McGuireWoods partner and host Geoff Cockrell and associate Amanda Roenius welcome Jessica Nunn, CEO of Maven Financial Partners, for a discussion about the convergence of med spas and private equity.

Jessica describes key characteristics of the med spa arena, different membership models and drivers of profitability and explains why she expects the space to be more competitive in 2025.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Corner Series, a McGuireWoods series exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods partner, Geoff Cockrell, as he and specialists share real-world insight to help enhance your knowledge.

Thank you for joining another episode of The Corner Series. I'm your host, Geoff Cockrell, a partner in McGuireWoods. Here at The Corner Series, we bring together thought leaders and deal makers at the intersection of healthcare and private equity, and talk about a number of different topics that impact investment in healthcare or operations of healthcare companies. Today, we've got two guests joining. One is my partner, Amanda Roenius, in our healthcare department. And then also, Jessica Nunn, who's the CEO of Maven Financial Partners. I might start by asking the two of you to introduce yourself briefly. Amanda, why don't you go first?

Sure. Thanks, Geoff. Like Geoff mentioned, I'm also an attorney with McGuireWoods. I sit in our healthcare group and have the pleasure of working with a variety of clients, including healthcare providers, investors, and health systems. I spend a lot of my time working with our healthcare private equity cross-department team on private equity transactions across a variety of sectors, which I'm sure we'll talk on today. Behavioral health, dental, orthopedics, physical therapy, and med spa. I've had the pleasure of connecting with Jessica in the past and all of the services that she's able to provide to our clients across these various sectors. So, Jessica, I'll turn it to you.

Yeah, great. Thank you. I'm Jessica Nunn with Maven Financial. We help practices in a fractional CFO capacity. So, we help practice owners understand their finances better and then make that clear roadmap to bring to fruition whatever their vision is for their business. Whether it's expansion, maybe they're trying to work less, maybe they want to hire more providers, maybe they want to scale down, maybe they want to sell one day, whatever it is, it's in their heads. So, we want to map it out financially so they know exactly what they need to be doing to get to that point. We work in those same sectors that Amanda mentioned. Primarily, we're in aesthetic medicine, so plastic surgery, medical spa. We're also in dental. We have concierge physicians, dermatologists, all a broad spectrum in the healthcare world.

Jessica, for a provider services business, what's the typical scale of that business when they should be thinking about maybe looking at outsourced CFO services?

Yeah, good question. And we get that a lot. Honestly, most of our practices start working with us really early on, some even before they open, when their business is just a dream in their mind. And for those practices, we can take them from that dream to opening. We have a startup package where we help everyone think through, "Okay, where should the location be? When can I expect to break even? When do I need to hire people?" From all of those big picture things, down to what payroll company should I use, what software, how do I find a bookkeeper, who's going to do my taxes? All those operational things that you need to think about from concept to opening from a financial lens.

Most of our clients are, I would say one to two, maybe three locations. And they have either themselves as a provider, maybe some mid-level providers as well. Some have multiple doctors, but most are really like, they own the practice, but they work primarily in the practice, providing services, taking care of patients. And they weren't trained in business school, and so they know that they need to look at their financials, but they hate doing it. "Please don't make me do it. I don't even know what it means. Why am I doing this?" So, we really like to sit down with those folks and say, "Okay, here's what's happening. Here's what it means. Let's come up with a plan of what you should do next together."

What's the impact of having tighter financial reporting for a company? Let's take a med spa. What's the impact of having tighter financial reporting as they look to maybe be a target in an acquisition context?

Well, I would say even before that, was they're just looking to grow their business and to understand what's going on. I would say for us, surprisingly, especially from you guys looking at it from a financial and a legal perspective, truly what these practice owners are getting is peace of mind. They're judging the success of how their business is performing from a financial lens based on if there's money in their checking account. They're really not looking at any numbers or data to see how they're performing. So, I think first and foremost, what people experience, what our clients experience is peace of mind. Like, "Okay, I suspected that maybe this provider was low. I suspected that maybe we weren't as profitable as we should be. Or I suspected that we were doing really well, but I didn't know why or how." So, first of all, you're providing peace of mind.

You're helping me understand the why behind my gut reaction, my gut instinct about how the practice is performing. And then when they get further along the road, we are like, "Okay, well, here are the things that we probably need to think about if we're going to raise the profitability of your business, which might then for our practices who are at that point, then raise the valuation." And we've worked with a lot of practices who haven't even considered selling. They're like, "I'm happy as can be. And someone's knocking on my door. And oh, it turns out I have very good financials." We have pulled for them what we call key performance indicators. And provided them every single month to the client so they know what providers are doing in terms of production. How many new patients are coming in? How many patients are leaving? And that helps the process, but we didn't necessarily do it for the process. We did it because we needed to know that information.

Are you usually preparing accrual-based financial statements even for a smaller platform, or is that a later on thing?

Yeah, good question. And to be clear, we're not preparing the financials. We recommend that they have an accountant or someone who's preparing the financials for them. Sometimes when we start working with clients, they're even doing the financials themselves. And so, that's the first thing we do. "Okay, well, you're not doing that anymore, right? Let's hire someone who understands accounting and make sure that you have a real accountant preparing your financials." Most of them are on cash basis, at least at the beginning, like you mentioned. They're reporting, for you guys who are listening, revenue when they receive payment for it. And they're expensing costs when they pay for those costs. If they start to grow, we tell folks, "As you're growing, and number one, you can afford a more sophisticated accounting function, at this point, you're probably going to need maybe an accounting firm or someone who understands accrual accounting, to make that transition to reporting income instead when you've earned it."

And I would say that this is impacting, especially a lot of our med spas. As you guys know, a lot of them will have, for example, a big party in December. Maybe we have a 12 days of Christmas party, and we're selling a bunch of product, and packages, and prepaid services that patients are going to use the next year. So, in cash accounting, it would be the best month of your life. You would record all of that income because that's when it's being paid. But in accrual, we would spread that income out and report it when the services are actually being performed. So, as you can imagine, if that's happening a lot, those big parties or times when we're selling a large amount of packages, we want to consider accrual accounting. So, we do it more based on, is there going to be a big difference between accrual and cash? Is that going to be meaningful to understanding the business? And can your current accounting team handle that level of accounting?

Jessica, you mentioned earlier on that folks are engaging you sometimes before they even get their business up and running. What does Maven do in connection with transactions? I know you said some folks aren't thinking about it, but some of your clients I'm sure are. And like you also mentioned, a lot of these folks who own their businesses are also practicing. When you guys come in from a transactional advising perspective, what are some of the services that you offer in that context?

Yeah. I mean, we're definitely not going to be providing brokerage services. We don't sell the practice. We have friends and partners who do, so we'll make sure that they've got a good broker or a good investment bank that can help take them to market should they want to do that. So, when we start having those conversations with our clients, the way that looks is they will say, "Okay, I think that it's time for me to start thinking about selling for one reason or another. Or should I? Do you even think I should? Is this the right time?" And we might say, "Well, let's think about the team that you need around you. Can you afford to make this financial change or is your income going to change afterwards?"

We just had a dentist who actually sold, goodness, two weeks ago. He had a buyer in mind. He wanted to go directly to that buyer, which we don't usually recommend. But in this case, for him, it made sense. But we helped him make sure that his finances were organized. Is your P&L correct? What do we need to provide to the team? Do you have an attorney? Do you have someone that you're working with to make sure that all your legal documents are prepared, and reviewed and all of that? But really, from our perspective, we're certainly not selling the practice, but we can help them understand the impact to their life a little bit.

It might look like this post-sale versus this pre-sale. Is it the right time with what you have in mind? We have a lot that are very early on in their business. So, is this really the time that you need or want some sort of capital partner, or to sell completely? Or should you wait until some of the things that you have in mind are enacted first and you're realizing the profitability from that?

Jessica, when I think of the med spa arena, it has a couple characteristics. And I'm wondering if they are characteristics that are conducive for what you do. I think of it as being super retail, meaning very, very storefront focused, but also an area where there are, in most jurisdictions, relatively few barriers to entry. What are the characteristics that drew you towards the med spa space?

Oh, that's a good question. So, for us, our history, and most of us in my business have worked in other aspects of healthcare. I'm from the dental industry. That's where I learned about healthcare. And I've had stints in other kinds of healthcare arenas. But for us, we had the opportunity to connect with med spa owners early on when there weren't quite as many practices. And then since then, we just noticed a huge upswing, as everyone has, in how many practices there are out there. Also, I think we connect with the type of business owners that tend to open med spas where women owned. We have a young team, so most of our clients, again, a lot of them are female. A lot of them, this is their first stint at owning a business. Not everybody, but a lot. So, we can really connect with them in that way.

But what we notice, it's different from other healthcare arenas, I guess is what you just said. It's not that different from plastic surgery, in that, of course, it's cosmetic and it isn't necessarily a need in the healthcare space as much as other things might be. But it's certainly different than dental and some of our other healthcare practices. So, we did have to really pay attention to the industry, and what the best practices are around sales training, and around measuring provider performance, and around understanding the practice performance. How do you know if the practice is this profitable? Where do retail sales fit in?

We had to learn all about sales tax, because most of our other clients don't have a sales tax obligation. But it's definitely a little different, but in a lot of ways very similar, too. I'd say just to add onto that, though, and you guys might be experiencing this too. One of the biggest differences that we notice in the med spa space is the quality of the data around the key performance indicators that we pull. Like for example, if you go into any healthcare practice management software, certainly in dental, the data tends to be much cleaner because they're using that data oftentimes to file insurance claims. So, we have to be very clear on exactly what was done and how much that costs and all of that, what provider did it. But we find in med spas, the data tends to be messier, and so our engagement is all about making sure the data is clean and that we can report it back to the client. And that has been more of a challenge than in some of our other practices.

In med spa, Jessica, one other thing I'm wondering, if it impacts what you all are looking at, but to that point. With it being much more retail focused, I often see sometimes not patient financing, but these patient incentive programs or a subscription-based model. Do you often see that in the med spa space compared to others? And how, if at all, does that impact looking at the data?

Oh, for sure. Membership programs. So, our clients, most of them have some sort of membership program. And they're all very different. Oftentimes, members or the patients will sign on and be banking their dollars. So, they're paying a monthly membership fee to use, eventually, on services in the med spa. So, that's kind of like the prepaids. So, we have to understand how much of that is out there, how much money have you already collected that hasn't been used yet. We have to keep that in mind with cashflow planning. Sometimes they're signing on to be a member just for access, access to maybe discounted procedures, access to maybe one facial a month or something like that. Just some kind of access, but it's not necessarily a prepayment.

Either way, we have to understand if it's priced accordingly. Is it appropriate? Are we losing money? Sometimes we see early on that these memberships just aren't priced right, and maybe it's resulting in the services being discounted so much that now our margins just aren't where they would otherwise be. So, we really have to analyze how the membership is working, what the price point is, and what exactly the patient is getting for that. And we also really like to track the KPIs around how many members are there, new members, members who have terminated, which is different than obviously a normal healthcare practice.

But we do work with a lot of concierge healthcare practices, so we're tracking that anyway. For them, they live and die by their number of members. So, that's something that we track for a lot of our clients, not even in the med spa space, if they have sort of a membership component. But it definitely introduces a different level of data management. You really have to know who's a member, when do we charge them, did their payment go through? These are things that we're not thinking of as we're just providing healthcare services.

Jessica, I spend a fair amount of time doing M&A in the med spa world. And I see a lot of different targets with varying degrees of profitability or margin percentages. And I have my theories on what some of the drivers are of the higher margin and some of the risks that kind of come from high margin, and risks from low margin. But first, wanted to get your take on what do you think are some of the drivers of profitability, namely towards higher margin businesses.

Yeah. I mean, I'd love to hear your perspective too. But for us, it comes down to a few things. One is the type of services being offered. Do we have any services that are just generally higher margin, like energy devices, lasers and things, or does every service have some sort of injectable, consumable component? That's definitely going to be a driving cost there. Secondly, how productive are the providers? So, we really look at production per hour, per provider. We want to understand, what I say, who's doing what and how. So, if you have providers, several providers who are half full, their utilization is 40%, 30%, and you're paying them 100%. You're paying them to be there and they're not seeing patients because they're not full.

Or when they're full, their production or revenue per hour, as high as what we would normally see for one reason or another, that's definitely going to impact margin. So, for us, we really look at, it comes down to us, what is the production per hour, per provider, and what is their utilization? From there, we can dive in, is it because of service mix? Is it because of appointment times? Is it because there's not enough patients? What really is the reason for the margins not being where they should be? Rarely do we find, "Oh, it's just because you're spending too much money." We almost always approach it from some sort of revenue issue. Is that what you see too?

Yeah, for sure. All of those things. And then on the mirror image side of that, very high margin businesses, there can be red flags there. Red flags that I've seen in the med spa space are, for example, under-compensating people. There can be very, very wide compensation models for, say injectors. And I've seen businesses, where compared to other ones, I could see that they were not compensating them the same way. The next red flag just from the perspective of it's hard to sustain that in a market if you're compensating less. So, that's a red flag on margin. It also could be heavily loaded into things that may not be as recurring or might not be recurring forever, like heavy leaning into GLP-1 prescriptions. So, things that may not be repeatable for the long term.

Certainly if it's not sustainable. Honestly, we see more opportunity in profitability. I think folks engage you guys, potentially, more often when, "Okay, I've had a great year. I should probably sell it now." It's as good as it's getting. Let's look at the financials. And I don't want to say dump it, but make a change before these things start to normalize. And when we see clients is when they're on the ramp up, I would say. "I just can't get my profitability where it needs to be. I feel like there's more juice to squeeze. I'm just not sure how."

And I guess ,Jessica, I'm curious just with med spa, at least from where Geoff and I are sitting, and from what I'm seeing, it does seem to be one of those sectors that is really taking off in terms of folks who are either thinking about going to market. Or like you said, you have some folks who people come and knock on their doors and want to potentially try and purchase them. As they're on that ramp up, because from what we're seeing right now, it is still very fragmented, and a little bit of the smaller practices that are going to scale. But what do you see in terms of with your clients who have had successful sales, that set them apart from where you're sitting and from your perspective?

Well, and to be fair, we're not working with clients post-sale, because most of our clients are in that where they're not ready to sell yet. So, I think that for us, we do have a few that are at the point where they could definitely gain some interest if they were considering selling, but they're really not. So, I don't know that I can necessarily answer that question for sure. But I would say those that are... We know, "Okay, you're going to have a really successful exit or a really successful opportunity." I'm thinking of one client in particular who just has strong business sense, incredible margins. He wants to continue to grow and expand, and I'm telling him, "Not yet, not yet, because you have so much more ahead of you." So, he's getting to the point to where he's not a provider any longer.

He's hiring other providers, getting out of the chair himself. He is managing the business, growing into that CEO role. So, he's really, I would say early on, but is definitely going to be well positioned one day for some sort of transition. And I could see his practice, the size that it's becoming, like being the platform. I keep telling him, and he's a dentist, "You're not going to sell to a DSO. You're going to be the DSO, because of the size that you are and what you're growing here." It's really cool to see.

Jessica, in terms of what we're seeing in the market and just talking with our clients. Like Geoff said, I spend a lot of my time kind in the M&A sector. It has been a start, stop, push, pull market throughout the year. I'm curious what your clients are experiencing or seeing throughout the past year, and then as they look forward to closing this year and closing out Q4.

Yeah. I would say that this year has definitely been a challenge for most of our clients. Certainly not everybody, but a lot of our clients are experiencing a down year. And we're reading and seeing through a lot of our industry partners that, right before an election, obviously, consumer confidence is a little bit shaken. And people can tend to be a little, I don't know if the word is spooked. But I will say that our clients are certainly down, in most cases, more than they were last year. I have heard that when the election wraps up, things tend to get back to normal pretty quickly. So, I'm hopeful that that will be the case for them. But we'll see. In the med spa space, for sure, there's more competition. And there are more med spas out there than there were before, so this may be the new normal. Folks may just have to be more creative on obtaining and retaining their patient base so that they're not shrinking year over year. But I think it'll be interesting to see what happens as we close out the year.

Jessica, Amanda, we could talk for quite a bit on these topics, but let's call it a wrap there. Jessica, thank you for joining us. It's been a ton of fun. Amanda, it's great to have you join as well.

Thank you. Thanks for having me.

Always great for connecting. Thanks, Jessica.

Thank you.

Thank you for joining us on this installment of The Corner Series. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@mcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.