What You Missed at The Medical Spa Show 2024

Christine (00:00):
Welcome to this week's episode of the Aesthetic Appeal podcast. We have Drew Smith joining us who is our Vice President of Mergers and Acquisitions here at Aesthetic Brokers. Listen in as we discuss the AmSpa 2024 trade show in Las Vegas and some of the key takeaways we left with as it pertains to what we do here at Aesthetic Brokers. So Drew, so nice to have you here today.

Drew (00:22):
Nice to be on. Thanks for having me.

Christine (00:24):
Yeah, of course. So I figured we could kick it off with you giving us a brief introduction of yourself. I think that would be helpful for anyone listening to get to know you. I feel like you have a unique set of skills specifically within M and A that sets you apart from others in this space. And then from there, I was hoping we could do some highlights for Vegas AmSpa.

Drew (00:47):
Yeah, so some background about me. I'm originally from Alabama. I actually live in Nashville, Tennessee with my wife, 1-year-old son and Golden Retriever. Professionally, went to Alabama and got my MBA from there as well. Started my career in healthcare transaction advisory advising typically large healthcare operators on fair market value for different acquisitions, physician practices, ASEs, diagnostic imaging centers, et cetera, et cetera. I did that for a number of years and then moved on to the industry side with an oncology company. And there I was mostly working on joint venture structures with the hospitals and carving out their radiation oncology divisions into, what we'll talk about here in a minute, is these MSOs or management services organizations. And then from there moved into another private equity backed dermatology platform on the buy side acquiring dermatology practices. And so that kind of, I guess translated directly into what we do now, which is merger and acquisitions on the sell side, representing sellers as they look to have a transaction with private equity firm or a private investor.

Christine (02:11):
Cool. I appreciate that. I think it's helpful just to give a little background. So now that we know how awesome you are, maybe we could go into AmSpa. And for anyone who doesn't know exactly what that is, it stands for the American Med Spa Association. So they were originally founded to address certain legal and compliance issues, but it has since become a multifaceted national organization for the med spa industry. Most people have heard of it, if you are within this industry, they offer legal business, clinical training, certain resources to help people build their practices compliantly and safely. So since 2018, they actually have been putting on an AmSpa trade show in Las Vegas, which is focused solely on medical aesthetic spa. So there's a lot of conferences out there, but this is specifically for med-aesthetics and nonsurgical medical practices, or at least the side of practices that are nonsurgical.

(03:08):
It draws a lot of like-minded people, certain individuals, whether it's practice owners, practitioners, business women and men, all sorts of vendors. And this was our first year attending. It was really interesting to see all the different vendors. There were so many topics and panel discussions. It was hard to choose, even you and I chatting ahead of time about key things that we took away. What I wanted to do is just you and I touch on a few key topics and some of the pearls that we walked away with that are more specific and relevant to what we do here at Aesthetic Brokers and just highlighting some of the things that we walked away with. So maybe we could start with your kind of feedback on some of the buzz around private equity and what exactly that means, the sale of practices to private equity. And so I'm curious to hear your opinion on just some of the things that you heard, trends in the market that you know of now, and just some comments that you have on that.

Drew (04:07):
Yeah, it's interesting. I think it's safe to say that the secret's out in terms of where we are in consolidation for med spas. We've seen it in a number of different industries, specifically in healthcare. Like I said, I came from dermatology. We've seen it in pharma, we've seen it in cardiology, dental, orthodontics, you name it. Private equity has pretty much had their hands in all these different healthcare sectors or service lines. And based on the turnout of practice owners, or med spa owners rather, at the M and A seminars that they provided at AmSpa, it's safe to say people are coming around to the idea that they can sell what they've worked so hard to build and make quite a bit of money off of it, while having a better quality of life post transaction without having to deal with all of the back office day-to-day headaches that most business owners have to deal with.

(05:08):
And so I think it's interesting, what we're seeing is a shift, a lot more questions and a lot more interest from the sell side. Up until this point, we've seen a lot of buyers wanting to get into the med spa space, and I think now what we're seeing is a lot of these practice owners are coming around to the idea and trying to get educated and knowledgeable on these private equity platforms as we are on the precipice of this consolidation. And so I think 2024 is going to turn out to be a very productive year for the transaction landscape and Med Spa specifically.

Christine (05:48):
So I think what was evident, at least from my perspective, coming from the business development side of the coin, having worked at Allergan prior to joining Aesthetic Brokers, is just how much more awareness there is around private equity and the interest on both sides, meaning practice owners, so the sellers, and then the private equity firms that seem to be much more of a topic of discussion now than it was even six months ago. And one of the questions that I and we hear often from practice owners is really what makes a practice attractive to private equity? And what I found was that many of the topics and discussions that were held at AmSpa all for the most part tie into this answer. So for instance, like Terry Ross, who I got to see her speak, I thought she had such a stage presence, highlighted a few critical KPIs that practices should be focusing on.

(06:39):
Many owners have already thought or are talking about these things, but things like revenue per hour, revenue per provider and procedure, conversion rates, whether that is converting patients that are inquiries over the phone, web inquiries, patients that are in there having a consult, are they converting to get the procedure? Are they converting to other procedures? All of that is so important to running a business and is obviously a much larger topic. We could talk about that all day long in a podcast. But I think what's important is if you're not measuring things like that, you need to start measuring those so that you can actually get a pulse on your business, understand where you are at, and then also identify opportunities for growth, and then from there, implement certain growth strategies. So from your perspective, there's lots of different KPIs people talk about with their business, but when you are assessing a business, where do you start? What do you look at? And maybe just a little bit of information on the background of the M and A. Where do they start? What are they looking at?

Drew (07:42):
Yeah, so that's a good question. Probably the high overarching theme here is around EBITDA, right? You hear EBITDA thrown around all the time, which

Christine (07:52):
Maybe you could share what is EBITDA, just break that down.

Drew (07:56):
So EBITDA is just earnings before interest, taxes, depreciation, amortization. It is typically used as a proxy for earnings. And so when people talk about EBITDA, they are really interested in what's, what we call adjusted EBITDA. And so these adjustments that you make, typically from a seller's perspective, what can be confusing and surprising is a lot of times these owners don't necessarily pay themselves a market rate salary if any W2 two salary at all. And so that is really the first adjustment that is made to EBITDA is making sure that that is captured because a buyer is going to be employing these providers. And so when they value a practice, they're including that as an ongoing operational expense. And so if you're not paying yourself today, you need to make sure that your adjusted EBITDA takes into account what you would make based on the level of production you produce, that is in line with the market rates. Typically what we see is a percentage of production or percent of collections. And so however much you produce in revenue personally, you will likely get a percentage of that because it incentivizes both you to do more, but if you end up doing less, it's a variable expense, so you're not going to get upside down on that as a buyer.

(09:25):
The other thing that a lot of people look at in terms of adjustments are these what we call add backs, right? So you've already accounted for the owner's salary, so that's a negative deduction to EBITDA, lowers it. Well, now we're talking about things that raise it. So any one time non-recurring expenses that are on the P and Ls, or profit and loss statements, also any personal expenses, a lot of the times small business owners, they can run personal expenses like their car or travel, things like that, that would not continue going forward post transaction, that are not necessarily involved with the day-to-day operation of the business. So those will be added back to EBITDA, meaning that it would increase the EBITDA level. So the adjusted EBITDA level is what buyers are, you hear multiple, right? They're applying multiples to this adjusted EBITDA to ultimately get to a purchase price.

(10:30):
And so the other thing they look for that is a little nuance is the synergies, right? And it's going to be different from buyer to buyer. So if you're a very large private equity backed platform, you probably have a lot more synergies than a smaller individual investor. So things like cost of goods. If you're huge, you probably have better contracts with the vendors, the Allergans and the Galderma's of the world, so you'll get cheaper product. Things like that go into on their side when they're calculating, okay, what is my effective multiple going to be? Meaning what is the multiple going to look like post transaction once we have implemented all of these synergistic things that we bring to the table as a buyer.

Christine (11:20):
One of the other talks I really appreciated was hosted by JobSnob and they made some really great points about best practices when it comes to investing in what they call human capital, a.k.a employees. And we know a common pain point for practice owners is hiring, retaining, and compensating top talent. The reality is that there are options out there in the market across the board, and it's not just for the highly experienced injectors, but also for the newer injectors entering the market as well as strong office support, well-rounded staff. There are options. And so the more practices can focus on bettering certain parts of the hiring, onboarding process, things that differentiate them from the competitive space. They also need to pay attention to competitive compensation. I know that we talk about that often. Certain pay structures, clear onboarding, effective strategies to make the culture of their company stand out, not just the clinical outcomes, but it's really specific to aesthetic industry as well. There's a lot of options. It's newer, people are looking for good staff. So I'm curious to hear about, again, your perspective, the M and A side, the buy side, what some of these topics mean to you and when you're evaluating a business, what people can do to make themselves more marketable when they go to potentially sell, as well as what the value is to private equity that might not necessarily be in the numbers. If you have anything to share on that, that would be very helpful for people to know I think.

Drew (12:58):
Sure. I think we're saying it's more and more common for office culture to be important to a buyer. Specifically what they're looking for now is employee retention. So it is a positive if you have employees that have been there for multiple years, you don't have a lot of turnover, you're a very stable business from a staff perspective. So that is one thing that buyers are beginning to look at. Within that is the risk assessment of providers that are maybe high producers. So I'll give you an example, let's just use 50% for a multi provider practice. So if you have one injector, for instance, that is producing more than 50% of the revenue of that practice, that is what a buyer would consider a risk and to help mitigate that risk a lot of times is they will try to negotiate that these high producing providers get some sort of compensation to create "stickiness" is what we call it. Whether that's they get equity in the HoldCo, the private equity platform, or they get cash compensation or what have you, but what they don't want is they don't want this transaction to cause a high producer to leave because they're uncertain about their future there. So they're trying to mitigate that risk by giving them some skin in the game, if you will.

Christine (14:48):
No, it makes sense, but it is something that I think people aren't thinking about until they go to sell. So getting ahead of that I think is smart. Alright, so moving on to some of the more fun stuff that I know you like things like peptides. Using that as an example, so peptides as we know, have been getting a lot of attention as of late. Obviously the GLP-1s have taken the industry by storm. And I'm curious to hear from your perspective through the lens of adding value, how might adding new services to your service mix if that would add detract to the valuation side of things and what you might tell a business owner to consider when they're looking at bringing on new procedures, things along that line?

Drew (15:37):
Yeah, I think I would say it depends on the circumstances. So let's take peptides as an example. They're becoming more and more popular, more and more mainstream. You're seeing a lot of people prescribing these, physicians and getting 'em compounded at compounding pharmacies for their patients. GLP-1s are a great example. Semaglutide is in fact a peptide I would say for something like that, that is, it's on the FDA's radar. They've already made some adjustments to the scheduling of these drugs and these peptides. I would say the future of those is probably unknown. I don't know how much value a buyer puts on that just because it is so unknown. So if I'm in a position where I'm thinking about selling my practice in the near future, I probably would not add something like that with the intention of getting value out of it from a transaction.

(16:42):
You just don't know what it's going to do to your bottom line. And I think there's just too many unknowns in such a gray area right now that it's probably risky to implement something like that if you're looking to sell right away. With that being said, if you've already implemented something like that or any new service line, for instance, let's say you only offer injections and you want to add lasers. That is something that you can definitely do. Just the expectation from the sell side is you're probably not going to get credit for that upfront when you sell your practice. It's going to be involved in something what we call an earnout, which takes the speculation of future cashflow or future growth or ramp up for new services, new locations, new providers that are already established. You've already gone through the work, you've already put up the capital to implement these new services or locations or providers. And so they will offer likely an earnout, which all that means is they'll give you some sort of threshold or target to meet. And if you meet that, there'll be a portion of money that is available to you should you hit those targets. So they're essentially giving you credit for what you've already implemented, understanding that there's future value there. And so if you hit that target, they will release that value to you as the seller. And so you'll capitalize on that.

Christine (18:19):
So I know this is kind of 30,000 foot view today, just going over some highlights of some of the things that we saw out of AmSpa, but is there anything else that stands out to you if it was a new business owner, new injector, et cetera, who is starting their business now and thinking, okay, I'm not looking to sell, I just started, but I would like to potentially plan an exit strategy regardless of if they're at actual retirement age or if they're just thinking, I want to start out for a year or two, maybe look for some capital to create new locations, et cetera, and grow. Is there anything else high level that you would suggest they pay attention to as they go about planning their business? Outside of all the things that are obviously first and foremost, like injection technique, patient outcomes, safety, et cetera. On the business side, are there any other key bullet points that you would say, make sure you're looking into these, researching how to do them well, that will help them in the sale of their practice?

Drew (19:15):
So I think first and foremost, keeping an eye on your profit and loss statements and making sure that your expenses as it relates to the revenue you're producing is in line with what the market is doing. So for instance, we look at most everything as a percentage of revenue, which is a common sized way of assessing a business as it relates to other businesses in the industry. So you want to make sure you're not too bloated in one expense area. Do you have too much staff? Do you have duplication of ,duplication of staff and job descriptions? Do you have, are you spending on marketing and not really getting the return that you would expect? So keeping an eye on your patient acquisition cost. All of these things, you really want to get your financials in order before you go to market. And so if you're new and you're starting from the ground up, it's much easier to start out that way than to try and go back and fix and reassess when the time to transact comes.

(20:28):
And so I think my best advice to give to any new practice owner is just make sure that you, you're keeping an eye on your expense ratios and make sure they're in line with the market, because like we said earlier, is that typical EBITDA margin is going to be really important when it comes to selling your practice because healthy EBITDA margins, that's what buyers and private equity is looking for. So I think that's probably my best advice. And as you get closer to a transaction or going to market or hiring advisor, the less moving parts the better. So if you know that you want to sell your practice in the next few months, making big hires, spending a lot of money on, a lot of capital on equipment, things like that, probably not a great idea. It's a lot of moving parts. Now you're looking at three years down the road, that's a different story because you have time to realize the potential of these costs that you're investing into your practice. So I think timing is a big part of it. And so that's probably, those are my biggest pieces of advice for new practice owners.

Christine (21:46):
Awesome. Well, I think that was very helpful. If anyone is interested in even just understanding more, regardless of the stage that they're at, give us a call. You've hopped on the phone with many people, a lot of our clients are in the process of getting healthy, is what we call it. And I just appreciate your time today. I think you have a lot of experience on the buy side, and I think it's extremely valuable to our position in the market now. So I just appreciate your time and look forward to the next one.