The Future Adjustment Podcast Episode 7: The Sweat Equity Buyout

 

Podcast Transcription

Daniel: Welcome to The Future Adjustment, Chiropractic Economics podcast series on what’s new and notable in the world of chiropractic. I’m Daniel Sosnoski, Editor in Chief of Chiropractic Economics. And our guest today is Mark Sanna DC, a diplomate of the American Chiropractic Rehabilitation Board and a fellow of the International College of Chiropractors. You probably know him as the head of Breakthrough Coaching, a practice development and coaching firm. He’s also a member of the Chiropractic Summit and an influential voice in the chiropractic profession. And he’s here today to talk to us about the sweat equity buyout, a strategy for successfully selling a practice. Dr. Sanna, tell us, what are some of the challenges facing doctors today who want to buy and sell a practice? Has the landscape changed at all?

Dr. Sanna: Well, Daniel, it has. Thanks so much having me with your audience today, I do appreciate it. And as I’ve ventured out through the chiropractic profession over the years there’s certainly has been a change in the landscape. For some doctors, it might be a bit frustrating. I think docs who had practiced early on in their careers may have had a level of financial reward that has become a little more challenging to a team today. And, gosh, after the recession that hit 2007, 2009, there are a lot of folks who were practicing and thought that they would be able to retire when they were 65 years old and found themselves looking at a very different financial picture. A lot of folks had savings accounts dry up and retirement plans blown up, and actually found themselves where are they thought, “Gosh, at this point in my career, 60 years old, I really ought to be looking at a very different financial picture for myself.” And, Daniel, I’m seeing the docs now are having to practice until they’re 70, 75 years old and their exit strategy is to, kind of, be carried out of the practice on a board rather than having, you know, a surfboard. So, it’s really changed the financial reality for docs who have worked so hard at a career, served their patients so well and they’re frustrated quite frankly.

Daniel: Yeah. And from another angle, we might be dating ourselves a little bit here but I know that when I graduated college, I had a essentially zero debt. I was able to basically fund myself all the way through. And I would imagine that when you got your license to practice chiropractic, you probably were not saddled with the hundreds of thousands of dollars in debt, is that right?

Dr. Sanna: Well, it’s a very different picture right now and it’s a very, very significant situation. So, it’s actually kind of a broken cycle. We’ve got our students are coming out of chiropractic college, and it’s an investment now to go to chiropractic college. You’re coming out with $200,000 plus in debt. And, you know, where you might have been able to have a clean start in a come out and get right into your career, and it certainly was much easier for me. The students today are looking at working but still 40, 50 years old paying $2,500 a month just for their student debt. I say it’s sort of the second home, the summer home that you’ll never get to live in, you’re paying for for your career. So, it puts them in a difficult situation. Because in years past, you could very easily come out of chiropractic college, put up your shingle, and start your practice or have some access to funding where you could buy an existing practice. And right now, because of the student debt that’s out there, docs are looking at being, sort of, indentured servants, as an associate in a practice for years, and years, and years, before they’re able to have a practice of their own. And I know that sounds real dark and dire on both the practicing chiropractor and then the future chiropractor, but there is hope, there is some light at the end of the tunnel, Dan.

Daniel: Tell us a little bit about what that hope is. What is a strategy that helps both the older doc who is looking to transition out, and the new doc is trying to set up his own practice. What is a possible route to success for them both?

Dr. Sanna: Well, here in lies the wonderful tool called the Sweat Equity Buyout or I call it SEBO. And what it really does is it serves both the owner and the buyer. And it puts them together in a way that allows them to have the maximum benefit from both perspectives. So, for the existing practice owner who’s not sure what their exit is, it provides an exit strategy, it provides them the ability to actually retain the value. I’ve seen docs actually, turning, giving the keys away to the practice because they’re done with it. This is a way you can maintain the value, actually maximize the value of your practice. And for the new practitioner who doesn’t have easy access to funds and has that student debt, now we’ve got an entrance strategy that allows that doc to actually cumulate funds through the efforts of their labor, and not have to access funding through traditional means. Going out for bank loans and/or, on the other hand, having to have financing from the owner which puts risk on the owner as well should the deal fall through, and have it not worked out. And then you’re 65, 70 years old back trying to reinvigorate and revitalize a practice that you thought you were done with. So, it’s a wonderful, wonderful strategy.

Daniel: So, let’s say that you’re the chiropractor and I’m the new student and you’ve agreed to take me on as an associate, and I work for you for a year or two and you realized that I’m picking up your technique, I’m making your established patient base happy. Is there something you might come to me and say, “Hey, Dan. If you’re interested, I’d like to talk with you about setting up a SEBO.” And where do we go from there?

Dr. Sanna: Absolutely. So, there are some very specific steps. And just to underline what you had just mentioned, we wanna have somebody who’s gonna match the owner doc, the existing practice patient technique, and the patient management or practice management style of that practice. So, I wanna make sure, first of all, that I’ve got somebody who’s gonna match me in terms of the care that my patients are used to being given. Second, I want somebody who has the ability to step into the ownership of this practice. I’m not interested in hiring an associate, I’m interested in finding somebody who’s gonna be the owner of this practice. And we’ll find out very quickly if that doc has the wherewithal to be an owner. It’s a little bit different than just being in an associate and sort of a technician and doing exams, and patient adjustments when you have to step in and actually manage the business of the practice. So, I’m looking for an individual who has that sparkle, that work ethic, to step up to this type of an arrangement.

So the first step is, we’re going to calculate what the monthly living expense will be of that purchaser. Now this is a key step and it’s very important to calculate all of the living expenses. So any personal debt, their rent or mortgage, if they’ve got an auto loan, any credit cards that are out there. Student loan payments, of course, and as I mentioned before, sometimes that’s half of the living expense of most young practitioners have a living expense. It’s gonna be about $4,000, $5,000 a month and unfortunately, half of that is gonna be their student loans. But we don’t want to underestimate that because the doc needs a good living expense and that they’re not having to look elsewhere to supplement that. Having to have a job working, you know, as a personal trainer at the gym or the Cross Fit, or whatever else is out there. I want this doctor’s full attention upon the practice. And so, once we agree upon that monthly living expense, then we add to that the increased overhead that we’re going to realize by having a second employee here or a second doc in the practice.

And so that’s gonna include like a practice insurance, health insurance, that we have to have additional staffing hours or equipment. All of that is gonna add probably another $3,000, $4,000 a month. So, take that $3,000, $4,000, add it to the $4,000 that we’ve got for the docs living expense, and we call that the base. So, that base covers our increased overhead and it covers the living expenses for the doc. And after that, about $8,000 here is where the SEBO really takes off.

Daniel: Okay. So, I understand at this point now we’re looking at, let’s say we’re up to about $8,000 a month is what it’s gonna cost to bring this doc on board. And then we’re gonna set up an escrow account, is that right?

Dr. Sanna: Exactly correct. And this is a very unique escrow account because that’s a win-win escrow account. So, after we meet our base, our 8,000, the escrow account is put in place for any income that’s earned by that purchaser, by the associate over that $8,000 amount. Those dollars, we’ll call that the bonus, is then split. It’s split between the owner and the associate. And this is pretty traditional for most associate type of agreements where the owner is gonna retain 60%, 70% of the services that are collected, and the associate is going to receive 30%, 40% of that and typically they would take that, put it into their pocket or increase their lifestyle. In the SEBO, however, that percentage that the associate earns, is tucked away into an escrow account. Now, this accomplishes two things because the escrow account actually acts as the source of funding for the purchase of the practice. So, here we now have in a period of four, five years, that associate is tucking away, tucking away, tucking away dollars. Four or five years, they can have $200,000 earned, $152,000 plus in that account that they’ve earned, it’s their sweat equity, that is actually going to be used to fund their purchase of the practice, without having to go out to a bank and get a loan, without having to borrow it from their mom and dad, without having to starve and not to be able to live as a doctor the way that they should.

The other thing that it does, you know, is for the owner Doc, if provides peace of mind. Because, should for some reason the relationship blow up and it not go all the below the way that we should, that escrow account is then forfeited to the practice owner. So, now I’ve got peace of mind. I know that the purchaser has skin in the game, I know that I’m not gonna end up if I’m into the SEBO arrangement for three, four years and for something unforeseen the associate then leaves that practice, I’m not stuck starting from scratch. Those moneys, at least, will help me find and put in place the new associate and help that new associate fund the practice. So, it really is a great way. So, a doc can come in without any finances, based upon their work ethic, their ability to go out there and build that practice, and maintain and grow that practice. They can have the seed money to purchase the practice that they would never be able to do anyway. And then the owner doc also has the great peace of mind. I’m getting great value for my practice, I’m actually working in it helping to grow it. So, as it grows it’s great for both parties. And the peace of mind of knowing that, “Gosh, if it doesn’t work out, I’m okay, I’m gonna be fine.”

Daniel: Well, that makes a lot of sense. And obviously, the longer that the associate is working and contributing into that escrow account, the less and less likely it is that the associate is gonna change his mind. Because as that investment gets larger and larger, he or she will really be able to see that they’re getting closer and closer to actually owning their own practice.

Dr. Sanna: And the great news is, is it that should that practice have a value that’s a little big greater than what’s in that escrow account, you’re now as the purchaser very easily able to go out and get an SDA or a loan from a community bank to bridge the gap between what you have and the total value of the practice. Because you now have a track record of actually having worked not in any chiropractic practice, but in the exact chiropractic practice that you’re purchasing. You’ve done it for five years, the patients know you, it’s a very, very easy loan to have funded. And I think from that perspective, it really, really provides a way to break the cycle because you now have a practice that is designed for two practitioners. And, Daniel, you and I have spoken in the past that the group chiropractic practice is the practice of the future.

Daniel: Absolutely.

Dr. Sanna: Chiropractics working together in tandem absolutely. That solo practice is really a thing of the past, there is great safety in numbers. And so, now as the owner doc begins to retire out of practice, we have the excellent position to be in of now being able to hire a new associate who can come in with their own SEBO agreement. And you now have the ability to have a practice that has a vision and a longevity, and a financial structure that permits its continued growth, and its continued future. And this, I think, is what really excites me about this SEBO approach. Is that it allows and provides hope for the docs coming out of school that, “Hey, Benny, there’s a place for me in this profession, there’s a way that I can absolutely fit into a practice and then purchase that practice.” And you automatically got this wonderful self-perpetuating legacy instead of the old way of, “Oh, gosh. I’m gonna work ’til I’m 75 and then who knows what will happen?”

Daniel: And then who knows what will happen, right. And often when an older doc does go to sell the practice, I understand sometimes they’re surprised that maybe they’re not able to sell it for quite as much as they had hoped to. And this is yet another advantage to a sweat equity buyout. And when you say, sweat equity, It sounds like the junior doc is gonna have to hustle pretty hard if he wants to make that work.

Dr. Sanna: That’s right. That you’ll know in about six months time from that doc coming in, you should see that that doc is able to meet that $8,000. In other words, have their own base paid and then the increased overhead, and then begin funding that escrow account. You’ll know right in about six months time.

Daniel: Okay. Now that then leads to, I think our final point here and that is, you know, and then what if it does… Okay, there is obviously some considerations of how this agreement will need to be structured. It probably is gonna have to be formalized in some way. So, this isn’t really something that could be done without a legal or technical assistance, right?

Dr. Sanna: Absolutely. So, this is obviously a legal arrangement. There are some tax issues as well in terms of how we fund that escrow account. There are some benefits also to the owner doc. I’ve seen some docs do some matching funds, so that even speeds up the clock even more. So, let’s say we wanna get out of the practice in two to three years rather than five years putting some matching funds in place. So, having the correct contract, legal agreement in place is very essential. Having a great coach is gonna help train that doc in proper procedures and billing, and coding, and patient management is super, super important. And having that type of legal and technical assistance really makes this something that is, for me, one of the most fun things that I like to do because I’m getting to work with the young doctors, vital. They know technology, they’re not afraid of the EHR, and they know social media, they know how to market a practice digitally, and the seasoned doc might not know that. But what the seasoned doc has is a great sense of how to manage that business, certainly how to manage patients, and that team approach is one that I think is an absolutely win-win situation.

Daniel: Fantastic. Well, I really look forward to getting this information out because it sounds like a strategy that will be welcome in it for a great many different types of practices. Well, Dr. Sanna, thank you so much for spending this time with us today, it’s been extremely informative and uplifting. And you’ve given us a breakthrough look at the future adjustment. I’m Daniel Sosnoski and we’ll see you next time. Bye-bye.