Acquisitions Anonymous - #1 for business buying, selling and operating - Are You Sleeping on This Deal? Breaking Down a Sleep Disorder Clinic for Sale

Episode Date: October 4, 2024

In this episode of Acquisitions Anonymous, hosts Michael Girdley, Bill D’Alessandro, Heather Endresen, and Mills Snell dive into the sale of a sleep disorder and attention deficit disorder medical practice based in Detroit, Michigan. With an asking price of $5 million and a net cash flow of $1.8 million, the team discusses the complexities of owning a medical practice, the revenue potential from sleep apnea treatments, and whether an owner needs to be a licensed physician. They explore the practice’s payer mix, potential technological disruptions, and whether owning the CPAP distribution side of the business is key to profitability.Key Points Discussed:- Payer Mix and Margins: How the mix of private insurance, Medicare, and Medicaid impacts the clinic’s value.- Physician Ownership: Whether a non-physician can own this practice through an MSO (Medical Service Organization).- CPAP Business Model: Understanding whether the clinic profits from the sales and maintenance of CPAP machines.- Market Trends: The increasing prevalence of sleep disorders and the residual income potential from repeat visits and equipment servicing.Thanks to this week’s sponsor:Acquisition Lab and their team have been longtime supporters of the pod. Acquisition Lab exists to help people buy a business and navigate all the complexities of the process, as well as provide a trusted framework, tools, and resources to support you from search to close.If you are serious about buying a business, check out acquisitionlab.com or email the Lab's director Chelsea Wood at [e-mail] and mention us ;)Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

So I like this. There's a lot to like. Do you think you have to be a doctor to own this? I'm not sure. Hello, another episode of Acquisitions Anonymous. We don't have 100% pure. Welcome to another edition of Acquisitions Anonymous. I'm Heather Anderson, and today we have the whole crew, and we won't put you to sleep, but we will talk about a sleep medical practice.

It does CPAP machines and attention deficit disorder treatment. It has great margins, and we had a lot to a good, discussion, a lively discussion that will not put you to sleep. This episode of Acquisitions Anonymous is sponsored by Acquisition Lab. Acquisition Lab and their team, they've been longtime supporters of the pod, and they provide a really great service for people who are looking to acquire a business. So it's created by Walker Diable, who's become a friend, the author of Buy, Then Build, how to outsmart the startup game. So Acquisition Lab is an accelerator with a highly vetted, cohort-based, educational, and support community for people who are serious about buying a

So a lot of our listeners like you, you turn in every week to our deal reviews. You want to get in on buying a business. You're on this podcast because you're trying to learn how to buy a business. But if you're not quite sure where to start, Acquisition Lab is a great place to start. So they exist to help people buy a business and to navigate all those complexities of the process, everything you hear us talking about on the show. They provide a proven framework tools and resources that support you all the way from search to close.

They do it. There's a whole bunch of educational material and support. So if you're serious about buying a business, check out AcquisitionLab.com, or you can actually email the program director Chelsea Wood directly. Her email is Chelsea at buy then build.com. Well, the good news, Heather, is this is 100% Gen X podcast today. We don't have to worry about any of those children or co-host showing up. And you know it's going to be good.

This is going to be great. Well, nobody will pay attention to us and we'll feel slighted about it, but we won't care or we'll act like we don't care. That's really big. Ignor us. It's fine. Oh, our millennial co-host has arrived.

Don't lump me in with those people. Well, Heather and I already got started. It's good to see you, Bill. Oh, good. So I'm live, trashing the millennials. Fantastic. I am an elder millennial I learned. I am, while technically a millennial, I'm 1985.

Oh, okay. I am like of the oldest old millennials or exenial. I have heard of myself called as well. So you're saying you're special and unique, not like those other millennials who all think they're special and unique? Yes. Yes. I'm not like those other special unique snowflakes. I'm my own kind.

Cool. All right. Well, I brought a deal that is a sleep disorder and attention deficit disorder medical practice. And so the price is $5 million. Annual revenue is $2.8 million. Can I tell you guys some more about this? Please. Yes. Cool. All right. So $5 million asking price, annual revenue, $2.8 million, net cash flow, $1.8 million, and is located in the healthcare industry in Michigan. And for over three decades, the company has been at the forefront of providing specialized care for individuals struggling with sleep disorders and attention deficit disorders. The clinic located in the Detroit, Michigan area, is dedicated to offering the highest quality of care backed by years of experience and expertise in the field of clinical neurophysiology. As a longstanding,

sleep medicine practice in the area, the company has established a strong reputation on loyal patient base. The longevity speaks to the clinic's commitment to providing quality care over many years, and additionally, the clinic's accreditation by the American Academy of Sleep Medicine further validates its adherence to high standards of practices. One of the company's competitive advantages is its competitive range, comprehensive range of services. Beyond sleep medicine, the clinic also offers attention deficit treatments and clinical research. This breadth of services allows the clinic to cater to a wide range of patient needs. Furthermore, the company enjoys a robust referral network from local physicians contributing to a steady stream of new patients. This network

reinforces the clinic's reputation as a trusted provider of sleep medicine services. The company's services include sleep medicine, attention deficit, and clinical research, and they primarily serve adults 18 to 30 and most of its clientele approximately 90 percent seek treatment for sleep disorders. The remaining 10 percent of patients are diagnosed with ADD attention deficit disorders. The clinic it caters to a local patient base within a 20 miles radius of its location. And the reason for selling is the owner plans to retire. So we have this 1.8 million net cash flow medical practice for sale for $5 million in the Detroit, Michigan area. What do we think? Well, I like the picture of the machine that helps you sleep. The CPAP machine. Yeah, the CPAP machine. Thank you. So we know what they do.

they provide folks who have problems with sleeping with some of those machines. I've never heard of attention deficit and sleep as a practice that goes together. I guess it makes sense probably in the science, but I'd never heard of that. So that's a little interesting. But whenever I look at a medical practice, I think, you know, this is pretty tough for someone who's not already a physician in this field to buy it. I wonder if you, I wonder if these are physicians who are, who are given this service. You think they may not be physicians?

I mean, it says neurophysiology. So it may be their PhDs or. Because, you know, there's these like kind of tangential medical services that happen like, fertility, right, that we've talked about. Sometimes those aren't, those aren't MDs. This may not be an MD. This may be a person who's like, I'm just using. some best practices or some you know something that doesn't require a medical license i think i think

cpaps i think you need a prescription i'm not sure or some of this stuff i think you need a prescription i know about these my buddy is in in in this space um and you do require a prescription and then there's another group of people for cpps for example that are the um like the the physical therapists that they're they basically come in and they're the ones that fit the mask to you and make sure you're not going to like choke to death and stuff like that. So it's definitely, it's definitely regulated medicine. Okay. So I like that.

I agree with Heather. I think the ADHD thing is a little bit of a weird bedfellow with the sleep clinic. It says it's 90% sleep disorder or 10% ADD. So I wonder, I wonder if like one of their practice. petitioners got a side certification and like started doing this. I'm not an expert, but I'm not sure how much Venn diagram overlap there is in the science on sleep disorders and ADHD. I'm sure that some people have both, but I'm not sure how related there. One thing to me that's totally crazy about the way medicine is regulated in the U.S., and this is tangentially only related to this,

But like when you become a doctor, like you can basically like prescribe all kinds of stuff and you can treat all kinds of stuff. Like they don't specialize it. So like like I had an acquaintance and he, she was an OB and like I looked up at one point and like the person, this person was like making a ton of money selling testosterone therapy to like all of the like all of my male friends. And I was like, what is going on here? Like how are you a specialist? Like how does the law let you who has no. expertise in this, doesn't practice it regularly, just be like, yeah, your testosterone looked low, here's some drugs. And kind of the same thing. Like, to your point, like this person

is a clearly a sleep doctor, right? And specializes in that. And they're like, oh, hey, you have ADD. Would you like some, you know, would you like some drugs to go with that? Like, it just, to me, it's just kind of crazy how we do it. It is. But I mean, they, they, that you do take all those classes in medical school, like once, you know, years ago. Right. And then, you know, then don't keep up on it if it's not your specialty, but they don't care. Right. What this teaser doesn't tell me, which is the first thing I think about when I think about medical practices is the payer mix.

How much of this is, that's the first thing, right? How much of this is private insurance? How much of this might be Medicare, Medicaid? I mean, some practices are all Medicare Medicaid. it really, it totally drives the value of the business because you look at payer risk, right? What are the risks of those different payer channels changing the reimbursement rate? How much have they changed it in the past? When might they change it again?

So, I mean, it looks like they're getting fairly good margins on what they're doing, which is also something we think of as, uh-oh, maybe they're at risk for a reduction in reimbursement rate, depending on who's. paying them. So that's the first thing I want to know when I look at something that has to do with medical. Super interesting. The business broker, I just Googled his name and number, and he's located in Long Island, or no, upstate New York, Westchester, New York. Like nowhere near Detroit. I'm seeing that more and more. The business broker is not local to the business, which I guess is fine. The lenders have done it long ago. You know, lenders used to kind of

try to stay local. And some small banks still do, but all the kind of medium size and up banks are are all national now. So I guess, you know, the brokers can somewhat do the same thing. It sort of seems like you have to go do a site visit, though. I wonder if these brokers do that. I mean, it wouldn't surprise me if a lot of times these burgers get listings because they like were the college roommate of the doctor. You know, same way my one of my relatives is a real estate broker. and I look at all of his listings and it's all like people he's related to like all of his listings are that or our high school friends so it's like wealth advisors right same correct correct I knew somebody who went into insurance and they basically just insured like

they got all the premiums from insuring their families real estate holdings and then they were like anybody else like that's fine but this is this pays my my full time so the real estate was significant enough that he could support a full-time integration broker yeah yeah So an anecdote for you guys about turning social capital into money, which is kind of the thing we're talking about, right? So I did not have an enjoyable high school experience. And I went to high school here at the same high school my kids went to. I did not enjoy it. I did not fit in.

It was not great. But there was a period like in my 30s where like every seemingly every other week I would get a call from somebody I went to high school with. And they were like, hey, Gurdley, like, how's it going? Like, you know, I remember you from the high school days? Hey, I wanted to take you to lunch and talk to you about your insurance needs or your wealth planning needs. And I would just be like, bro, I didn't like in high school. And I don't think we're going to like each other now. So, but it was just like, you know, and that's what they tell you when you go do the wealth management business. Like, okay, open up all your contacts and start calling all of your

relatives and ask them for buddy. Like that's what that's the training plan. And so these guys were doing it. And I was like, but somehow I ended up in the part of the list where it's like, oh, people that didn't like each other. Well, I'll call them anyway. Well, it's like. You never would eat lunch with me even once in high school, and now you want to have lunch with me. No, you threw food at me in high school. Michael, were you six foot five in high school? So I had a really weird high school scenario. Like, I grew five inches in high school, and I lost 100 pounds.

So, like, when I started in high school, I was like two different people. No, like there's, you know, like, in my junior year, I, and I saw my son do this exact same thing. In my junior year, I decided that I didn't like the way I looked and I didn't like the way I felt and I was 260 pounds. To put it in perspective, I'm 225 right now, right, and taller. And I was 6-2, 6-3 and 260 pounds. I didn't like it. And I just decided, like, I was just going to live a Spartan lifestyle and I was just going to like not eat and I was going to. And so within the span of like nine months, I lost 90 pounds. And it was just through sheer force of will, I started swimming. And like, I was just, like, I was just, I I was that kid who left for summer and came back and they're like, where's the other half of you? Like that was how it was. And so I went from 260 to 170 and I was 6-2 and I did that in nine months. And I saw my son do, he's not overweight, but I saw him do the same thing in his life. Just like that maturity thing happened from 17 to 18.

So to answer your question, Mills, I finished it at like six, three and a half, six four, you know, 170, 180 pounds. I started at like six foot and 240 pounds and was a different person. Wow. So back to the deal. No problem sleeping though. So I actually really like this industry. So here's why I like it. Problem sleeping are highly correlated to a couple things.

Being overweight. Having a lot of blue light exposure from scrubs. screens late at night. And both of those things are only up and to the right. Right. I mean, you know, there are other things, but like these are two big causes of not sleeping so great. And so you've got this kind of cyclical tailwind that is driving people into your office. More and more people have sleep apnea. More and more people have CPAPs, et cetera. And also once you have a CPAP, like that's your doctor and you're patient. And you probably got to come back every so often to, you know, make sure the CPAP is working. You know, there's definitely a residual

income stream here as well, which I would want to understand if I was diligent in this business, you know, there's kind of an average order value in AOV in e-commerce terms, and then there's an LTV, a lifetime value of these people. I also want to understand how this clinic makes money, like, do they make money just from the visit? Or do I get to sell them the CPAP? Do I get to sell them consumables for the CPAP, you know, et cetera, over time? So I like this. There's a lot to like. Do you think you have to be a doctor to own this? I'm not sure. Hey, Michael here.

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If you're a business making over 500,000 annually in revenue, we'd love to hear from you. Go to joinscalepath.com, use the code AAPod, and you'll save $100 off your first month membership. That's join-scalpath.com and use code AAPod code for your first month discount. Now, back to the show. You'd have to do an MSO if you weren't a doctor, most likely. And a medical service organization, it's, you know, a legal vehicle, basically. to get around the regulation. And the regulation

varies by state, but it usually says whoever has the license to perform the service has to own the company that does the billing for that service. So an MSO is kind of where you set up a shell billing company that's owned by the physician and then you, and all that

income passes through to the opco, which you own. So you can do it, but it's tricky. It's done in med spa, you know, because it's a little less medical there. I don't know how often maybe private equity probably does it more more than anyone else for for regular medical practices like this we probably need to bring on a business broker who specializes in medical

practices at some point i think because every time we wait into one of these i'm like wow this seems really awesome get how can i buy this and like then i'm like your questions bills like i don't know like it's like two and a half times like i agree with you guys at face value this seems like a great business it's a pretty fair price it's ridiculously high margin other than the the fact that it's in Detroit, which I think Detroit's really cool and I've spent time there relatively recently, but I think you don't have like tons of people flocking there like you do other markets. Is there not potential technology disruption for this CPAP machine though? I feel like I've seen it recently where there's like an alternative to it that's not this giant

machine on your face. I think they're all selling that too. Yeah. Yeah, all right. True, true. We can pivot. So the way. There was a long conversation in our office this morning about somebody has a colonoscopy and it turned into a very long conversation. But one of the guys was like, why don't you just get that thing that you can order online where you poop in the box? So like to me, right, that's that's one of those disruptive things where people are saying, hey, we can provide maybe not the full screening, you know, for a colonoscopy and colon cancer. But we can get you kind of halfway there with some direct to consumer e-com. And to your point, Heather, maybe there, maybe there is something like that in this industry that isn't a, you know, prescribed medical device, but it's something that is kind of gets you halfway there and maybe is disruptive. So the, in terms of the value chain, the way I've seen it work around CPAP machines is, you know, there's a medical practice like this that's doing the studies and doing kind of high margin medical work. And then there is another group of people who are the, you know, the medical. supply companies. And they are the ones that have the respiratory therapists, and they're the ones that are buying and selling and maintaining the CPAP machines. And if you're on oxygen or whatever it is, like those are all kind of that stuff. That low margin crap is totally insurance paid

and a horrible business and is is not part, typically part of one of these high margin medical practices. It's put into the medical supply kind of separate set of companies. And those are very, very often privately owned and very hard businesses. Yes, I've seen my share of those where people thought about buying them. And I agree with you. They're pretty tough businesses, very dependent on the physicians to refer them in and fairly low margin. And you are getting hammered left and right by concentrated insurance providers.

And like, you know, I had no friends in those businesses and the things they say and talk about what the insurance companies do to them. It's just like, and it's horrible because the insurance companies refuse to pay you. They pay you late. They come up with reasons not to pay you. That's their insurance companies. That's the way they work. They're incompetent. You have no choice but to work with them. And then your clients who really, you know, the insurance company screws you over as the medical supply vendor, but then the patients and the doctors blame you for everything going wrong. Like, for example, if the insurance company refuses to pay a profitable amount of reimbursement for a service, the referring doctors and the insurance people will blame you

for not taking a loss to support the patient. Like, it's just a byproduct of how insane our system is. Sorry to be a downer. No, I mean, it's wild, though, how much money, you know, changes hands in the healthcare space. It's just unbelievable. I mean, the most expensive roofing jobs we do are on hospitals. And it's not because they're the best roofs necessarily. It's just like the nature of the of the beast.

I think on this deal, I mean, if you have a friend who is a physician, who is entrepreneurial and you live in this market, like to me, that's the ideal buyer. And you say, hey,

I'll partner with you on it. And I'll, you know, help put the deal together. I'll help provide, you know, all the back-in admin services for the business. You provide the medical oversight. And like we said, maybe you don't even have to be what, I don't know what specialist this is, but it's like, you know, maybe you don't even have to be this specific specialist to own it. Well, the way that a lot of these end up transitioning, like I know this from friends who are like radiologists, right? They're in radiology practices. And that's a racket too, right?

They own, they'll own not only the practice, but then the group will also own like the screening centers. And then they just happen to send all of their patients to the screening centers. And it's just like, oh, man, such a racket. Anyway, so the way a lot of these groups and practices end up transitioning is they'll bring on new doctors who come in out of, you know, out of training. And then they will, you know, allow them to buy in over time. They'll give them a job. And then they buy in over time to where they'll. they own shares in the practice.

And then eventually, like, the next group comes in and they can get bought out when they want to retire. So I forgot who asked, like, should a doctor own this? I think that's probably why this is priced at, like, two and a half times earnings, despite being low gross margin, consistent revenue. It's like the buyer here is somebody who is an owner operator and comes in and buys themselves a job. And I think typically something like this would transition because the person comes in and

starts to just take over the practice for this person. and then they go off into the sunset. Heather, have you ever worked? I know, like, I know your predecessor firm, there were all the, you know, the vertical kind of focus. And I think dental is one of their big focuses. But it reminds me of that where you have these folks

who are coming out of dental school and they go to a start my own thing. Or actually, I found somebody they're a great fit. And there's kind of the rules of thumb are just so well established. And I can't remember what they are. And dental, in dental they really are. Like it's a formula. There's a couple of companies that actually ended up getting bought by Wells Fargo and B of A.

So now they're part of that, but they used to be independent companies that that's all they did was specialize in dental practice startups or expansions. And I worked with them many years ago. They didn't want to do the real estate loans for the dentist. So I would do their real estate loans. And they showed me their little grid. And it was, you know, statistically very, very good. you know, this is what a good practice looks like. You look at these things.

It has to be in these ranges. And boom, if it's there, we lend. And if it's not, we don't. And so, yeah, you can definitely, when you verticalize, do that. Now, Dennis, it makes sense to verticalize because you have enough of them, enough of a market size. I don't know if it does for sleep apnea, right? Like, maybe.

Maybe you could make a small vertical. But anytime a bank does verticals, it's really, really fascinating because they learn so much better how to spot the good ones from the mediocre in that, in that industry. And Michael, to your point, it's almost like, I wonder there's got to be somebody who, there's a broker out there who's done, you know, a dozen or two dozen or three dozen of these. Like there's somebody out there who's like, that's all I do, you know, is I help. And I go to the, you know, the industry association and I let everybody know that I'm the guy whenever they think about this.

I wonder why more brokers don't verticalize, though. You know, that yes, you're right. some do, but you know, you don't see as much of it as I would think you would. Because they get, there's one guy. I think everybody knows who he is, who's verticalized in HVAC. And he's got a great practice because he did that a long time ago. Yeah. I love like the weird niches like that when I was doing financial planning work.

I found this guy who he became the financial planner for all the professional fisherman, like who were on the fishing circuit. And he just like, there's nothing unique about managing their money other than that they like professional athletes get, you know, sponsorships and they get big pots, you know, when they win and stuff like that. But he was like, I'm your guy. Like I know, I know exactly what you need. He can talk fishing too. Yes. Yeah, exactly.

He's been on all the tours. Yeah. That's fun. Yeah. Love the deal. I don't think any of us can buy it unless we're an MD. That's where my head's out on it. I'm not going back to school now.

I will say, I mean, if this were in Columbia, South Carolina, I would totally try and find a way to put like a deal together around it. Like if this is in your backyard and, you know, like I know enough physicians, one of them is probably entrepreneurial enough. Like it would be worth looking at. I mean, I love the whole space. I would be interested in getting a book on this just to understand the economics, right? What's the payer mix? Who gets the cut of the. actual CPAP machine, do they just refer that out to, you know, some retailer? How much of that is

covered by insurance? How price sensitive or not price sensitive is the purchase of the CPAP machine? What's the ongoing residual from these patients? And then you kind of pick out the spot in the value chain where most of the value accrues. And it might be the clinic. It might be the guy slinging the CPAPs to people paying with insurance and don't care what the prices. You know, I'd be interested to learn. That's a great point. which by the way can be a point, can be a reason to get books and talk to sellers as a way to learn about the industry. Like if you are interested in the sleep industry and you think there are tailwinds here and you'd like to find an entry point into the industry, learn about businesses that are for sale. Meet the CEOs. Try to understand the value chain and sniff your way to, you know, the target set that makes sense for you.

Yeah. I talked to a friend the other day who had done that and he owns an existing business, but he got really cute. curious about like workforce housing and like kind of more lower income property management went under LOI on a deal fell in love with it and the deal ended up not going through but he's like now I have all this expertise and I have a premise and like a thesis I'm going to go find another you know I've already kind of done the work and been down the path now I just want to go go find one that actually does work all right so thumbs up thumbs down on this one Mills where are you at Sounds like your thumbs up except for Detroit. Yeah, I love Detroit.

It's just a long way away from Columbia, South Carolina. I agree. Suburban Detroit, not bad. Not bad. Even parts of downtown Detroit. Other parts of Detroit, not amazing. Tons of revitalization. It's really cool.

Bill? I'm thumbs up. Just kind of like the industry. I don't know if I can buy it because I'm not a doctor, but I'm interested. I also like the price, 2.7 times, you know, almost 2 million of cash flow. not I mean this is this is a sizable business this isn't 200,000 of cash flow. This is $2 million of cash flow price at 2.7x. You know, that's pretty good.

Heather? I'm thumbs up, but I think the cash flow probably adds back the physician's salary like an SDE. I'm suspicious of that, but but. Heather, you're such a wet blanket. I'm sorry, but I still probably thumbs up.

I want to learn more. That's very realistic. That's a good point. I think that's definitely the case. Yeah, I'm thumbs up on this one. It makes me wish I'd gone to medical school, though that would have been horrible. All right, well, thanks everybody for listening this week. If you do dig into this one and learn more about it that we know,

there's money to be made here. Tell us how you're going to do it. So keep us posted. Thanks, and we'll see you next week.