This transcript covers a detailed discussion of a business acquisition opportunity involving three orthopedic clinics located on the US East Coast. The clinics, founded by Dr. Craig in 2002, specialize in surgical and nonsurgical treatments, including joint replacements, cortisone injections, and nerve reduction studies. The clinics face challenges, including a single physician managing the workload, lost liability cases, and uncollected accounts receivable exceeding $5 million. Dr. Craig, dealing with health issues, aims for a clean exit and is open to creative deal structures, including annuity-based no-money-down options.

The discussion explores the complexities of replacing Dr. Craig’s workload, which requires hiring at least two new professionals to maintain operations. The panel evaluates the risks and rewards of acquiring the business, citing concerns like intense competition, unresolved legal liabilities, and the burden of managing a heavily Medicaid and Medicare-dependent revenue model. The pricing of the business at $1.75 million, which is below typical valuations for medical practices, also raises questions about hidden issues.

Various contributors share insights, emphasizing due diligence on root causes of liability cases and accounts receivable collection issues. The importance of structuring the deal as an asset purchase to mitigate risks associated with ongoing liabilities is highlighted. They also discuss whether the price reflects operational constraints or if there are deeper, underlying concerns with the business.

Despite the challenges, the seller’s openness to no-money-down deal structures makes the opportunity potentially appealing. Further evaluation of the financials, staff capacity, and legal exposure is deemed crucial. The discussion ends with some participants expressing cautious optimism and others recommending passing on the deal due to the significant risks.

Overall, this case showcases the intricate considerations in evaluating a professional medical practice acquisition, emphasizing the need for thorough analysis, strategic structuring, and aligning risk tolerance with deal structure.

Full Transcript:

Get that simple model up there for Carmen or anybody else who wants to take a screen cap of it, then I will go down here. I can read the disclaimer for the third deal either. Alright. What’s this deal all about?

You hear the dog barking in the background, the dog sitting this morning. Dusty’s, running around with his madman ways. I guess he’s upstairs. You might not be able to hear him.

Alright. What’s this deal all about? Your orthopedic clinics, three sites. That’s what the business is.

Do you wanna or own an orthopedic clinic? In fact, do you wanna own three of them? This is the business you’re gonna wanna buy. They offer both surgical and nonsurgical treatment.

The surgical treatment’s about what you expect at an orthopedic clinic. Arthroscopy, joint replacement, foot and ankle type conditions. I think joint replacement is a lot of what they do. They do nonsurgical stuff as well.

It seems like it’s mostly injection related based on the list. Cortisone injections, steroid injections, platelet rich plasma injections, do some stem cell therapy, and do some nerve reduction studies as well. The seller is located in the US East Coast region, populous area, but competition is pretty stiff. Ask price is really interesting in this deal.

We take a look at one point seven five. We look on the right hand side and take a look at what the adjusted EBITDA is. We’re thinking, hey, what’s going on here? But we’ll get to that.

Property is optionally available, but not included in the ask price. What’s the ownership story? The ownership story is that this business was founded in two thousand and two by Doctor. Craig, who was a board certified and licensed surgeon.

Now he is the only physician involved in this enterprise. There’s obviously other health professionals there that are in the system, physical therapy, chiropractor, physician assistants. There’s other people around, but he’s the guy in charge. He’s the guy that’s overseeing it.

And, you know, to do that, I think you need to be board sort of certified. He is. But he’s the only game in town in terms of, you know, the medical side of it, in terms of the decision making and the party, which is why his motivation for sale is to reduce stress. And when you look at this operation, you think, yeah.

This would be a pretty pressable place to, to to own, manage work. But and this is, I guess, really key for a surgeon. He’s also experiencing health issues that are impacting his ability to perform surgery. And the next bullet says and this didn’t come up when I talked to Anil.

Well, when I talked to him a couple times about this deal, and, you know, I just didn’t get to that level of detail, but and it was a bit of a passing comment. They appear to have lost some medical liability cases, which I think are directly linked to this idea of reducing the stress. You know, for non Americans, like, the, the medical system does seem to be quite litigious down there. So I guess it’s, you know, kind of an occupational hazard when you’re practicing medicine, especially in something like a joint replacement that you’re going to have some medical liability issues.

Of course, have them anywhere, but they seem to be a little more pronounced there. And he’s had to guess some of them, and some of them, it looks like he’s lost. So that’s, that’s probably pretty stressful. He’s looking for a clean exit.

You know, after the transition or the handover period, he’s not looking to stick around. He’s not looking to put in a little bit of time. He wants a reasonable, sort of handover handover transition period and then start with a clean break. Now doctor Craig is working so hard.

We need two people to replace him. Obviously, you need an orthopedic surgeon, and I guess one has been identified as potentially being brought on board. And also, office managers need to oversee the business. There are three clinics.

Doctor Craig’s already working sixty to seventy hours a week. Oh, you know, you’re not gonna replace him with one person. Revenue mix, looks like Medicare is paying forty percent. Medicaid, thirty percent.

They said major medical. Twenty percent. I’m assuming major medical means private insurance. And, you know, as a non American, I’m only guessing at that.

Liability, I’m assuming. Yeah. Liability insurance, if I’m wrong about that, then I’ve got a couple of doctors on the loan and can correct me when we’re done. Surgery performed at the clinics, only once a month.

I wonder what kind of surgery they do at the clinic. Wouldn’t be joint replacement. Wouldn’t that be a little too involved to be doing out of the clinic? Maybe some art for scoping up like that.

But, doctor Craig does operate twice a week at the hospital. Obviously, a better situation doing there. Business is operating at capacity. No additional patients could be seen unless a physician is added.

Yeah. So seventy hours a week. Doctor Craig, no. No more patients. They do get some hospital referrals when doctor Craig is on call.

Otherwise, referrals are from local doctor’s offices, and some patients just kinda call in or walk in. They did have a full time marketer that was eliminated this year and did not seem to have any real effect on the business. Balance sheet was prepared on a cash basis, and this is something that Niwa and I did not talk about because I had been at that level of scrutiny. They do have accounts receivable.

It doesn’t show up because it’s a cash value, and they have a significant collection problem associated most of it. That was buried in some notes that I took the trouble of reading. I was prepping for this deal last night. Over five million, I think, but we would really need to get to the bottom of what’s going on in the account.

Steven, well, I think a lot of it has to do with these Medicare and Medicaid ounce, I don’t know what it is that gets you in arrears. You know, obviously, maybe something on your side they don’t like and it’s wet and big. Not really sure, but five million dollars. A lot of it having, a collection problem associated with it.

It’s something we definitely need to get the bottom of. Twenty three staff members, only one doc, doctor Craig. He’s it. Two physician assistants or PAs, three techs, three secretaries, three call center personnel, one surgery scheduler, one chiropractor, one physical therapist, etcetera.

Didn’t list every single one of them, but you get the general idea. Our website is average, you know, functional. Yeah. I couldn’t really say any more than that.

I didn’t really have strong feelings about it one way or the other. I’d say the MUD score for doctor Craig is above average. You know, motivated to exit. You know, he is distressed.

He’s got physical problems that prevent him from, you know, I guess, comfortably doing surgery. He’s still doing it, but I guess it’s interfering in some in some way. So I definitely have the sense that, there’s some urgency associated with it. But and he when I talked, right, I did not know about this health issue that were preventing him from company doing surgery.

I didn’t know about the accounts receivable at five billion. I didn’t know they’d lost some liability cases. And so, you know, and he when I were talking about different ways we might be able structure an offer and whether it was going to work, etcetera, etcetera. You know, we look at the at the balance sheet and we think, how could we finance this thing?

There’s only two hundred eighteen in the assets. So, again, you know, if we could get some cash flow lending on this, we, you know, we might be in good shape. Anyway, I got some comments on this, but I don’t wanna do my comments as I don’t want to optimize schedule. I’ll put my comments in kinda as we go at the tail end.

I would like to get some folks involved. Obviously, it’d be nice to to hear from one of our physician members. I’m not sure if Natasha is here or not. I didn’t check.

We could see. No. No. Natasha not here. I don’t remember the name of our second physician.

Oh, Niwo himself is a physician. Physician trained and, trained up in, it was Nigeria, if I remember correctly. Is that right, Niwo? Yep.

Is that where you’re medically trained? Yeah. Yeah. But I was more interested from the American side, kind of had a little bit more of a, sort of a a take on the insurance side of this kind of a business, you know, etcetera, etcetera.

Can’t remember what the second one is, but apparently, they’re not.

Christopher Botha. Oh, okay. Not neither one right here. Maybe they’re in surgery. Looking for the drum roll there, whatever they call it.

So Yeah. I wanna I wanna do this a little differently. I wanna do this a little different. I wanna kinda ask a few questions to people rather than asking for the green light, red light comment.

I wanna kinda ask for their their their, their their input or intake. You know, I like to ask Carl a lot of questions. He gives right answers. So let me kinda do that on this deal.

Let me throw a few questions out there. I’m actually gonna pick on you specifically.

You know, so if you really don’t want me to call on you, I guess you could turn your camera off.

But if you wanna play along, keep your camera on, and, let’s do it that way. First question I wanna put out is, could we because this is what I’m thinking. Could some known physician by this business engage a physician who was a non owner who had to kinda replicate the kind of efforts that doctor Craig is putting in, you know, as a non owner when a lot of the rewards are accruing to somebody who’s the non physician. In evil’s case, he is a physician, but not someone practicing in terms of that jurisdiction.

Is that gonna be too tough on this deal, trying to get a physician working for you, right, to do all the things that’s necessary to keep this Let me, let me, let me go to Clive. I always love to hear from Clive. Clive, what do you think? Should we get talk a doctor into working for us in this?

Yeah.

I mean, it’s, well, through my international marketing company, we actually work with US Audiologists. And so one of the challenges is there’s a lot of acquisition in that space right now, and, there’s a problem there in terms of getting the right person in and get the right licenses and depending on which state they are. And it’s all there’s a there’s a bundle of complications that I’ve now come to appreciate working with that sector. So for me, I’m a saguir, I would not such it because I’m not a physician. So that that’d that would be my take on it. I thought you could do it. I’m just saying that it’s something that I think is far too risky for somebody that’s not.

Yeah. Yeah.

I mean, I I think that’s a good take.

I’m thinking more like, okay. You got a physician that you gotta I meant to replace doctor Greg who’s working sixty to seventy hours a week. The new guy doesn’t wanna work that hard. We’re gonna get an op manager who’s gonna help out on that side of thing, but still twenty three people. You know, you’re the person of record medically for all the people.

This is nice. Isn’t it? It’s business. I mean, that was that was one thing that did go in his favor for me. That seems to be a referral business as well. So, obviously, reputational risks there because of some of the issues that I’ve had recently is a concern.

And, obviously, he’s stressed over that by the sound of it. So I think there’s a there’s a few things to unpick there. So I certainly wouldn’t you know, you never all end the hour without digging it up with Diva, but, I know there’s a there’s a there’s a fair few questions I’ve have around.

Kind of finish that thought. I’m thinking, well, if I don’t have a ton of money to put in, right, maybe I don’t yeah. Maybe I’m I’m I’m going for max leverage LBO. I’m trying to do this thing.

It’s a one hundred Yeah. Now all of a sudden, we got this medical professional in here. Right? Maybe he doesn’t wanna put any money in the business either, but neither is the person who’s going to buy it.

We’re gonna try to put in either, some kind of, you know, generous seller financing type of a structure, and it’s something that anyone I talk about. You know, we threw around some ideas on doing that. I’m thinking, well, if we did that, you know, wouldn’t doctor Craig just say to the new guy, well, I got somebody who wants to buy the business on this basis. Maybe, you know, you could buy it on basis.

They weren’t planning to put any money into it. You don’t necessarily have to put any money into it, but you’re gonna be running it, you’re gonna be owning it, and you’re gonna benefit from it. So is that too tough of a competitive situation for Nivo to invest a lot of time and effort into making it happen? I wasn’t entirely sure, but it was certainly more let me switch gears to another question, which is and I don’t know.

I guess you gotta be have a little bit of medical experience in the US. Is the fact that you’ve lost some liability cases concern here? Or is that just basically the cost of doing business as a medical specialist in the US? You are gonna have litigation.

You are gonna potentially have to settle on some of them or maybe lose some of them. And you know what? It’s, it’s really nothing more than just, you know, cost of doing business that affects, you know, a majority of physicians who practice in the United States. I mean, is that a fair way to look at it?

Let me, let me pick on somebody. Let me get Irene in here and get her take on that. What do you think?

Irene, can you unmute? And and you think that would be an issue? Can you restate it? I’m sorry.

I’m looking at a contract. Yeah. My question was, how concerned should we be about the fact that they lost a couple of medical liability case? We just consider it that, hey.

Listen. When you practice pediatric medicine in the US, you’re gonna have cases. You’re not gonna win every one of them. No big deal.

Let’s move on, or is this something that we should get positive?

Yeah.

I’m not this is not my lane, admittedly. I’m a management consultant. So but the the the consultant in me is always looking at ways to indemnify the buyer. Right?

Like, so how can you fortify, first of all, make sure that there’s no overhanging or outstanding fees that are still that they’re that they’re liability that they’re responsible for, number one. Right? And number two, I would wanna find out from a process perspective liability cases and understand what happened. If there’s a common thread in there, like, not following procedure or, you know, taking on two risk when they took that patient because of their age or their con the the particular, malady that they had.

I would just be very, you know, very cautious.

You know, anything there where there’s a bad you know, maybe it’s the doctor has poor eyesight. I don’t know. And they then they, you know, the knife slipped or something. I I you know, it’s it’s because of the poor performance of the surgeon.

Right? Like, and they are aging out, then, okay, that’s one thing. But I would be very cautious, and I would really wanna do some root cause analysis with those liability cases to understand why. Right?

Yeah. What a great point. I mean, that’s the kind of answer that, you know, we all should undertake on so many things. Let’s take a look at the root causes.

Let’s not make a top level kind of, like, global, conclusion based upon very skimpy type, information. Let’s go to the root cause and really kind of get into this thing on a, you know, one by one basis if there’s more than one basis and see what that root cause is. So yeah. Then the other thing that I’m thinking of is and let me get David Gerelthon to answer this.

He’s the lawyer. I mean, how much exposure do we have to, you know, dental medical liability basis that haven’t been brought forward yet? Are they all going to accrue to doctor Craig, or are we on the hook for some of that?

Well, I think, John, that’s gonna be a partially an issue of how we structure the this may be one of those that it’s a candidate for an asset purchase rather than a stock purchase so that we don’t we don’t potentially don’t bring those liabilities with us. The other thing to look at, and this is this is opportunity for a quick lesson on insurance to bore everyone completely to death. But there’s in professional liability in particular, there’s two kinds of insurance. There’s claims made coverage and there’s occurrence coverage.

Occurrence coverage covers an incident that occurs during the policy period.

So if I own a policy this year and I get an accident, my car insurance covered my car insurance for this year covers that because the accident occurred this year.

Claims made insurance covers claims claim is presented.

So if the if I got an accident last year, but they made the claim this year, it’s this year’s policy that covers.

So you need an insurance expert to be looking at this as you’re buying the business and making sure that there aren’t any gaps. If you’re if you’re shifting from one type to the other, things like that, you wanna make sure there’s coverage and you wanna there’s gonna be a huge legal due diligence piece of this, in looking at what are all the possible claims out there, making sure that those are all disclosed, they’re all listed in purchase agreement, and that we’re doing everything we can to insure around.

1. No. That’s that’s a great take. And then the other thing that I I wanna put out there to somebody that I’m gonna have to kinda vote vote soon.

Here’s the last question. They put the question out there before I kinda pick up someone to answer it, and that is, what do we think about the price of this business? I mean, these people have bid off one point four, one point five million. The ask price is only one point seven five.

Yeah. You know, professional practices, accounting practice, architectural practices usually sell at revenue, you know, point eight or one point two of revenue. This is considerably below that. Right?

And the other question that I wonder is why? Why is this thing so attractively priced? And and, you know, I don’t have a good answer for it. I guess nobody else would either.

But how concerned would you would you be about that? Like, that’s the start. And, you know, most people that sell are like most people that buy. Like, you know, whatever the ask price is isn’t necessarily what they expect at.

The same way, we don’t necessarily accept people who accept our first offer. We realize we’re gonna have to go to the higher. So this guy might potentially take less than one point seven five. Like, how concerned would you be about that?

Would it go to Charles Whitmore for an answer to that question?

Well, if we’re looking at a time’s EBITDA, I’d first off, I’d be very skeptical about the EBITDA then. I don’t remember seeing a line there to replace surgeon’s salary. But I yeah. So I imagine if you’ve got to replace two surgeons because he’s working seventy hours a week, that’s probably gonna hit up half the EBITDA. The multiple is gonna be much higher. If he’s asking one point seven five and the actual EBITDA after proper adjustments is, like, five hundred k. Yeah.

Well, I think we added a second surge, and we could do better than, you know, continuing the same level of, activity now.

Like, I think we’d expect that an increase for sure, but I get your point. You know, it’s not necessarily gonna double up. So they’re asking one point seven five. Right?

Revenue rise is right around three million. Right? So what’s that? Fifty five, six percent of revenue?

That just seems really low for a professional practice type situation. So I I would be concerned about that. I would definitely be concerned with the fact that Medicaid and Medicare will pay these people. They have, like, you know, this massive amount of accounts receivable in the book that’s not collectible.

And so talk about root causes that Irene has already mentioned, we would definitely need to get So let’s, let’s load on this deal. It’s gonna hurt me to do this, but I think I might have to red light this deal now. You gonna be mad at me? No way.

Yeah. There’s just so many things going on here that, you know, I just really think this is not the kind of deal that you would be able to close without be without having to put some money in. There’s plenty of deals that we can, and we see them all the time. There are max leverage LBO, you know, zero, equity type deals.

I just don’t think this is one of them. I’m gonna go red light twenty two.

Okay. Mahuj, Joel, they all beat me to the old head to head. See a lot of two one threes. Don, I wanted to hear if Enio has any feedback on this. I don’t I don’t think he spoke about the business. Right?

He didn’t speak about the feedback.

About this deal? Like, what’s his feedback on this deal?

What’s Enio’s feedback? Yeah. I mean, that’s a great point. Like, retirement. Let’s get Anewo on here.

Yeah. Well, I’m what am I thinking? I got my eye too much on the clock here, but we can go over by a few minutes. Anewo, yeah.

It’s on it’s on you. What do you like about this deal?

And any additional information that I didn’t necessarily, you know, get to that may be perfect in buying the system.

The seller agreed on an annuity deal and, no money down. He, he used to have three centers, but currently, he has to be downsized to two. And the issue we had with, those cases were actually his fault according to him because he has, arthritis on his wrist. So, that’s why he lost those cases. So, yeah, basically, he’s ready to do a no money down deal, and, yeah, I’m actually meeting with him today.

So you got an acceptance accepting on the offer that you showed me, anyone? You accepted that offer?

No. We are meeting today. He agreed he was gonna do I spoke with him yesterday. He said, yeah. He can do an annuity deal, but, yeah, let’s talk today. Oh, very good.

Happy to hear that. Yeah. I would really love to get some feedback from you when you finish talking to him in terms of how you felt after that meeting. I mean, I like the business.

I think this guy’s a good doctor. I think he’s looked after a lot of people. He’s busy. He’s an absolute workforce.

There’s nothing really flaky about this business. It’s just, you know, some of the things were kind of positives like Irene, said that we ought to, and they kind of fall out in a reasonable way, then it could be a very nice deal. I mean, these are real clinics, real patients. This guy’s seeing hundreds of people working super hard.

Yeah. Okay. That’s, that’s good to know. And, you know, based on that, unlock won two one three.

I’m gonna go. Two three one. Am I alone? No other two three ones out there?

Yeah. Otis says two three one. One three two one three two one three. One two three says Sean.

He likes that. Or it’s business. That’s loud. Other one three two. No one two three.

Sorry. Not cool. I thought I it would be kind of a little more up in the up in the air, but, yeah, it’s hard to beat that second business. It’s hard to bump that, that I I was either one of those number two.

But well done, Anywell. That’s, that’s great. I think, it’s got potential for sure.