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David Murphy on What Buyers Are Really Looking for When They Evaluate a DSO · The Dental Economist Show

• Mike Huffaker (00:00.13) If at any point you don't like a question or we lose our train of thought or anything else and we need to reset, we can certainly do that. also it records on your local device and mine at the same time. So if the internet gets choppy or something, or I look pixelated or anything like that, it doesn't matter. It'll still be perfect quality at the end, as long as we can track the chain the train of the conversation and we don't lose our place. David Murphy (00:05.314) Yeah. Okay. David Murphy (00:25.133) Yeah. Mike Huffaker (00:26.78) there's no need to like reset or wait for the internet to come back in or anything along those lines. and if you have water or anything and you want to take a sip, it's fine. When we do the recording, we'll like not show the person that's taking a sip while they're not talking. So, you know, all that takes place during the during the editing. David Murphy (00:41.869) Yeah. Okay, perfect. Mike Huffaker (00:46.111) All right, cool. So I'll jump into the brief intro and then we will jump into the conversation. Welcome back to the Dental Economist Show. I'm your host, Mike Huffaker. If you're getting value from the show, please take 30 seconds and leave us a review. It helps more people in this industry find these conversations, and we genuinely appreciate it. Today's guest operates at the intersection of capital strategy and the dental industry. My guest is David Murphy, Managing Director at Mollis Company, the number three ranked global independent MA advisor. And the most active investment bank in dental over the past decade and a half. Mollis has advised on more than $22 billion in dental transactions since 2010 and has been the advisor on a significant amount of every dental deal over a billion dollars in enterprise value. We're gonna cover a lot of ground today, from the basics of what an investment bank actually does and when you need one, to what the MA market looks like right now, what buyers are really scrutinizing in diligence. What DSO operators should be building today if they want to maximize their outcome tomorrow. David, welcome to the Dental Economist Show. David Murphy (02:00.686) Thanks, Mike. thank you for inviting me and happy to be here today. Mike Huffaker (02:04.876) Yeah, really looking forward to this conversation. And, you know, I think oftentimes we make a lot of assumptions as to people's knowledge or education level on the financial side of the business as it relates to investment banking and private equity, taking investment, going through transactions. So for today, I kind of want to start simple. If you yourself are explaining what an investment bank does to a DSO CEO who has never been through a transaction, What's the thirty second version? David Murphy (02:35.5) Yeah. So I would say we we like to characterize ourselves as being a trusted advisor and partner to companies as they look to achieve various strategic objectives. And what I mean by that is it could be they want to go acquire another, you know, dental organization, for example, they want to go raise some money from third party investors, whether that is debt or equity. Or, you know, they they want to optimize their balance sheet, work through different scenarios with different constituents within their their stakeholder ecosystem. And we we help them think through all of that and and really achieve their objectives, you know, regardless of what it is. And ultimately, you know, we try to enhance their position or their strategic growth initiatives that they have outlined for their company in in any way that we can. I would say on the MA side, the simplest way to think about us is a broker. We we are running a sale process for you on the sell side, for example. We are helping you craft the story, craft, you know, the origination story of the business, the growth story of the business, and then helping you find up like the optimal partner based off what your needs and objectives are. whether that is a strategic partner, whether that is a financial sponsor partner, we are running that process for you. We are engaging with them. we are negotiating terms on your behalf and and we are making sure you are getting the optimal outcome that you set out to get in the onset of the process. Mike Huffaker (04:21.74) So where does MOLA specifically fit in the landscape? You know, you've got the the the big bulge bracket banks, the boutiques, the regional advisors. What does an independent MA advisor actually mean in practice? And why should that matter to them? David Murphy (04:37.612) Yeah, so so MOLAS was founded you know, f from its origin in being a strategic advisor to companies and and having a lot of flexibility on the size range. I think what, you know, Ken and the group of founders or co-founders back, you know, in in 2007 through 2009 saw was there was a dislocation in the market where you had a lot of a lot of the bulge bracket banks who were really focused on you know, five billion dollar plus transactions. And then you had a lot of the small regional banks who were doing 200 million dollar enterprise value transactions and below. But there is a massive donut hole where there is a high need or there is a need for for a bank or an institution like us where we can kind of partner with sponsors, partner with founders and help them talk through or strategize on some of the items that you know I just outlined to you. So today I would say we have and this is one of the best things about MOLAs. I think we we have a lot of flexibility in the types of mandates that we take on from a size perspective. We can do, you know, the $200 million enterprise deals and we can do, you know, deals up to really no limit, to be honest. So I don't know, like a good example of that is that we were the exclusive advisor to Netflix earlier this year on their contemplated. acquisition of Warner Brothers. That was a $100 billion plus deal. But there's also, again, as I said, deals that we're doing within the sub billion dollar range. We we try we try to find interesting companies, interesting sectors, and just be a partner to them along their strategic growth path, regardless of size. And it's really finding people you enjoy working with and that you can build relationships with over a long period of time. Mike Huffaker (06:34.988) So let's talk a little bit about that strategic growth path. you know, walk me through the moment in a company's life cycle when hiring an investment bank goes from optional to essential. Like what what are the signals that that a DSO leader should be watching? David Murphy (06:55.608) I think it really comes down to what are their objectives. I think it is good once you get to, you know, a a I think you should always be engaging with advisors regardless of size. And I think you should be understanding, you know, what we're seeing in the market, what we're seeing go well for other folks. What is a macro environment backdrop? How is that impacting transactions? You know, where where are people really double clicking on a growth perspective? And where are some your competitors having success from a growth perspective? And where are people struggling? So I think getting that constant engagement and market intel is super helpful regardless of size as you think about growing your business. I think engaging specifically with an investment bank is really coming down to do you have an objective that you want to go out and achieve? I.e., do you want to go sell your business right now? And if so, then that's the time to bring on. an investment bank more formally. And that's really one of those relationships I think that you've been fostering over a handful of years, months, et cetera, you know, where they're sharing market until you're getting to know each other. Because at the end of the day, I think choosing a bank or any advisor is incredibly it's a big decision. And I think making sure on a personal level there's trust and there's a deep relationship there and they have your best interest at heart is, you know, the number one priority that that folks should be focused on as they think through bringing on an advisor. Mike Huffaker (08:30.434) So you would say that, you know, probably even before you get to the point where you believe that, you know, you're ready to engage in a transaction or that you have these strategic goals or initiatives of of going out to market, that it is worthwhile to build that relationship. You should s probably s most DSO CEOs should start earlier than than they think that they should, so that they can build the relationship so that they can get the guidance and and kind of understand what you're seeing in the in the macro environments as well, heading into when when you're going to ultimately want to go to market and run a process. David Murphy (09:10.934) Yeah, I think that's right. And and and I think it's important to be thoughtful about that. The CEOs are busy. Your day job is to grow and scale a business and you should one hundred percent focus on that. So I'm not saying you should go run around and start talking to ten big banks on a weekly basis, but you should pick, you know, at least a a handful, you know, three to five banks and start having quarterly touch ins with them. And just getting, you know, thirty minutes on the book with them over the course of a year and get their intel and then start to digest that and see how you can apply some of those things to your business if you think it is applicable. Mike Huffaker (09:51.029) Yeah. And I I think you've answered some of this, but you know, I think a lot of operators here, you know, you need a banker, but they don't really know how to evaluate one. You talked about the importance of trust. If you're a DSO CEO and you're sitting across from a few different banking teams, you're starting to to build those relationships. What what are the criteria that they should be using to make the call of who to David Murphy (10:15.694) Yeah. So I think to to your point, I think trust is a big one. I think making sure that your partner in a pretty pivotal decision for the company is somebody that you think has your best interest, you know, at at heart. And I think that's probably the number one factor. I think their understanding of your business, the market that you serve, and how to position the company to maximize outcome, whether that's maximized value, certainty, success, et cetera. I think understanding the business and being able to frame that, you know, within the broader market is important. I think whatever type of transaction you're also looking to set out to do, making sure that they are qualified, they have expertise in that type of transaction. So if that's sell side transactions, you know, how many sell sides have they done within the size range that you are today? what are their relationships with the buyers within that size range, whether that's strategic or financial sponsor? on the capital raise side, similar, what are their relationships across debt and equity partners? have they done similar transactions to this? And, you know, I think a benefit of a bank like MOLAS is that we we historically have been an MA-focused bank. we have made a lot of investment over the last handful of years in bringing out some of bringing or developing incremental products, i.e., capital markets for us and and, you know, both on the public side and the private side. And if there's a bank that can bring in some partners who are doing that all day long, coupled with the industry expertise that, you know, somebody in the healthcare group like myself might have, I think that is also a pretty interesting differentiator and something that you should consider. Mike Huffaker (12:05.826) So I I want to get to the the macro kind of overview in just a second, but but before we do, you you mentioned a couple times, and I think maybe it it would be helpful for you to provide a definition so folks have an understanding of what it means. When you're talking about a capital raise, you mentioned either debt or equity. Can you explain kind of what the differences are there, what people need to be considering when they look for what type of approach that they're going to take? David Murphy (12:32.855) Yeah. So I think it really comes down to what are your again, it comes down to what are your objectives for the company and you know, what are you looking to achieve long term? Debt is going to be your cheapest cost of capital, right? I.e. your the return profile of debt is lower than what equity investors would be expecting if they were to be making an investment. but there's also more risk associated with that because, you know, there's minimum There there's minimum cash requirements, there's different, you know, restrictions that they could put on the business. You have to be sure that you can hit an interest payment, you know, monthly, quarterly. and you know, without that, you know, there's potential risk for for that lender, for example, to take over the business if you aren't able to achieve those things. I think equity is gonna be a higher cost of capital, as I said. There's gonna be less restrictions on the business. And oftentimes equity investors are going to be more hands-on oriented. So lenders are very passive from operating the business, providing insight into the business and helping you grow. They are there to clip their coupon or their interest rate. Think about, you know, simplest terms, i.e., like a mortgage on your house. And then I think Having an equity partner is somebody who is aligned with you from a strategic perspective, who's looking to grow the business long term and maximize what the return on their equity investment is going to be over the course of a handful of years. Mike Huffaker (14:21.11) Got it. So you're trading your equity in the company for investment with an equity investor. You're retaining your ownership, but you're bringing on debt when you're raising capital through a lender relationship. And when you're trading your equity for somebody else acquiring and gaining that investment, you're also gaining a partner in the business versus David Murphy (14:35.575) Exactly right. Mike Huffaker (14:46.25) really being able to retain running the business as you did before, but with these potential risks that are associated with taking on more debt. Is that relatively accurate way of of putting that? David Murphy (14:55.587) That's exactly right. That's g a good way of putting it, yes. Mike Huffaker (15:02.096) awesome. Real quick, we'll take a pause. You had a few things like binging or beeping on your on your screen. I'm not sure. David Murphy (15:07.563) Eve. Okay. David Murphy (15:12.003) Let's be Mike Huffaker (15:14.25) What app that is. It's virtually impossible these days to get rid of all notifications on our computers. but it kind of buzzed. Okay. David Murphy (15:19.107) Yeah. Let me exit Outlook one second. David Murphy (15:30.895) Yeah. Mike Huffaker (15:32.096) Yep, that was the noise. David Murphy (15:35.983) Okay, should be all set. Mike Huffaker (15:40.169) Okay, awesome. Perfect. all right. So you and I, we've we watch this market very closely. give the audience your honest macro view. Like, where are we in the cycle right now? I think you know, we've we're coming out of a a pretty from an MA perspective, suppressed 2023 and 2024. how how how are things looking to you now in 2026 and beyond? David Murphy (16:08.557) Yeah, yeah, yeah. So I think if if you're gonna kind of think about where we are today, I think it's important to kind of spend some time on where the industry has been over the last four or five years. So I think, you know, we are coming out of a period where there is both macroeconomic pressure as well as company specific operating challenges. And on the macro side, you had, you know, labor and supply costs increasing, wage inflation. you know, driving a lot of margin compression on the business, while as everybody knows, like pricing power within general dentistry, for example, is is relatively sticky, which means you don't have the ability to really pass through increases in wage inflation or cost inflation for supplies onto your consumer. So that is one piece from a macro perspective that has impacted the industry, I think, you know, pretty meaningfully. I think the other component of that, which gets to you know, the conversation we were just having is cost of capital has also dramatically increased and the ability to obtain financing or leverage or debt, you know, has was diminishing over the course of twenty twenty three to twenty twenty four. So if you think about, for example, where cost of capital or the interest rate on debt was in twenty twenty one, that effectively doubled. To in in when you hit 2023 to 2024. So that means that companies are spending more of their cash flow to pay interest expense than they were, or double what they were paying in 2021 for interest expense, you know, in 2023. So you factor that in, I think, with you know, some of the labor shortages and and some of the supply inflation, et cetera. Like, That created a pretty challenging macro environment, I think, for dentists to operate in over the course of the last handful of years. I also think, you know, on the company specific side, there was an onset of of DSOs formed when there was meaningfully cheap cost of capital that needed to be thoughtfully or spend time integrating the business. David Murphy (18:34.071) And putting some more infrastructure around the business. there were these, you know, big emphasis on buy and build strategies where people were going out acquiring smaller DSOs, you know, aggregating EBITDA, but there wasn't a lot of true business building to support those practices, you know, during the that same time frame. So you had a period where it was a challenging macro environment with you know, company specific challenges that created a little bit of a downturn and compression in MA volume over the course of, you know, 2023, honestly, until I would say pretty recently, where we're starting to see a little bit more of an uptick in MA over the last probably six months now. so I would put it thinking about where we were historically, that we're in like the early innings of a recovery here. I think inflation has moderated, cost of capital is starting to normalize, albeit it's at higher levels. I think we have more visibility into what that looks like and people can underwrite that and start to forecast more appropriately. And also I think like financing has become more accessible for folks. So people can go out there and obtain debt inequity capital easy more easily than they were able to in twenty twenty three and twenty twenty four. so that's you know, macro conditions have normalized, stabilized, and feel moderately improved versus where they were 24 months ago. And I think you have businesses that, from a company-specific perspective, struggled over the last 24 months, but have been heads down trying to grow the business, integrate these businesses. And I think you're starting to see the pull through of that on organic growth, what these businesses are doing on a monthly basis. basis and the overall performance. So you're starting to also see company specific operating metrics, benchmarks, etc. improve, which is feeding into this early re innings of recovery that we are in today. Mike Huffaker (20:44.03) I think that's really well said. When you're thinking about if we put the company and the the companies aside for a second and the need to integrate the business properly and create operational excellence and growth, and we just focus on the financial side of things, one of the biggest challenges was the unexpected rise in interest rates, as you as you laid out, and the cost of capital. You made a comment that Now, even though those rates are higher, that you can underwrite it and forecast it. So is it a motion of when you don't get hit with this surprise? And if you enter into the investment with the knowledge of rates being high, that you can actually create a better financial model that is more durable when you're investing into an organization which will If you weren't one of the groups that is currently over-levered, offer opportunities for investment from private equity into the DSO space again? I'm not sure if I worded that question incredibly well, but I'm trying to understand why, even with the high rates, like it can become an early stage of a recovery when the rates are so often pointed to as one of the main reasons why we've gone through such a challenging period. David Murphy (22:10.541) Yeah. So I would say I think two parts of that. One, I think in the twenty twenty one, twenty twenty two timeframe, nobody was modeling out doubling like cost of capital doubling. So people were thinking about what is the cash flow of the business going to look like? What are the investments that I'm going to make into the business? and and forecasted that out without assuming a dub like interest rates were gonna double. So they had a growth plan. that they outlined to hit, you know, a return profile that they shared with investment committee and and got comfortable underwriting. And then that growth plan changed because cash flow had to get, you know, reallocated to paying interest expense versus, you know, strategically growing the business. I think what we are seeing today is people take on less debt to offset what the interest rate elevation or the rise in interest rate looks like. So, you know, peop Companies are taking anywhere from I think, you know, in the twenty-one time frame, I think a lot of companies were taking, you know, five turns of e of of debt, which is basically think of your EBITA for the business multiplied by five times or six times. That was kind of the range that we were seeing in in the dental market. And that's how much debt they were putting on the business. we are now seeing that compress where people are now being a little bit more conservative. about the quantum of debt that they are putting on the business and just to offset where the interest rates are. So they don't feel as strapped from a cash perspective or as nervous from a cash perspective where they have to meet these interest rates while also trying to grow the business and invest in the business, whether that's MA, de novos, etc. Mike Huffaker (24:00.226) So where do you see this going? I think, you know, a lot of the headlines over the past six months to a year have focused on a number of organizations that are now lender owned. by my analysis, I think it's roughly seven of the top 15 from a size perspective, and I think another three or four across the top fifty. So we're at almost, you know, one in five of the top fifty DSOs that are that are currently lender owned. we're starting to see. David Murphy (24:00.816) Mm-hmm. Mike Huffaker (24:30.006) maybe more strategic activity. The last couple deals that have been published were the merging of Gen4 and SGA, Modus all under the Thurston umbrella. And then we just saw the acquisition of Select by Guardian. there still haven't been very many announcements of kind of fresh investment from a PE acquiring David Murphy (24:38.159) Mm-hmm. Mike Huffaker (24:58.786) a a DSO that maybe had not been invested in by a private equity group prior. So there's a lot of these kind of moving pieces, different types of deals that are happening, restructures that are taking place. Wh where do we where do you we think we go from here? And I know it's probably a complicated question to answer, but I'd love to hear your perspective. David Murphy (25:19.107) Yeah. I'll I'll take it in a few parts. I think one, we're going to see a delineation of winners and losers within the dental space. I think you're gonna see the folks who have built well integrated businesses, you know, with strong operational performance, good management teams. I think there's gonna be a really interesting and exciting opportunity for them to take market share, whether that's regionally, nationally, et cetera. because they are well positioned, their businesses are performing, and they can start thinking about strategic growth versus trying to, you know, fix operational headwinds. so I I think they are going to be well positioned to continue to take market share. I also think they're you're gonna continue to see a wave of mergers, whether that's for you know, some folks within equity to see a partial exit. Maybe they're getting it's a mix of cash and stock that the target is getting to kind of return some capital to investors while also continuing to ride the upside, you know, be able to recognize synergies between the two organizations and grow more strategically. so I think you will continue to see more MA from that perspective. I think you will see some of the larger, well-built platforms. start to think about consolidating or going out and and tucking in some of these, you know, more MSA focused or regional focused DSOs as a way to grow because they think that they're in a a strong position to really double down on the market where the market's in a little bit of a shaky time. I think, you know, for example, we just saw Dental Corp make their first acquisition into the US. And if you're if you spend time with, you know, folks around that situation, I think they're pretty excited about you know, what the outlook for them is across the US more broadly to continue to penetrate, you know, the market there because of the strength of the platform and the operational expertise that they have there, where they can go take some of these businesses, integrate them into the larger business, recognize synergies, recognize economies of scale, and start to gain market presence from that perspective. I think on the sponsor to sponsor side or David Murphy (27:41.23) you know, a sponsor and private equity firm buying a dental organization that is owned from another private equity firm, that, you know, is still I think going to take a little time to fully return back to where it was. I think, you know, a handful of the re like valuations I think are going to be a big reason for that. and I think valuations you know, remain relatively low versus where they were historically for a lot of the operational and macro points that we were just hitting on. we ran an analysis, you know, basically showing if you looked at deals done in the 2020 to 2021 timeframe and the multiples paid for those deals, in the 2020 if you were to assume everything this is the same from a deal structure perspective for that deal. But you changed the cost of capital that that deal was being done at, i.e., you put it at double the rate because it were in 2023 or 2024. That naturally suppressed transaction multiples by one to two and a half turns of your EBITA. So you're seeing you you saw compression specifically driven from that. I think, you know, there is the company specific, you know, limited struggling from a growth perspective. Mike Huffaker (28:53.666) Interesting. David Murphy (29:06.391) not able to do as much buy and build was impacting also where valuations were changing or where valuations have kind of been shaking out. where you're in a little bit of like a bid ask spread right now, where sponsors are interested in dental. They want to continue to get into the space. I think they like the long-term tailwinds that dental has to offer, whether that's, you know, resilient through different economic cycles growing pretty consistently at 5% a year. $180 billion market, highly fragmented. Like there's a lot of good reasons to like dental, but I think buyers want to be entering at a cheaper price than where sellers are willing to sell right now. And part of that is because of where sellers bought, you know, when they entered in a lower cost of capital environment. And that goes back to the analysis that we were just outlining. So there's a little bit of a bid as spread where that has impacted. the sponsor sponsored deals over the last handful of years. and it's going to, I think we're we will see over the next 12 months that I think alleviate a little bit, but it takes time. And I think what sellers are realizing is that okay, if I had a headline valuation that I wanted to hit. So for example, I wanted to be valued at a billion dollars. And I thought I was going to get there with a 15 times multiple, for example, You know that sellers are now realizing, okay, my multiple is going to be less. How do I achieve that billion dollars? Well, I need to go heads down and I need to grow the business. So that that's how sellers are trying to counter the compression in multiple, but I think that takes time. So I think there's still gonna need to be a little bit of a period where these dental organizations can kind of grow into the valuation that they want to hit, because I think. Where we are from a macro perspective, from a cost of capital perspective, I don't think we are returning to multiples that we saw in 2020 and 2025. Mike Huffaker (31:15.318) Yeah, so there's still misaligned expectations that David Murphy (31:19.117) Mis misaligned expectations, yes. Mike Huffaker (31:21.724) Need to get resolved. What one area that does seem to still be commanding a premium? I'd be interested in your perspective on this, is the specialty platforms, oral surgery, endoperio. why is specialty outperforming general dentistry? And do you think this is a a structural or kind of cyclical piece? David Murphy (31:31.055) Mm-hmm. David Murphy (31:46.81) I think, you know, from an operational perspective, I think we're seeing outperformance there because these are essential services. If you have to go to the oral surgeon, you are not bypassing that. Maybe, you know, on the general dentistry side, you are putting off going to get your cleaning and saying, you know, maybe I would do this typically every six months this year, I'm skipping it. That's fine. I will do it, you know, a year from now, and everything normally will be okay. But you can't skip something that's more specialty oriented that you need to go get fixed. So I think that's driving volume and more consistent volume patterns for for those organizations. And then I think also specialty specialty has more pricing power or ability to drive price. So I think general dentistry again, not a lot of pricing power if wage inflation, supplies inflation is impacting your business, there's not a lot you can do to pass that on to the consumer at the end of the day, I think there is more ability to do that in the specialty market. So operationally, that is yielding more consistent organic growth and premium organic growth versus a general market. And you're seeing buyers where we're in a period of time where buyers are rewarding organic growth. So that is driving multiple and there's also a scarcity. There's not that many specialty dentistry platforms So, you know, the the ability to go out and partner with somebody who's has premium growth is more rare than it is on the general side, and that is also driving valuations. Mike Huffaker (33:26.922) So let's let's dive in a little bit to to diligence and and what that actually looks like. So you you're touching on some of that right now with the importance of organic growth. But if we kind of pull back the curtain on diligence for operators who have never been through a formal process before, when a serious buyer is engaging with a DSO platform, what are maybe the first three things that they really want to understand? David Murphy (33:53.112) Yeah. So I would say best in class DSOs are able to demonstrate a handful of things. I think that includes like pretty durable and consistent organic growth in the mid to high single digits. And that's comping month over month, quarter over quarter, you can see it at the same practice level. You will always inherently have a little noise if you were working with a, you know, dentist office where maybe there's two or three physicians. one of those physicians goes out on vacation, like you will see some drop. But I think that is explainable. It is and something that you can underwrite. But, you know, overall over the long term, you want to be seeing pretty consistent growth that's in line or slightly above where the market is growing from an organic perspective. I think strong dentist and hygienist retention ability to keep that staff is important as you think about the ability to serve and And meet the demand within the MSAs that you're in. Specifically on the hygienic side, it feels like there's been a meaningful shortage of that over the last handful of years. And with that, you're having dentists focus or spend time on lower revenue generating or margin procedures that can be impacting the financial profile of the business. So I think from those are two things to kind of think about as growing revenue. On the operational side, I think like timely and accurate financial reporting is super important. We are seeing groups. One of the first questions that gets asked is, well, how long does it take you to close your books at month end? Is that a 20-day process, a 30-day process, or a 60-day process? And I think what they're trying to get at with that question is what is your ability to have real-time insight into practice level performance? Is that something you can monitor on that monthly basis? Are you seeing, like, for example, is there a scheduling error in one of your platforms that's causing cancellations, or you're not being able to fill blocks? And can you see that week of, or are you seeing that two months later because you close your book 60 days from now and you're seeing, you know, volumes in May, for example, or light? Let's see what's going on there. When that happens, David Murphy (36:17.827) That issue was in there for May, it was in there for June and July. So that creates some operational challenges for the business. I think integration is a big one. And that kind of feeds into the point I was just making. But if you are going out and if you are executing on a buy and build strategy, I think what we've seen is the importance to be on an integrated platform, an integrated, you know, practice management solution that can help. drive, you know, visibility across your entire book of business. I think it is challenging to own a DSO that as it scales, it's on six different practice management solutions, for example, that is hard to really understand the consistency of the practices, you know, execute on your RCM strategy, on your scheduling strategy, you know, being integrated on on one single platform is really important these days. And we're seeing a lot of folks take the necessary steps to to do that. and then I would say the last thing is on a from a strategic growth perspective, you know, consistent de novo performance, being thoughtful on where you're putting de novos. Does the ramp of those de novos from a volume perspective look pretty consistent? Are you able to kind of show what the return on investment is for those de novos? Is is is one factor. And then with that on the MA side, are you driving value for these businesses after you partner with them? Are you integrating them? Are you able to buy down the multiple, i.e., if you buy it for six times EBITDA after it's been on your platform, have you been able to grow EBITDA? So now it looks like you really bought it for four times, maybe a year down the road. I think that is an important factor. as people think about continuing to go out and do these buy and build strategies, are they disciplined from the multiple they're paying up front? And then are they driving value for the practice line? Mike Huffaker (38:22.4) Very helpful, very comprehensive. maybe help the audience understand what EBITDA quality means. So I've I've kind of I've heard this phrase, buyers looking for a 90% plus quality, you know, meaning adjusted EBITDA as a percentage of their pro forma. It sounds like a lot of financial terms, but but what are we what are we talking about? And what what does that actually mean and why is it important? David Murphy (38:48.803) We are talking real EBITDA. So if you think about what is the cash in the business, how what is your cash EBITDA look like as a percentage of what you are trying to sell off of? and what you wanna see is really limited pro forma adjustments where, for example, a pro forma adjustment can be I opened five de novos, I think they're gonna be within th at three years from now, each doing you know five million dollars of EBITDA in aggregate that's 25 million of EBITDA. I'm asking for pro forma credit for that 25 million today. That is considered a pro forma adjustment and buyers look at that and say that is not clean EBITDA. And I think you know the simplest way to think about that is and why people have gotten burned, going back to your point on lenders taking over businesses. People were taking leverage off of a pro forma EBITDA, but you cannot pay cash interest with Proforma EBITDA. So you need to have more alignment around what your actual cash flow generation for the business is tied to what your, you know, the interest expense and the capital needs of the business are. So people want to see when they're looking at your, you know, EBITA build, what is the gap from reported to adjusted? And then adjusted to pro forma and making sure that they feel that reported is still a pretty high percentage of that overall profile. Mike Huffaker (40:26.508) So one of the things I'm hearing here is that having a strong CFO in the organization becomes very important when you're moving into a diligence process. Is that an accurate assessment? Is it a challenge for some groups that might not have the financial muscle built out to the expectations of a buyer? And if there is a gap there, how Does an organization close that gap to go through diligence? Are there outside services they should consider? Consultants? What's the right approach? David Murphy (41:02.201) Yeah. I think it it's gonna vary. If you're a smaller DSO, you know, we we see folks that are able to do well with a really strong controller, for example, who has a good pulse in the business, the financial reporting of the business, and a strong management team around them, where you know, you don't need a CFO that's that, you know, that expensive, for example. As these businesses continue to scale and grow and start hitting a hundred practices, you know, 75 practices, having a CFO who can monitor these businesses is critically important to make sure, you know, the the financial profile hits all the items that we were just talking about. and I think as you think about going to market or going through a transaction, there's plenty of third party support services that you can hire. You know, we we always advise clients to get a quality of earnings done on the sell side. That is an accounting or third party independent accounting firm really validating your earnings profile, validating your your you know, income statement, making sure that you are collecting on all the revenue that you are charging out, that your, you know, adjustments are not just The banker and the CEO putting out, you know, these adjustments that are validated by a third party, you know, independent source. I think those are incredibly helpful. It helps retain leverage for the seller throughout a process. Buyers are all going to go do their own work. So you might as well know what they're going to find before they go and do it. So you can better kind of respond in diligence sessions, et cetera. and there's also transactional support around that that can help, you know, pull diligence, et cetera. and the banker should be able to drive a lot of that at the same time. Mike Huffaker (42:56.756) It's funny. I have so many notes on things that I wanted to discuss with you. And we're not gonna be able to get to all of them. So maybe we can do a a part two at some at some point in the future. but as we kind of head into the home stretch, I I want to talk a little bit about maybe the the psychology or the approaches of of deals. And you know, you you've been in rooms where processes have succeeded and you've also been in rooms where they've fallen apart. And, you know, without David Murphy (43:16.227) Mm-hmm. Mike Huffaker (43:24.438) You know, naming names or or any specific examples. Like what what does the emotional arc of a failed process look like for a seller? And what do the best banking teams do differently to to protect their client through that? David Murphy (43:45.53) Every situation is different. I don't think anybody likes to have a failed process. There's a lot of time, resources, emotional investment that goes into those. so it's, you know, upsetting for all parties involved at the end of the day. Oftentimes what I would say is that it's it's a little cheesy, but everything happens for a reason. Sometimes things just aren't meant to be. I think. You know, whether that is you're not getting you're not able to maximize value because maybe a a buyer found something in diligence and you know what's the best response to that? Go heads down, go fix whatever they found. So next time you come back, you're stronger and a more cohesive business. so I think there's there's always learnings that you can find from sales from failed processes, and making sure that you're optimizing what the eventual outcome is going to be. It just might take a little bit longer to get there. I think on the banking side, it's making sure, again, you have the best interest at hand of your client, making sure you're putting them in front of the right people to give them the highest probability of success and outcome, and managing the process, knowing, you know, what are our objectives? Is it certainty? Is it maximizing value? how do all of those things triangulate within one another and making sure you're balancing that? appropriately as you're engaging with the different third parties or potential investors there to to to get to the outcome that we, you know, have all kind of agreed upon on the onset. Mike Huffaker (45:20.608) Yeah, I like that framing. Certainty or maximizing value, making sure that at the outset expectations are are understood with everybody involved. It if you could change something about how DSO operators approach the capital event, either mindset or preparation or timing, or maybe something else, what what what would it be? David Murphy (45:45.251) I think David Murphy (45:51.354) I think preparation is something that's easy to do. And I think there's a lot of resources out there today where whether that's just talking with bankers earlier, talking to some third party consultants, experts earlier, to really formulate and make sure that the business is ready from a diligence perspective. You know, I think it's it's challenging to run a process where the the business just isn't where it becomes clear that the business isn't integrated or that there's you know weaknesses from an operational perspective, being able to fix as much of that heading into a process versus rushing a process i is always the optimal outcome for you know all parties involved. Mike Huffaker (46:35.778) Is there anything that's currently happening in dental that you think the market is underestimating, either as a risk or as an opportunity? David Murphy (46:44.205) Yeah, I think I think AI and dental is gonna be a massive tailwind for these organizations and I think it's really gonna unlock Top line revenue growth, it's gonna unlock margin for these businesses or EBITDA margin for these businesses. And I don't think people are spending as much time focused on that as you know, maybe they should be. as you think about what you can bring from a partner pers partnership perspective to a DSO to really, you know, provide them capital to go out and invest in AI or partner with folks like. you know, planet D D S who are doing so on on their end. I think that's gonna be a really exciting tailwind for for this industry to kind of experience over the next two to three years. Mike Huffaker (47:35.244) David, have really enjoyed the conversation. I learned a lot. I always enjoy learning a lot when I have guests on the show. where can people find you and connect with Mollis if they want to continue the conversation? David Murphy (47:47.607) Yeah. they could always ask you for my contact information, email, happy to talk with folks. you can find me on LinkedIn, you can find us on the MOLIS website. but we're always around and and willing to talk with folks, whether that's through transactions, through strategic thinking. you know, again, we enjoy being long term partners and advisors to to companies and and helping them across many events over the course of their, you know, life cycle. Mike Huffaker (48:15.936) Awesome. Thank you so much for joining. David Murphy (48:17.739) Awesome. Thank you. I appreciate it. Mike Huffaker (48:20.503) Hold on one sec. Let me hit