At six months old, Seva Dental Team – Naimish Patel’s second venture in the dental consolidation arena – is already as successful as his first operation was at three years. What’s driving Seva’s fast-track?

“We believe in picking a swim lane and swimming really fast in it,” explains Naimish, Seva’s chairman and co-founder. “So we are exclusively GP-focused, and we’re acquisition based.” With host Geoff Cockrell, Naimish breaks down his strategies. A critical one is acquiring practices where the doctor plans to transition in 12 to 24 months. Seva then brings in its doctors “to take over that practice very quickly and, frankly, grow it.”

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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. Here at The Corner Series, we try to bring together dealmakers and thought leaders at the intersection of healthcare and private equity. Today I'm thrilled to be joined by my longtime acquaintance, Naimish Patel. Naimish is the chairman and co-founder of Seva Dental. Naimish, maybe give a quick introduction of yourself and Seva, and then we'll jump into some questions.

Great. Geoff, great to reconnect with you, and I appreciate the time to be on here. So I spent most of my professional career in private equity and about 10 years ago, left to go be an operator and an entrepreneur to go start my own business and did a build-up in the dental space, which is how I got... well, how you and I first got connected way back in 2014. And I'm back at it again with round two. So that's my background.

So Naimish, you built and sold Tru Family Dental. What brought you back to the dental consolidation arena, and more specifically, from the first time you did this to now, what's kinda different and what's kinda the same?

Yeah, happy to talk about that. So it was a great journey. Our first run through it, certainly first time in the healthcare space, first time in dental, round one was a lot of learning, some growing pains, a lot of lessons learned, and really still taking advantage of some industry dynamics that made a great investment thesis for a build-up in the dental space. When we sold in 2020, we took some time off to really think about what was next. We knew there was a next. Wasn't ready yet to quite hit the beach, and frankly looked around in a lot of different industries, a lot of different opportunities because I considered myself a bit of a generalist, and really came back to dental as still being a great place to help support the consolidation trend that I think is bringing better care to patients across our communities.

And what we saw in analyzing what's changed, certainly, margins have compressed from where they were when we were last in largely wage inflation, although I'm a believer that that's going to correct itself and was a believer, and I think we're starting to see some signs of that. But wage inflation certainly has compressed margins as payers still aren't paying any more than they used to. Seeing a little bit of inflation in some of the supply costs. So overall, the margins are down a little bit. We're also seeing multiples have come down, so exit multiples. I think the market was very frothy in the '21 timeframe, and so exit multiples have come down. And I think at the same time, the sellers are looking for higher prices, so where you're buying from, where you're selling, that differential, it has compressed. So those are I think two of the main dynamics that we've seen that might cause one to wonder why get back in, and certainly we evaluated that.

But when we looked against, really, there's still a phenomenal opportunity to bring practices together to help deliver a higher standard of care and continue to consolidate the still, which is 75% non-DSO industry. While the consolidation has been going on for a long time, it's still relatively early, and so we thought it still presented a great opportunity to take advantage of things that we knew. And obviously for us being a second-time operator, the big advantage for us is all the lessons that we learned in round one, we're going to be able to do it, I think smarter and faster than we did last time. And our goal is just to make new mistakes. We won't make the same ones, but no one's perfect and so we'll make new ones. But the ability to I think build more rapidly, I think in the first six months that we've been in business, six months in, we are where we were almost three years in last time. So we've certainly been able to shorten the learning curve there.

Is your model of growth more de novo growth versus acquisition? Or how do you balance those two dynamics?

We believe in picking a swim lane and swimming really fast in it. So we are exclusively GP-focused and we're acquisition-based. And even one layer deeper than that, I think we're a bit of contrarian in our build, is we focus primarily, I don't want to say exclusively, but primarily on retiring and transition practices where the doctor is going to transition out in a 12 to 24-month period and we bring in our doctor. So which again, most DSOs shy away from that. Where they require long retention, we're a little bit of a I think a contrarian in that place. So that's really the specific area that we're focused, and it's exactly what we did last time. It's where we found great success in our first build, and we're continuing that exact same strategy, not reinventing the wheel because the wheel still rolls really well.

Do you think that Seva has some secret sauce in that? There's obviously a lot of consolidators out there, many of them are acquisition strategy oriented. What's the Seva secret sauce?

Yeah, I think two things. One, we're able to do transitions, so we don't require the seller to stay three to five years. We don't really hold them to a lot of expectations post-close. So I think that's one thing, we don't really run into a lot of DSOs who are buying because they're looking for a longer duration. We're typically competing against the private buyers, and I think we can compete really well against that. And what allows us to do that is we have built a reputation and a capability to be a great home for doctors. So we have an ability to recruit doctors who are five to 15 years out of dental school. They have developed their skill sets. They have at this point figured out, I don't really want to be an owner, I also just don't want to be an associate, I want to be a cog in the wheel, I want to be able to lead my offices, I want to be able to make some decisions, but I'm not looking to be an entrepreneur, I want to be a dentist, but a leader as a dentist.

And we've built an ecosystem at Seva that allows really highly successful, highly accomplished doctors to build a career with us and get a lot of the advantages of private practice ownership with being able to really influence how their office runs, but without all of the headaches of having to handle everything on their own. And so that strategy has allowed us to do these transitions when we find an office where we're able to bring in a doctor to take over that practice very quickly and frankly grow it. So that's our secret sauce, and it's nothing new. We've been doing it for 10 years and we're continuing to do it now.

How significant is achieving geographic density in accomplishing that?

It's important. Certainly. We're playing in our home field advantage right now in Michigan. I'm sitting here in Michigan, where we had about half of our offices last time. So we do have a reputation in the marketplace. But once I think…at Seva, say… we've got seven transactions. We've built enough critical mass now where we can enter new markets and use the experience of the doctors that we've hired as our references and our calling card. And so it was helpful to get us off the ground and launched in a market that we knew where we had a reputation to be able to hire our first few doctors, but at this point, we're rapidly expanding into new geographies, leveraging what we've built so far at Seva.

Has your acquisition target size changed any as you moved from Tru Family into Seva, or is it still looking for the same size of targets?

Yeah, that's a great question. I think we're focused on larger offices this time around. We bought some smaller offices previously. We were really looking for two-doctor offices, a $1,500,000 of revenue and up is really the sweet spot for us. We will dip down below that where we think there is a high potential to grow into that, but we are looking for an opportunity to grow into a multi-doctor office, at least in a reasonable timeframe. So, that is one difference in terms of the acquisitions that we're looking at, they're larger than we had done previously.

As I look at consolidators, I see some different models, and on one end of the spectrum is a model where things are largely kept the same at a target location. I know you're going to be looking to replace the doctor, but personnel generally stays the same. Branding often more or less stays the same versus a much more centralized view of the world, both from a branding and uniformity. How do you think about that topic?

It's an important topic and maybe another way to draw some comparisons. So last time when we bought offices we rebranded them all Tru Family Dental, and there was a branding change. This time around we are not doing that, and so we're creating a more local presence name. So we'll typically remove the doctor name from a legacy standpoint if that's part of their existing name and genericize it to something that fits in the community. In terms of other changes, our view is we are here to help them deliver great care and great experiences to their patients. So we have a very detailed playbook on how things can be done in a dental office to accomplish those two goals; great care and great experiences.

And so when offices are finding challenges in different ways, we look to our playbook as an opportunity for them to potentially implement some tools and processes. But we are not about uniformity in terms of how they do things. If the way they do a patient confirmation process or the way they run their morning huddle, if that works for them and it accomplishes the end goal, great. We're not about, "Hey, you have to do it our way," but we want to be able to have really strong resources to support how they deliver great care and how they deliver great experiences.

And in our experience, we think offices tend to gravitate to 70 to 80% of uniform practices across a network, but it's on a pull basis versus a push basis based on really, again, addressing opportunities or situations that are happening in the office. So that's how we think about it. And we do like to build a culture of the practices really getting to know each other across the network, and so we do different things. We do clinical summits, we do front office type summits, we do social events, both in the summer and the holiday season in the winter, trying to help people, again, remember that they're part of something bigger than just their four walls and something that can support them in their careers and their experiences as team members of our company.

I know your model generally has a retiring founder construct, but on a go-forward basis, you still need provider alignment. That's often an interesting topic of how to think about provider alignment, both from the perspective of compensation arrangements and also from the perspective of equity ownership. How do you think about provider alignment in your business?

I think provider alignment is critical. I think we as an industry, and I would say myself as well, we over-index the economic pieces of alignment versus the non-economic pieces of alignment. And I think studies will show that job satisfaction is more aligned with the non-economic matters than it is with the economic matters. So I think as an industry, we have an opportunity to really focus on both, not just, hey, if I've got the right equity incentives, I've got the right compensation model, everything's going to be hunky-dory. The reality is, that's not true. And so when we think about alignment, we first are really evaluating the doctor in terms of what's important to them, what type of environment do they want to work in, where have they found success previously, and does our model support that?

So I'm looking for alignment around the person in Seva, and does it work for them? What we ask our doctors to do? We ask our doctors to lead our offices. We ask them to be involved in some of the difficult conversations that sometimes have to be had in the office. We ask them to be the standard-bearer. And if that's not aligned with that individual and how they like the practice, it doesn't matter what my equity structure looks like, doesn't matter what the economic incentives are, we're not going to ultimately find success. So we spend a lot of time understanding how we operate, the role of the doctor in a Seva office, and we actually define it. We say, "This is what it takes," and we show it to our prospects and say, "This is what we want you to do, and is this exciting to you? Is it intimidating?" And so, that alignment.

And then of course on the economic side, we want to have great economic alignment and joint shared success, and so equity is a big part of that. We allow our doctors to buy equity into our company. We do it at the holding company level. We've gone back and forth on the location level economics versus Holdco, and there's I think pros and cons to both models. We've studied it exhaustively and at least for now, settled on the hold co-equity as an opportunity for our doctors to participate in the growth and the long-term success of the business. But again, we lead with the non-economic alignment pieces, which I think sometimes tend to be maybe undervalued in the overall assessment of alignment.

As you've built from the ground up dental practices that you're consolidating and then sold them to upmarket buyers, how interested in the experience of the larger consolidators are you? From the sense of, the much larger consolidators had kind of a mixed performance and have had difficulty in finding buyers when you get to a certain scale, how significant are those dynamics to you as you're looking at consolidating a smaller practice?

Yeah, it's important. I think one of the things that I'm most proud of and having built Tru Family Dental is what's happened to Tru family Dental since we sold. And they have had tremendous retention. Over 90% of our doctors are still there four years later. The practices are performing very, very well, and it's been a win-win. It was great for us as sellers, and it's been great for our buyers. And so we remain very optimistic that if you build a great business... And we didn't build the business to sell it. We built the business to be great neighborhood dental offices. And along the way, the opportunity to sell it presented itself. And so, we're approaching Seva the same way. If you build a great company with a great culture and a great focus on delivering care and experiences to patients, and for us as a support team, developing great experiences for our team members, you will find buyers that will find success with the business.

And I think our reputation now will make that even easier than the first time around. And so we're optimistic that though there's been a lot of challenges, and there's a lot of carnage in the dental industry. There's been a lot of troubled assets. We're all aware of the failed deals, the extended private equity hold period. There's a lot of challenges and we see that as opportunity, because when you build something I think the right way, which we will do, it'll be very attractive to the larger consolidators. And again, there, we're looking for alignment. We're looking for the right buyer who will approach the group of offices in a similar way, whether it's cultural alignment, it's a philosophical alignment, that's important. It's just not the highest bidder.

Has the changing landscape on restrictive covenants put any pressure on your business? I know the changes at the FTC are still evolving, but the tide is definitely moving away from employment-based restrictive covenants. Is that a challenging aspect or not? Have the sticks been less important to you than the carrots? How do you think about that topic?

Yeah, certainly a lot different than I thought about it when I first started. When I first started, I thought that was the absolute most important thing and had to have that really locked in. I know you and I had a lot of conversations about that way back when. I would tell you today, I feel very, very differently about it. I view it as if a doctor's going to leave me to go compete, that's a failure on my part, either because I made the wrong hire or I didn't create the opportunity for that doctor to be successful. So it's on me to create an opportunity that's so great that they don't want to leave. And the second piece is, if my practice is so fragile that a doctor can leave, who wasn't the owner, and impact severe harm to my practice, that's on me again. I've got to build a stronger capability in the practice.

So I'm not concerned about non-competes going away. I think there's probably some good to it because I think they were abused at the cost of the doctors, so I'm not as concerned about them going away. I think, look, they're still quite enforceable for sellers. I think sellers have a different responsibility just to get paid significant money, and they have to perform a certain way. I put more weight into the non-solicits, so protecting our team members and our patients. But if a doctor wants to go and compete near us, we're comfortable taking to that battle. And again, I put it on myself to make sure that we're, again, hiring the right doctors and putting them in a position to be successful. If I can't do that, a legal agreement shouldn’t preclude them from operating. So I don't view it as a significant change to how we view things.

One of the conversations I'm trying to have with private equity investors in healthcare is to talk more about how their engagement in the industry has improved outcomes, patient experience, maybe cost. How would you describe the impact of Seva on the patient experience?

Yeah, it's interesting. There's a lot of negativity around corporate dentistry and whatnot, but you're absolutely right. I'm shocked, saddened, and not surprised all at the same time of some of the things that we see happening in these private practices. The way they handle sterilization to basic procedures from a clinical care perspective, to instrument usages, things that have an impact on the patient's quality of care. And it's not necessarily due to negligence or a fault of the provider, but it's the information, the industry is changing at such a rapid rate that the scale of the larger DSOs are able to bring so much more knowledge and education and training, and systems and support to provide a higher level of care to patients. And so the advantages are significant in being able to, again, provide these resources.

And so the patient should be getting a better quality of care and a more consistent, because these private practices, nobody is there to keep an eye or help ensure that these providers are up to the latest and greatest. So the DSOs certainly bring a lot of advantage. And of course, the DSOs got to make sure that they're focused always on the standard of care and clinical excellence. The financial results will fall from that and not get into those temptations and dynamics of how do we, again, enhance revenue through just pushing more dentistry, and that's always the fear and the risk, but I think that's really more of a myth than reality.

And I think the industry as a whole needs to do a better job of communicating that and showing how the industry has progressed over the last 15 to 20 years, with the consolidation and how care has enhanced. Because look, our biggest battle as competing dental offices isn't competing with each other for patients, it's getting the 50% of Americans off the couch who aren't even going to the dentist. And so how can the consolidation and the enhanced care inspire those who aren't even going to the dentist to start coming into the dental office? Because every office in the country has enough patients if we just got 10% more who don't go to the dentist come in. So that's where I think the consolidating group can really help provide a positive trend. And look, the more people who go to the dental office will end up leading to a healthier country. The correlations are undeniable.

I think we will leave it with that. Naimish, thanks a ton for joining. I'm glad you and Brandon got back in the game, and thank you for joining.

Thank you, Geoff. It was a pleasure, and happy to be here.

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 McMaguireWoods for informational purposes only. By accessing this series, you acknowledge that McMaguireWoods 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 MaguireWoods. 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.