one of these can have a significant effect on the multiple of earnings it’s gotten at the time of sale. And, even if your organization isn’t being positioned to sell or if you don’t have a sale in mind even in the next 5 or 10 years, building your organization so it has better value creates a better business, creates more EBITDA, it’s what you should be doing anyway, even if you don’t have a sale in the near future.

Heather: Absolutely. And, I hate to be the bearer of bad news, but all of those elements, if done well, can certainly be positive to valuation multipliers, but unfortunately the reverse is true as well. So, decisions made today, they may make sense for the size you’re at now. But, sometimes when extrapolated out over 5, 10, or 15 locations, those decisions don’t always make sense. And, if you’re not careful those really well-intentioned decisions can ultimately have a negative impact down the road.

Dr. John: Yep, absolutely. Well, thanks Heather! I hope everybody enjoyed this first episode of The Strategic Thinker. We’ll be with you every week, and I hope you get some really good things out of this. I hope it changes the way that you are thinking and really sparks your mind. Thanks everybody.

Heather: Thank you!