Acquisitions Anonymous - #1 for business buying, selling and operating - Heather gives a master class on Med Spas - Acquisitions Anonymous 229

Episode Date: September 19, 2023

In this episode of Acquisitions Anonymous, the hosts discuss a Med Spa business for sale with an asking price of $3.8 million. Heather drops knowledge into the Med Spa industry, including compliance requirements, types of treatments, and business prospects. While the business generates a cash flow of $269,000, the significant challenge is the inclusion of $3 million in real estate, which poses financing and cash flow issues. Heather also mentions the importance of analyzing the mix of services, especially recurring services like facial injectables, and the potential for growth in the industry. Overall, it's a valuable episode for anyone interested in  Med Spas and the complexities of buying such businesses.Thanks to our sponsors!Thanks to this week's sponsors.Acquisition Lab and their team have been longtime supporters of the pod.Created by Walker Diebel author of Buy Then Build: How to Outsmart the Startup Game, is an accelerator with a highly vetted cohort-based educational and support community for people serious about buying a business.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, [e-mail].-------------CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.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]

Hey, everyone. Welcome back to another episode of Acquisitions Anonymous. I am one of your hosts, Bill Alessandro, and today we have a masterclass from my friend Heather Anderson on med spas. We talk about a med spa that is for sale, but Heather kind of digresses and starts talking about the industry at large. I learned a bunch of I didn't know about the compliance and the type of medical professionals you have to have on staff, the different types of treatments, which ones are good ones from a business perspective, which ones are bad ones, just the type of stuff that you would really want to know if you were actually looking at this space. Heather has personally done quite a few med spot deals as a lender. It has shares a bunch of inside baseball with us. So if you're at all interested in this industry, I think you

really enjoyed this episode of Acquisitions Anonymous. This episode of Acquisitions Anonymous is sponsored by 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 Dival, who's become a friend, the author of Buy, Then Build, How to Outsmart the Startup Game. So Acquisition Labs is an accelerator with a highly vetted, cohort-based, educational, and support community for people who are serious about buying a business. So a lot of our listeners like you, you tune 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 now. 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 education 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.

All right. Another episode of Acquisitions Anonymous. Michael is coming to a us from some swanky place in the mountains. I am back from the beach and Heather has a cool new background. I do. Yeah, this is artwork from, actually from Maui, where I vacation a lot. So we're kind of sad about what's happened there. Oh, yeah, very sad. Have you actually been to, do you go to those specific places? I go to West Maui to a place called Napili, which is really close to Lahaina, and we're always in Lahaina. Yeah, so we've been in touch with people that we know there. And actually, I bought this art there last February, like in Lahaina. So I've actually, and I reached out to the art gallery and they're okay, but, you know,

it's cool. It's totally burned down, of course. Uh, brutal. Yeah. Terrible. Well, by way of a terrible segue, they will probably need to rebuild the med spas there. And that's the kind of deal we have today on the show. So, Heather, will you, will you read this one for us?

Yeah. I love med spas. I love this industry. So this is a state-of-the-art med spa with real estate in San Diego County. Asking price is $3.8 million. Cash flow $269,000, gross revenue $1.656. EBITDA $194. So I'm assuming the cash flow is maybe an SDE.

FF and E 220, inventory, $50,000. Real estate is $3 million. So they're saying, I guess, I don't know if that's included in the 3.8, I'm assuming it is. business description. Great opportunity. State of the art med spa with commercial real estate. Real estate includes 51, 64 square foot, doctor condo suite located on the ground floor of a class A. Doctors building valued at $3 million. Ideal for medical practitioner looking to get into the med spa business and expand their practice. All new state of the art equipment with over $1 million spent on tenant improvements. It does look pretty nice in this picture. equipment includes roer. I'm going to say that wrong, laser hair removal, tattoo removal, spider

vein treatment, another micrometaling machine. I'm going to butcher these names. Haifu treatment, other aesthetic services. The med spa is fully automated with customized patient management software and a paperless system. The owner is willing to stay on through whatever transition training is needed and help modify the suite for your practice if requested. pre-approved by SBA lending. The mortgage on the property works out to be less than a lease. Okay. Maybe that was before the interest rate hike.

I don't know. Employees 17, FF&E included. Let's see. The rest is kind of repeating here, just looking for anything else that they might have said. SBA financing available as low as 0% down. Well, we'll talk about that. We're going to unpack this. Yeah, we'll talk about that.

So that's kind of it. It's a med spa that's doing okay volume, but most of the value here looks like it's in the real estate. What do you think? This just kills me. So this business makes $270,000 a year. They want $3.8 million for it, which is obviously ridiculous. But then you find out it includes $3 million of real estate.

So there's two deals in one here. There's a business making $270,000 a year. They're trying to sell for $800,000. And then there's a $3 million real estate transaction. trying to do these together. Heather, I don't know what you think from SBA land. I'd actually be very interested to hear how this actually works. These deals are so hard to do because if the owner keeps the real estate,

you've got to then burden the P&L with the prospective lease. And if you're trying to buy the real estate, usually the LPs are different. Like if you're a searcher, you've raised money, they're not trying to invest in real estate. They're not trying to invest $3 million out of the $3.8 million in real estate. they're trying to buy a med spa, you know? So like you have this alignment problem. So Heather, how does this work out when somebody comes like a surfer wants to do this? It really doesn't cash flow. I mean, to your point, how much debt you've got to take on, even though the $3 million, you can finance that over 25 years. Okay, so that's the debt burden isn't as high on that,

but it's not going to cash flow. And this is a problem with any of the California listings that include real estate. It's almost always a problem because real estate value. are so high relative to, you know, what the business might be producing. It just doesn't work from a cash flow perspective. Now, I do think the 800 that they're asking for just the med spa is appealing. It depends a lot on the type of services and the mix. So I'm really, I've said it before. I'm kind of really into this industry because I've learned a lot about it. I've financed a few in the last three years. I actually financed one at the beginning of 2020 and learned I was amazed at how many people came back right away during COVID for, in particular, facial injectables.

So when you look at a med spa deal, at least when I do, I go, what percentage of the revenue is facial injectables, i.e. Botox, and there's two other medicines. I can't remember what they're called, but we look for that because people come back. I think it's every three months or so. Once you start that, you've got to keep it going. And we found that it's almost behaved, like an essential service in that respect. Now, there's lots of other services that may not be as as repeating as the facial injectables, though. So is the facial injectables good? You like that because that's recurring revenue? Or is that bad because that's a COVID-Bump, you know, kind of Zoom-motivated thing? And people do that less after COVID is over. How do you look at that? I don't see it being

done less. So I do see it just continuing to grow. It seems like a change in society, basically, that we're sort of becoming more anti-aging in many respects. So there's wellness clinics and there's all kinds of other businesses that are sort of popping up around that notion. But facial injectables are growing not only in terms of the typical demographic that we think of, but men are doing it. I even have a deal right now where the male lender admitted to me, it's a medspa deal I'm working on with him, admitted to me that he gets Botox too. So there's a bigger demographic and they're going younger, you know, so you're finding that the people that use med spa services are younger and younger. So it's still growing. And like I said, once people start, they're very, very sticky customers.

They don't tend to stop. What you have to look at is all the other services that the med spa does. you know, there's going to be tattoo removal. This one's talking about it, you know, all kinds of facials and those might not be as recurring. But when you talk to med spa owners, you find out that those are sort of the gateway drug, if you will, to get people in the door and thinking about, well, maybe they would do some Botox, you know, now that they're comfortable and they're coming to these places. So it's really an interesting industry where you've really got to analyze the mix of services and revenue to decide how to value them. And some of them might call themselves a med spa, but are really more in the wellness category. And I don't see those quite the same way yet.

At least that's my personal opinion. I don't think their customer base is as sticky. You know, you've got all kinds of different services there, including like IV hydration. I don't see that as being very sticky. I see that personally as being a little more fad-like, but maybe I'm wrong. know. But, you know, it all depends on what the, what the mix of services is. This is such a great example for me of getting familiar with an industry. If you are a, you know, drive-by searcher here and you go, oh, I could, you know, figure out a med spa, right? You're not going to know the difference. You know, you're not going to put together all these different trends that you just unpacked, Heather. But you know this because you've financed,

I don't know how many. So, you know, I think, you know, Michael, you know, you always say, look at 100 businesses before you buy one because hopefully some of the sellers will screw your head on straight, you know, in this way. And that's just one more of a million examples that highlights that for me. Back to this, you know, my other question about this deal is three million for the real estate. I'm just trying to imagine, like, I guess maybe that deal could have worked as a sale lease back or, you know, like you buy it and you try to get an investor to buy the real estate for and you lease it from them. But like with interest rates where they are, I don't. don't know how that works either. It's all just like this California problem or stuff's too expensive.

Yeah, and it really depends on how much the seller has been expensing the rent through their P&L historically. So that cash flow that we're looking at, if that's not at market rent, if market rents aren't running through that P&L, then the cash flow just shrunk a bunch if you're going to either be renting or buying. So, yeah, overpriced real estate relative to the cash flow it's a problem. Sellers, you know, are in sort of a conundrum as to what to do with a business like that. Yeah.

I mean, both things have to be fair, right? The real estate. This was established in 2020. And now the reason for selling is retiring three years later. Like, who starts a new med spa three years before retirement and invests all this money in it? Like, I'd be very curious with the story is maybe they like set it up for their kid to run or something.

But like, you're getting ready to retire at 65. Why did you start a brain? new med spa in 2000. I don't understand. Michael, they're retiring because you're about to pay them $3.8 million for their stupid med spa. That's why they're retiring. Oh, oh, yeah. I would retire, too if some stupid people showed up and overpaid for my stuff. Well, stupid. Well, you know, who it might be is a physician. And this is another big issue with this industry that's interesting. So they're kind of marketing it to another physician, because so I'm going to guess that this is probably a physician or a nurse practitioner or something, someone that's health care licensed. So if you're not

health care licensed and you want to buy this business, you can, but it's really tricky. You have to set up what's called a medical service organization. And that is because there are regulations about who can bill for the medical services. And you have to be licensed to perform the services, i.e. the injectables, if that's what the med spa is doing, you have to be licensed to do that, and you have to own 100% of the entity, the licensed person must own that entity. Really? Oh, man. In most cases, the regulations are different from state to state, locality, locality, but in general, that's always true. So what you have to do if you don't have these licenses

is, and this is a growing trend, we have a lot of buyers that are just like this. So business people are buying these, and they're setting. up a medical service organization that is effectively like a shell pass-through entity. And it is the billing entity. And then they hire these medical directors. So you would think, oh, that's expensive. I'm going to have to hire a medical director. Well, guess what, it's not. And that is because these are sort of like, I don't want to say this wrong because, you know, I don't want anyone to be in trouble that's in this industry, but it's kind of like license for hire. They're just doing kind of sitting over this shell entity, looking over things,

kind of meeting the regulations, but not really in the business day to day because you don't really need somebody like that in the business day to day. You have injectors that are actually doing the Botox, not the physicians. So you set up this MSO or this medical service organization. You hire at actually not that expensive rate, a medical director. They're available in all areas. In fact, I found this week through a client two organizations, two websites I went to that specialize in just helping you set up the MSO and get the medical director. So there's businesses set up around just doing that. So that's what you have to do.

It's going to be added legal expense. You're going to have that medical director expense, and you've got a little added sort of compliance that you've got to take care of to make sure you're doing it right. But non-physicians, non-health care providers can buy med spas, but that's the way they have to do it. So you have to go out and get a medical director, aka license for hire.

Basically, yes. That is correct. I want to be the license for hire, not the guy running the med spot. That sounds like the good gig. It doesn't make that much money, though, Bill. That's the part you're not going to like. How much does it make?

I'm curious. I mean, it's a few thousand a month to sometimes. I've seen it vary. It's not that expensive because they're not doing that much in what you'll find is the same physician might be the medical director over multiple. med spas in an area. So there's a few that will do it in a given area that you can find.

So it doesn't make that much money, but it's also not very much work. So to your point, it might not be such a bad gig. But you've got non-physicians running these and doing quite well. All right, taking a quick pause here. I have something to tell you. This is Michael. I hate bookkeeping. I hate bookkeeping.

I hate doing HR. I hate doing all that kind of stuff. But for bookkeeping, I have found a solution. It is my friend Charlie's business called cloudbookkeeping.com. So that's cloudbookkeeping.com. They are your perfect partner if you want to get bookkeeping out of your hair and focus on making your company, your customers happier and more successful. So please give them a call, call Charlie, cloudbookkeeping.com.

Tell them we sent you. They're a great way. If you're a business buyer, if you're a business owner, you're tired of hassling with getting your bookkeeping done. He's got a whole fleet of people that are well. well-trained and work for him. He's located here in St. Antonio, so I can tell you because of that, he's awesome. And they're a great partner for you to potentially call to help with all your bookkeeping needs

so you can do the important stuff in your business rather than worry about getting your books right. So give Charlie a call, cloudbookkeeping.com, and now back to the episode. What's also interesting about the med spa space is it the part of the reason valuations have gone up is that not only is it recurring revenue there, growth, of course, but a lot of private equity folks have come into the space. If you're above a million dollars of EBITDA, these get, you know, very, very attractive to the private equity groups. And most of these PE groups that are coming in are coming out of the DSO space or dental service organizations. Same concept, but with dental offices. The difference being that with dental offices, when they were doing roll-ups with dental, they

they, you know, really just had to grow through acquisition. That was really the only option because you already have enough dentists all over the, dentist office all over the country. With MedSpot, that's not true. We have a lot of greenfield. So PE is coming in, getting established with one good core, you know, practice. Maybe it has two clinics or something like that and over a million dollars of EBITDA. And they're growing by de novo clinic. That's much cheaper than growing by acquisition. And so this has become a very attractive space. If you can buy a med spa that is not too dense, your competition is not too dense around you, then the de novo growth strategy is really effective. And I've seen it work. I mean, these things get to break even actually very quickly,

the de novo offices. Well, I imagine they're not that expensive, right? I mean, how much equipment is it? It's just like a couple, you know, chairs and like a nice waiting lobby. You know, it's not like a restaurant or something that has real buildout. That's right. And you can share laser. Like say you've got one type of laser, you sort of, you know, go nearby. You go to the next kind of community over and you can send patients back over to the other clinic for certain lasers. You don't have to fully build out all the equipment in each one. And so it's really, it is pretty cheap. And the break even is in about a year. So it's pretty fast, break even, pretty cheap way to grow. And a lot of investors very interested in the space because of all that. So does that mean, like, is it too hot now? Like, are the multiples going up? Like, have our med spas over? Have all the searchers and the private equity come in?

Or is there still a lot of opportunity here? I think there's still a lot of opportunity because you just have to look at the density. There's just lots of places where there aren't that many med spas yet. And so I think if you buy sub-a-million ebada and it has the right mix or at least the opportunity to get to that good mix of, you know, you want that facial injectable to be at least 50 to 60% of revenue. Yeah, you've got a great opportunity there. Those can be worth a lot in, you know, three to five years, especially if you can at least get one or two de novo clinics up and running and profitable.

Okay. Interesting. Every time we talk about these, Heather, I feel like you always tweet, like, disclaimer, I know a lot about this because of business, not because I'm at a med spa every weekend. It's true. I have not ever even done Botox, and I was asked that by credit committee when I did my first deal, like, well, do you go to these meds fos? And I said, you know, so far I have not. But, you know, and I was learning just the same time that they were, that how popular they were and how many different types of people are using them. So now, I'm not a patient, but, or, you know, a consumer of it, but I have learned a lot about it. And I really like the space. Yeah, I think maybe we need to start going in order to, you know, as diligence for the podcast. At least the facials, right?

Yeah, you couldn't hurt. I went to a place on Sunday with my buddy and we did a sauna session and then a cold plunge. So I am also an expert in this space. So happy to talk through what it's like to sit in a 40 degree tub of water. And it turns out it's very cold. I don't get the cold thing. Sorry. I guess I haven't tried it enough or at all.

actually. It sounds true. It was actually pretty fun. I would kind of recommend it. The sauna part was more fun than the cold plunge part, but it wasn't as stupid as I thought it would be. I actually kind of enjoyed it. Do you do it regularly, Michael, or was this like a one-time thing?

This is the first time I've ever done it. Yeah, like another friend was like, you've got to go do this cold plunge. Do you know what it'll turn your white fat into brown fat? I was like, okay, fine. And so then I went down with a... and we like sat in a son and dunked ourselves in. So I don't know. I feel like there's better hobbies.

This is like a one-time thing and like boom, you're five years younger. But you got to do this like daily or something, right, to get the benefits? I hope not. It wasn't that fun. I feel like you're reversing quickly on your recommendation of cold plunges. And it's not real if you didn't put it on social media. Now, because I did one cold lunch. So that's all I do.

Yeah, you have to show it on social media or you didn't do it. That's the way cold plunges are, apparently. That is. You don't want to see. It's not that great. Bring it back to the listing, Heather, there was something that while you're reading that stood out. Cellar financing is not available. However, SBA financing is pre-approved and available as low as zero percent down. Oh, boy. True. Yeah. Well, per the SOP, it is feasible, but it is not. probable. The likelihood of any lender doing that is, you know, pretty close to nothing. So, and everybody gets excited when the, when the SOP, the SBA, SOP says you can do something and they, they tend to think it can be done for everybody. The SBA did come along and say that if a seller note was on standby for at least 24 months, full standby, no payments, that a down payment,

and that seller note was at least 10% of the project, that there could be zero down payment from the buyer. Okay, that's allowed, but who's going to use it? What circumstances would a lender ever approve that? It's probably going to only be used where it's an inside key manager buying, right? Someone who's already been running the business alongside the seller is getting credit for their sweat equity that they put in over years and doesn't have any cash. And the seller, because I've been in these situations where the seller wants to give, you know, their employee help them out with the down payment. And they've had all these rules preventing the seller from doing that. This is just a way of SBA saying, okay, the seller can now do that. They could help their key employee. The SOP doesn't say a key employee, but that's really

the only practical situation that a bank is ever going to do that in. The only other circumstance I can think of is somebody's got a lot of real estate equity and no cash, and they're willing to pledge that and say, hey, can I do 100% financing because I'm going to give you all this collateral? Okay, then now a lender could do that. But no, someone's not going to be able to come along. and just get 100% financing on this most likely. Okay, so that's not happening. What should people pencil? You know, what's kind of the median SBA deal as far as percent down in this market,

as we sit here, August 2023? Well, I'd say at least 10% down. There's a few deals still getting done at 5% down if the multiple is low. You want 10% equity and you want 10% or 15% seller note. And the more, you know, quote unquote, hair on the deal, the more seller note you want. And this is where sellers have been negotiating lately. They've been giving bigger seller notes with better terms as opposed to reducing their price. So you're seeing that be a pretty common structure. These seller notes, is it still got to be the full standby 10 year, not really a note

feels more like equity? Or is there now room to do a real, quote unquote, seller notes subordinated to the senior SBA debt. As long as you had 10% equity, you could always do a regular amortizing seller note. And the vast majority of the deals I've financed were just like that. They were 10% equity, 10 or 15% 5-year amortizing seller note that started amortizing right away so the seller felt comfortable. And the deal cash flowed with that five-year payment on the seller note and the 10-year payment on the SBA loan.

So you can still structure like that. And I think a good, strong deal looks great like that. It's just at least 10% is really the way to think about most of these deals. Yeah, you could get them with five. You could even get an, I actually have one going through right now that I helped get done. That's at 2.5% equity, but it's a very unusual situation. I think most people should plan for 10%.

If they can get any less than that, great, but don't plan for it. Okay. So basically what we got here is a med spa with 270K cash flow selling for $800,000. It sounds like it's pretty good cash flow if it's mostly the facial injections because it's sort of reoccurring at least. Right? So it's somewhat sticky or you'd hope so. People get into a routine, go to their med spa every three months or so. It's a reasonable multiple.

I mean, it's less than 3X. It's almost exactly 3x. All you got to do is solve for the real estate problem. And the MSO if you're not a physician. And the MSO if you're not a physician. Yep. I did the math on the real estate. If it's a $3 million property and you're going to get an 80% mortgage on it,

you've got a $2.4 million mortgage. Commercial mortgage, what, 7, 8% right now? So that's going to be, you know, $190,000 of interest every year plus principal, right? So not huge on a 30-year mortgage, but still. So you're looking at $200,000 of mortgage service, right? at the very least, if you also buy the real estate here. And if that cash flow of 270 is not already affected for that, that it wipes out everything and the deal doesn't pencil.

Yeah, it doesn't work with the real estate. It just doesn't work with the real estate at this level. The seller would have to do something. Like you said, maybe a sale lease back, but then the lease would be too expensive even in that scenario. So I think there's just a problem there, period. This is not generating enough cash flow for the real estate that it's in. assuming that they valued the real estate fairly.

I mean, there's always a chance that they overstated the value of the real estate. You go, you know, look at the comps and maybe it's not worth $3 million. I don't know. Yeah, it's like buying a car, right, where you're like, okay, like I'll pay less for the car and then they like jack up the service contract or whatever. It's kind of the same thing. It's like if you want to underpay for the real estate, they won't give you a good deal in the business.

If you give you a good deal in business, they're going to try to overcharge you in the real estate, which is why this stuff just ends up going in circles. It's very hard to do. I forgot to mention one thing because I love to talk about med spas. The injectors in these med spas are like your salespeople. So if you're ever looking at buying a med spa

that's doing facial injectables, you need to look at the turnover of the injectors because they'll take at least 50% of their customers with them when they leave. It's kind of like when you get a head person or whatever. They'll take about 50% of their customers. So you've got to retain them.

You've got to make sure they haven't been turning over. And I've seen this before. You've got to make sure you're paying a market because they get kind of like a, they get paid on volume. So you need to make sure that they're getting paid right so that you're not going to lose them when you come in. Makes sense. Yeah. So it's like a hairdresser and they earn commission and all that stuff. So you got to make sure you can retain them. Interesting. All right. Anything else to add on this one before we wrap it up? All right. That does it for another episode of Acreducing Anonymous, Medspa edition. We will see you guys. next time.