This week on Inside Reproductive Health, Griffin has a conversation with Richard Groberg, a man who helped facilitate the acquisitions of The Sher Institutes to Integramed, eIVF/PracticHwy.com to private equity as well as many other business owners exit their business through rollups, sales and consolidations. A common thread through a lot of acquisitions is that he sees fertility business owners lose out on millions upon the sale of their company because they don’t categorize their accounting correctly. Richard gives his insights on roll-ups/consolidations from a private equity group, and he believes that he has not found a consolidation that has been successfully operated.

This episode covers:

How to get the biggest evaluation of your business
How to survive the ‘proctology exam’
Why roll ups from a private equity groups haven’t been successful
When it makes sense for an owner to sell his/her business

Episode Sponsors:

Inside Reproductive Health is sponsored by EngagedMD. For technology that educates your patients with true informed consent, visit engagedmd.com/IRH for 25% off your implementation fee.

Richard’s Information:

Email: Richardgroberg@outlook.com

LinkedIn: www.linkedin.com/in/rsgadvisorsllc

Mentioned in this Episode:

Built to Sell book: https://builttosell.com/

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[00:00:00] Griffin Jones: If you're thinking about selling all are part of your fertility company. You're going to want to listen to this episode. It doesn't matter if you have a practice or a pharmacy or an EMR or a lab manufacturing company. You want to listen to this episode with Richard Groberg and you'll probably want to listen if you've sold and maybe you're having some sellers remorse.

Richard gives his framework for. What, how he helps practices and other companies in the fertility field to sell. He's been in the field for many years. And in the past three years, he has helped with, uh, three major sales. So we talk about the. This is an area that I don't have complete expertise in. I've never bought or sold a fertility company.

And so when Richard gives very specific examples, I don't, I might reference a conversation that is particular to an episode. It was publicly discussed on this shell. Otherwise. You know, de-identify whoever I'm talking about, because this is not my area of expertise, why I had Richard on. And if you have a different point of view, you're welcome to come on the show too.

If there's something that said that you disagree with, tell me what that is. And come on the show. The show is an open platform and anytime. I have some money on that talks about some of the challenges or problems with private equity. I'm willing to have somebody come on that talks about the pros of private equity.

We keep this conversation pretty balanced, but if there is something that you disagree with, you're welcome onto the show. And otherwise just enjoy this conversation with Richard Groberg.

[00:02:20] Griffin Jones: Mr. Groberg, Richard, welcome to Inside Reproductive Health.

[00:02:24] Richard Groberg: Good morning. Happy to be here with you.

[00:02:26] Griffin Jones: You're on because my knowledge of clinical operations go so far. That's why I have clinical ops guests on, and my knowledge of finance goes so far as for my firm. I try to shade in all of the parts of the Venn diagram, where sales and marketing overlap with finance and overlap with ops, but I'll never be a pure ops consultant.

I'll never be a pure finance consultant. When I reach the borders of the realm, I need to talk to somebody else. And one of those people is you, and I don't know why it took me randomly bumping into you in Las Vegas to think I need to have Richard on the podcast, but I'm glad I did. And I'm glad you're here.

So I want to start our segue into the topic with what have you been helping fertility centers for a while, but what have you been helping them do specifically in the last two or three years?

[00:03:12] Richard Groberg: Well, in the last three years, I've had a couple of different avenues where I've helped fertility businesses.

I've worked on three transactions where fertility, one fertility practice, and two fertility related service businesses have partnered with larger groups and private equity, both to get a partial cash out and also to get access to management resources, to build more depth for long-term growth. I've also worked with smaller practices that were dealing with selling part of their practice to a doctor trying to expand do I open satellites? How do I buy other practices? And most recently, thanks to you. I assisted a fertility doctor who was a minority owner of her practice uncoupled from a corporate roll up group and become an independent practice majority owned by her.

[00:04:08] Griffin Jones: So of the three where you helped sell to a private equity group, where they all private equity of those three, where some of them high net worth individuals, where they all private equity firms that they were selling to, or where some private equity firms and some were networks backed by private equity firms.

[00:04:26] Richard Groberg: Two of the deals were sales of, of related companies that were related to the fertility industry specific practice highway EIV F and ReproTech. Two private equity that was interested in the space. I also helped Boston IVF wanted to rid parts of its original sale to the British group.

That was a large fertility network outside the United States, but had no presence in the United States that would also was ultimately private equity back. But it was a pretty large sort of fertility roll-up.

[00:05:00] Griffin Jones: So when you get a call, it says, Richard, we're interested in doing this. I'm interested in maybe, maybe I'm interested in exiting or maybe I'm not interested in exiting.

I want to just expand and bring in someone to help with that scale. What is your checklist? Like? How do you start the process to it's a big elephant. So what is the first bite that you take?

[00:05:25] Richard Groberg: Well, the first couple of steps or a little bit like a health exam for potential fertility patient have to understand the nature of the business, its financial performance, its challenges, its growth opportunities and what the goals are of the current owners.

There are cases where owners want to sell on leave. There are cases where owners want to partially sell, but need access to resources that they don't have for growth or the depth of management. So the first step is a practice evaluation, not, not a valuation, so to speak like a formal evaluation, but assess the health and the goals of, of the practice.

After that is the part that most people who've never been through this before. Don't understand and forgive the terminology, but I've called it the proctology exam on steroids of, it's not as simple as you call up somebody and say, I want to sell and you give them a couple of numbers and they shake hands and the deal's done.

That's where the process starts. They do an extensive evaluation. They do due diligence. They review your contracts, they review your financial numbers and your, your, your pregnancy rates and other statistics. And before you're prepared to do that, you have to get your house in order. So there's a lot of housekeeping to be done to prepare for that, that extensive painful review.

The determined is the price we've agreed to in the terms fair. And am I getting what I think I'm getting from the buyer's perspective? A lot of times these companies, because they're private businesses aren't necessarily prepared for the scrutiny in terms of expenses that you run through the business that most private companies do, that might not remain after a transaction.

And I can tell you all kinds of fun stories about unusual things.

[00:07:21] Griffin Jones: Like the business trip to Hawaii. Shout out to Dr. John Frattarelli. Cause I bet everybody wants to visit Dr. Frattarelli because oh, well that was good. We took the family and we stayed for two weeks, but it was for visiting Fertility Institute of Hawaii.

Is that what you're talking about?

[00:07:37] Richard Groberg: Oh, yeah, I would give you some examples or the car that you expensed, or the fact that you're paying your mortgage and utilities and all your vacation expenses. And this is an important concept. I had one scenario where a business thought it was making $3 million a year because that's what he saw in his bottom line.

But between one time expenses that aren't recurring. And personal expenses running through the business. By the time we got done evaluating it and recasting their financials to properly reflect those non-recurring and what I call private company expenses, he actually was making $4 million a year. And when a buyer is coming in to pay, I'm picking a number for illustrative purposes, 12 times your profits, that extra million dollars of, of, of profitability that you can substantiate and prove in that particular case, put another $15 million in his pocket.

[00:08:37] Griffin Jones: I've jotted that down because I want to come back to that and get some examples from you. I want to try to go in the order that I'm thinking of you dealing with fertility companies that are in this process, you mentioned the first is, is assessing their goals. One goal might be exiting.

Another goal might be having financial capital to, to scale or to take over some other business side of the operation in those two. What are two different paths for those two different goals? Why are those two goals important? Like why is it important to make a distinction between the two?

[00:09:13] Richard Groberg: Well, if I'm buying a fertility practice and let's just say it's a three doctor practice and two of the doctors want to retire and go away.

As the buyer, what I'm buying is not as valuable. And obviously the purchase price is not as high as look, I want to partially cash out. But I can't really compete. I want to expand, but I need money to expand. I need access to other resources and I'm going to stay and I'm not going to take a hundred percent cash out.

The business is now more valuable to the buyer and will garner likely a higher purchase price. The two large transactions I initiated and negotiated for service providers to the industry got a very high valuation because the seller was staying and retained a 30 to 40% ownership stake in the business post-closing. He's got skin in the game. So that's an important distinction because at the end of the day, The buyer, if they're buying a fertility practice, the buyer is to a large extent buying the engine and the engine is the doctors running the practice and performing the service.

[00:10:28] Griffin Jones: So it makes sense that if the seller's staying that the business would be worth more, especially if we're talking about providers and the scarcity of REI's, so it seems like if they're staying, then the practices worth more, but one perception that I have, or at least it seems as like the value is in it, for those that are exiting, like okay, I'm going to, I'm leaving the I'm going to retire in a year.

So whatever happens to the practice, I guess, is the decision of the people taking it over. I'm cashing out all of my equity and for, I guess, what is the upside for a seller staying as opposed to a long-term hold strategy of their asset and retaining all or more of the equity.

[00:11:19] Richard Groberg: Well, let me give you an example.

There's a practice in Utah that recently sold to Boston IVF. One of the doctors was retiring, but another doctor, who's an outstanding doctor, medical director. Who's older, but committed to stay for four or five years. And there's another associate there that practice obviously is more valuable to the buyer because there's continuity there.

But to the seller, he's getting now access to this big corporate group who hopefully will provide services better and less expensive leave in a solo practice can provide, give him access to recruiting and hiring other doctors, give him access to the network and hopefully. Two to three years out when he is ready to retire, his practice is bigger, it's more profitable and his ultimate exit will be at a higher valuation.

We can now slide into a whole other discussion of whether all the past roll-ups have worked and whether people who've sold into them for some future consideration have benefited or not the doctors who sold into Integer Med, it obviously didn't work, depending where you were in the spectrum of prelude.

Maybe it did work. Maybe it didn't work. Doctors who participated in ovation strategy benefited handsomely when ovation did a second transaction with another private equity group, I guess a year and a half ago at a higher valuation. They got a second payday that was successful for them. So there's always the promise of that.

It's no different than when a smaller practice that wants to get bigger buys another practice and they merge. And now the practice that got bought is now part of a bigger practice, theoretically, that could be worth more to that doctor later down the road than if they just gone on their own.

[00:13:17] Griffin Jones: Okay, well maybe you can be the tie breaker in something that Dr. Andrew Meikle and Mark Segal each said in their respective episodes. And I don't want to paraphrase them too much. So I encourage people to go back to listen to the episodes. If my memory fails a little bit, go back to the episodes. But in each conversation asked about building value up until the end.

And if I'm paraphrasing Mark correctly, he felt that, it's sort of feudal just to keep adding value to the practice, right when it's too late, if you know, you're going to sell within a year and Meikle said, no you should be adding all the way to the end. And from my vantage point, especially when you're looking at that, for the case that you just talked about, we got three doctors in any given scenario, I'm not talking about a particular case.

We have three doctors, two of them are going to retire. One is going to stay. Well, it seems to me that if those, if that one is going to stay has a robust brand, that's attracting more patients. That has a recruitment pipeline that younger staff want to work at especially younger docs want to work at that.

I would want to keep that flywheel moving and invest in that until I'm out for the reasons that you talked about, but where do you fall on the debate of it's too late to add value. If you know, you're going to sell in a year versus keep doing it all the way to the end.

[00:14:38] Richard Groberg: I, you never stop making your practice a better practice because a deal might not go through.

But I also believe, and I have a very close friend in the veterinary business. Who's been through a number of roll-ups. He operates an independent practice. Everybody wants to buy him. And he's like, I'm three years out when I'm, when I'm a year and a half hour, I need to start preparing so that when I go through that proctology exam on steroids, I'm prepared for the process.

But up until the day you close, you always risk something negative happening that gives the buyer an opportunity to renegotiate. So you constantly want to be making your practice more and more attractive unless you're selling and walking away. But even then again, one of the mistakes people make small practitioners and lots of businesses is they get so focused on the sale process. They lose focus on their business and suddenly something gets delayed and your volume is dropped by 20% and you're not as profitable. And the buyer comes in at the last minute and goes, you know, things have changed a little bit where to renegotiating the price or I'm having a hard time attracting the doctor you need because your practice isn't doing so well.

I mean, if Griffin, if you're walking into a, to a dance and you're looking for a date, I mean up to the very minute you walk in, you want to make sure that your hair is bright and your beard is straight and everything looks good. And there's nothing that gives a negative impression. So that's my view.

[00:16:14] Griffin Jones: So I want to ask you about the proctology exam and if I'm doing Mark Siegel's argument injustice, please listen, episode 100 and Mark if I'm still doing it injustice. You're welcome back on to clarify at any time. Let's talk about the proctology exam. Richard, what does this involve you? You mentioned that as the second step, but you said before the financial house has to come in order.

So let's talk about what that means in order to be prepared for the due diligence.

[00:16:44] Richard Groberg: Oh, and a lot of industries, not just the fertility industry, private businesses don't necessarily keep their financials expecting third-party scrutiny. They run expenses through the business that are personal. They may not be tracking non-recurring or one-time expenses.

They may be expensing things that are most setups are things that should be capitalized, but for tax purposes, oh we bought this piece of equipment. Let's all expense it in year one. So that that data needs to be cleaned up. So it's ready for the review, from a perspective of a roll up group or private equity, who's going to have banks and financing sources and investment committee approvals to understand the financials and that all needs to tie to your contracts, your ownership structure.

So all of those documents and contracts and historical data and financials need to be ready.

[00:17:42] Griffin Jones: Meeting employment agreements, contracts with vendors.

[00:17:45] Richard Groberg: Absolutely and again, most people not out of any fault they're operating private businesses. They never expected this. And all of a sudden, someone's at their doorstep saying, I'm going to buy you for 12 times your profits.

They're not prepared for this. And frankly, they don't have the time off and to stop and get prepared for it. And one of my other favorite expressions, if you've never been through this before, you don't know what you don't know about the process, about the descend on you, it can be consuming and overwhelming and you need to be ready for what's about to come.

Because again, it's not so simple as, oh, you're making $2 million a year. I'll write you a check for $24 million. I'll see you at the closing table in a week.

[00:18:29] Griffin Jones: So with regard to the expenses that you said detract from the bottom line that are necessary for that against a multiple are worth that much more if they're added back on.

So is your advice to not take any of those as business expenses? Or is there another way of accounting for it?

[00:18:51] Richard Groberg: They're there. I don't want to give away all the secrets, but there are ways to pet to track it or go back and recast it so that you can track it.

And like, for example, again, when a private equity group or roll-up group buys you, they have an independent accounting firm that does, what's called a quality of earnings review, which is like getting a 360 body scan. And if you can demonstrate that, Hey, these are the expenses that were personal or time, and here are the receipts and I can run a report that shows them, and I can provide you the backup to prove it.

And in the contract, they won't continue afterwards. Then you can get credit for. When I was in the animal hospital business, there were practices that didn't record all their cash. And then they'd have a little piece of paper that would show all the cash that got deposited in the account that never went through their POS system or accounting system.

If you can't prove it, the buyer's not going to pay for it. So there are different, I'm not suggesting that you don't do it, but you have to be able to track it and prove it. If you want credit for it in a transaction.

[00:20:01] Griffin Jones: I don't want you giving away all the secrets, but you do have to give me a little bit of free consulting right now.

Here's the, here's an example. So one thing is because I'm not married yet, we'll be soon, but I'm not yet. I don't. And I've rented and living in different cities. I haven't itemized my own tax returns. So when I do charitable contributions, I don't have anything to deduct on my own tax returns.

So one of the charities that I support is Nuestros Pequeños Hermanos. It's dear to my heart. So many people listening have donated. When I've asked them and I'm so grateful for that. And so one of the things that I've done, you know, for example, is I will have Fertility Bridge sponsor a gala, and it will be Fertility Bridge advertising.

We'll get the logo on the page and in the pamphlet. And I will invite fertility, doctors, fertility, clients, to the gala with me. So they're at my table and that's business networking. I don't know though that it's something it's not something you would do if someone else was running the business though, right?

Somebody else would pick some different kinds of avenue. So is the advice that I categorize that somehow differently?

[00:21:10] Richard Groberg: The advice is if you know, now that at some point in the future, you're going to be borrowing money, selling partnering, track it, take the extra time to track it, categorize it. Even if you put it, like, if it's a personal expense and use QuickBooks, put a class code in for P so you can always run a report that everything that's P for personal.

So if you think now that you're going to have to do this going forward. When I work with new companies, if I know they're going to be raising money selling at some point, there are things we do from an accounting and tracking standpoint that anticipates the proctology exam a couple of years out so that you don't have to double back.

And say, okay. Mr. And miss bookkeeper go back and find every personal expense that you've run through the business and reposted with a code so that when we get to that point, you can prove it.

[00:22:12] Griffin Jones: There's a book called Built to Sell, and I haven't read the book, so I'm not necessarily recommending, but if the audience is curious enough, we can link in the show notes, the books called Built to Sell.

But I believe the value proposition is to business as though you're going to sell it regardless of whether you do or not, that you have that it is a business that someone would want to buy. And that seems like a tenant of that having your books categorized in such a way.

[00:22:40] Richard Groberg: Well, it's a good book. And again, that is good advice.

If you've anticipated, you will save a tremendous amount of time, aggravation money and not getting distracted from continuing to manage your business by having to double back and figure all this stuff out at a later date, when you're ready.

[00:22:58] Griffin Jones: When you're helping fertility companies get their financial house in order, what are some of the main booby traps or the most common booby traps that you see when you're, when you're taking the PNL against the income statement or excuse me, when you're taking the income statement against the balance sheet, what are some of the common things that jump out to you?

Like, eh, this isn't right. Or something needs to be fixed?

[00:23:21] Richard Groberg: Well, it's the personal expenses and the non-recurring expenses that aren't tracked. It's I haven't reconciled my bank statement in a year. And my books are an up to date. It's, it's again in the cannabis business where I've done some work and what I used to be in the animal hospital business.

It's not recording all the business, I did. The other area in the fertility business is some doctor owners pay themselves big salaries and show little profits, some take little salaries, and then have all the profits. Well, if you're selling to a corporate group, you're going to negotiate what you're getting paid for your work as a doctor post-closing. So that's one of the other things that you have to have an understanding of and then recast your numbers to accurately reflect the past. As if it was the future post-closing.

[00:24:12] Griffin Jones: I want to talk more about the due diligence and the proctology exam, but I remember what I wanted to ask you about when we were talking about goals and that was had to do with earn-out.

So is it simply the case of one goal as well? I'm just ready to leave the business or, and one is, well, I'm going to stay , is the case, even if you're going to sell, is there still an earn-out and how long is that typically that I need to stay for two years or I, or a year or three years. And how much of my buyout is tied to that earn-out? And how much should I expect to get in cash? You can talk about earnouts for a little bit.

[00:24:51] Richard Groberg: Let me address that first from the buyer's perspective, if I'm buying a fertility practice unless it's a large multi-doctor practice, a big part of the value is the producers. And if they're cashing out and leaving it's worth less So most buyers want one form or another of incentive. I call it a golden handcuff to incentivize and ensure the continued performance of the drivers of the practice, whether it's the younger doctors who were taking over or the existing doctors. So if, and by the way, I have another line, favorite expressions there.

That's why there are 31 flavors of Baskin Robbins. Well, every roll up group has a different way in which they like to do it. They want you to own part of your practice or have a profit participation or percentage of the revenues above a base or a percentage of the profits of a base. Or do you have stock in the, in the parent company or little, all of the above, you know, elevation, you still own part of your lab and you won't stock in the parent one way or another.

The practice is more valuable to the buyer. If the seller still has an incentive to grow the practice and grow the practice profitably for the bot. So for the buyer, the seller standpoint, if the seller is selling and staying, he wants to participate fairly again. If I, if I sell my, if my business is worth $60 million and I keep 40%, I sell, I take a partial cash now, and I keep 40%.

I want that 40% to be more valuable later on. That was part of the story of every roll-up group Ovation is the only one that's even partially worked with. There's been a profitable partial cash out for others, obviously Integra Med, didn't work and peoples, including mine and residual interest was worth zero.

So you want the interest of the buyer and seller to be aligned one way or another. So that business becomes more valuable. And when I eventually get my next cash out, it's for a higher number than today, because that's why I'm selling to you and letting you tell me what to do and putting your services in place and helping me grow focus, do more.

None of that matters if you're not improving my quality of life and, or making my residual interests more valuable later on.

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Now back to the show.

So for how long, because owning 40% of a company that one built is different than owning 100% of the company that one built and having all of the say. And I suspect that this is where a lot of the problems could come from as well.

I don't own the whole thing anymore. I, but I'm still on the hook for, uh, I'm still on the hook for. Listening to what the new leadership or the new ownership has to say. And I do have a financial stake in, in retaining this 40%, because how long does it, like when, when somebody sells partial, how long does that stay?

For

[00:30:26] Richard Groberg: every scenario's unique, it depends on whether a doctor is 40 years old or 60 and, and what the goal is of the buyer. So again, every situation is different and unique. I mean, but understand that every private equity group, every buyout group, every roll-up group, no matter what they tell you, their goal is for them to either sell to somebody else at a higher price or go public.

[00:31:01] Griffin Jones: is there typically, is there some sort of. Remaining buyout agreement. I don't know. You know, if you would call that a buyout agreement within the new agreement that, okay, if this isn't happening, the remaining partner has to sell their 40% or those typically in

agreements,

[00:31:18] Richard Groberg: Yes there has to be some mechanism for an ultimate exit when a doctor retires or dies, what happened no different than in a group, private practice, whether it's HRC or one of the other groups, you know, when someone's ready to leave retire or die, there has to be in mechanism to buy them out.

And for other people to get their equity,

[00:31:41] Griffin Jones: do you have to have a mechanism for the evaluation in that agreement as well? So that, you know, well, we say it's worth it Well, I think we grew the value to this, and now my 40% is worth Y when you're saying it's worth X, is that evaluation in the agreement?

[00:31:56] Richard Groberg: Absolutely. I mean, and that's, that's no different in any kind of equity this morning. I was on the phone with someone who was offering me. Equity to join a board of directors. And I said, well, if you're issuing the equity every

single year, how do we value it? So you have to mutually agree on a valuation methodology, whether it's you have an outside appraisal or it's the last transaction that raised money.

But yes, you have to, you have to button up every open issue so that both sides know what the future holds.

[00:32:28] Griffin Jones: Okay. So you talked about the roll-ups that have happened in private equity. Can you first, how do you define a roll-up? Is it just any network? Consolidating, I guess consolidating in, in this instance is self-defined because they are moving more practices into their network or company of practices.

First, can you define, roll up and then we'll talk about some of the things that people have to consider?

[00:32:56] Richard Groberg: My understanding of roll up and roll out is a roll up is rolling in any business is rolling up other businesses in the same industry, a roll out is a strategy which could be part of a roll up where you're opening De novo locations.

So you might have a roll up rolling out satellites. You might have, you know, there've been some models out there that open new locations, you know Kind Body, which is opening new locations. That's a rollout, but they're, I know they also may be buying practices. So that is a roll-up and it happens, they've been roll-ups in the veterinary industry all over health care. Now in the cannabis industry, businesses are being rolled up.

[00:33:41] Griffin Jones: So what are some of the considerations that for not just fertility practices, but any company that the fertility field should consider, if they're going to be a part of their being approached by a larger organization that wants to roll them up into their portfolio.

[00:33:58] Richard Groberg: So if I'm the seller it starts with, what are my goals? Am I looking to cash out and leave, or do I want to stay three years or five years? You know, this organ transaction that recently closed, they were looking to be part of a bigger group and have access to resources and have a partial cash out. But it's not, this is a very important point.

It's not just the price and the terms. If you're going to be there the morning after, operating your practice that you built and you've run, but now somebody else has bought you in. You have to understand that you they've now bought the right to make some decisions, to have veto power, to insist that you do certain things certain ways.

And once you get past price in terms, what the relationship is going to be like in the morning after? What are you going to insist that I do? What are you, what am I not going to do? What's your strategy for providing value added to my practice become as important, if not more important than thank you you valued my practice at 60 million. I'll take my check and go home. And the, this industry, unfortunately to date is littered with. Not overly successful roll-up strategies that have had ultimate exits, but why there are a lot of new groups coming in. I'll address that in a second. There are a lot of new groups coming in.

There's a lot of private equity money saying, wow, this industry is growing. Let's do here. What we did in other industries, you asked why hasn't it worked? I'll give you my personal opinion. The driving force of these practices, the doctors, whether it's in the animal hospital industry, where I used to be, or the fertility industry or other industries.

And when you buy a practice that is entrepreneurial and self owned, you're immediately, no matter what anybody says, de incentivizing partially the driver of the business. That's part one part two is. The roll-up only makes sense. If the roll up group creates economies of scale, can we purchase cheaper?

Can we negotiate? Third-party payer contracts? Can we do things that manage for your practice better and or less expensively than you can as an owner operator and to date? I don't want to talk specifics to date there, I don't believe there are many real success stories of people look in the mirror.

Now they're unbelievably fabulous practices like Shady Grove and others, Boston IVF, and others that CNY and Hunting HRC that within their own group have expanded, have centralized certain services have provided value added to their doctor partners. But when. You start getting 5, 10, 15, 20 of them across multiple states that aren't born within a central strategy named me one that's worked in a long term.

[00:37:16] Griffin Jones: I don't know that I can yet, but I would suppose maybe the jury is still out. And I suppose if we had some of them on, they would say that it is working right now and so.

[00:37:26] Richard Groberg: The jury is out and I hope that there are some success stories, because I think that if you can build better, if you can do the accounting better, if you can centralize buying, if you can do that for a solo practitioner and let them focus on running their location and the practice of medicine, it does create value for that practice.

So in theory it should work.

[00:37:51] Griffin Jones: It sounds like you've got a strong point of view on this, and I'm wondering why haven't they been able to improve the economies of scale? You said that's one of the things that they have to do is their value proposition. I've got, I don't know that this is true in the fertility field, but I did observe something back.

My first job out of college, Richard was selling radio ads. Just here's the phone book, kid, go, go slang. Some radio ads, a hundred percent commission. I did that for five years in my early and mid twenties. And I noticed that it wasn't the McDonald's and the Verizon's and the Geico's. They got the deals because if the large companies, Citadel, Clear channel, Cumulus, Entercom gave those companies deals that would just obliterate their revenue. It was the additional people that got it was, you know, your local driving school, your local jeweler, the scrap dealer. Those are the people that I could cut any deal. I could sell five bucks in O8-O9 during the recession is a particularly egregious example, but I could sell, you know, things that were, should have been a $200 spot for $30. And I could sell the evening spots for five bucks a piece and give away the overnight spots and all of that type of thing. And so I don't know that that's happening in the fertility field. So one question is, is it?

[00:39:05] Richard Groberg: Let me double back, because I need to amplify at the end of the day, the corporate group needs to be able to generate value above and beyond the cost of its infrastructure. So, and I remember back when I was in the animal hospital business and we had 15 locations, the cost of getting up to 15 of a corporate infrastructure was very high.

When you went from 15 to 30, you didn't need a lot of incremental infrastructure. So you have to have enough infrastructure to provide value added, to pay for that infrastructure and create value for the practices. Otherwise, you're just adding overhead that doesn't create value. The other side of the equation.

And I recently worked with a solo practice that was minority owned by a doctor, that was part of a roll-up group, where the question was, are the fees we're paying to the roll-up group worth the services we're getting the answer was no. Now we have to replace some of those services, but they were doing billing collections.

They were doing accounting. They were running the call center and the doctor right or wrong thought that she could do it better or less expensively for herself. If that's the case, then the roll up fails. But if the roll up can provide those services more efficiently, less expensively than the practice can and add value to the practice in a way that creates incremental value above the cost of that corporate infrastructure, meaning Integra med drowned under its corporate infrastructure among other reasons why Integra med fail.

[00:40:54] Griffin Jones: So is it because is it sometimes because there's redundancy or is it simply because of the inefficiency and expense I could do, I could be doing this myself more cheaply and cheaper and more easily.

[00:41:10] Richard Groberg: Again, at the end of the day, if you choose to outsource something in your business to a third party, it's gotta be less expensive than what you're doing, free you up to do other things which will add value more than the cost or it's not worth doing.

So if a fertility doctor can let somebody else manage his billing and accounting and it frees he or she up, and the cost of having a third party doing it is less than having your own person doing it. Well, then it may be worth it. But if not, there's no value added because at the end of the day, it has to create $1 more value. Then the cost of doing it.

[00:41:57] Griffin Jones: You mentioned thatIntegra med was kind of the pinnacle example of all of this. What are things that people should be looking for to make sure that they're not in a similar situation right now, or, you know, if you could have gone back in time three years or however long, I suppose to have people look out for the things that happened in that situation, what would you advise people that could be in a similar situation right now.

[00:42:24] Richard Groberg: Let me, I'll give you an example. On another industry years ago, when I was in the animal hospital industry, there was a group that had raised money at what I call stupid valuations based on their promise of we're going to buy a hundred hospitals and we're going to add value to them of blah, blah, blah.

And they wanted us to sell our group to them for a combination of cash and stock in their business. And they were going to pay us an artificially high valuation. But most of the pro pro proceeds we were going to receive was in their stock. That was artificially inflated. So my partner then used to say, what makes us think that the stock we're getting at 15 times earnings is going to be worth that five years down the road?

It's, doesn't make sense. Now sometimes fundamentals don't matter, but fundamentally if you're taking highly inflated stock in whatever business, and then the other is you have to believe in the strategy of the buyer that they'll be successful. Otherwise, again, you know, my partners and I took seven figures of stock and Integra med.

It was ended up being worth zero, you know, had we gone back. If we didn't believe their model, if we didn't believe that they were going to be successful, why would you make a bet in them by taking their they're artificially inflated stock? So you got to believe who you're getting in bed with, again, as I said earlier, especially if you're going to wake up the morning after and have to work with.

[00:44:00] Griffin Jones: When you're talking about, in this case, you're talking about inflated stock, but previously you were talking about the multiple of EBITDA that sometimes people are selling, selling at use the example of 12 and two or three years ago. I was wondering, I was with one of my earlier clients, and I told them that some people are selling at 12 times EBITDA

and they said, no, that's not true Griffin. They did not believe me. I said, it's absolutely true. I'm not saying it's true for everybody. The only times I've seen that high is through like very large groups selling to strategic buyers and you know, and having an established brand and clearly a system in place.

But I think four is like the lowest I've ever seen. So what's common nowadays?

[00:44:41] Richard Groberg: Well, the market's gotten hot again, because there are groups that have emerged with private equity backing that believe that again, make them buy so big groups that have a brand that have multiple doctors seem to be selling a double-digit multiples in some combination of cash stock or ounce notes.

But again, if you're a one doctor or two doctor practice, you're not as worth as much to the buyer. So those multiples can be four or less. Because again, if you're the buyer and you're buying a one doctor practice, you're taking an enormous risk. And that's why when I work with smaller practices that are thinking about exiting, well, you need to get multiple doctors.

You need to open satellites, you need to buy people. You need to get bigger so that you're more valuable and perceived as more valuable to the next roll up group that wants to come into your market and expand their market share.

[00:45:41] Griffin Jones: I want to do a whole episode on a topic that I think where a lot of upside is if there is a single doc group.

I actually think that's one of the areas where somebody coming out of fellowship or a young associate doc that is either leaving academic practice or they were at somewhere else for two years. That can make sense for them if it's done. Right? Because if that younger doc can bring in that younger doc is in a better position to recruit other younger docs and they have more time to do it.

And so if somebody vehemently disagreed with me when I was talking about this with them at MRSI. So I want to know if you disagree with, they think there's too much risk in that. But I see huge upside.

[00:46:19] Richard Groberg: If you find like I recently worked last year with a doctor in the Southeast great practitioner, great practice.

He's getting older. He's a solo doctor. He had a young doctor working for him and to sell that doctor equity on the cheap may seem like you're giving it away. But two, three years from now, when they're ready, when he's ready to sell or retire, his practice is significantly more valuable because it's a multi-doctor practice.

That's reduced the risk. You and I have a friend in Florida. We almost did business with a couple of years ago. In the last year he's hired two doctors. He's opened satellites. He's made himself. Instead of being worth three to four times, he's worth six to seven or eight times now when he's ready to cash out.

[00:47:09] Griffin Jones: So, okay. So we're looking at this, you know, if you could be looking at under four, if you're a single doc group, and if you don't have a brand and you don't have things in order, if you do have a really robust brand, you have a lot of docs here. You're talking a well in the double digits of multiple. So I'm still curious, like, do you think my economies of scale hypothesis applies to the fertility? Giving the local businesses the deals, but less so to the McDonald's and the, and the Geico is that one of the things that's hindering economies of scale, I don't know that this is happening at all in the fertility field, but I do see when I look at people in the industry, side's target list, their target lists are all the same.

It's these independent groups that still multiple doctors that are still the, the, the biggest in their market. If it's a mid market or at least the third biggest in a large market, these are the ones that everybody is courting. And so it seems to me like they would have more purchase power, but I could be wrong.

[00:48:11] Richard Groberg: Well, first of all, I want to comment about the lack of supply and demand is such that if there are a handful of roll-up groups with a bunch of private equity money saying, we need to go after this industry that drives up multiples because the law of supply and demand is that there are multiple companies bidding on the same handful of larger independent practices, which is why multiples are escalating now.

And I don't think most of these practices in the long run are worth 10 to 12 times. So I would say it's a great time to be a seller. There are some economies of scale there, theoretically should be some efficiencies of consolidation. I've seen aspects of it work. But again, that doesn't necessarily mean that a smart solo practitioner can't negotiate the same deals, but you only have so many hours in the day.

It's why practices hire practice managers, because that way the doctor can go back and practice medicine, deal with the patients and staff and leave someone else to do what they do better. If they can do it better. And if they can do it less expensively than the value they're creating, if it costs $2 to make one, it's not worth it.

But if it costs $2 to create five, well, then it's worth it.

[00:49:31] Griffin Jones: What about, I guess if you're, you know, in your early forties and you own maybe half of a group or a third of a group, and you've got a one or two partners, and then there's a young associate doc in there is I, I guess I'm still, we, I asked you a little bit about the, the long-term hold strategy and, and I briefly read a paper from HBR Yales paper about that holding a whole longterm hold strategy is more profitable in the long run. When is it the more viable option if it ever is to just say, you know what, I'm going to own this thing for outright. I'm going to slowly increase the value and be a hundred percent or majority equity owner?

[00:50:15] Richard Groberg: There's no one right answer. But if I'm a 35 to 40 year old physician in this industry or the animal hospital industry, another industry, and I believe in myself and I believe in growing the practice and I have the wherewithal to do it unless I'm lacking something that a corporate group can give me, or I want to hedge my bet.

Why would I sell now? And you know, if you've convinced me that I should sell, and the residual interest is going to be worth much more, three years, I'll answer the question by telling you a story years and years and years ago, when I was buying animal hospitals, I met this guy in Westchester who had the largest animal hospital in Westchester.

He was making a ton of money and frankly, he was under-reporting about a million dollars a year. So he was really making a ton of money. And he said, why would I sell my practice now at five times my earnings, even if I add back the cash, when I'm 40 years old. And I said, there's no reason for you to, until you're ready to retire die, or you told me you eventually want to move to Arizona with your girlfriend and become a professional illustrator.

And he went you're right. Thank you. For being honest with me, two years later, he called me and said, I'm ready to go. So, you know, there was no reason for him to sell. He had plenty of money. He had plenty of growth opportunity. There was nothing that anybody could provide him that would add more value. Now, if someone comes in and says, I'll sell you an I'll buy you at 15 times your earnings, that means it would take 15 years for you to earn enough, to, to be equal in actually does come down to partially a mathematical equation.

And then, you know, our friend in Texas who sold his software company, reached a point where valuations were so high and he needed management help that it made sense, but until it made sense, it didn't.

[00:52:27] Griffin Jones: Do you want to talk about some of the principles where you've done the deal and then you find out it didn't make sense and now you're unrolling up?

[00:52:36] Richard Groberg: Oh boy. I know we've only got a few minutes. There are a lot of cases where the roll-up group didn't perform the way it said it was going to perform and all those things I talked about didn't make sense. And, and especially for smaller practices, where does it make sense for the roll-up group to have a one doctor practice?

People have cut the umbilical cord and uncoupled. The complexity there is if the corporate group has been doing your billing, your collections, your accounting, your new patient generation, doing all kinds of things for you. You better be prepared to take that back in and manage it yourself and not disrupt, you're doing what Stephen Covey calls keep the most important thing, the most important thing and practicing medicine and running your practice. There've been lots of examples of where it's done. And it is because the corporate group didn't live up to the promises in the eyes of the seller. They didn't get me more doctors.

They didn't grow me. The services they're providing aren't worth what I'm paying for it. You know, I can't get anything done. So cut the umbilical cord. Let me do it myself.

[00:53:48] Griffin Jones: Richard, this interview has been so much value for the audience. I think they're going to get a ton of value. I want to do a live event with you in 2022, where people can jump on and ask questions.

Are you open to that?

[00:54:01] Richard Groberg: I love to you, you can tell, I've been in this industry since 2001. I have a passion and a personal interest in the industry. You know, I've got lots of friends in the industry. This is an area where if I can answer questions. And help doctors through these different processes.

I love to help.

[00:54:19] Griffin Jones: There are some episodes that I go back and listen to because I need to get all of that information. I can already tell that I'm going to be an early 2022 at the gym listening to this episode. So hello, future Griff, while your listening to this. Richard how would you want to conclude about the topic of selling a company in the fertility field, whether it's a practice or not any, whether it's a pharmacy or an EMR company or a lab manufacturer, how would you want to conclude?

[00:54:47] Richard Groberg: Prepare for the process and make sure you have the resources to go through it, to understand what you're getting into and to live with what you're going to face the morning after

[00:54:59] Griffin Jones: Richard Groberg. Thanks so much for coming on Inside Reproductive Health. We'll link to the places where you can find Richard and where are some of those places? Richard we'll link to your LinkedIn in the show notes. Where can people get ahold of you?

[00:55:10] Richard Groberg: Through my LinkedIn is the easiest place or Richardgroberg@outlook.com.

[00:55:18] Griffin Jones: Connect with Richard. And Richard thanks so much for coming on Inside Reproductive Health.

[00:55:23] Richard Groberg: I really enjoyed it