People have invested a lot in derm and dental and other areas and are now looking for the next sector. 

In this episode of The Corner Series, McGuireWoods’ Geoff Cockrell is joined by Mitch Stern, Managing Director, Head of Healthcare at Dresner Partners to discuss plastic surgery and medical spa investing.

The discussion delves into the growing private equity interest in the plastic surgery and med spa sectors and compares various operating models. Stern addresses considerations for potential sellers in plastic surgery, emphasizing the need to avoid key man risk and highlighting the attractiveness of practices that have boosted the percentage of their business from med spa. The conversation covers both the opportunities and risks inherent in these sectors, with Stern expressing optimism for the market in 2024.

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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 McGuire Woods series, exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuire Woods' 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, partner at McGuire Woods. Here at the Corner Series, we try to bring together thought leaders and deal makers in the intersection of private equity investing in healthcare. I'm thrilled to be joined by my longtime good friend Mitch Stern from Dresner Partners. Mitch is one of the best investment banks I know. I've worked with him on a bunch of deals across a number of sectors, and this will be a fun discussion, and we're going to talk some about plastic surgery and med spa investing, which are two very, very active areas. But maybe to get us started, Mitch, if you could introduce yourself and Dresner Partners.

Sure. And thank you, Geoff. My own background, I've been in the investment banking world for about 35 years now. I started out in public accounting with both Ernst, Deloitte, and then worked at bigger firms and small firms from Salomon Brothers to Schroders to Needham to Morgan Joseph, and have been running the healthcare team at Dresner for the last 11 years. First out of New York and now out of Fort Lauderdale, Florida. The firm itself has been around for close to 40 years and participates in a number of different areas within the MNA market. It's headquartered in Chicago. We're also part of an international group home merger alliance in 25 countries. But within healthcare, we've been primarily focused on healthcare services and within that, a lot of clinic-based businesses and especially physician practices. It's a little of my background.

Thanks, Mitch. So to start us off, we're going to talk about plastic surgery investing and consolidation around that sector. Can you give us a little bit of flavor of where the private equity interest in this sector is coming from?

Sure, and it reminds me a little bit of the IVF sector, which we are the leaders in terms of high profile doctors, a lot of cash pay, key man risk, things of that nature. So it's kind of one of those spots where people have invested a lot in derm and dental and other areas and are now looking for the next area. So there's been probably a dozen and a half or so of PE backed what we call roll-ups or investments into the space. There were five done last year from people like Latticework and VSS and Corbel and Varsity and Sheridan and some prior to that as well. So we think it's a good area and it's ripe.

We've completed a few deals in this space. We recently completed one of Waldorf Center for Plastic Surgery in Portland, Oregon and Seattle. We sold them to Forefront Dermatology, and right before that we had sold New Horizons plastic surgery to what is now called QualDerm, but was Pinnacle Dermatology. We're working on two others right now. One is a medical spa deal in the Florida area, and the other is a plastic surgery deal in the Mid-Atlantic.

You mentioned some of the buyers tend to be larger dermatology practices. From the perspective of the derm business, what's the value proposition of adding plastic surgery?

Yeah, great question. Few of the big derm players are looking at this as kind of a hub and spoke model where they have a lot of dermatologists in one geographic area and putting one or two plastic surgeons kind of in the middle of them where they can feed those higher surgical procedures and feed them to the plastic surgeons as opposed to giving them away. And so a lot of people who are coming in for fillers and injectables and so forth within the derm space are also going to be looking for more invasive surgical procedures.

Is the move always being consolidated into a larger derm practice or are there pure standalone plays? I think of the idea of take orthodontics and dentistry. There's different ideas around that. You can build a big general dentistry platform then bring orthodontic services into it, or you can consolidate pure play orthodontic businesses. Is there a corollary to that in plastic surgery?

Yes, and I've mentioned a few of the buyers, but there's people like ARSA, which is probably the largest reconstructive player, which is backed by Webster, and so they're looking at people that are mainly doing reconstructive surgeries. And then there's a few newer ones that have come on the market such as the Ascend Plastic Surgery and United Aesthetics and Premier Plastic Surgery. So there's a bunch of roll-ups Now, most of them are fairly regional. There's a few national ones, but they're looking to grow actively.

Is there a sense of ancillary services revenue contribution in a lot of provider services' businesses? One of the theories around that business is that if you can get to a certain scale in a geography that you can internalize some ancillary services that had previously been outsourced. Is there a corollary to that in plastic surgery?

So yes, and the big answer is the medical spa. So a lot of the plastic surgeons have their own medical spas, and that kind of provides more of the consistent cashflow as opposed to the super high margin cashflow. So a lot of them will either rebrand, have a separate brand for a medical spa or will be under the same brand where they're providing laser services and fillers and injectables. And obviously that's a huge area of growth. And the standalone medical spas are actually now being priced even higher than the plastic surgery practices. And I think that actually has a broader section of buyers as well, mainly because A, you don't have the big key man risk of the doctor, and B, because you're also bringing in consumer investors. It's almost kind of consumer retail medicine kind of play so you can get the consumer and the healthcare end of it.

Do you think the pure play model for either plastic surgery or med spa is better than the kind of consolidated larger derm practice? I'm sure there's pluses and minuses, but how would you describe those pluses and minuses of the pure play versus a consolidated business?

Yeah, I mean, I think with the derm practice, it was kind of like the OB GYN practices acquiring the IVF clinics, right? There's some different mentalities, and if the organization as the whole can get around those differences than it works. So you have such as IVF doctors or plastic of surgeons are probably going to be much higher paid than a dermatologist or an OB GYN doctor. Getting the system in line with people accepting that mentality, that's really what's going to make it work. But obviously if you are a pure play than everyone's riding along the same path and kind of has the same expectations,

One of the difficulties in some of the higher compensated provider businesses is getting the right provider alignment structures in place, whether that's comp apparatus or ownership structure. When you're advising sellers in this business, how do you think about comp and incentive alignment?

Yeah, so we kind of see that every buyer has a very different model. There's not one same model, but obviously the bankers are going to try to create a post-transaction compensation model that is on the lower end, but still makes the seller happy because that way you're maximizing your EBITDA and obviously a multiple of that, you're getting a nice purchase price on it. Sometimes we have a buyer saying, "Hey, we need to pay them more," and we'll adjust accordingly. We're seeing everything from pure bases to base plus bonus, to pure, you kill kind of models. So they're really kind of all over the place

In the kind of consolidated model where it's not a pure play plastic surgery model, how do you see the compensation apparatus of these plastic surgeons fitting into the broader compensation apparatus of a derm practice that tend to be different? Do you see friction there or how are you seeing folks think about that?

We haven't seen friction yet, but those tend to be more kind of percent of net revenue type models after your basic costs. Those we tend to see, which aligns a little bit more with the dermatologist themselves. So I think they try to create some sort of alignment that way, but it's really about can you create a good referral based both ways? And if so, then I don't think the doctors care as much about the compensation model if they're benefiting.

A number of sectors in the last 12 or so months have come under pressure from labor pricing pressure. Has that been a feature in plastic surgery roll-ups or has that been a little immune?

Yeah, we haven't seen it as much as some areas. I mean obviously there's turnover at all these groups, and that's why a well-healed group that has a good kind of internal model works a little bit better. As I would say, in the fertility, there's a limited pool of REIs and endocrinologists in plastic surgery practices. Definitely nurse practitioners and injectors, there is a shortage of them. So it hasn't hit like we've seen it hit really big in places like long-term care and so forth where the costs are just skyrocketing, but not as much in these areas yet, but I'm sure it will be down the road.

Yeah. Switching from kind of the labor constrained to a certain degree plastic surgery environment to the kind of wide open med spa environment, which has very few barriers to entry, how would you describe the competitive landscape of new entrants in med spa? I feel like every private equity fund I know is looking to either acquire or just de novo start a med spa business. What do you think the competitive landscape in that sector looks like?

Yeah, so med spas vary greatly. So I think the preference for most private equity firms is to get more a healthcare oriented medical spa as opposed to where they actually have a number of doctors and it provides more of a healthcare bend to it as opposed to kind of just a retail outlet. And I think those will price higher. So again, you are right, there's a lot of people that don't even have a healthcare background setting up medical spas and just broadening them. And there's some franchise models out there, which I don't like as much, and I don't think the PE firms as much. I guess I always think it's better to own rather than just franchise it out and lose some of the control.

In number of sectors in provider services, the market has been choppy over the last for certainly all of 2023. What has the market relative to the kind of broader provider services market, what has the market for getting transactions done in plastic surgery in particular been like compared to that broader market?

Yeah, no, last year I think was a tough market across the board. I think we saw in most of these physician practice segments that the multiples have come down. Money was more expensive, deals had taken longer to get done in terms of due diligence, and that's very similar with the plastic surgery market. So I don't know if we're going to get back to multiples that we saw a couple of years ago in a lot of these spaces. On the other hand, the medical spa, especially in the second half of the year, market has kind of taken off, and those multiples have been extremely high.

As you're talking to existing practices, thinking about the plastic surgery environment, what's some of your advice for a seller or a practice that is looking at maybe partnering with someone? Is there a certain size or scale that they should be at? When should a practice think about being kind of the base for a platform versus a tuck-in? How do you advise folks on that front?

Sure. So our preference is to have practices with at least two surgeons. Having three to four plus surgeons is always going to make it easier. And within that bucket, making sure that the surgeries are not kind of all on one person. So if someone's not doing 80% of the surgeries and the other person's doing 20% because you want to avoid anything related to key man risk. And it's tough to do, but the more you can broaden it out in terms of locations, in terms of surgeons, in terms of the other providers, in terms of the med spa, people want to see med spa being a decent sized portion of the business as opposed to 10% of the business. If it's 30% of the business, that's going to add to value and make people a little more comfortable.

Mitch, one of the areas where we see private equity funds looking for investment are in areas where there's a little less antitrust pressure, and given the cash pay dynamics around plastic surgery and med spa, that would appear to be an area where consolidation would not be kind of encountering those antitrust pressures. Is that a part of the discussion that you're having with buyers? And I would think that that would help fuel more interest in these sectors.

In most of these practices so far, we haven't really hit the size requirements to really be concerned about antitrust. Again, as you had mentioned, most of these, unless you're doing a lot of reconstructive surgeries, are going to be cash pay companies anyhow, and not relying on commercial pay or government reimbursement. So again, a lot of these platforms are newer and are much smaller in size, consists of two or three practices at the moment and growing. So I think that if it ever gets there, I think that's out in the future.

Mitch, a number of sectors have their own specific headwinds or risks attended to those businesses. As you look at plastic surgery first and then med spa second, are there some particular risks in those business models that you think that a company or even a buyer should be most attuned to?

Yeah, so with plastic surgery, obviously these are higher costing procedures in general. So obviously the economy is going to have some play into it, though there are some areas where you're just never going to go down, and I think that's probably more in the medical spy areas. People are still going to get their Botox and their fillers and so forth no matter what the market is, right? People are just concerned with how they look these days. But yeah, I think that the main concern with plastic surgery, and that's one of the things that we work hard with the client to get around is how to minimize at least the perception of key man risk to a potential buyer, and really where can we really grow the business and how do we broaden the revenue stream so it's not based on one particular area.

Whenever I'm chatting with a banker, I try to get a little bit of the look forward vibe from the banker. You guys always have the first look at what the upcoming pipeline is going to look like. From where you sit here early 2024, what do you think 2024 holds for the provider services market in general and dermatology/plastic surgery/med spa in particular?

Yes, we're all hoping that it's going to be a better market than last year, and I think it will. I don't think interest rates are going to go up and hopefully they may even come down, which will help everyone overall. And I think now that there are a bunch of new roll up entrants into the plastic surgery market, they're going to be actively looking to go out and acquire companies. In fact, there was one just announced today, I believe it was Varsity Healthcare's platform, United Aesthetics. So we think obviously the newer entrants into the space are going to be aggressively going out and trying to buy companies. Medical spas, as you mentioned, there's a ton of players out there looking to do something. I think if you can get some decent size into a 3 to 5 million of EBITDA and up, I think you have a real attractive opportunity.

With that, Mitch, I think we'll bring this to a close. I think we could talk about these sectors for a long time, but as always, it's a ton of fun to catch up and always love to hear what you have to say.

Thank you, Geoff. Appreciate it.

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 McGuire Woods for informational purposes only. By accessing this series, you acknowledge that McGuire Woods 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 McGuire Woods. 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.