Why Investors Are Targeting Medical Spas More Than Ever with Brian Colao

Bill Walker (00:04):
Ladies and gentlemen, welcome back to Aesthetic Brokers' podcast, Aesthetic Appeal. Today we have a very special guest for you, widely considered as the expert in the space. Brian Colao, Director of Dykema Law Firm for MSOs and DSO groups. Mr. Colao has been serving the healthcare space standing nearly 30 years now and has dedicated himself to understanding the legal practices of intricacies that surround med spa and aesthetic practices. Brian's extensive knowledge of healthcare law has positioned him as a trusted legal advisor on business formation structures and related mergers and acquisitions, as well as the full array of regulatory compliance requirements for organizations. Mr. Colao, welcome to the show.

Brian Colao (00:54):
Hey, Bill, my pleasure to be here. Like I told you, I just got a tiny bit of a cold still, so I'll try to project as much as I can, but I'm really happy to be here.

Bill Walker (01:04):
Brian, thanks for sticking it out. It's always tough when you're battling a little bit of a bug, and he's been a trooper for us to make time to be on the show today, so thank you very much.

Brian Colao (01:19):
You got to play hurt, Bill, in the football game. You got to come out, you got to play hurt. So we're here.

Bill Walker (01:25):
That's right. That's right. So for those of you who are listening today, we're going to dive into the med spa aesthetic space from an attorney's viewpoint. Brian, if you would, for those who are not familiar with the word Dykema, would you talk about Dykema and talk about what your purview is within the organization?

Brian Colao (01:49):
Dykema is a law firm. We have about 500 attorneys, but on my team there's about 72 people that do healthcare and do MSO, DSO transactions. We represent probably around a thousand healthcare organizations, including DSOs, MSOs, all disciplines, and I think you gave a very nice introduction to me. Nobody goes to law school to be the dental or medical guy, but that's sort of the way it's turned out for me and I'm entering my 30th year and I think we've done our team something like 1500 plus healthcare transactions in the last 10 years. So we pride ourselves on being as far as we're concerned, the leader in the space.

Bill Walker (02:37):
So let's dig into that a little bit. So those numbers, for those of you, when you look up Brian's background, he has clients in all 50 states of the United States, six provinces in Canada. I think you're admitted into what, four or five, six different US circuit courts?

Brian Colao (03:06):
Well, it's more than that to be honest, but I think we're in, have clients in every Canadian province now, Canadian province, every know reading from, that's a bio that we put together, but I think we're in every Canadian province. We've got clients in Mexico, we've got clients in Europe, clients in Australia, Japan. So we're really, healthcare has exploded all over the world really. I mean, certainly exploded in the United States, but these DSO MSOs are exploding all across the world.

Bill Walker (03:39):
So when I think of where we're at in medical aesthetics, it just seems like the gilded age. You have such an insightful background because you've seen the consolidation occur in previous industries. What are your thoughts on the medical aesthetic space right now, where we are at and how does that compare and contrast the previous cycles that you've seen in healthcare? What are your thoughts on that?

Brian Colao (04:14):
It reminds me a lot of the dental industry about 10 years ago. It's poised to explode. The only thing that's just a little bit holding it right back is, I'm sure, Bill, you've been following the interest rates and inflation and everything that's been going on in the last two years. We're in a little bit of a challenging economic time for a consolidation and m and a, but we're coming out of it. There's a lot of optimism for 2025 and 2026. So I think the med aesthetics industry was poised to explode around 22, 23, but we went into this challenge time with inflation and interest rates, and even though deals still closed, it sort of just held it back from the complete explosion. But I think it's poised now with a lot of optimism going into 2025, three interest rate cuts this year. There'll be more in 2025. I think it's poised for an explosion in consolidation.

Bill Walker (05:20):
Interesting. So from your vantage point, it is almost as if the cookies were made, the sheets were ready to go in the oven, there was a stutter step. So are you saying that for those who were building successful med spa practice, they have not missed the boat?

Brian Colao (05:39):
Oh gosh, no. Absolutely not. I mean, that's a good question the way you ask it, but no, absolutely not on that mean, I think we just put cookies in the freezer. Once the cookies come out of the freezer and they defrost as far as I'm concerned, they taste just as good as they did before, but we were on, I mean a lot of things were on the eve. I mean, this is not specific to med aesthetics. I mean, you could go to the dental industry. It was white hot with consolidation and it was already going on because I believe dentistry's about 10 years ahead of med aesthetics. So it was in the middle of the explosion, and then right around end of the second quarter 2022, the interest rates went from like zero to about four and a half, 5% in breathtaking fashion, not in a good way.

(06:26):
Sometimes we say breathtaking and it's good. No, in a bad way, in breathtaking fashion, they went from zero to five or 6%, the fed's benchmark rate, and it really froze up a lot of the dental markets and the med aesthetic market that was just starting to really kick in also got slowed down dramatically. But again, a lot of optimism going into 2025 have a new presidential administration, one that's going to promote deregulation while more interest rates cuts are on the way. There is literally, I saw a study trillions of dollars on the sidelines of investment dollars.

Bill Walker (07:07):
Trillions?

Brian Colao (07:08):
That want to be deployed. Trillions. I was very surprised by it. It was a published study of, it was something like, and it's not my thing, so don't hold me to it. Everybody agrees there is an enormous amount of money on the sidelines. But the one study I looked at recently said it was something like 3 trillion plus dollars, which was even larger than I thought, of investment dollars on the sidelines waiting to be deployed.

Bill Walker (07:33):
When you think of that amount of capital that is at the ready, what is it about healthcare? Do you think that healthcare continues to be an attractive option for those investors specifically that are looking to be off of the public market in the private market? And then how do you see medical aesthetics playing into that portfolio for those mega investors as it trickles down to the mid-market to small cap market?

Brian Colao (08:05):
Yeah, I mean, med aesthetics is really attractive. I mean, again, it reminds me of dentistry. Dentistry, that quite frankly has a longer track record. I mean, people have been drilling teeth longer than Botox and things like that. But dentistry has been virtually recession proof, pandemic proof has done incredibly well. But one of the issues in dentistry that, it hasn't stopped the consolidation, but you got to work through it, is a lot of the reimbursement rates, there's a lot of Medicaid, there's a lot of private pay insurance involved. You've got to work through a lot of those issues and run numbers when you're valuing a dental organization. But in med aesthetics, it's mostly a cash business. HIPAA doesn't tend to apply the same way it does in the regular healthcare context because you're not filing insurance claims, and if you're not filing insurance claims in most situations, you're exempt from HIPAA. So there's a lot less regulations. It's a lot less complicated on the payer side, it's kind of like you walk up with your credit card and you pay, and that's kind of it. So for that reason, I feel like not only has it been poised to explode doing med aesthetic transactions, in a lot of ways, are less complicated and more straightforward than dentistry. So I think the mass consolidation of med aesthetics can be bigger than dentistry ever was even.

Bill Walker (09:34):
Wow. You talked to, Brian, you speak with a lot of private equity firms, a lot of high net family offices, high net worth family offices. What is it that are the most attractive features of medical aesthetic practices that they like to see? Where do they assign risk and how do you view that through your lens from a legal standpoint?

Brian Colao (10:04):
Yeah, I mean, the first rule is Warren Buffett's rule that I've loved, I live by this rule. You don't invest in something you don't understand. Okay? In the med aesthetics industry, we can understand, it's not a complicated thing. We're not building hardware that's going to planet Mars that we have to think about what does this really do or not do. Everybody can understand pretty quickly what a med spa is or what a med aesthetic business is, who their customers are and what they do. So the first thing is it's easy to digest and understand what is going on. Second, the pay structure, it's pretty easy to understand. It's mostly a cash business. It doesn't have the web of confusing insurance reimbursement rates and Medicaid regulations and all the audit risks and things that go with that. It doesn't really have that. You don't participate in government programs, so that makes one getting paid simpler, and two, the regulatory burden simpler. Plus, as I said a few minutes ago, HIPAA is mostly exempt on these transactions.

(11:11):
So one, you've got a business you can understand, it's easy to understand. Two, the pay structure is very straightforward. Three, the regulatory burden, which sometimes can be a challenge in healthcare because healthcare is regulated. So when some investors want to do deals in healthcare, they're like, okay, but I'm scared, there's all these regulations. Med spa and med aesthetics has a lot less of a regulatory scheme. So in the end of the day, you've got something, everybody can understand, something with a very straightforward payment structure and a lot less regulatory burden than other aspects of healthcare, and I think that makes it very, very attractive.

Bill Walker (11:50):
Brian, do you think about the speed at which dentistry consolidated over the past few years, and then is there anything that you think is indicative of the rate at which med spas consolidate in terms of the size of the market where dentistry being 170, 180 billion, industry medical aesthetics, maybe around 18 billion, so about one 10th the size, how does that translate to time?

Brian Colao (12:22):
Yeah, well, the consolidation will happen quicker, obviously, but it's still going to happen. Dentistry is going on, I would say the consolidation really started in earnest around 2013, 2014, so it's in its 11th year of consolidation, and the market share is about 31, 32% say, call it 30% plus market penetration of DSO, so there's about 70% runway left. Med aesthetics, I understand based on what I've looked at, to be around 4% market penetration depending on who you talk to. So you've got an enormous amount of runway, but you do have less inventory, but you've got a lot of room for growth for new inventory. So I do think the consolidation will occur quicker than dentistry because it's taken 11, 12 years to get one third of the way through dentistry. I think the whole med aesthetic thing might be a third of the time for the consolidation to occur, but it's still poised to occur. And I think the med aesthetic organizations, even ones that haven't even been created yet, that people are just thinking about in their mind and are about to create them somewhere, there's a lot of demand for it, and I think they're going to be very, very attractive to investors.

Bill Walker (13:54):
Brian, I've heard you speak at the Dykema DSO conference in the past in Denver, and I see how pulling together industry experts, financial sponsors, investment banks, that back the private equity groups, the individual practice owner, all of that synergistic effect. Is there anything on the horizon for Dykema with regards to creating that kind of environment forthcoming for med aesthetics?

Brian Colao (14:30):
Yes, I'm real glad you asked that, Bill. We're having our first ever med aesthetic event in May, I think it's May 8th through the ninth, but it's going to be on the web. You'll be able to see it real easy if I misstated it, but it's in May of 2025 in Denver at the Gaylord, the same location. They love us there, of course, because we have our big DSO conference. So when we told them we wanted to have a med aesthetic conference, they were jumping for joy at the Gaylord. They were delighted. So we figured let's stay with a facility that we're very comfortable with a staff that always treats us well. So we're going to have our first ever med aesthetic event, May of 2025 at the Gaylord Rocky Mountain Resort in Denver, Colorado.

Bill Walker (15:12):
Alright.

Brian Colao (15:12):
And we are trying, Bill, to do exactly what you said. We're going to replicate, bringing everybody together for our principles with the DSO conference have been best content, best networking, most fun. And that's the same principles we're going to live by with the med aesthetic conference, best content on stage, all the big names, people that really know what they're doing, best networking opportunities, most fun.

Bill Walker (15:39):
Yeah, I can say those are great descriptive words for sure, and we'll be on the lookout for that. That's awesome. At a granular level, for the individual who has created a very successful practice, I'd like to dive in and get your aspect on they're ready to sign an LOI, they're ready to do a transaction with a group. What are some key tenets that, pearls of wisdom?

Brian Colao (16:09):
First thing is have it reviewed for regulatory compliance. Let's make sure, you know there are lenient states, there are moderate states and there are strict states, and I can't tell you the times in med aesthetic and it doesn't surprise me, cuz I went through this for decade in dentistry, so it does not in the least bit surprise me, but somebody comes in and they've built a great organization except it's illegally structured. And I'm like, well, hold on before we go sell this thing, we got to fix it and we got to put it in the right structure because the buyer's going to see this and it's going to affect the sale. Second thing you want to do during this week, where you're just sort of thinking about everything, is you want to say, what am I looking for, for a partner? Because the most critical thing is you've got to pick the right partner. And the last thing you want to do in my view is say, let's get all these LOI's and on the fly, we'll just figure out what kind of partner we want. No, you want to sit down and you want to think, do I want a hands-on partner that's going to micromanage me and have me on calls every week, talking about the performance? Or do I want a partner that if I hit my numbers, they're invisible, I never see them. I see them once a year at a board meeting and they pat me on the back and leave. And there's no right answer. Some people say, some founders of the organization say, Hey, the whole reason I want a partner is I want them in my business. I want them talking to me. I want them adding value. Why would I do a deal if I'm not going to consult these people regularly? A lot of people believe that. Other people say, absolutely not. I know this business, the buyer, if I'm hitting my numbers, I don't ever want to see them. Now, I'll say this, if you're not hitting your numbers, I don't care who you are, you're going to be talking to your partner, but some partners, even if you're hitting your numbers, they're hands on, and they're talking to you and trying to improve it. Others are sort of like, Hey, I'll leave it to you if you hit your numbers and projections, you'll never hear from me.

Bill Walker (18:09):
Culture.

Brian Colao (18:09):
But you need to think right away is this, which of the two do I want? What am I looking for? Number two, once I get this partner, what is my plan for growth? What do I want to do with this organization? Because no partner is going to affiliate with you and then not have a growth plan. I mean, of course, the whole point is to affiliate with you, and then there's going to be a growth plan for the organization going forward. If it's a large organization, you're going to have to slot into their growth plan. If you are the platform organization, you're going to be part of growing. And that's the other thing, Bill, you got to think about, do I want to slot into a larger organization or do I want to find a PE investor to make me the platform where I'm the focal point and I grow it, versus I get slotted in to a large organization? Again, no right or wrong answer here, but you got to think about what your priorities are and what's important to you. And you have to, you know, somebody like you, Bill, can answer these questions. I can, other people can, but you got to ask these questions and figure out what you want. This is a lot, Bill, I say it all the time, like a marriage, right?

Bill Walker (19:24):
Yes.

Brian Colao (19:24):
The people that just go to Vegas and get married in 24 hours without ever sitting down and figuring out, do I want kids? Where are we going to work? Where are we going to live? They don't have the greatest success rate. I'm sure there's somebody that got married in 24 hours and they're still here decades later, but a lot of the people that do that 24 hour marriage thing, they break up kind of quick. It doesn't work out. And the ones that sit down and say, Hey, I want to have kids. This is what I want to do in my career and this is what my spouse is doing. This is our plan for our life together, and everybody's aligned and everybody's on the same page, those are the marriages that have the highest success of working out. So you really have to think of this as a business marriage, not a romantic one, but a business marriage, and you've got to have an alignment of interest.

(20:13):
But the only way you can know if you have an alignment of interest is you've got to know what your interests are. And there's so many people, Bill that founded these organizations and it's going great, but they haven't taken just a little time to sit back and say, here's my vision. This is what I want for the next five years. This is what I want in a partner, either micromanagement, hands off, this is what I need going forward. And once you've figured all of those things out, then you can start interviewing prospective partners and see which ones are most aligned with your interests.

Bill Walker (20:48):
That inventory taking, I couldn't agree more. That is so important for a lot of our clients. I mean, there's so much to unpack there. For everyone out there listening, Brian Colao is one of the best voices in the space when it comes to healthcare, specifically with dentistry and medical aesthetics. Brian, I want to put you on the spot and I want to ask for, we won't hold your feet to the fire on it, but give me a prediction for 2025.

Brian Colao (21:23):
There's going to be a gradual re-engagement of the mass consolidation of med aesthetics. The interest rates have gone down three times here at the end of 2024. They're expecting two more cuts next year. I don't think it's going to be just an explosion. It's January and everything goes crazy, but I think slow and steady, there's going to be a re-engagement of the mass consolidation of med aesthetics, and honestly, I think that might be good for a year Bill to just slow and steady do deals because that will give people time to consider who the right partners are, consider what their priorities are. Both parties can do proper diligence on each other. When we get into a white hot market like we had in dentistry near the end of 21, everything was so boom, boom, boom, it's got to be done now, some people rushed through diligence, both on the buy and the sell side.

(22:20):
They didn't know what they were getting into, and a lot of people are having to now readjust things and like I say, digest it, just like food. You ate it too quick and now you got to digest what you got, and sometimes you get indigestion. What you ate was not what you were hoping it was going to be. And when you have slow and steady, like I'm predicting for 25, you got more time for everybody to think. Everybody can, using the analogy, eat their food slowly and look at it and think about things and you don't get indigestion that way. So I think it's almost good that I'm predicting slow and steady for 25, and then 26 I think is poised maybe for a big explosion, but I think easing into slow and steady would be a good way to reengage the marketplace. And then it'd be poised for, really all bets are off in 26.

Bill Walker (23:14):
I love that. That's a great analogy. For a lot of our clients, it's a six month to 12 month process just to get to that stage, and so it definitely builds in time for things to be done the right way. Brian, thank you for being on the show. Appreciate your time.

Brian Colao (23:32):
Hey, Bill, great to be with you here. Happy holidays to you. I don't know when everybody's going to see this, but right now it's holidays, so happy holidays, Bill, and so nice to be with you

Bill Walker (23:43):
Everyone, Brian Calao He is the director for Dykema Law Firm's DSO MSO Group nationwide across the US, Mexico, Canada. We'll see you next time on Aesthetic Appeal.