Long-time fertility financial advisor, Richard Groberg, joins Griffin this week to review a Yale School of Management paper and to discuss whether the time is right (or wrong) to pull the trigger on selling an REI practice. What factors should you consider about timing, taxes, keeping a piece of the pie you created- and everything in between- on this week’s episode of Inside Reproductive Health.
Listen to hear:
What it really costs to sell your fertility business.
What hidden caveats to consider when selling an (even profitable) REI practice.
The reality of compounding growth in the fertility field
What the long-term hold principle means for younger fertility specialists who are not yet owners, but who may be on the brink of buying in.
Yale School of Management resource: https://www.readkong.com/page/on-the-nature-of-long-term-holds-holding-a-business-for-5835798
Richard’s Information:
Transcript
Richard Groberg 00:04
On a recent fertility sale, one of the internal discussions was, how much do I bet on myself versus taking equity in my acquire, which diversifies my risk? Because now, my results aren't dependent on much just my practice, they're dependent partially on 5 10 15 practices around the country.
Griffin Jones 00:26
Is it time to sell your IVF practice? Are you getting screwed over by not holding on to your IVF practice? Are you getting screwed over by being a young physician who isn't building equity in their own IVF practice? To begin with? I visit these questions with my guest, Richard Groberg. Richard has been on the show before he's been a Chief Financial Officer, he's been a for-hire financial advisor to help practices on the sell side to sell their practices and devalue them. And together we review a paper by the Yale School of Management that visits the pros of a long-term hold of a business when it might make sense to sell though I think Richards’s commentary is a lot more in-depth and interesting than what the paper has to that particular point. And the different things to consider when you're building an asset versus just trying to flip one. For those of you that have practices that are thinking about selling right now, this paper and this review is hopefully good news to you. I try to get more advice from Richard for younger docs than is offered in the paper. And we also get Richards’s insights on what he sees happening in the marketplace. Now as practices are selling, are they selling at rates as high as they were? Are? Is the buyer side starting to slow down our volumes starting to slow down what returns some practices are still getting? We get those today. And so I hope you enjoy this visit again with Richard Groberg. Mr. Groberg. Richard, Welcome back to Inside reproductive health.
Richard Groberg 02:07
It's good to be back riff and thank you,
Griffin Jones 02:09
You are a popular guest the first time I wanted to do this in a live event with you. I've just been so busy. I tell you audience; I will do a live event with Richard at some point so that you can come on and ask questions directly. While we're talking. I still want to do that. But in the meantime, I had to have Richard back on, so I was chomping to talk to him before the interview starts. Richard says Hang on a second, how are you slow down and caught up for a little bit. But today we're going to talk about the nature of long-term holds, particularly talking about a paper that came from the Yale School of Management on building a business or buying a business and then holding it for a long time. This is mostly about building a business and then holding it for a long time, as opposed to selling it or flipping it. And so I want to go through this with Richard because I think a lot about the younger docs that are not building equity themselves by building a practice and again, getting multiples down the line. And I don't know how much this consolidation happening in the field helps or hurts younger dogs, I have heard arguments made for younger dogs that they are able to buy into things that will be worth a lot more and then sell for a lot more later. But I don't know. So we're going to review this paper together. So and bring up some points for all of you. And then we'll share this paper for you in the show notes so that you can review it yourself. But let's talk Richard, about buying and holding a business and then we might be able to also talk a bit about some things that are either accelerating or decelerating in the field. Maybe it's a good time right now. But in your view, how do you Scott, how do you do summarize the pros and cons of holding a business?
04:19
Oh, Grif, I'd actually unpack this article from two perspectives if I'm putting on my pure corporate finance numbers guy hat on. One is every year my business makes money. What do I do with those profits? Do I Do I pull it out? Do I invest in something else? Do I buy a new sports car or do I reinvest in my business? And the second aspect is when do I sell and I think whether you're in the fertility business or another business, to the extent that you can reinvest your profits to grow your business profitably. It always adds value whether you're adding another doctor to fund growth, you're opening a satellite, you're buying equipment, you're expanding your facility. If over a period of time, that endeavor generates a higher return than the cost, you've added value to your business. And some of the great success stories in the fertility industry, Shady Grove, Boston IVF, others CCRM, in its early days have added value by reinvesting in themselves and growing, as long as you can earn a higher return than the cost, or alternative investments, that always is a positive, especially in owner operated businesses. The second aspect is the whole concept of do I sell? Or do I continue to grow my business? And that's related to the first answer, if you can reinvest in your business and generate an incremental return above your cost relative to the alternatives, you're going to be better off in the long run. Now, there are some caveats that the article talks about, which I'll double back to in a minute. But if you continue to grow your business versus Okay, I want to sell like the article talks about I have to pay lawyers, I have to pay accountants, I have to pay advisors, I'm gonna have taxes, am I really getting what I think I'm gonna get. And again, some of the great success stories in American business and in the fertility industry, are companies that have held long term. Now that that can change. When you and I talked in January, the market for PE back groups buying fertility practices was heating up, multiples were increasing. And when someone wants to pay you 910 1112 13 times your profit. And there are other factors that make you think about selling, I'm getting older. I don't want to be left out of the corporate consolidation. I have leadership issues. I need help with renovations. It's hard to resist that. But as the market pulls back, which it is now, people, I'm sure are rethinking? Do I really want to do this now? Or do I continue to grow my business?
Griffin Jones 07:24
So there can be conditions to sell? And that is part of the second part of the equation that you're talking about is when do people make this decision? But you also referenced the first part of growing the business investing in the business every year it's making money, what do I do with the profits? Do I invest? Or do I take some of it out how much of each the papers starts with this thought exercise, and it's an anecdote, but it's useful for people to think about, which is, think about where you're from, and our audience is from 75% is from all over the US and other 7% or so is from all over Canada, another 6% or so is from all over India, and then everyone else is from all over the rest of the world. And so think about wherever you are from Think about the wealthiest people where you are from. Are they employees of larger company? Did they do they flip businesses one after another? Or do they have at least one major enterprise of which they're still the either the largest shareholder or some kind of plurality shareholder? And I think of Buffalo New York, there's only there's only three billionaires in all of buffalo Richard so my list is a lot easier than somebody from Dallas or somebody from Las Vegas like yourself. In Buffalo. There's only three billionaire families the rich family which owns the very fortunately named by the way right that owns rich products. There is the Pegulas who own who now own Pegula sports entertainment which owns the Buffalo Bills and the Buffalo Sabers. But they've held the interest in their energy company is escaping me at this point and the Jacobs family who some of you know, the Jacobs family for owning the Boston Bruins, but before that they own Delaware North, which is one of the largest concession companies in all of the world and they still do and so so that passes that sniff test but Richard, can you give us more to think about if not data then other points for the best pathway to wealth being holding a business other than just the anecdotes phrase like that in the paper?
09:38
Well, some further anecdotal examples in our industry. Most of the transactions going on in the industry. The sellers are taking some combination of continued equity in their own business and or equity in the acquirer. And if you think about some of the growth A success stories of people who've built businesses and sold them. Most of those people are people who've made great wealth outside of ownership, the first thing they want to do is look for something to buy. Investment bankers, pe people, when they make their riches, they then want to own their own business. People like Griff Jones, rather than being consultant and working for somebody else, you own your own business and continue to reinvest. And so the world evidence is that when people make good money, if they're not holding their business long term, most of them that are really successful the second time around, are buying another business reinvesting in themselves through partial ownership, investing in the company that's bought them looking for that long term value. Now, there are a lot of good, there's a lot of good information in that article about what it really costs when you sell your business, you think you're selling your business at x times your earnings, by the time you get done with the fees and expenses and taxes, you're not getting as much as you think you're getting. Which is why, again, from a pure mathematical standpoint, if your return on reinvesting in your own business is higher than what else you can do with your money, apart from the social, the social equity value of building community and building Employee Relations and building community relations, it's always better off to wait as long as there's not a prevailing alternative scenario.
Griffin Jones 11:40
So what you're talking about Richard is substantiated in the article with the 2017 version of the Federal Reserve's evidence from the survey of consumer finance, indicating that US wealth predominantly resides with entrepreneurs and business owners, the top 1% of wealth holders in the US derive the largest percentage of their wealth from business equity, and other financial health as as, as opposed to residential equity or retirement assets. And,
Richard Groberg 12:08
you know, are people people who who earn high salaries and, and get sales commissions, they don't build long sustained wealth, unless they become owners, or they reinvest those profits in something that gives them ownership or long term value.
Griffin Jones 12:27
So maybe, you know what I do want to go down this rabbit hole for younger Doc's listening, I kind of want to save being prescriptive or even not being prescriptive, but giving younger ducks more to think about after we get more into the paper. But it raises a good point, which is, sometimes people do get money from other ways, then being the capitalist from the beginning, and then they become the capitalist. So in other words, may be one route, is to build a practice from the beginning and and then you're building equity from the start. But another potential way is you go work for someone else, like a dog, and earn a lot of money and minimize your expenses, and then start a group you open up a practice or buy into another venture, do you think one is usually better than the other? Well,
Richard Groberg 13:27
it's hard to answer that without looking at the other factors that affect it. For younger physicians in the fertility industry, the cost of getting in business, the cost of operating is very high, and you come out of school and med school and your specialty, and you have so much debt. How do I afford to open my own practice? How do I compete with the big group down the street makes it more difficult, and we've seen that in other industries. So there seems to be a movement away from younger doctors coming out of school, opening their own practices, versus going to work for somebody else. And, and hopefully, and I'm seeing the PE back groups, granting equity over time and options to the younger physicians, so they do have a stake and can build wealth. And it's not just about maximizing my current income, but at the same time Grif I am seeing some groups starting, that are backing doctors to open practices from scratch. I'm working with one now in the southeast and for them, and hopefully for a lot of others. It's not about how much what's the most salary I can make. But how do I earn equity and build long term value? But as I said before, it gets difficult in an environment where the cost of getting in business and staying in business is very high. And I'm competing again. Hands roll up groups with hundreds of millions of dollars of private equity backing, that can spend on marketing and recruiting and opening satellites much more easily than a doctor just out of school can.
Griffin Jones 15:15
Okay, so we have major expense considerations for doctors just finishing training, we've got other considerations for ducks to think in the when do I sell question that are within a few years of retirement, maybe they're within one or two years of retirement, and it's just getting to be to be a lot and, and there are reasons to sell that you brought up earlier. But what about the folks in the middle? In your view? They're, maybe in their mid 40s. They've been a partner for eight years, and maybe they have one senior partner, then they have two peer partners and then two associates on the way What about that middle group here is this is that really who the paper is talking to about holding their that holding their practice?
Richard Groberg 16:07
Yeah, I've had a few situations like that this year, where you've got to practice with a few doctors who are significantly older and closer to retirement, and other physicians who are 1015 20 years away. And interestingly enough, in some of those scenarios, where they've sold to the roll up groups, the younger doctors have retained a significant equity stake in the business to bet on their future versus cashing out. Whereas the older doctors would cash out. I've worked with other practices where absent what I call stupid multiples from the buyer groups, they're like, Oh, I'm 45 years old, I've got 1015 years at most, my practice is still growing, I still have opportunities, I have no interest in selling now. And I remember in one of my former lives grift when I was in the veterinary industry, and I was tasked with going out and buying practices for a corporate group, I need some doctor who's making a ton of money. And I basically said, unless you're ready to retire, or have some strategic reason for wanting to sell, there's no reason for you to sell. Here's my card when you're ready, call me. Because they're making too much money, there's too much growth, they can reinvest incrementally, profitably, again. But doctor can open a satellite and a physician and generate enough incremental business and grow his or her practice or change your quality of life by not being the only physician. The value added there is better than I'm going to sell, pay all the advisors pay taxes. And then what do I do next? Where am I going to make this higher return as my business.
Griffin Jones 17:58
And that ties into performance. The paper also talks about compounding and of course, compounding capital as a surefire way to accumulate wealth that's discussed anywhere that wealth is discussed. But in the paper, they talk about the concept mathematically, and they illustrate it by depicting the growth of $1, over 25 years, at 15% interest per year, initially, barely any interest is paid. But over the 25 year holding period, the initial investment soars to over $32, the first 15 years representing 60% of the holding period, show the first dollar have grown to $8.10 20 for 24% of the total capital growth in the final 10 years, that $8.10 More than quadruple to $32.90. And a full 13% of the total growth occurs in the final year. So translate that for the rest of us that are not CFOs, please.
Richard Groberg 19:06
Well, that example is a little bit sort of mathematically theoretically static, in that if you're reinvesting your money, and you're earning 15% a year, that that's the case, unless you're investing in bonds or some interest bearing account. That's easy math. But that doesn't necessarily apply, if I'm reinvesting in my business, unless I can earn those kinds of returns versus pulling the money out and putting it elsewhere. But there are also some tricks of the trade if you're if you're opening a new satellite, there are expenses to open it that get deducted for tax purposes, that you're generating the incremental revenue. And if you sell a year from now with the same multiple you could sell now But you added $1 of men earnings than you're worth $10 more. If you wait two years, if you keep doing it over and over again, you get the same compounding effect. The unfortunate reality is that for the average fertility practice across the United States, and frankly, for the average roll up group, unless you're doing something unique, and you're adding services, or you're again, opening satellites, adding doctors, it's hard to generate a 15% compounded return year over a year. Again, unless you're doing things like some of the great success stories have done, or, again, companies like engaged MD and others that are increasing their number of subscribers and increasing revenues by reinvesting constantly in marketing and sales people and adding services. I hope that I hope that answered the question.
Griffin Jones 21:03
It helps to illustrate the concept in a way that isn't like the example that's often used just about compounding interest, how much money would you have if you compounded a penny every single day, if you just started off with one penny on day one, and on day two, you had two cents, and on day three, you had four, etc, etc, that by the end of that it's in excess of $5 million, I believe. But of course you're not you're not doubling money every single day in any kind of investment or owning a business or being in stocks or even writing the crypto wave really. But the so you help to give more context to that example of that. That's how compounding can work. But it doesn't mean that that is the way that it always works. You talked about what do you do with your businesses making money? What do I do with the profits? Is there a way of thinking about it? With regard to how much one should invest? Other than the other side of it, which is this is how much I want to withdraw for personal expenses. I want the Tesla now I want the vacation home, I want to go to Bora Bora. Is there a way of thinking about how much money to reinvest versus how much to distribute? And at what point?
Richard Groberg 22:29
Yes, the practices that I work with that are not sale assignments, but looking to grow and expand. It comes down and in any industry, it comes down to a fundamental, you know, a doctor says I want to add a doctor, but I can't afford it. So okay, how much is that doctor gonna cost you? And how many more cycles-starts? Do you have to generate a month to pay for that and be incrementally profitable? Or I want to open a satellite? Okay, well, how much is it going to cost? What's my overhead gonna be? How much more business do I need to do to be profitable? And what's the likelihood? Or I want to buy a piece of equipment? Not because obviously, safety and patient care is always first. But someone says I want to buy a piece of equipment because it can do extra me. Okay, well, how many more of those procedures will you do a month? How much are you going to charge? And is it profitable. And if it is, then assuming you don't have other things personally, you have to do with your money, it'll that investment will make your practice more profitable. And if today, your practice is worth a multiple of x, as long as that x doesn't change a year from now, if you're making $1 more than your cost, then your business is a bit more valuable than it was today by reinvesting in it versus taking the money out and doing something else with it.
Griffin Jones 23:59
I suppose that this could be an entire episode in and of itself, especially when we talk about satellite offices. You talk about forecasting of this is how many more procedures I expect to do this is how much more revenue I expect to Bill. Is there also a way in perhaps it's just going against those projections in real time. But whether you cut losses on an investment because I think that's one of the things that make people perhaps want to sell sooner is like well, I could invest in the business in this way. But if I am wrong, and I don't make $1 more than I did last year, because the expenses are more than that set on that satellite office then we expected that they would be how should one review that perhaps review the forecast to decide okay, this is this is something that we were right up out and we should keep going or, or, or bail on. Where? Because I think satellite offices. This is anecdotal. So I don't know if this is true, Richard, but it seems to me like they get let go more frequently than they make it a year or two. And maybe I'm wrong about that. But how can people make more informed decisions either as they're forecasting, or they already have forecasted and open, but they have to make a decision on to, to continue to investor cut their losses?
Richard Groberg 25:34
Well, any kind of decision like that there's a judgment call, people need to do their homework, if they're opening a satellite or adding a doctor, they need to weigh demand and potential demand and weigh the risk against the costs. They need to have the wherewithal to make the investment and bear the risk that maybe instead of taking one year, it takes a year and a half or two years. But that does need to be weighed against the alternatives. I mean, I could argue the other side of it, some people feel, you know, something, I work in this business, I make my livelihood, it pays my salary. Maybe I need to diversify. On a recent fertility sale, one of the internal discussions was, how much do I bet on myself, versus taking equity in my acquire, which diversifies my risk? Because now, my results aren't dependent on not just my practice, they're dependent partially on 510 15 practices around the country, and the ability of the corporate group to do some things, or, you know, something, I'm going to put the rest of my money in the stock market, I want to know a very famous broker, who would not buy one stock ever. Because he said, I make my living on the stock market, if the stock market goes down, my livelihood gets hurt. So my profits from the stock market, I put in real estate, so I'm diversified. So there is no one right answer. But I think it should be balanced. But I also think that there's another concept from from this article that I think is important is that if you're building your business to be fundamentally sound, and not be dependent on a flip, then you can weather a storm. You know, look what happened in 2020. With COVID, a lot of businesses that weren't prepared to weather the storm in various aspects of the utility industry were hurt 21, it rebounded 22, as an industry has been a little softer. So if you're fundamentally sound, and you've protected your downside risk, then it's not about what I'm going to get bailed out, because the next roll up group is going to pay me an insane multiple, you don't have to sell and when the time is right, and the factors, say this time, then I can choose that decision versus being forced to.
Griffin Jones 28:12
Let's talk a little bit about taxes. And I'll come back to other parts of the paper. But we talked about diversifying risk, we talked about compounding one consideration in how much money that one makes is how much they have to pay in taxes. And so can you talk a little bit about the advantages of holding business versus not with regard to tax?
Richard Groberg 28:37
Well, when you decide to sell, even though in today's market, people are taking some retained equity in their business stock in the parent, which usually can be tax deferred, the cash portion of what you get is going to be taxed. And that means that your net proceeds are less, there are always some strategies and tactics and things that tax experts and tax lawyers can do to minimize that. But you don't get what you think you're gonna get. Versus Holding, holding, holding. Again, you build a very valuable business, you always can borrow against it to create liquidity. There are things that you can do without selling, paying taxes and having a lower net proceeds. And again, depending on what state you're in, it can be painful California. If you're selling your fertility practice, between federal and state taxes, it's a pretty painful number. And a lot of people don't set up their corporate structure preparing for that. And then when the deal happens, they realize oh my goodness, I'm not getting what I think I'm getting. But again, it also comes back to why and myself Like, if I'm selling because I'm older, and I'm closer to retirement, and I need to diversify, I'm worried about competitors coming in my market need a big brother behind me. Multiples have gotten so high that I'd be crazy not to sell part of my business, I need to build a new facility or renovate, then you take into account the tax aspect. And you just understand that I'm gonna have to pay what I have to pay. I want to make another point there. To the extent you're reinvesting in your business in a way in which you get deductions, then when you sell some of your taxes or long term versus short term, if we go back to my example of I add a doctor, physician, and the physician costs me, let's say it's a major urban market, by the time I got them with salary, benefits and malpractice insurance, they're costing me over $400,000 a year. But I generate enough incremental revenue that I'm profitable, then my revenue and expenses are proportionally balanced, I've made $1 more, if my business is still worth 10x, then I've added $10 in value that will be taxed as long term gain versus income short term.
Griffin Jones 31:28
And I suppose there's also the benefit that a business owner has. And in order to be able to deduct some of the expenses that we talked about, in our previous episode, where you were advising on categorizing as one time expenses, these are things that maybe maybe it was a business trip, that was kind of a business trip, but kind of a personal trip. And and I don't even know if the paper is talking about that kind of tax advantage.
Richard Groberg 31:57
No, it's not. I mean, it's like, again, if if I had a doctor for Doctor cost me $400,000 a year, and I generate enough cycles, that my profits, my revenues are $401,000 a year, I have 401,000 of revenue, I have 400,000 of expense. So but I've added $10 of value to my business if my business is worth 10x, because I have $1 More net profit with that new doctor. So I've offset the revenue. So I've got no tax impact. And I've created $1 More of long term value.
Griffin Jones 32:36
To give some more context to the paper as well. They're not talking about businesses that are suffering for a long time that aren't creating value that have a poor investment thesis. They say that a business that is slog through for five to 10 years without really getting off the ground should be liquidated or exit even then I don't know that that's totally obvious of what that is, there could be some, there still is a line that says well, it's making a little bit of money is it worth getting rid of and moving on to doing something else. But what they're talking about is healthy business with a tenable investment thesis that is improving their revenue consistently should not be sold just because of a 60 month period of up and down what they are talking about in terms of really good business to hold on to is one that is capable of generating mid teen returns on equity for at least a decade with a path forward for equally desirable returns, in your view from looking at a lot of clinics, books. Are they doing better or worse or around that?
Richard Groberg 33:51
As a general industry? 2021? I would have said yes, in the post COVID recovery. Most of the industry statistics say in 2022 in general No. Of the eight practices that I'm currently representing one way or another, some are growing significantly. Some are relatively flat. And there's a whole host of reasons why. So every business is unique in that regard, but as an overall industry. They're not growing that dramatically. Which by the way is part of why recently the PE back roll up groups are starting to pull back from being as aggressive, lowering their multiples that they're willing to pay. And some of them have even temporarily paused in the market, because the growth does not support the valuations being paid because practices aren't growing double digit like they did in general in 2021.
Griffin Jones 34:57
So there's a bit of a Yeah. I don't want to call it, Jacqueline. No, I wouldn't. So there's a bit of a catch 22 in that if you want to diversify and reduce some risk by selling at a higher multiple, because you're not doing as well as you were last year, well, the buyers are also seeing that. And so there may have been a six month window, where there, people could have said, you know, what, I probably only have about two years left or three years left, and I don't know how long this slower growth or flatlining will continue. But now, buyers are potentially seeing that as well, from what you can tell.
Richard Groberg 35:43
Yes, I mean, if I'm a, if I'm a fund that invests in the PE back roll up groups, between the slowing economy and slower growth in general, the utility industry and higher interest rates, you know, how do I justify the valuations on paying? Now, having said that, the and we talked about this last January in our podcast, the premise that one of these groups will find some economies of scale, and value added, above and beyond an individual practice, that hopefully will make the corporate group and the underlying practices more profitable over time than just going it alone. But like any other investment, stocks get overvalued. And they eventually correct back to a rational place. And that's going on now. Because just like the individual practices, the corporate groups have to ask themselves the question, if I'm reinvesting all my profits to buy more businesses, am I generating a higher rate of return than doing something else with the money? It applies to everybody all the way up and down the food chain.
Griffin Jones 37:04
And from the seller side, we talked about taxes being one of the things that they have to consider. But there's also transaction fees that the paper discusses. So how significant is that? And How significant are transaction fees when a practice is selling their practice? And how significant is it when they're selling part of the practice that maybe they're not totally exiting, but they are selling a controlling stake in equity, maybe even a minority stake in equity, are transaction fees similar in each of those cases? Or do they vary depending on how much of the business someone is selling?
Richard Groberg 37:48
Well, if you're selling a minority stake to an associate, or partner leaving is buying out another partner, the fees are much less significant. And I have some of those clients and you manage it properly, it doesn't get out of control on on sales to the PE back groups, even when the selling doctors are retaining equity in their practice, equity in the buyer or both. The fees can can be very significant. The buyers hire an outside accounting firm that goes through your numbers with a fine tooth comb to make sure everything is recorded properly. A lot of businesses are on a cash basis and need to be converted to accrual basis, you have legal fees, you have an unbelievable burden of document requests that burdens the practice manager and other people. And if you and then of course, you have fees to the advisors, people like me and others in the industry that helped guide through the negotiation process. And then the lawyers and accountants, you know, it can get expensive, but you only do this once. So making sure that you've got good counsel and good accountants and good advisors is worth the investment if it's not getting out of control. Because if you're still going to own part of your practice afterwards, you got to wake up the next morning and know what the deal is with the person you're now working with, as opposed to being on your own.
Griffin Jones 39:24
Well, so do you only do it once? Or is there more transaction costs to consider if I'm selling a controlling stake in the practice now I'm selling 60% of the practice. I'm retaining 40 Do I have to expect the same transaction costs to be incurred the next time? When
Richard Groberg 39:44
what no because what typically happens is, let's say one of my recent transactions. That was a multi Doctor practice where two of the doctors were older and closer to retirement, but there were younger doctors. They sold the practice They took some equity in the parent and they took back 40% of the practice going forward, which differed a bunch of taxes, and gave them an incentive to grow their practice, but also gave them the diversification. The documents themselves were such that when one of them's ready to retire, or a new doctor physicians coming in, that they want to sell some equity to the documents were so thoroughly negotiated, that there might be a little bit of legal work internally, but not to the extent of I'm selling all over again.
Griffin Jones 40:33
Do you want to talk about the idle cash? Because I don't I want to I wanted to ask you about it. But I don't totally understand it. The idle cash part of the paper?
Richard Groberg 40:44
Yeah, I mean, especially if a business is expanding and taking risk, like you talked about before, I think it's important to keep reserves in the business. In case things don't go well. But if you keep too much reserve in the business, it's what's called dead money. So if if interest rates are one or 2%, you're keeping a whole lot of money in the business, you have to say to yourself, oh, if I pull that money out, what else could I be doing with it? Could I earn a higher return somewhere else, versus just letting it sit there and not be reinvested or in return. But again, it's very important. And I'm a big believer that businesses should have some cash reserves. Because you never know what's going to happen. You never know, when the next COVID happens, or you get seven feet of snow in Buffalo, and you can open for a week, or, you know, I had some businesses in Staten Island where they had the hurricane come through a few years ago, and they got flooded and took six months to get insurance money. So again, there's no black and white there. But cash just sitting there not doing anything isn't earning your return.
Griffin Jones 42:02
So I think what the paper is talking about here is that there's also risk of have the opposite of that wretched. So if once you if you do sell a business, you don't want to just have it do nothing and not compound. But there's a risk in the redeployment of that cash that finding a new business to start or purchase is hard work requires a lot of time. And there's also a high possibility of false starts. So you have something right now that's making money, maybe it's making 10%. Maybe it's making 5% compounding year over year, maybe maybe some years, you're doing really well. But if you sell it, and then you have to make the decision of well, it's not it's you know, it's gonna make one to 2% in a savings account. What do I do with this money? Now, in terms of how I redeploy it, it takes a long time to start another business or even find one that's worth buying.
Richard Groberg 43:02
Yeah, that's what I was thinking about the other aspect of idle cash. But that's true. And you and I both know, some people from the industry who sold their businesses for a significant amount of money. And then they're scratching their heads, what do I do with it? Do I speculate, where can I reinvest it? It's not earning much for me anymore. And some people make colossal mistakes in that regard. It also depends on where you are in your life. You know, if you're 60 years old and closer to retirement, you're going to be more prudent with it, then, you know, I just cashed out and I'm 35 years old, and what am I going to do and there are some great success stories and there are also some people who've gotten in trouble making rash mistakes.
Griffin Jones 43:54
So that has to do with the the redeployment risk of the money, there's also redeployment risk in choosing a venture. So if you have a practice that's doing really well, and you think you know what, I can sell the practice right now. And then I can start a company that is maybe I start a surrogacy agency or I start an AI company or I start a finance company for fertility cycles, that I'll just take that money, and I'll I'll start the next venture. But this paper talks about the redeployment risk in doing that, that that is far from a guarantee that just because one person was successful at an untrue entrepreneurial venture in one area, that they will be in another for a prolonged period of time.
Richard Groberg 44:50
Right. And you just brought up a good point, which is the redeployment of human capital versus financial capital, someone who started and ran their business and may have A lot of money. Getting there are two aspects is what am I going? Where am I going to redeploy it? But where am I going to redeploy my expertise, and my passion. And sometimes those two can be in sync. And there are some great success stories when that's happened. Think about Mark Cuban are some people in our industry who've done things successfully one time and then redeployed in a different area, and there are others who were doesn't translate.
Griffin Jones 45:29
So now let's start to explore when it is time to actually sell. So we talked about risks to selling we talked about the compounding benefits of holding on to a business, the paper says that we think keeping a business that is performing well has a durable investment thesis is a privilege and is an economic golden goose that should be nurtured, pampered and retained for as long as possible. Doing so provides a few other primary benefits, like we talked about avoiding transaction fees, avoiding tax fees, and or avoiding certain taxes at certain times. But as you mentioned, there still can be a time to sell. So let's pretend all of these things are the case, Richard, that that things are still going well, is there? Is it still? Is there still a time to sell. And let's pretend everything was like how you saw it in 2021. And it was year after year after year, is there still a time to sell? If things are mid teen compounding returns every single year,
Richard Groberg 46:41
I think there are a combination of factors which lead people to sell. And this year, even with the market now pulling back, there's still people doing and it's usually not one reason but a combination. physicians who are getting closer to retirement, thinking about retirement diversification concerned that they don't want to go it alone. The some of the big groups are going to come into my market. And while I'm still growing, and doing well, I need a I need a strong partner to help me. I need to renovate my facility or build a new one. I'm having a hard time recruiting. There are some practices where you and I know where a doctor was 60s partner was retiring, he had a hard time recruiting, he wasn't ready to leave. So he sold part of the practice. Or the practice has problems that the current leadership can't solve that perhaps. And then of course, if you take any combination of those factors, and then valuations are high, you know, if I've got practice growing double digits, and that's a multi Doctor practice. And someone's only willing to pay me five or six times, well, I might as well keep going. But if I have a multitude of those factors that are weighing on me, and valuations are still strong, and some of the subjective factors meet my objectives. While it is still time to sell. And even with multiples coming back to reality, there are still practices that I'm working with that are selling because they want a combination of those factors. And then they figure out how do I minimize my taxes? How do I diversify my risk? How do I still own part of my business so that because I still believe in it. And by the way, some of the practices that I'm working with are still on double digit growth paths, but meet some of those other objectives. And their attitude is, well, if the price is reasonable, and I have the right partner, and I still retain part of my business, it makes sense to do it. If not, I'm growing 15% per year, so I don't have to sell I'll wait.
Griffin Jones 49:03
That level of growth. And those concerns seem like they should address each other meaning for practices that are growing 10 12% 15% year over year, it seems to me like it makes sense to solve for a lot of the issues that you talked about while they're having that level of high growth meaning they get to a point where they don't want to face competition. They are there. They're getting close to retirement but they're having a hard time recruiting ducks to come in. Maybe they're having a hard time recruiting other staff like embryologist it seems to me like solving for those issues investing in the the company while they're doing that well make sense to do because a lot of times people will say, Well, we're growing so much anyway, why do we need to invest in these areas? because eventually you get to a point where that might force your hand to sell, it seems to me. And it seems to me that if they do invest in those areas that they're not as pressured by this sale and an answers to some of the question of how much do I reinvest in the company right now?
Richard Groberg 50:22
Well, in most cases, when they're getting that kind of growth, unless there's a very strong other factor, it probably makes sense to wait. I have a few situations where the combination of factors is such that okay, I probably could wait. But because of my growth, I'm going to get a higher valuation and cut a better deal and get the help I need but still own part of my practice. So, you know, I like to say there's a reason why they're 31 flavors and Baskin Robbins, everybody likes it differently. So depending on which who the group is, the answer might be a different answer. But again, the longer you wait, if you're growing, the more valuable your businesses on a pure economic basis, the way this Yale study is calculated, which is, which is an accurate way to do it.
Griffin Jones 51:19
I'm stepping away even from the sales question for a second, going back to the reinvestment section for or the reinvestment thought for a moment, which is, if you have a practice or a business, whether it's in the fertility field or anywhere else that has mid teen returns compounding year over year, and really isn't the investment, just making sure that that thing goes on forever. Don't you just want that to go on forever. And I guess it gets to a point where if you start to see some growth, that's a lot higher, like a lot of people saw in 2021, a big jump in the end of 2020. over the previous year, doesn't it make sense to say, you know, what, what we're trying to do is preserve our 12 13% growth year over year, anything after that is going to go back into investment into making sure that we're that we're doing that for the next five and 10 years,
Richard Groberg 52:16
if you have a valid place to put it. Yes. So let me give you an example. I'm working with a company in another industry that has a bunch of retail locations. And last year, the business was at breakeven, the business has tripled, it's making a lot of money. Every dollar has been reinvested this year, to open more locations to replicate what it was doing. And by the end of the year, it'll have twice as much revenue and be twice as profitable. And instead of pulling out $3 million, that $3 million is being reinvested and probably created $10 million in value to the owners. Now, a year from now, the investment proposition may not justify reinvesting. So there's, you have to reevaluate all the time, whether I can make more by reinvesting then doing something else with that money.
Griffin Jones 53:14
So those things are immediately obvious in terms of where you could reinvest your money. There's other things that maybe work but aren't as obvious as if we open up in this location, we'll get this many more patients right now. Or we can hire this doctor right now and see this many more patients and do this much more volume. But I think of things like, Oh, if you were doing really well, in 1996, maybe you didn't need to buy a website and invest in having a website, but by the year 2000, you you needed to have it. So do it in 1996, even though it's not a place where you have to put your money right now, but in a few years it will be or social media in 2012, let's say but then by 2017 or 18 is you're not attracting nearly as many patients if you don't have that and or all of the things that are necessary for recruiting young Doc's that might not be a place that we have to put our money right now. But in order for us to not become the older group that has a hard time competing for the newer talent, we have to make a couple of changes. So what about those investments that good point that aren't as immediately obvious.
Richard Groberg 54:39
So if I put my financial geek hat on, and someone says Look, I need to hire Griffin, I need I need to build a new website. I need to have a marketing campaign. I need to figure out how to convert more of my leads into interest into actual cycles, new patients and cycles. At the end of the day, while there's not a black and white answer you still need to die would do the financial analysis, what's it going to cost? And over time, is it going to generate more more patients for me, which results in revenue, which results in profits, which makes my business more valuable. And those often are not short term decisions. But if I've also seen the other side of the equation where someone spends money on something that feels good, but if it's not good, either improve the quality of medicine, improve the quality of customer service, or bring more customers or revenue in, you have to question the economic validity of making the decision. That makes sense,
Griffin Jones 55:48
it does make sense and to me, it hits the nail on the head of what makes the best visionary entrepreneurs is they can navigate those decisions, when the clearest, and most obvious data isn't in front of them in that people can err on the side of well, I can't make that calculus right now. Because I don't know what the return will be. And then they end up not investing in the things that allow them to continue to appeal to the people that they're trying to recruit to come work for them, that people that can that become their patient base in the future, because they're doing well attracting patients right now. And then just over time, they become the less desirable group and their volumes decrease and, and then you get to the 2022, end of calendar year where they are in the group that you're talking about that isn't doing as well, because they didn't make those decisions five or six years ago, and or maybe even two or three years ago. But you can also err on the other side, like you said, of people that just throw money away. And, and there's a lot of faux entrepreneurs that do that. Because this lol This is an investment. And it never pans out to be one. And I think the best visionary entrepreneurs are the ones that make those decisions without airing too far on either side of the spectrum.
Richard Groberg 57:18
Right? Typically those kinds of decisions, you're going to be 51% right or wrong. But you've got to think about what happens if I don't do it, well, I lose business. If I don't make this investment. If I don't update my website, if I don't figure out how to convert better. If I don't improve my lobby, am I going to lose business. That's the same economic analysis, it just works in reverse. Not how much incremental revenue and profit am I going to get? How much I gotta lose, if I don't do it. And great leadership, you can't great leadership, you can't just live by the numbers, you can't just live by the seat of the pants, and I'm gonna hold my finger up in the air and see which way the winds blows, you have to look at both and make balanced decisions. And if you're taking a huge risk, you better have the wherewithal to withstand the storm.
Griffin Jones 58:17
And I would define a huge risk as something that that bets the farm. And if it has to do without, do I just take out a bit more profit this year, and you don't really need to take out a bit more profit than my gut tells me to reinvest back in the business. And that's if it's, if it's something that's if you're if you're kind of on the fence, and you don't totally, you don't really need the profit, then if you make five of those decisions, it's likely that one of those is going to have a Pareto effect distribution where it's truly significant for the business.
Richard Groberg 59:00
You know, again, without revealing anything confidential I know over this last year or so you've done that you've reinvested in staff and other things to expand your business and make your business more valuable by being a more robust greater depth service provider to your your clients.
Griffin Jones 59:21
I think about the the building the business in this way of having a hold asset and that's why I wanted to go over this paper with you and and like you said that applies to me with what I'm doing with my business. It applies to a lot of practice owners. When I first wanted to talk to you about it, I thought of the younger Doc's that have not bought in yet that are about to buy in. And I don't think this paper really speaks to them. So what do you what do you think this paper means for those folks? So that's who I was originally thinking of the folks that are me Be they've been in associate for two year three year, they have the chance to buy, they either have the chance to buy in, start something on their own or, or buy in or work for a new network group. And so what do you think this long term hold principle means for the folks that are not yet owners, but are on the cusp of potentially being owners,
Richard Groberg 1:00:26
I think in the fertility industry and other health care businesses, where the practitioners are the primary drivers of the business, in the long run, if you have any kind of ownership mentality, you care about your business, you want it to do well. And it's not just the job, you're not going to build the same kind of wealth, just taking a salary, maximizing your income, as having a piece of your own business, whether you're starting your own practice, you're starting a practice backed by one of the groups and I've got a client doing that, or you're opening your own business, the concept applies if you're, instead of making $500,000 a year, if you're making $400,000, you're here. And that other 100,000 is building equity in your business. If you believe in yourself, and you're building business value, then somewhere down the road, you're going to be worth much more money. And frankly, from a from an self appreciation standpoint, you've built something that's partially yours, you're better off. Now that needs to get balanced against do I open my own practice? And where do I get the money to do it? Or do I work with one of the groups and make sure that they give me equity or options or those kinds of things. But again, I've worked with physicians who want no part of that. But for the most part, physicians in this industry and other practitioners are so dedicated to the craft, that why would they not want to own a piece of what they create?
Griffin Jones 1:02:03
I think it is okay to not want a piece of it too, even though the evidence that we've gone over today is dictated that the people that make the most are the capitalists, the owners of the capital, doesn't mean that everyone has to do that, and you can't have a really good life. If you don't do that. I also think it's true for some business owners that as long as they don't walk away with lots of debt visa, as you make some money for a while, you can still go back to the to the employment path, if you decide, you know, what, I have now made myself a much more senior person I've been I, I have put myself on a track to now be number six are the number four at a much larger organization. And I never would have been able to build that career capital had I not been the number one of this smaller venture, and I can walk away from that and then go be somebody else's number four, number six, I think that's a reasonable. I think that's a reasonable career path. And I think it's it could also be the case for people that if they start their own practice, and maybe it's just them in a partner, and they do okay for five years. But maybe that makes them the opportunity to be a senior partner at a much larger group after that, as long as you're not going into debt. Or if you're making more money than than what you're borrowing or spending, then that still can be a part of the Career equation.
Richard Groberg 1:03:38
Yeah, not everybody wants to be an owner. In my former industry in the veterinary industry, there are now statistics that more than half of the veterinarians coming out of school don't want to be practice owners don't want to work full time, and the burden and stress of starting a practice and the debt in the ownership, which plays into the corporate groups. There is some of that in our industry. Not everybody wants the burden, financially and mentally of being an owner. And I'm fine. But even then, to the extent they can have a small piece of the equity, whether it's options and equity in the parent company or a piece of their practice. There are ways that roll up groups are making that happen now. But again, there's no one right answer because everybody's different.
Griffin Jones 1:04:29
But I would love to have you back on for a live event where people can ask questions in real time, but for concluding this thoughts on the yellow paper, which we will include in the show notes, what would you like to summarize for the audience?
Richard Groberg 1:04:45
I think the premise of the paper is, is that if you can reinvest in your own business, and it doesn't have to be at a 15% return at a higher return than you can do elsewhere with your business. You You're building value you're building community, you're building loyalty amongst your employees and constituents. And your business will be more valuable when the other factors say it's time to sell. But every micro and macro decision should be made with some thought process of what are the financial implications, and the non financial implications? Not one or the other.
Griffin Jones 1:05:27
And I suppose that valuing one's time would also be a tiebreaker for that, isn't it, Richard? So if you could have a business that's doing well, but if you're working 80 hours a week, and you feel that you could be doing as well working for someone else, it at some point, one's time is is valued in that not just for earning potential, but also quality of life and, and their time with their family. And
Richard Groberg 1:05:54
that is one of those factors that would lead someone to say, you know, something, let me let me get the benefit of selling to another group and having them help with certain things. Take some pressure off
Griffin Jones 1:06:08
me. You had a few people that reached out last time we shared your email address. Are you comfortable with doing that again? How can people find you?
Richard Groberg 1:06:17
Absolutely, I can be reached at Richard Groberg and outlook.com. I'm on LinkedIn as well. And your podcast is so well viewed and received, that I had a number of calls, I picked up a number of assignments to work with fertility practices, both in the United States and surprisingly from Europe. So I think that's a testament to your reinvestment in your business to continue to grow it.
Griffin Jones 1:06:43
I appreciate that very much, Richard and I appreciate being able to cover these topics and I look forward to having you back on to cover them some more. Richard Groberg thanks for coming back on inside reproductive health.
Richard Groberg 1:06:58
Thank you. It was my pleasure.
1:07:01
You've been listening to the inside reproductive health podcast with Griffin Jones. If you're ready to take action to make sure that your practice thrives beyond the revolutionary changes that are happening in our field and in society. Visit fertility bridge.com To begin the first piece of the fertility marketing system, the goal and competitive diagnostic. Thank you for listening to Inside Reproductive Health