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Jason Wood is a partner at Wood & Delgado and one of the nation’s premier attorneys for dentists. Having worked with thousands of dentists, he has become an authority on practice-related transactions. In this industry expert edition of Dentist Money™, Jason describes the role of a good attorney during acquisitions and transitions, the important considerations to make when buying a practice, and the monetary implications of a DSO career path.
Reese Harper: Welcome to The Dentist Money Show. I am your host, Reese Harper, here on the industry expert series today in sunny southern California. I am at the offices of Wood and Delgado. I am going to introduce you to a friend of mine, Jason Wood, or should I say counselor Wood? How are you doing, sir?
Jason Wood: I like to go by counselor, esquire.
Reese Harper: I just like to call you counselor, an esquire counselor is a good title. How come no other professionals get cool secondary titles like that?
Jason Wood: Well, we make the law!
Reese Harper: This is going to be a great interview. For those of you that don’t know, Jason and his father, Pat, are probably some of the best known dental attorneys in the country. They do everything, and they have a ton of experience. Not only in the legal work that they do, but they have experience in consulting, finance, and a lot of different areas. They have seen it all, and I think the interview today will hopefully focus on some things that are in Jason’s wheelhouse and are his areas of expertise. We hope to highlight some mistakes that we have seen people make over the years. Then I might drive into some broader questions to get Jason’s opinion on different subjects and things that happen that we see as financial advisors. Then we will go from there. Jason, let’s start with your background and how you got into the spot that you are in.
Jason Wood: I went to law school and I had worked at my father’s firm in high school and clerked with him during law school. I was actually going to become a DA, and the legal market wasn’t that great when I came out. So my dad said, “why don’t you just come work for me for a little bit and see if you like it.” I did that. He gave me a baptism by fire. We would go over documents and point after point he would just nail it into me, “what is wrong with this? How can you make this better?” That lasted for about a year, and then after that year all of my colleagues were still doing research and were basically in small closets without windows not being able to meet clients. Here I was having conference calls with clients and with centers of influence and other things. Primarily because I had spent eighty hour weeks just getting inundated with the dental industry I grew to love it. Unlike everybody else, I am not harming people. I am not suing people. I am not dealing with divorce. I am not selling my soul, things like that. I really took to it because I feel that I am changing people’s lives for the better. I kid around sometimes that I am part shrink, marriage counselor, and all of the other things. Then sometimes, very seldomly, I am an attorney as well. I love it. To a very small extent I save marriages and…
Reese Harper: I think it is an important thing that people don’t always realize. When you hire somebody that is a specialist within their industry, the thing you are hiring them for is not always the biggest value you get from them. Sometimes the attorney that you hire that is really experienced in acquisitions or transitions will be able to give you a piece of advice outside of his scope that is so valuable because you would have never gotten it from any other place.
Jason Wood: Right.
Reese Harper: An attorney who specializes in dental and does a lot of transitions learns things that he would never have learned about dentistry any other way. I think that is one of the underrated factors about working with a specialist like yourself. Sometimes the advice you get is way beyond the scope of why you hired them. You said seldom you are an attorney and you are often outside of that.
Jason Wood: Honestly, doing the legal work is my least favorite. I love getting to understand the deal, the people involved, the strengths and weaknesses of my client and how those relate to the practice or situation. You know, I think that that actually is a knock on our profession. Attorneys don’t typically spend that time getting to know the intricacies because that is not important to the legal aspects, but we view it much more as a global aspect. I really want to make sure that the client is going with the right practice or partner or doing a start up in the right location. Whatever it is business wise. Yesterday I spent an hour on the phone with somebody who is very late in the deal. She wanted to buy a practice that was only, in terms of revenue on a yearly basis, was only doing $260,000. Through a series of questions I am finding out that she produces, as an associate, $700,000. I am like, “why are you doing this deal?” It kind of took her back. She said, “I am asking you how much you charge to help me, why is this any of your concern?”
Reese Harper: Yes. Just do the paperwork. Stop asking questions.
Jason Wood: Did I say you could talk? I mean it does take people back because it is against my economic interest to ask these questions. I want people to make the right decision though. You only get this shot once, unless you are extremely lucky and get a second opportunity, but you have to go with the right practice. For this individual, if you are doing $700,000, you shouldn’t be looking at a practice doing $260,000. Think of all the lost opportunity cost. What I was trying to explain to her is that it will actually harm your hand speed, and all of these other things that will derail your growth in your profession. Those are the things that I like to talk about and really get involved with.
Reese Harper: You are trying to make sure they make the right decision not just a decision. You aren’t just like an order taker, right?
Jason Wood: Exactly, but it is very easy to fall into that. You called me, I know you have got a deal, and therefore let me just shut up and here is what I charge.
Reese Harper: Totally, yah.
Jason Wood: I really love educating, and I love making sure that the people have the right information. I mean we are all big boys and girls. Once you have the information, then you have the ability given what you know about yourself to make the decision based on the best information available. The problem with the dental industry is that far too often we don’t have the best information available. We are getting bits and pieces from all of these other sources that may or may not have your best interest involved. You know I tell my clients al the time, “you have already paid me, so I am just giving you the risks and benefits and you can choose to do what you want with that information.” That is really how we approach things. It is not about ego or anything else, it is, “hey, here is the information, what do you want to do with this?”
Reese Harper: I think that is good insight, thanks. I talk a lot about the value of advice and how a lot of people discount the impact that advice will have on their trajectory. You know you talked about the situation that you get one shot at buying a practice. There are five or seven times in your life when you are going to make really consequential decisions. How am I going to invest my money? What loans am I going to get? What practice am I going to buy? Who is the office manager that I am going to hire? There are a few crucial moments where those decisions will change the trajectory of your net worth. Your wealth will be meaningful different and your intellectual confidence will be meaningfully reduced if you make a poor choice. Your own intellectual confidence, your clinical ability, and your net worth will be different if you make the wrong choice at that crossroads. A lot of people discount the power of good advice. It starts to get to the point where they compare advice to any other cost. If I am going to go get a $50.00 steak dinner versus $100.00 steak dinner…
Jason Wood: It is still a steak, dang it.
Reese Harper: At the same time I think that there are commodities that are ok to make a cost cutting choice. Go for the cheaper car, smaller home, different neighborhood, whatever. Advice, however, from the wrong person, or from the wrong service provider, consultant, coach, equipment specialist, sundries rep., etc., will set you on a trajectory that really changes the future of your wealth and your intellectual capacity and clinical ability. People cut corners on who they take advice from.
Jason Wood: I love what you just said because we as humans typically think of the here and now. We think of how there is a $5.00 differential or whatever. We don’t realize that when you extrapolate out it can be thousands or tens of thousands of dollars. You kind of hit on something that I love discussing and that is the whole idea (sorry young dentists, I’m about to disparage you) that the millennials bring that acquiring a practice or going out in private practice is risky. I have been told that the security and only way to be able to satisfy my debt obligations and this and that is by corporate dental. We are inundated by corporate dental. They are passing themselves off as the saviors of doctors and unfortunately what these young doctors don’t realize is that it is possibly the riskiest thing you can do. Yes, you are going to receive $125,000 maybe even $150,000 salary, but you don’t realize how much you are giving up. When I explain to people that when you extrapolate that over a career you are probably in the tune of five to ten million dollars. Then they just look at me like I have two heads. They are like, “what are you talking about?” You just have to show them. The problem is that as Americans, people who are built upon instant technology and information, we don’t spend the time anymore to really think about it and extrapolate the information. I like to give examples of that. Most doctors should be able to produce $500,000. That is not the top 1%, it is really that you should be able to produce that in a year. That is a little bit more than $40,000 a month, you know? When you extrapolate that down we are talking about less than $2,000 a day in revenue and production. I believe that everyone can do that. Ok, so $500,000 in a corporate chain? You are typically going to get 25% of your collections. What’s that? You are the math whiz. It’s about $125,000.
Reese Harper: I am the math whiz by the way. Thank you for labeling me.
Jason Wood: I like the cape, it is quite dapper.
Reese Harper: So we are going to make 125k on 500k if I am working for corporate.
Jason Wood: Yes, as an employee. That means that you will be taxed at the highest possible rate that you can because you don’t have write offs and all of these other things. If I take that same $500 grand, I really like to talk apples to apples because it is important, and put it into private practice? I am the owner, and I get $500,000 in doctor revenue, but I also now have a good practice which should have at least 25% of revenue in hygiene. Now all of a sudden I have 25% higher which is $650,000 now?
Reese Harper: Yes, $650,000.
Jason Wood: Now all of a sudden I am getting $150,000 more just for hygiene. Then if you use ADA statistics you are about a sixty percent plus or minus overhead. Now you are on the spot.
Reese Harper: You are going to take home 40% of the $650,000. That puts you at $260,000.
Jason Wood: It is the same $500,000 we are talking about but all of a sudden you are at double the annual revenue, and what I love to talk about is that you aren’t really double. You are actually a lot more than that because as a business owner in America the tax basis is geared towards ownership. What I like to say, and this is very simplistic, but every dollar the you make as an owner is worth about 10%-15% more than that dollar as an associate or employee. Really with that $260,000 you will get another bump up of $25,000-$40,000 more in comparison to the $125,000 you are making as an employee. Now we are talking about $150,000 different differential per year that you own. Now if you extrapolate that over thirty years, than you are 4.5 million differential. That does not include the investing capabilities, back end sale of the practice, compound interest of savings along the way.
Reese Harper: There is one other thing that people also tend to neglect in that equation. Let’s say that you are at $650,000 and you are able to capture an equity exit of 60% of the sales or 65% of that $650,000. Lets call it $400,000 in equity out of that sale at the end of your career. The thing that is interesting is that people say, “well, that is only $400,000. That is not a huge number.” But that is after tax money! That is money that you will pay capital gains tax on after net. You will have $400,000 sitting there. How many years of working for $125,000 a year does it take to save up $400,000 after taxes. You could be talking twelve to thirteen years. If someone has a 25% or 30% savings rate on their $125,000. That would be very impressive. Most people will be able to save 10%-15%.
Jason Wood: After all, we are entitled to this, dang it! I am entitled to spend my money!
Reese Harper: Yes, we are just talking about the equity value of that practice which could literally be twelve working years of your life that it would take you to save up that much after tax money. As you get more extreme and the practice gets bigger, it is still an applicable metaphor. It doesn’t really change the ratios. The ratios actually get bigger.
Jason Wood: They get bigger! I mean if you are a huge producer in corporate, and you can do a million dollars a year then you will make $250,000 in corporate. That is the top 5%, maybe 10%. You take those same numbers, plug them in, the divergence is even more!
Reese Harper: This is a real issue. It is probably one of the most consequential decisions that a dentist will ever make. There are some situations where the corporate contracts aren’t as tilted towards the DSL. The doctor might have some equity value, or the split is a little better. There are variations of this that are not the worst thing you’ve ever seen. Don’t take this as the law in every case. DSL’s are not bad in every situation.
Jason Wood: No, but I am public enemy number one and I do not want to lose my perch!
Reese Harper: I am a big economic history guy. If you look back at the history of the United States and the whole reason that we left monetarism and why capitalism exists, it is interesting. Monetarism is the system that existed before capitalism.
Jason Wood: Don’t fall asleep, stay put people!
Reese Harper: Right, don’t fall asleep, stay with me. This is what happens when you have a belief that few people need to control all of the stuff.
Jason Wood: Right.
Reese Harper: When very few people control everything it is safer, it is more simple, more organized, that is the way that people think in China. Perhaps outside of Hong Kong, right now. Great Britain was built on that principle and they have had to move towards capitalism. Capitalism allows a belief where all of these dentists can go out and say I want a piece of that pie. I might have to learn some things and actually spend some money. I might have to pay for advice, and build my intellectual capital. I can’t do that without any knowledge. But by selling out too early and assuming that we just all need to consolidate and have this monolithic industry will bring less competition, fee pressure which is not in the dentist’s best interest, less clinical competency, and no incentive to improve your intellectual capital of your practice and train your staff in a way that is competitive with the person down the road. I am a huge advocate of letting people build independent businesses not just because it makes more money, which it will, but it also makes better people.
Jason Wood: You know, the more information you have, the more negotiating power you possess. The better you understand the business aspects, and I am not saying you will learn them over night, but the more you understand that the better clinician you become as well. That may seem, I don’t know, revolutionary? But the better you are at the business it helps you to become more efficient. That helps you to be more clinically efficient which helps you to be able to work your hygiene department correctly, which helps you to then be able to focus on taking a procedure that would be an hour long down to forty five minutes because your are more efficient at everything else. They are not disbarred elements. They are much more of a symbiotic relationship than people like to think. At least I believe so after dealing with thousands of doctors.
Reese Harper: Totally, I think a lot of people assume running your own company means you have to be responsible for having a lot of knowledge in every area and that you have got to manage in a way that you are not capable of managing. It is really not that overwhelming. It is just having the right team in place. It is hard to pick those people. I don’t want to say that is easy because if you don’t have knowledge it is hard to staff up your team and choose the right participants. Let’s say that Jason Wood happens to be the attorney you hire to be on your team. If Jason tells you that he does not like your CPA then why is that happening? Or maybe the CPA tells you that they don’t like Jason. Why aren’t those two guys getting along.
Jason Wood: By the way, many people will tell you that they don’t like Jason. Let’s just get that out there right now.
Reese Harper: But if Jason sounds like he is making sense to you when you are talking to him because he is on your board and someone else is saying, “I don’t like what this guy is saying.” You need to ask yourself why that is happening. A good board of directors can disagree but they generally arrive at a consensus that is good for the company and they know how to work together and they get along and respect each others opinions. Usually one of the problems with dentists getting advice and building an advisory board is that the people are comfortable with them disagreeing and they have like five people that disagree and all have different agendas. That is not really an advisory board. You have to get to a point where you are getting a consensus out of multiple people on your team.
Jason Wood: I say you have got to test your advisors. You have got to test everybody. I mean the problem that I see is that an industry, as a profession, dentists typically don’t like conflict. That is an issue because first and foremost has to be conquered because it will hold you back from being able to make important decisions. We were talking about trajectories earlier that are going to literally transform your life in a positive way. I don’t mean, ya know, conflict of “hey, lets go get that.” I am talking about challenging any advisor in your life. It doesn’t need to be confrontational. It just needs to be challenging so that you understand things better, but more importantly, they can back up their positions. Here is a bit of a segue, this goes hand in hand with humility. I tell a lot of my clients that the least important person in a practice that you are acquiring or sometimes in a start up is you, the doctor. You are the buyer and the least important. It is the staff and other people that are more important. They have good will tied to them and things like that. It is In those times of humility that there is a lot of growth potential, a lot of education. That applies to your employer and advisors that you have. You should know, you don’t need to know a huge depth of everything, but you do need to know a little bit about all of these facets that we are talking about. You need to know some legal, accounting, HR, all of it. You don’t need to know a ton, but you need to know enough to be dangerous.
Reese Harper: That is great advice. I want to jump to a couple of other subjects real quick. If you had to list the two or three mistakes that you see dentists make most commonly when it comes to an acquisition or a legal transaction, what would those be? What comes up all the time that feels like you are beating a dead horse?
Jason Wood: I think that far too many people will go to a seminar and they won’t realize that all of the information that they are hearing is geared towards a specific purpose. I always say, “don’t trust anybody. Do not trust me. Do not trust Reese. You have got to keep your guard up everywhere.” What I mean is that, for instance, you hear people saying, “I want to do a startup and I want to do a startup here because my family is here.” Or perhaps it is something more like this is where I want to live or I went to a seminar in Texas. They say something like that and they don’t do the research. They don’t realize that you should not do a startup here because the demographics are poor or all of these other aspects. You need to spend the time. If you want to do a startup because they are riskier than acquisitions. Understand that this is coming from someone who does both acquisitions and startups. I don’t have a dog in the race on either one. You have to do your homework for startups. I see far too many people moving into a saturated area because that is where they want to live. Then they do a startup and look around going, “why am I not growing?” You aren’t growing because there are not enough patients for crying out loud! I say for startups you have got to make sure that you have the demographics in your favor. I personally like 3,500 to 1 as a dentist to population ratio. That basically not only ensures success, but that you will hit it out of the park.
Reese Harper: The mistake that you are cautioning people against is that when they go to an event sometimes they have an agenda…
Jason Wood: Yes, more importantly, I want people to do their homework, especially on start ups. There are so many people that have very big commission checks built on convincing you that you have to do a startup.
Reese Harper: They say it is time and this is the location.
Jason Wood: You have to be very cautious. I love startups when the demographics make sense. That is when you can sell me on the reason for this location. I can tell you without a doubt that basically every metropolitan city in the US does not need a startup. If you want to build a startup go where other people won’t go. That leads me to my next mistake. Too many people won’t go where others won’t go. If you go to a rural area or a less saturated area you will be far more successful. Not because you are the greatest dentist or businessmen, but because there is less competition. When you have less competition there is a much higher likelihood that you can produce and make your practice more successful. Another mistake that I see in terms of acquisitions is not knowing your strengths and weaknesses as it relates to that particular practice. What I like to tell clients is that they should be looking for practices where you can do at least 90%-95% of the procedures that the seller does, and that hopefully that seller is referring out procedures that you are doing. If you can do all of the procedures and the referring out things, then boom, let’s do this asap. Another mistake that people make is not matching their production skill set to the practice and it kind of goes back to what I was talking about at the beginning which is if you are a higher producer you can’t buy a low producing practice. Even if you were to double that practice we were talking about earlier you are still way below what you can produce as an associate. I like to tell people to find people where the minimum practice level you can be looking at is what you can produce as an associate. If you produce $500,000 then you shouldn’t’ be looking at any practices under $500,000.
Reese Harper: The push back you will get is that someone says, “I just want to build it up, it is a value stock, it is something I am going to build up, it is a good deal.” What do you follow that up with?
Jason Wood: Why is it a good deal? Why do you think that you can grow this practice when the other doctor that has been there forever can’t.
Reese Harper: Generally they won’t have an answer for that.
Jason Wood: Sometimes they do.
Reese Harper: And it could be that he is not doing procedures that I can do.
Jason Wood: What procedures do you do that he or she is not doing? What are the negatives that you see? Tell me about the location. There are twenty different questions that go into that. I am ok being wrong. I actually love being wrong.
Reese Harper: That is just a bias you should have. Don’t buy a lower producing practice until you can identify the rationale that helps it make sense.
Jason Wood: I am willing to be wrong, but you have got to be able to sell me when I’m wrong.
Reese Harper: There is an opportunity cost of the lower production and the fact that the patient base might not match up with your ability to produce anyway. IT might be the wrong kind of patients or fee schedule. There is a reason that it is producing less and it is more.
Jason Wood: A doctor just can’t be old and not be doing marketing. Those aren’t good enough reasons for me. There have to be better reasons. For example, this has five operatories and it is in a resale location. It has great visibility and he has done no marketing. He used to produce high or nine hundred thousand and it has nothing to do with external forces, it is just that he has gone from working 210 days to 78 days. The local market and economy is still there. The demographics are still there to support this much volume. Then we get all of these data points that are leaving you thinking that we really can grow this and more importantly we can grow it in a very short period of time. If you can tell me that I can double this thing in five years than who cares? If it will take you five years to double it, let’s just buy a practice that is already double.You can double your money for those five years! What is the right practice for you given all of these data points. You have to look at all of the variables as it relates to you, the practice, and the local area. All of these things come into play. Far too many people don’t look at it that way.
Reese Harper: They just see a deal because it is cheaper than the next one, right?
Jason Wood: That is probably the worst financial decision you can do. Do not do it because it is cheap and you don’t want to go into more debt. The hardest thing to convince people of, which you probably deal with a lot more than I do, then that doing something like that actually places you at a higher risk of going into bankruptcy or not meeting your potential because there is not enough cash flow in that practice to be able to support the debt threshold that you need. The response is, “ok, well, I have got my job. I have got another job that I..” Ok, worst case scenario, you get fired. Which can happen a lot when the owner finds out that you have bought a practice, but given the worst case scenario you are terminated and can’t find another job. Can you make ends meet? A lot of times the answer is no. More importantly, can I still be able to be pay off my debt in a very reasonable period of time or is this going to place a huge financial burden on me if I lose my other job and I have bought this practice that does not have the cash flow that pays for my living expense needs. It will put a drain on you financially, professionally, and worst, it will place a drain on your relationships. It could be your husband, wife, or whatever. I can only do so much marriage counseling.
Reese Harper: That decision definitely will put pressure on a marriage if there isn’t already. That is a tough decision to recover from if you don’t make the right acquisition decision. Before we wrap up, I want you to give us one or two thoughts, and don’t overthink this, just give us the number one piece of financial advice you would give a dentist.
Jason Wood: Buy a practice as soon as you can, or start up if it makes economic sense. You basically want to ensure that you do that because the sooner you do that, the better your career trajectory is. The quicker you will be able to satisfy debt and get debt free. Also, don’t listen to Dave Ramsey when it comes to business financial decisions. He is amazing when it comes to personal. We love savings and stuff like that, but do not listen to him on business debt. The more money you can make, the quicker you can get out of debt.
Reese Harper: That is great advice. Thank you so much for taking the time today. You are a wealth of information, we could reschedule for a couple more episodes.
Jason Wood: I can podcast to no end.
Reese Harper: I am sure people love it, thanks for taking the time. It means a lot to see people who care about dentists and care more than just the transaction you are getting paid for. That is a sign of someone who will thrive and succeed in the future. We appreciate you having a good voice for financial literacy.
Jason Wood: I love it.
Reese Harper: Good luck, man. We will wrap up and get it out to the listeners soon. Thanks again!
Jason Wood: Thank you!Practice Transitions