Secure Dental_Diwakar Sinha: Audio automatically transcribed by Sonix

Secure Dental_Diwakar Sinha: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Dr. Noel Liu:
Welcome to the Secure Dental Podcast. Through conversations with the brightest minds in dental and business communities, we'll share practical tips you can use to scale your practice and create financial freedom for yourself and your family. My name is Dr. Noel Liu, CEO and Dentist at Secure Dental, and also co-founder of DentVia. I'm your host for this podcast, and I'm so glad you're joining in.

Dr. Noel Liu:
Hey, welcome to another episode of our Secure Dental podcast, where we bring in many different talents from both inside and outside our dental industry. And today we have a really special treat here: Diwakar Sinha. He is the CEO of Polaris. Polaris is a full-time consulting firm that helps dental practices scale, expand, make them out there into the market with capital, with scaling, with processes. Anything to do with numbers and financial, this is a guy we want to contact. So, Diwakar, let's go, man. Love to have you. Thanks for coming on. And the floor is yours. What's your background?

Diwakar Sinha:
Thank you for having me. Yeah. So my background is 17 years in transaction advisory after that, but 17 years in the lower-middle market and middle market space, providing capital in the form of debt to dental companies, medical urgent care companies, pharmacy companies, all healthcare. And then I transitioned to the transaction advisory space and have transacted over a couple hundred million dollars in the dental space. We've done plastic surgery. We've done work with ENT companies. So all different aspects of that, and also help businesses scale in the space. So our process at Polaris Healthcare Partners is to not only help businesses scale, but eventually help them transact in the space to whatever their goals are to a strategic partner or to eventually a private equity sponsor if they get to eventual scale.

Dr. Noel Liu:
So you guys basically consult, advise, and direct them, and also provide guidance throughout the process, right?

Diwakar Sinha:
And eventually transact. Yes.

Dr. Noel Liu:
Okay, cool. Now do they really have to transact or do they have to have something like a goal in mind, or do you just help consult as well?

Diwakar Sinha:
Yeah, more than half of the clients that come to us, they don't have a vision when they engage us in the beginning, and we help them guide on what their vision may be. We always want to work with the end in mind. Right? So if they don't have a goal, we want them to think about, are they building a legacy business? Are they thinking about going from 1 to 2 locations or five locations? Why are they building it? Why are they thinking about scale? Right? I think a lot of people go to conferences and think about building a DSO. What does building a DSO really mean? Are we setting up legal structures? Are we setting up multiple locations? Can we build one location with 15 operatories built in multi-specialty in one umbrella? What are we really trying to build? And the why; that's really important to us. And so we're trying to guide the clients that are calling us, doing a consult with us to really help them understand the why. And if their end goal is to transact, then we want them to understand the mathematical outcome they're looking for. And that could be a three-year horizon, that could be a ten year horizon. And then we walk them through that journey on what that journey looks like. And because it's not a lot of roses out there through the process, we want them to understand what that journey looks like.

Dr. Noel Liu:
So let's start with the end in mind. And I love that what you just said. So someone who's looking to transact. So let's say I got one practice, and I want to scale it up, and I want to transact eventually. I remember in our conversation you said about if you want to transact at a certain time frame, you need to start going backwards and thinking about the time frame. When and why is a good time to start thinking in terms of when do I want to transact? Like a few years? Five years? Ten years? 15 years? I want your experience on this.

Diwakar Sinha:
Yeah. So I always recommend for people to think about their valuation expectations first. Okay? So you've known me for a while. I'll use math as a denominator to think through it. So if somebody wants a 7X or 8X valuation and let's remove the EBITDA as a denominator for a second. Okay? Then they're typically tied to a five-year post-transaction event through employment or earnouts or some kind of a process. Okay? Now if somebody says, Hey, I only want to be two years post employment or post transaction, that limits our buyer pool. Now at Polaris, we have a huge strategic pool, a huge private equity pool when we take clients to market. We don't, we run a very broad process. So, I think that's important for people to think about: what are their valuation expectations. Now, so if somebody comes to us and says, I only want to be two years, now that 8X deal might go down to a 6X deal. Okay? Just because their exit horizon is only two years, or 6.5X. So I think how they're looking to exit the deal impacts the value of the deal. So my recommendation to your audience is come to us five years out. Let us evaluate, or before, let us evaluate your journey, and then give you the recommendation: are you two years out from your process? Five years out from your process? Seven years out from your process? What is the process you're looking for based on your goals?

Dr. Noel Liu:
So it's like the retirement number. You got to have that in mind, right? What is it that you're looking for?

Diwakar Sinha:
Yes. And I think we even help people come up with that number. And I'll give you a basic mathematical answer again. I think that people need to think about after they paid off all their debt. Okay? After they paid off all their debt. Right? Because you have to pay off your mortgage. If you have kids in college, think about the 529 plans. And if you don't have a 529 plan, nothing wrong with that. Either they're signing on for their student loan debt, or you're paying for their student loan debt, right? Or their college education. But after you paid all the obligations, whatever your living expense is, and let's say it's $200,000 or $300,000. Okay? You multiply that times 15 post tax basis. Everything's post-tax here. Okay? That will be the stream of income you need for 25 years. So I just gave your audience members a really easy math number. Now I'm no CFP. Okay? But that should give you a 5% rate of return. That should give you a fairly easy stream of income. So people that are looking for $300,000 in income on a post-tax basis or pre-tax basis, on that 5% return, need $4.5 million in their retirement account at a liquidity event. Okay? So I'm just giving you that math like $300,00 for four-and-a-half million dollars. So I think that just allows a 25-year stream of income. So those are the kind of things to think about in the math.

Dr. Noel Liu:
And with these numbers, the sky's the limit, right? You can retire whatever amount you want. One of the burning questions a lot of people ask is: Once when we transact, what is the post-sale look like? And since you've done so many of these transactions, what are some of the stuff, like the stuff you've seen? Which are favorable for the dentist owner and which are not favorable for the dentist owner? And I remember your conversation was like, Not all the deals are the same. Getting more money does not mean it's a better deal, something along those lines like post transaction. And then we'll come back to the other stuff.

Diwakar Sinha:
Sure. Yeah. I always say, Devil's in the details, right? So most of our deals are, most of our clients do not go for the highest multiple. And I think it's very important to understand because as the highest multiples sometimes have caveats in the legal aspects of it of, and you can understand it. When somebody is paying a premium for your transaction, they're going to look for some level of protection on the legal side. So you have to kind of balance the last half of a turn or last one turn with what you're willing to compromise in the legal aspect or structure aspect of the deal. So it is our goal as the advisory firm, to work with our client to help them balance those needs. To think about, the difference to think about is: one aspect is the employment term. So the employment term is going to dictate some level of valuation change on what that looks like. The involvement of the principal of the business, actively within the business, does dictate some level of valuation of the business. So when we work with clients, one of the biggest challenges that a lot of principals have is how dependent is the business on the principal. And a lot of principals have a difficult time transitioning out of the chair to running the business; even when they're running the business, how they can scale back from running the business and letting the operations team run the business without them. And as you work with Aidan and as we work with a lot of principals, our goal is for the business to run independent. We want our clients to go on vacation, travel the world for 2 to 3 weeks, and the business actually has an uptick when they're on vacation. We want them to say, Oh, the business didn't really miss me. And that's a good running, efficient business. And if we can demonstrate that when we're taking a business to market, and if I can demonstrate that on a CIM, which is confidential information memorandum, and show systems within the business are performing quarter over quarter, year over year, then I can get the extra half a turn, extra one turn on that business, even if the employment terms and the structure of the deal are more conservative. When I say conservative, where my client may say, Hey, I don't want to do a five-year employment term, but I would like to do a three-and-a-half or a three-year if I can, the business is not really dependent on me because you've helped me scale back from the business, and I like to have some level of flexibility on it, because now I can demonstrate different things within the business. So it all comes down to: What can I demonstrate? The other aspect is just like publicly-traded companies. If you look at stocks within a business, stocks go up to some level; not knowing exactly how. There's a lot of variables in stocks. They tend to go up when somebody can see a leadership team forecast the earnings and the revenue of a business, and how that company hits the predictability of that stock a quarter later. Okay? So it is our goal with the principals and the executive team ability to forecast their revenue, forecast their net expenses, forecast their ability to see the number of patients, and execute on that strategy quarter after quarter, and improve that quarter after quarter. And if they can do that, we can demonstrate that, now we can take that business to market, show that to the strategic partner or the private equity partner as they're scaling their business; that, Hey, this company forecasted. This is their notes. This is their quarterly meeting notes from their board meeting. Okay? They demonstrated that they actually hit it. And we're able to demonstrate that in our process.

Dr. Noel Liu:
Diwakar, this is huge. This is huge. I'm serious. Because guys like us, we are so entangled in the business that we, it's hard for us to pull ourselves out. And what you just mentioned, it's like this huge nugget. So you're saying like, as much as we can pull ourselves away from the business, and the business is operating on its own, that's where you get the highest multiple. Is that correct? With the leadership team.

Diwakar Sinha:
With the leadership team. And if you can show that, yeah. That's really because it's about scale. It's about the ability to scale the business.

Dr. Noel Liu:
So someone who's really entangled in a business right now, and they really want to take it to the private equity, and they're just looking at the EBITDA, you were probably, in your experience, say that's not a good time to go yet. Correct?

Diwakar Sinha:
Again, if you're 1 to 2 locations, I mean, you're going to be tied to the business. I just want to kind of caveat that. Yeah, if you're 1 to 2 locations, you're going to be tied to some level to the business because you're probably in the chair. Nothing wrong with that. You're still going to get a good valuation for your practice and you're going to strategic. You're going to strategic at 1 to 2 locations, 1 to 3 locations. If you're at 10 to 25 locations, your options are strategic, your options are sponsors. Okay? So it really comes down to and what kind of back office have you built? Have you built a good centralized back office? What is your uniqueness? You know, these are the questions we're asking our clients. What makes you different than some of the existing platforms in the space? Okay. So when we take on a client to take them to market, to transact, and they're at 15, 25, 40 locations, we're actually asking questions like a buyer. What's different about you? But then again, going downstream, if somebody is at two locations, at three locations, and we're taking into the market, we're still asking the questions. Okay? What the questions there would be? What is your valuation expectations? And what is different about you in the market? Let's say if somebody is located in Dallas, Texas, or somebody's located in San Antonio, Texas, what is unique about your business, and how have you weathered the competition in your market in 2024 or 2025? And how do you see your business performing going in 2026? And we have to be able to work with them to show quarter-over-quarter improvement and going to market, because that's what's going to; even if that business is going to transact at 6X or 7X, my goal is to transact it for an extra quarter-and-a-half a turn, because I can show that business performing better than their peers and that our principal, our client, has the ability to outperform the market.

Dr. Noel Liu:
Got it. So it's pretty much, it's very tailored, right, to someone's goals and someone need and what's out there.

Diwakar Sinha:
Yes. I mean, our approach is personalized. Yes.

Dr. Noel Liu:
Right. All right. So we talked about the last, the goal, like what's going to happen on a transit? Let's come back. Let's come back in time a little bit. I'm going to pull you back to, let's say, we have 1 or 2 locations or three locations. Now we want to start growing. We want to take our organization. We want to grow up into, like let's say, into multiple locations. What are some of the challenges? I know for sure, capital is one of the biggest challenges for sure. And then of course, is the processes and the systems. What's your take on that, on what the capital market is? Like how do we get capital to grow and fund our growth?

Diwakar Sinha:
Sure. So as I said earlier, I was in the credit markets for about 17 years. So I always tell everybody this: I can get you in debt. Doesn't matter. So finding capital for clients, that's not a concern for us. The question is being responsible with that credit and deploying that in a meaningful way. And the question is: Why are you taking on the debt? And I'll give you an example of it, and I'll go in, and how scale matters when you're taking on debt. So let's say you're buying a practice grossing $1 million, and you have two locations. You're buying a third location, and you're buying a practice grossing $1 million. And let's say the transaction firm is selling for 80% of revenue and it's $800,000. When you take on that debt, you're going to the bank for $800,000 loan. The practice is selling for $800,000. The day after you've transacted, you have zero equity, just like real estate, right? When you buy real estate, the value of your loan, even if you put money into it to the value of the property, your equity in that position is zero. Okay? So our goal with that client is to say, Okay, what are we going to do with that, with that asset we bought? Okay? How are we going to improve that asset from grossing $1 million to $1.5 million to $2 million? So we have to have a plan for growth before we acquire it. Okay? So we have to see some kind of a CAGR, compound annual growth rate, within an 18 to 24-month plan within the business. So if you add on debt and if you're going to take on debt, the ability to continuously have access to capital has to have foresight, which means you have to be able to show yourself first, forget about the bank, that you can take on that debt, you can repay that debt, and that you can create equity within every business you buy within 12 to 18 months before you buy the next one. Okay? That's responsible lending to yourself first, before you show responsible lending to the bank. So we work with our clients to think through that philosophy as you grow. But the capital is available. Cost of capital in 2023 and '24 were extremely high. So for secured overnight finance rate was really high. Those conditions have gone down a little bit. Prime has gone down. In my podcast, end of last year, I talked about that a Prime is going to go down in Q1. It's gone down a little bit. I think going into Q3, Q4, we're going to see cost of capital, probably by Q4, going down by at least 50 basis points. We're not going to see some of those changes today, but I think we're going to see going into Q3, Q4, another 50 basis points. It's going to be too politically driven to have it done right now. But I think you're going to see unemployment go up a little bit. You're going to see some level of uptick in inflation going up a little bit. But I think everything's a lagging indicator with the Federal Reserve's. So they're going to probably react to a little bit in Q3 and then a little bit of Q4. So we're going to, hopefully, see Prime go down to 7.1% to 7% by the end of the year. And I think that's really, that's going to, again, create some level of excitement going into the capital markets towards debt, towards equity, and all those things. And those are the kind of things. So to coming out of 24, credit's readily available. Credit was available in '24, but you had to have a really good performing business. In '25, credit's available, now, for businesses $2 million in check size to $500 million. I mean, that's the space we play in; above $2 million in assets. A lot of people are going to the traditional banks in this space and having a tough time getting debt above $2 million. That's where we really play, you know? So that's not a challenge for us. And then institutional debt where we sometimes play is above $50 million and goes into $250 million.

Dr. Noel Liu:
Got it. Got it. So okay. No, that's great. That's great to know about capital market. Let's go back to basics, man. Why would somebody want to grow?

Diwakar Sinha:
That's a great question. I think those are very individual conversations we're having when clients are coming to us. I think a lot of our people that come to us are entrepreneurs, right? They're wanting to fulfill a vision. They have a practice that are one locations or two locations. They're getting, wanting to see the practice grow within their four walls. They're wanting to grow to second or third locations. So that's one aspect of it. I always caution them. I said, Hey, you know what? Be cautious about it. Growth is not always successful, right? So think about your four walls first. Think about have you maximized your utilization within your four walls? And the thing I would think, get people to think about is: before you get to the next acquisition, think about: are you at $300,000 in revenue per operatory within your four walls? Okay? So that's probably a key takeaway for your audience members. So six-share operatory should be doing at least $1.8 million. An 8-share operatory should be doing about $2.4 million. If you're a run rate to do that, great; now let's start thinking about the next acquisition. But also understand: do you have the bandwidth to do it? What is the quality of work life balance you're looking for when you're thinking about those things? Are you comfortable with taking on additional debt? So these are conversations we're having with people to make sure they understand that when you go from practice one, to practice number two, to practice number three, is that something you're ready for and ready to? I think you asked earlier, the biggest challenge ends up being practice number three and practice number five. Those are really the dark holes for a lot of people. Practice number three is where they really need to start stepping away clinically, maybe down to two days a week because somebody has to work on the business. If you're not working on the business, we start to see financial performance and clinical performance drop down in the business at practice number three. And by practice number five, they need to bring on a regional manager to run their operation in conjunction with them being on the business 2 to 3 days a week.

Dr. Noel Liu:
So that black hole. Do you see oftentimes see see a lot of practitioners, they go down, like pretty significantly in those?

Diwakar Sinha:
Third practice is really the one we see the biggest drop in impact in financial performance. The third practice is probably the biggest one. If they can get past the third one, they can get to the fourth one; they start to see a little bit of an uptick. The fifth one is the next one. We see a bigger drop in, for two reasons. One, they bring in on the regional manager. Sometimes the regional manager is not a successful hire. They're still trying to figure out their clinical schedule with running their business from afar. They might have associate turnover. Again, it's that fifth. Again, these are third and fifth one, are the really the big black holes within their practice. So just managing that, having the foresight to it, stress-testing your business, stress-testing your cash flow, I think those are very important things. So anybody that's thinking about their third practice or their fifth practice de novo or acquisition, I would drop your revenue down by 10% and test it and say, Okay, if that happens to my business, how does my cash flow look? How does my lifestyle look? And what is my cash reserve look like under that environment?

Dr. Noel Liu:
Sure. And if someone have a stomach to take it, they go for it. Otherwise, they just stay where you are. Correct?

Diwakar Sinha:
Yes. Yeah. And if you don't have the cash position today, then build up the cash position. And I always tell people they need to have six months of operating capital in cash reserves.

Dr. Noel Liu:
Six months of operating reserve. I love it, I love it. Now, when you say six months, it's like, how often should somebody from a business start replenishing that cash? Let's say if they used it up. Is there a metric? Is there a formula? Or is it like just case-by-case basis?

Diwakar Sinha:
So we use a rule of a third of excess cash. So I'm giving you a lot of, your audience members are getting a lot of tidbits from this thing.

Dr. Noel Liu:
Oh yeah. Big time.

Diwakar Sinha:
So the majority of businesses have maybe one month of operating reserve and cash reserves. It's just what we see in the market out there. So not to panic anybody in the market, there's a path forward, right, to get people there. And the way to think about it is: as we help you improve performance within your business, okay, is to look at your improved cash flow, which is after debt service; improve cash flow after your normalized clinical compensation, which is you're paying yourself as a normal doctor for working within the practice. So pay yourself normally, okay? And let's say, based on your improved performance, we're able to show that you're getting an extra $20,000 a month in cash flow. Okay? A third. A third goes to pay taxes. Put into your tax account, tax reserves, because Uncle Sam's got to get paid. Okay? A third goes into your cash reserves for the business, which is help replenish your six months of operating capital.

Dr. Noel Liu:
Love it.

Diwakar Sinha:
Okay? And a third goes into immediate gratification. Because if we don't realize it ourselves, and we don't realize that we're able to put it into our personal savings account and our personal checking account and show that to our spouses and our family and our children, and go on vacations and say, You know what? We are working hard, and this is what owning a business is about. Okay? Then we're not able to validate for ourselves the reason we're working harder and what our business is to be able to provide for us. So a third.

Dr. Noel Liu:
The rule of thirds. I love it, I love it, man. So let's talk about multiples. We, you and I, we just spoke about the business should be ready to transact. Right? Like, what are some of the preparation stuff that we do? I mean, we don't really have to decide, like, Hey, we're going to transact, we're going to sell. But I feel like at any given time that business should have like a valuation done, and should be ready to go. What are your thoughts on that part?

Diwakar Sinha:
Absolutely. We recommend people every 3 to 5 years come to us for an analysis to see where their business is today. Even if they're transacting in ten years, just get an analysis. Like, Hey, somebody comes to us today, say, Hey, I'm looking to transact in 2030. Nothing wrong with that. We can have them do a due diligence and say, If your valuation expectations. Let's say you have two locations. Okay? And we actually did that with somebody that has two locations. And their valuation expectations was $8 million. Okay? And based on what their business is today, they're probably on track to hit 5 million. Okay? And we said, Hey, these are the things you need to be thinking about if you want to get to where your valuation expectations are in five years. We actually provided them the guidance today if they want to work towards those goals. Okay? And we gave them the guidance to think through it. That's our discovery day of go-to market. So, and said, Hey, why don't you come back to us in another two years? Because that will put you right around another three years from that, from a transaction. And we need to, at that point, think about going to market. So you have two years to fix the operational issues in the business we identify today if you're thinking of transacting in 2030.

Dr. Noel Liu:
So would you recommend that someone looking to grow and acquire practices that they need to fix their existing ones and the current books first, right, before actually going out there to the market and saying, Hey, I want to buy another practice, another practice?

Diwakar Sinha:
Yes, financial reporting is so essential within the business. And when we onboard a client, I mean, that's one of the first things we notice. We onboard, and we do a financial due diligence and operational diligence in the company. So financial reporting is: if you don't have clear line of sight within the business, then how are you running the business from my lens, right? Yes, you can look at production reports, clinical reports, and yes, it gives you some level of line of sight. And I really do appreciate when you have a reporting like dental intel and practice analytics, it allows you to understand how patient care is being done within the practice. Absolutely appreciate that. But having good financial reporting that allows you to understand exactly what things, how operational performance is tied to financial performance in a real-time basis, which means you should have financial reporting within ten days to max 15 days after month end, that gives you clear KPIs. Means: if you're trying to run supply expenses at 4.5% of your top line revenue, you should know that by the 10th to 15th day of the month that you are there. If you're trying to keep dental assistant wages around 7% or 8% or 9%, depending on your business model, some businesses have a dental wage expense of 9% in their model, nothing wrong with it. Even the industry might say 7%. Nothing wrong with that because we'll say, Okay, your model does deserve it because you are XYZ type of dentistry. Okay? We will accommodate that. But we need to have that reporting by the 10th day of the month because we need to be able to pivot if we're looking to make a change within the business. So that's really important. And that comes down to changing from cash to accrual, especially for.

Dr. Noel Liu:
Cash to accrual.

Diwakar Sinha:
Cash to accrual, as you, especially a lot of businesses, when we take them to market, if you're exceeding; this goes into the larger groups. When you start exceeding five locations, when you start exceeding $2 million in EBITDA, we're probably the only firm that will take a client and ask him to do a sell side QofE: the quality of earnings. We believe in that wholeheartedly. Our due diligence typically is about.

Dr. Noel Liu:
What is that? What is that? And let's talk about why.

Diwakar Sinha:
Yeah. So the best way for me to describe a quality earnings is like a home inspection. When you buy a house, the buyer is going to do a home inspection. Right? And they're going to find go through every cabinet door, refrigerator, turn every faucet on and off, and they're going to say. And no home inspection comes out and tells you, You have a perfect house from a buy side. Okay? So I always tell people, When you're selling a house, get your home inspection done so you know what's wrong with your house. Okay? And you know exactly where you stand. Okay? So when we have a business that is over about one-and-a-half to $2 million, and I talk about this in our podcast, we do, have our clients do a sell side QofE. It allows us to have a higher level of accuracy when we take a deal to market and have a defensible position in the market. Okay? A defensible position in the market. And so now you have two positions in the market: a Polaris financial metrics and a sell side QofE third party firm. Okay? Both with a very close number. And our numbers are within 5% typically, max maybe 7% off from a sell side QofE. A buy side is going to come in and have their QofE, quality of earnings also done. Okay? Their house inspection done of auditing your financial numbers. Okay? And they're going to have a difficult time looking at that number and having a much variance number because you have two firms. Having a number that's very close to each other, they're going to come in within your number. Okay? So that allows people to have a closing LOI be very close to the initial LOI from our process, because our numbers are so close to typical third-party QofEs in our process. So quality of earnings is a financial diligence typically done 1 to 2 years out. Okay?

Dr. Noel Liu:
1 to 2 years out.

Diwakar Sinha:
Oh, I'm sorry 1 to 2 years back. Apologize. In a business. So if you're orthodontics, we go back two years within the business because orthodontics patient cycles are 18 to 24 months. If they're general, we go back 12 months to maybe 18 months, depending on the type of business we're looking at within the business. And it's important: the larger the cycle of the business, if it starts becoming more than $5 million in EBITDA, we might go more than 12 months. If it's closer to 1 million to 1.5 million in EBITDA, close to 1.5 million, we're just doing 12 months. But it's well worth it. We're able to drive valuation of the business. What is the impact of it? For example, whenever we have a sell side QofE deals based on our Rolodex, we're able to drive a certain quality of buyer to the letter of intent, certain valuation to our letter of intent, because what we've done for the buyer is given them confidence. Just like when you buy a house, imagine when you're looking at a house. You have five houses to look at. One house has a home inspection already done on it. The other four houses have no home inspection done on it. Just takes your level of stress away. When you're buying that house, that home inspection is done, and you know what's done. Now, you may do your own home inspection because you need to have something that reflects your interest. But if that home inspection is done for you, you know, yeah, you know, that faucet in the kitchen is not going to work; it's going to cost me $200 to have a handyman fix it. Okay? But you're aware of it, and you're comfortable with it versus the other four houses are not giving you that information. Okay? And that's really our process in the market, is to ensure there's a higher level of confidence with our clients to the buyer space. So when the deal is going to market, we have more confident LOI's being issued. Our clients understand that we have a bona fide offer on the table.

Dr. Noel Liu:
Love it, love it. Would you recommend everybody just do it just for the sake of doing it? Or is it only when you're about to transact?

Diwakar Sinha:
I always recommend to call us, and understand does it make sense for them, because it is an expense they take on board that needs to make sense for their business. We have some clients that are going to market in 2028 that we're doing that for them right now. So they're going to do one now, one in two years because they're actually prepping for their business two years ahead. So that's really a process that's a little more personalized to them two years out, because we're trying to test their process two years out. So it doesn't make sense for everyone to answer your question.

Dr. Noel Liu:
Got it. Switching gears a little bit. Coming back to, we're slowly going back to the single practice. Right? So now we are looking at a group practice trying to buy a single practice. Aiden keeps talking about arbitrage. I want you to shine some light on what is that and why does it matter? So let's say a group of 6 or 7 locations trying to buy one practice. What is the difference in that multiple that we're looking at?

Diwakar Sinha:
Yeah. So we've worked with a lot of groups that are 5 to 10 locations that are buying one to two-location practices in the market. And there's a, this play of arbitrage which is economic upside within a deal. Okay? So instead of the doctors that are 1 to 2 locations transacting with a strategic that is private equity-backed, they're consolidating within doctor-to-doctor-owned practices. So there's this big movement coming out of 2023, 2024, that they're not going to big strategics in the market; they're actually transacting within the doctor pool. So you have this big 5 to 15-location group growing in the space. And what this economic arbitrage is, if you have a doctor location group that has five locations and let's say, they're $2 million in EBITDA. Okay? And let's say their valuation is 7X or 8X in the market. Okay? They can acquire a practice, a solo location, at 5X. Okay? Maybe 6X. Okay? Depending on where that practice is, EBITDA is at. And the next day, they can roll it into their cap table or their ownership table at 7X or 8X. So the moment they roll it in, there's a one-turn improvement maybe a two-turn improvement. Okay? And that's for both sides. That's for the doctor that's rolling their equity in. And that's also beneficial for the party that's rolling that doctor in. So it's mutually beneficial for both parties that they can continue to grow that journey together. So hopefully, the doctor that's rolling in their practice into the five-location group has a good partnership plan in place or growth strategy plan in place for that. And the five-location group that's working with that one-location doctor has a good plan to support them to grow that business. So it needs to be mutually beneficial on that side. And so when we're working on that buy side to help bring that partnership together, you know, that economic arbitrage is immediate because of the delta between the 7X and the 6X or 7X and the 5X is immediate. But also there needs to be a long-term plan improvement for both parties.

Dr. Noel Liu:
And you guys at Polaris help with advising both sides or one side, depending on who you're representing. Correct?

Diwakar Sinha:
Well, yeah, nine out of ten times we get brought in by the group that's like 3 to 5 locations or ten locations. Yeah, but we actually are working on both sides. We'll go, and if our five-location client or ten-location client is not being fair towards the one-location doctor, we'll say, I think if we do this decision, you're going to kill the deal. And we don't want them to kill the deal. We want it to be equitable. Because to me, a good partnership is a partnership where that one-location doctors, feels that the goodwill was given sincere consideration from the beginning. Right? And because it's not, even if they're rolling over 30%, 40%, let's not go over the $30,000 or $50,000-valuation change; let's focus on what this journey looks like over the next 5 to 10 years.

Dr. Noel Liu:
Cool. Well, I got this last topic here for you.

Diwakar Sinha:
Sure.

Dr. Noel Liu:
Now, I'm a new dentist. I just started I want to grow a group, and that is a lot of the dental students nowadays I'm seeing. They're, for some reason, they all want to grow a group for some reason, right? De novo or acquisition as a first, very first practice? And pros and cons of both.

Diwakar Sinha:
So that's a really tough question for me because I've done over a thousand de novos as a credit banker. And I've done a few hundred acquisitions in my last seven years. They both work really well. So I'll answer the question. And I actually spoke at the Academy Dental group practices on this topic specifically. And so de novos are meaningfully successful in the fact that if you are willing to spend 500,000 to 600,000, 700,000, depending on the square footage of the space, and you have a good marketing plan in place, and you can get to 40 to $50,000 in production in the first month, okay, there's a whole plan in place around that, and if you have a plan in place with new patient flow to get to $1 million in revenue, in the first 18 months, okay, they're going to be very successful. And if you look at a lot of successful models for de novos, they're trying to get to $1 million in revenue in the first 18 months. Okay? And you can build a successful group practice that way. Okay? But you need to be able to reverse engineer your plan, okay? And you need to have patience and fortitude to be able to build a successful de novo model. 50% of our clients, 60% of our clients that do group practices are de novo models. Okay? You look at Pacific Dental Services, historically, they've been a de novo model; very successful in the market. Okay? Deca Dental overall was a de novo model; very successful in this space. So really good brands in this space that do a really good aspect of de novo. So I don't want to discourage people from building de novos. I think the challenge ends up being that is, are you okay with low cash flow in the beginning? But I think that could be offset by having planning into your business model. And we help people plan. So if somebody is a startup doctor thinking about it, give us a call. We can help you think through it as far as what that looks like. As far as acquisition goes, if you're thinking about your acquisition in your situation, ideally buying a practice that's six shares. Okay? If you can. Now that may not be available in your market. Okay? You might be looking at a 3-chair or 4-chair practice in your first practice. Okay? Don't be discouraged by it. Buy a practice that has a low-remaining lease term. Okay?

Dr. Noel Liu:
Low-remaining lease term.

Diwakar Sinha:
Low-remaining lease term. I said that specifically with intent. Reason being, if you're looking to scale a group practice, okay, buyers in the space want multiple-provider practices, okay? They do not want single-provider locations. So four-chair practices are not very attractive in the buyer space. Okay? They want 6 to 8 shares. Okay? That becomes very attractive in the space because their concern is if a doctor resigns or a doctor quits, am I shutting down that practice in that location? So if you're looking at a practice that has three chairs or four chairs, absolutely go for it. Acquire it. Just look at it to make sure it's got a two-year, three-year lease remaining on it. Or if a bank's requiring you to have a five-year lease, great. Get a two-year lease with three one-year renewals on it. Get to a five-year lease. Satisfy the bank. Okay? At the end of two years, if you have three chairs on it, you should have $900,000 revenue. Remember I said: $300,000 per operatory? Okay? You would have bought that practice for hopefully a good economic value. You would have created good equity. Remember I said: when you buy a practice, you need to create equity within 18 months. Borrow responsibly. And at that point, relocate that practice that has three chairs or four chairs to a 6 to 8-share facility, 12 months before your lease is expiring. And then, you know, now you've set up your, for lack of better word, Taj Mahal of your first practice. That's your 8-chair practice. You're bringing on your associate; work on your leadership skills; build out your team; scale back to maybe from five days or four days to three days; figure out how you're running the business on the business before you think about going to your second location.

Dr. Noel Liu:
That's a nugget right there. That's a huge one. Why does banks have so much a problem giving out loans on a de novo versus an acquisition? If everything is planned out, like you as a banker, you did a lot of underwriting. What is the biggest concern they have? Is it the operator or is it the de novo in general?

Diwakar Sinha:
So I think, so I'll speak from what may be happening out there. So one is could be the operator. One could be the business plan. Okay? So business plans are a lot. Okay? And I think a lot of people may not be thinking about their business plans clearly. And, Noel, I'm happy to help people think through the business plan on another podcast. Because I've done a lot of business plans, and we actually have a curriculum internally on how business plans should be for group practices and how business plans should be for private practices that are 1 to 2 locations, and how to think about de novo versus acquisitions on growth strategies. And when they're thinking, so that's one aspect of it. The second aspect is that banks look at how doctors are applying for startups. So these are some criterias out there that are in the market. So if somebody's coming out of dental school that does not have GPR, okay, general practice residency behind there, on there, then they're going to have a tough time getting bank financing without GPR. Okay? So I don't know if some of your audience members are having those challenges or not. But typically, under, without a GPA it's tough. Okay? With the GPR, you typically have to have one-year license. Okay? Without a GPR, you have to have two-year license. Okay? So these are some things to just put it as a guardrail to think about. Okay? Then typically, I'm going to give you a lot of credit aspects of how to think about on that side. In addition to that, most banks are looking for doctors to at least make about 175 to $200,000 in personal income. Okay? Why is that? Okay? Well, the average doctor has about 400 to $450,000 in student loan debt coming out. Okay? Even if they were on an income-based repayment program because they have $500,000 in a mortgage. Okay? Because they're going to have $500,000 mortgage. They might have one-car loan. Their spouse might be making 100, $150,000 to augment some of that personal household income; they still need to make $200,000. Why is the bank looking for that? They're saying, Okay, you're applying for a $500,000 bank loan. Okay? That needs to, at least, grow some million dollars in revenue at some point, even if it's three years out. Forget about my 18-month rule. Let's use a three-year rule that a bank may have on that practice, or a four-year rule that a bank may have on that practice. They're going to say, Okay, in order for that practice to do $1 million, that means the doctor has to have the ability to produce $800,000. Is he or she producing $800,000 today as an associate? And if they're not producing that as an associate, how will they be able to run a practice and produce $800,000 on their own? Okay? So those are the kind of underlying things that bank's looking at and thinking about and wanting to digest in their business plan, in their economic due diligence to think about long term when they're thinking about de novo underwriting. It becomes a little bit easier in acquisition. But on the acquisition side, it's actually a little more cleaner. More deals get turned down in acquisition financing than startup financing thinking about it, being if I'm a doctor making, let's say, $150,000, and let's say I'm buying a practice grossing $1.5 million, and the selling doctor's grossing $1.2 million, I'm producing $150,000, I'm making $150,000 as an associate. I'm clinically producing, let's call it, $500,000. Banks are not going to approve me for 1.2 million because the bank's going to be concerned how can I replace a $1.2 million producing doctor when I, as an associate, am only producing 5 or $600,000? This is the question a bank's going to ask, and I'm just giving you my banker's lens.

Dr. Noel Liu:
Great. Those are great nuggets because we as dentists, we don't think about bankers going to be knowing all this stuff. Right? So we are like, All right, cool. We got denied. Why? Right? No, I love it. I love it. Hey, anything else you would like to add? This was a great episode. Lots of nuggets, man.

Diwakar Sinha:
Yeah. I think just to take away as far as building a group practice or even if you're a 1 to 3 locations, just think with the end in mind. And if you don't have an end in mind, we're happy to have that conversation with you. Building a group practice can be great, it can be very rewarding, but it comes with challenges within that. So take a pause. Let's digest what that looks like for you. And we're happy to walk you through that. Whenever your exit is, really come to us five years out, seven years out, before that, help us let you understand what that looks like for you. Because to maximize the value of your business, you really need to transact five years out because most parties want you on board for 3 to 5 years to really provide that continuity and make sure they have good longevity within the business.

Dr. Noel Liu:
Absolutely. And Polaris does all the stuff here. In full disclosure, I was a client of Polaris as well, and we did take away lots of good stuff. And I think Aiden was our guy that he helped us with getting us set up. And so far, we're on the right projection. So the trajectory is right. I mean, the direction is good. So, Polaris does a lot to help any group practice. How can someone, what is the website there? Polaris.com?

Diwakar Sinha:
No, that's going to get you to the ATV website.

Dr. Noel Liu:
Okay. Okay.

Diwakar Sinha:
And our website is PolarisHealthcarePartners.com.

Dr. Noel Liu:
PolarisHealthcarePartners.com. I'm definitely going to put a link down there as well. And anyone, when they call, what are they expecting?

Diwakar Sinha:
Yeah, I think if they send me an email, I think they're going to get, depending on their need, we'll just do a basic console to understand what they're looking about. And we're happy to, again, just help them if they're a, coming out of residency, just thinking about a startup; we can just have a console with them, give them guidance. Probably 20% of my calls are people that are one year out. We're talking to people now that are one year out, thinking of building their first practice to your point, Noel, and we're just giving them the guidance on how to think about doing their de novo. So we're just happy to have conversations with people to think about what their future looks like in five years, ten years out. So just give us a call. Let us have a conversation with you. Help us give you your vision, give you your why, and guide you in what the right direction may be, coming out of the podcast.

Dr. Noel Liu:
All right. Great deal. Hey, Diwakar, thanks a lot for coming on. It was a great pleasure.

Diwakar Sinha:
No, thank you for having me.

Dr. Noel Liu:
Lots of good tips. Yep. So we're gonna land the plane here. Ladies and gentlemen, thanks for watching. And thanks for hearing. Make sure to like and subscribe, and we will catch you on our next episode.

Dr. Noel Liu:
Thanks for tuning in to the Secure Dental Podcast. We hope you found today's podcast inspiring and useful to your practice and financial growth. For show notes, resources, and ways to stay engaged with us, visit us at NoelLiuDDS.com. That's N O E L L I U D D S.com.

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