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Med Spa Success Strategies
Multi 7-Figure Med Spa Benchmarks: Why You Should Build It Like You'll Sell It! w/ Ben Hernandez
00:53:35
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- [00:02]
Ricky Schockley
Hey there, I'm your host Ricky Schockley with MedSpa Magic Marketing and this is the MedSpa Success Strategies podcast where med spa and aesthetics practice owners come to discover strategies and tactics that help them better market and manage their practices so they can grow, improve profitability and have greater impact for their teams and their patients. I'm joined today by Ben Hernandez. Ben is the CEO and Managing Director of Sky Tailor where he leads the firm's strategy, vision and culture. As founder, he brings deep expertise in healthcare consulting, mergers and acquisitions and capital raising. Known for his thought leadership, Ben regularly speaks at industry conferences and advises growth focused healthcare organizations. Before founding Skytail, Ben held leadership roles in investment banking, hedge fund management and healthcare consulting. He serves on the board of C5 Texas and actively supports St. Monica School. Ben holds a BBA in Finance from Texas A&M and an MBA from SMU's Cox School of Business. Outside of work, he enjoys endurance sports, nonfiction reading and family travel. Now this episode is focused on what it takes to grow and scale a med spot to the point of saleability and how to do that at the optimal level. But the advice here is incredible for practice owners regardless of your end goal or your vision for your practice. So even if you have no intention of selling, if you just want to make sure that you're operating as efficiently as possible and that you sleep better at night, knowing your numbers, having confidence in the profitability, diversification of your service portfolio, mitigating risk, just chock full of incredible insights. We're super grateful for Ben for sharing his time. With that, we'll jump into the episode. Ben, thanks so much for coming on the show. We're excited to have you back.
- [01:49]
Ben Hernandez
Ricky, thank you so much for inviting us again. Enjoyed the first time. So one I've been looking forward to.
- [01:56]
Ricky Schockley
Yeah, I don't know if it's been like I got to check the dates. I feel like it's been at least a year, maybe a little bit more than that even. And I know things have changed in the market and I wanted to make sure that we kind of go a level deeper than we did. Even on our last conversation, we touched a lot of this stuff at the surface level. And I really want this conversation to be focused on successful, profitable med spas that are considering sale and what they need to do to set themselves up for, you know, a good valuation and to do that a little bit more granular level. So the first thing that we wanted to just touch on was from a high overarching standpoint, what Is a high value med spa. What does it typically look like? Location, service, portfolio, Basic structure of a successful sellable med spa.
- [02:39]
Ben Hernandez
Yeah, that's a great place to start. I think, you know, internally we have like an internal scorecard when we look at a business that touches just on these things and we kind of grade people green, yellow, red to have these conversations. I think at the beginning, the overarching theme here from a valuable med spa. If I'm a successful med spa, I'm running my business. I would start with the question of am I de risking the buyer? Just think about it. Of buyers do not like risk. So anything you do to de risk to add to. To that sophistication, you'll be compensated for very nicely. So then what does that really mean? Some of the big things that we look at, of course, financial performance is one. I think everybody knows that. But, you know, are your financials growing nicely? Number one, you never want to sell a business that's declining. That's very difficult to value. So how am I doing as a business?
- [03:36]
Ricky Schockley
Can I ask you a question on that?
- [03:37]
Ben Hernandez
Of course.
- [03:37]
Ricky Schockley
So I think when most people think of valuation, they think about it in a moment in time. So they'll look at like their profitability number and they'll come up with some sort of multiple. You just said it's important that the med spa is growing. Is. Is a stagnant med spa that's maintaining a certain level of profitability, kind of like a red or yellow flag. Do you actually want to see growth or is stability valued or is it like, I guess, give me a little more nuance on that, if you don't mind.
- [04:01]
Ben Hernandez
Yeah, of course. Good question. So stability can be valued if you're a med spa that is relatively flat because you have. You're bursting at the seams at wall level. In that case, yes, that could be valued nicely. You won't get credit for future value. And I'll get into that here in a second. And then the other part of that risk, if I'm a buyer and you're bursting at the seams, is you can't mess anything up. There's no kind of meat left on the bone, if you will. But something like that, you would get a nice value for. You just wouldn't get credit for future value. You know what I mean by one that's nicely profitable. Trending up, if you will, is at that point in time. It's a combination, Ricky, of what have you done the last trailing 12 months. That's absolutely important. And you'll get some value off that. But really the other thing from an investor perspective is what am I buying in the future? What future cash flows am I buying? Because those you've already achieved, I want to know if you're growing 10% a year, that's, that's very attractive. If I pay academic example six times multiple on that, the way that investors look at it is behind closed doors, what they're saying is they're talking to their investor committee and they're saying, okay, we're paying it six times today, but look at this growth. You're averaging it down to where two years from now we'll average it down to three, four times multiple. That's a very attractive business. And one that if you're a business owner, you might get a little bit of extra credit for those future revenues as well in the way of an earn out or sometimes in a bit of a higher multiple.
- [05:41]
Ricky Schockley
Ah, cool. Okay. Sorry, I know I distracted you. The rest of those things that are the de risking buyers.
- [05:46]
Ben Hernandez
Yes. So what else would I be looking at? One of the most important things to me and to investors would be like provider count and diversification. If I'm a sole, you know, provider at that point in time, you have the key person risk or if I get hit by a bus, what happens to my business? So the more diversified that your provider count is, the better. If I'm only 10, 15% of revenue as an owner, then I've done a few things. I've de. Risked the buyer for that. I've also proven concept that I have this really nice operational model where I can bring in new injectors, I can bring in new estheticians, whatever my model is, and have a nice profitable med spa. And if somebody does leave, I know how to bring somebody else in. Service mix kind of going along the same lines would be another one. You don't ever want to be overly indexed in anything, you know, like a business that I might like just on a spreadsheet and. But I would run it if you're a business owner your own way. But from a service mix perspective, maybe 50, 60% injectables round that out with some nice energy based devices, you know, maybe 10, 15% retail, you know, and then there's other things like you know, medical weight loss and some of these other things that are coming under the aesthetic umbrella and then getting a little bit more into the operational piece of it is, you know, what does my management team look like? They'll look at that. Especially if you're a multi Site type of business. What does your management team look like from an operational sophistication? Like your tech stack is very important, I would say. And then from a market perspective, are you a market leader? You know, and then you start talking about primary markets versus secondary markets and the competition that each one has. And then I'll round it out by saying if you can prove that you have a nice tested and proven growth model, that would be something else that I would look at. So anything that you're doing around SOPs a playbook, like I would want to say to you, Ricky, this is my secret sauce. This is how I hire people, this is how I retain patients. This is my methodology in adding a new service line, a new, maybe potentially even new clinic.
- [08:05]
Ricky Schockley
Cool. Yeah, those are great. With locations, I got a few follow up questions on that. With locations, is there, let's just say the profit number, like the EBITDA number is the same between. Oh, but it's, let's say it's 20% at a certain revenue number at one locations, verse spread across three locations, same dollar amount, same EBITDA. Is there a benefit to diversification with multiple locations as well or not necessarily.
- [08:31]
Ben Hernandez
You know, the thing I always like to say is I would rather invest in this. If we're talking about the same EBITDA in one location versus three or four, generally speaking, I would say I'd prefer the single location with the same dollar EBITDA number. Now that's generally speaking, if the three or four have the same EBITDA but they're each trending upward and you're seeing that and you're seeing a path to, let's just say 2 million of EBITDA, maybe I would prefer that. But if we're talking about an inefficient business with the three to four, where you think you're getting credit simply because you have multiple locations, at that point it might actually hurt you. And here's why. The reason is if I have to manage 15 people, let's just pretend in the single location for the same amount of cash flow. That's a lot easier, a lot less risky, a lot less human intensive, capital intensive than if I had to manage 60 people, you know, spread over four locations for that same number of cash flow. So, you know, it depends. But if you're talking about efficient versus not, I would say that's the answer.
- [09:41]
Ricky Schockley
That makes a ton of sense. And I think my hunch is that that's contrary to what most med spot owners believe. I think they think that they're somehow going to like be better off in terms of valuation or growth or profitability by expanding to I see people rushing to second locations instead of building a really profit single location. So that's really cool advice and a cool insight. You mentioned this percentage of risk and you said like a typical med spa that you feel like has a healthy balance might be 50% injectables, then some like laser based devices and retail. Is there a difference between a med SPA that's like 60% injectables, which have a long track record, they've been around for a really long time. Pretty good market stability versus having 60% of your revenue be in weight loss. I know we touched on that pre conversation. So does that if injectables are 50 or 60%, I assume that's a lot different than another service that's maybe more volatile or newer being 50 or 60% of revenue.
- [10:34]
Ben Hernandez
Absolutely. And the reason being, you touched on it a little bit there, Ricky. The reason being If I'm a 50 to 60% injectable business. One of the reasons why med spa revenues are valued highly, in fact, let's just compare it to plastic surgery. The reason they're valued more highly is because there's this concept of less risky revenue and cash flow because of in the case of injectables, that recurring revenue, if you will, meaning my patients are going to come back roughly every 90 days for additional services and then you can nicely round it out with good treatment planning for some of those higher margin services like medical weight loss, as you mentioned, energy based devices and the like. But you have them as a patient potentially for life. So certainly from a patient value perspective, the dollar amount is pretty great as opposed to let's just go to the practice that has 60% of medical weight loss. That would absolutely spook an investor. And the reason being one, a lot of these medical weight loss clients currently are not taking on additional services, but then also two, the riskiness of that cash flow. You see a lot in the news here as to whether things from an FDA perspective are on the shortage list or not. And if the comp pharmacy option goes away for these med spas, then you're talking about a revenue source that pretty much could go away overnight. So it's absolutely important to consider the type of services that you're offering.
- [12:10]
Ricky Schockley
You you mentioned the recurring revenue model. I think this is another place where maybe practice owners can get a little bit caught up or maybe there's a little bit of a difference between objectives here because I know there are Some people, for example, if you're selling a bunch of coolsculpting, you might have high margins on those sales but the revenue is basically collected and then it's gone. Injectables. I've heard people say that like they, they don't love the injectables in their business because they feel like the margins aren't good. But that's in the isolated single visit over the duration they tend to be much more lucrative because of the stickiness. Is that basically kind of what you're saying there in terms of valuation too? So even like if you're doing a bunch of business on coolsculpting, that has higher margins and a bigger differential between acquisition cost and capturing ltv, that still might not be as profitable for an investor because it's here and then it's gone and you have to keep re grabbing the business from some source.
- [13:01]
Ben Hernandez
Oh absolutely, Ricky, exactly what you said, and we've heard that as well, is, and they're right, it cogs on injectables and maybe around 40%, that's, that's a pretty high, you know, 40 cents going out the door anytime I inject, that's fairly high. And then you have to pay the provider and everything else. So the margins might not be as nice as, you know, some of the energy based devices. However, I would look at it as a lifetime value of a patient. If I have a patient that's coming in for some energy based device services, the lifetime value is probably not going to be as great as one that's going through your entire program of injectables coming back every 90 days. You can then do total treatment planning on them with some of these things that we're talking about. Retail is another one people forget about. Especially if you have your own brand. The margins on those are tremendous. So you have a practice doing 10, 15% retail. That only happens if I'm loyal to your practice and one of the ways to do that is by way of injectables because I'm coming back all the time and then you have me for quite a number of years adding on additional services that I can continue to offer. And there I would monitor what is my community asking for. The other thing I'll add to that is the risk, especially if you're early on, of buying a bunch of this equipment that depreciates pretty much like a car. So you want to be sure that whatever it is that you're offering, if it is energy based devices that you know your patient base is going to ask for it. And there you do have something extremely profitable. But we have seen practices that do it the other way around, which is if you build it, it will come. That may or may not be true. Now, you know, in fairness, we have seen some businesses that do very well that are laser heavy and so forth. So if you've done that, I think you'll get value for that. But it has to be a proven model that you know how to replace patients over and over and over.
- [15:04]
Ricky Schockley
Yeah, I think that was. That's come up on the podcast, your little note there on these devices and making sure that you're doing something your existing community and patient base wants instead of trying to jam a square peg into a round hole. I see so many times people buying devices where they're like, okay, if you build it, they will come. Where are my patients? And they're freaking out. And their only solution is to run marketing campaigns that have $1,000 acquisition cost associated with it. You squeeze the margin down and like, now it doesn't look as attractive. So please, for everyone listening, this is probably the 65th time this has come up on the podcast. Make sure that your devices are things your existing patients ideally want and that you've got a community of people that are already interested in that service, and it's going to be easy to cross sell and upsell that and not rely on new patient acquisition to fund that device. Ben, you also mentioned this concept of being a market leader, adding to your valuation. What do you mean by that?
- [15:56]
Ben Hernandez
Yeah, so I think from a market leader perspective, some of the things that we look at is, you know, how many Google reviews do you have? What does your patient retention look like from a community perspective? How successful have you been? So those are some of the things that we look at, especially in competitive markets. In fact, we were talking about this earlier. If you're looking at a secondary tertiary market as an investor and you're the market leader at med spa in that area, it means you don't have really any competition. And so what that means is you probably are looking at a very, very highly profitable med spa that from a provider perspective doesn't run that super high risk of provider turnover, which is a stressor in the market right now, versus, let's just say I'm in a primary market, maybe I'm in Miami. There's a mud spa in every corner. Well, in that case, you want to be sure it's even more crucial. How am I going to differentiate myself and be that market leader? Because there is competition, more competition continues to come. So you just want to be sure that from that perspective, if I'm googling you, if I'm searching you, or if I have friends recommending me that you're positioning yourself as a business in such a way that you're going to win relative to your competition.
- [17:23]
Ricky Schockley
Yeah, I love that. This episode is brought to you by Med Spa Magic Marketing, my agency. We help Med spas and aesthetics practices grow with more effective marketing strategies. And I know that's a vague phrase, right? It's a vague claim. So I have an offer for you. I offer this to any new prospects if you're interested in exploring any of them. Another marketing option, a new agency, or just getting into Facebook, Instagram, Google Ads for the first time. I'd love to show you why we're different, what we're doing for clients. And we can do that via a one and a half hour planning session where I'll outline a specific marketing plan and I'll give you all of the blueprints that we would implement if we were to do business together. Now, you can take that, use that on your own, hire someone else to help you execute it or work with us. We really don't hold anything back on that strategy call. And I think you'll have a lot of confidence in how you manage your marketing investment moving forward, understanding some of the nuances that can help you implement more effective marketing strategies for your business. So if you want to do that, you can go to medspa. Magicmarketing.com you also mentioned this importance of like having provider diversification and having a process or a system in place that if a provider leaves that, that does not destroy the business. I know that's a major challenge for people because in the industry you have a lot of loyalty. It's kind of like a hair salon. People are more loyal to their hairdresser than they are the salon that they work from. That can be true with injectors. Have you seen practices that are successful at replacing injectors? Do anything specific in terms of like SOPs or protocols to make sure that that's a more seamless process?
- [18:50]
Ben Hernandez
We have, yes, the ones that we've seen that run very successful businesses. I think of it a little bit like the Blue man group, where you know, everyone's kind of doing things the same way. So some of the ones that are very successful, they have really good training protocols in place. Like if you're a provider in that business, they provide you training throughout your life there, which I think is extremely beneficial because there's this level of consistency. At that point, I as a patient start becoming comfortable with you Ricky telling me, hey, you know what? This injector is not available, but Susie can absolutely do it if you can come in. And when I start as a patient trusting that, and we've seen practices do this, at that point, it de risks some of what you just said, which is so true, which is I am going to be loyal to my provider, but what the really successful ones do is I'm going to be loyal to the practice because I know that the owner and their providers are top class across the board. So why would I ever change that? And they continue to be taught and trained. And the other thing I would add to that is adding provider ability. So some of the ones that are doing training, they might, they might come in as an injector, but they might be trained on other things throughout the life. So they're adding to their repertoire of what they can offer me, the patient, which is extremely valuable. I want to stay with a practice like that. And then having very consistent SOPs, I would say this is one that sometimes gets lost. There's a difference in having four locations that all run individual of one another and having four locations that share the same DNA. So are you letting all of your team know this is why we exist, this is how we do things, this is how we treat a patient, this is how we retain a patient. Practices that are able to do that, have that training plus the SOP just succeed so nicely relative to others.
- [20:52]
Ricky Schockley
Yeah, I know people use Chick Fil a a lot as an example here. It's like I can go to a Chick Fil A in Boise and one in West Palm beach, and the experience is insanely similar regardless of who's providing the service and frying the sandwich and handing it to me. Down to the. Down to the word they use to say thank you for your business. So, yeah, I do think it seems like that is. That is maybe an overlooked aspect of success in the Space is developing SOPs, processes and protocols that are a layer on top of your team instead of just relying on like this really good provider that people like doing something a little different than this provider that people also like and stitching it together. Because you don't create loyalty to the business, you create only loyalty. That is not going to be perfect, I'm sure, ever. But you want to try to lean into practice loyalty as much as you possibly can, I'm assuming.
- [21:37]
Ben Hernandez
Absolutely. And you know, you know what else? You brought up a really good point. Is if you do hire those all star providers and start mishmashing them, that's fantastic if you're able to do that and retain them. However, one of the things based off of what you just said, one of the things that we see now in deals with that we weren't seeing two years ago is that importance of a provider. We have a lot of deals now. I would say the majority of them the contingency to close is based off how do you keep these providers, if you have any that are doing a significant amount of revenue. Buyers will try to figure out a way how do we retain them. And that can come by way of a bonus, a significant one to them that comes out of sometimes the owner's pocket or it can even come by way. We've seen this happen where there's equity offered at the point of sale with the new firm. And so what that happens there is I as a business owner may have to give up some of my equity to my provider to retain them. So these are things that you really should start thinking about on the front end because an investor is going to protect that. If an all star injector leaves, you're talking about 3, 400,000 sometimes in cash flow going out the door and you put a multiple on that. That's a significant number. So investors are absolutely. They've seen that they've skinned their knees and they're now protecting themselves from that risk to where you are sharing the risk with them.
- [23:07]
Ricky Schockley
Yeah. Do you see people coming into the sale where they've already as just a retention strategy given the provider equity and it's just kind of baked in. I'm assuming that makes it relatively easy to handle that because there are. That part has already basically been overcome.
- [23:21]
Ben Hernandez
It makes it so much easier. And you know, I'll go to the not extreme, but I'll go to an example plastic surgery. That's one where. And I mentioned that because a lot of them have the med spot component to it. And so I think it'll be a pretty easy example if you're a plastic surgeon or if you have, if you have three plastic surgeons, the ones that have partnered the other associates have done a lot better because of that risk discussion. And at that point in time, to your point, Ricky, there's nothing really to discuss. They're already partners. They already think like a partner. They already have that equity stake position in there. So they already think that way. Same with med spas, we have seen some where as you grow, especially if you're going to additional locations and you're starting to trust people and depend on people to grow other locations alongside you. Now you have the golden handcuffs on them, if you will, where maybe I'm partnering an injector, giving her, let's just call it 20% equity or something for a location. Now what you've done is you've given someone that owner mentality and they behave differently, they think differently, and they're motivated differently. So at the point of sale, if you do have a group with multiple partners, that's typically a lot easier.
- [24:42]
Ricky Schockley
Cool. Interesting. I wanted to pick up on the conversation about service portfolio a little bit you talked about at a recent conference you all were at. You did a panel discussion and people came up after and we were talking, you were talking about some of these services that are under the like wellness health and wellness functional wellness umbrella and that that tends to be like a growing part of the space and that that would increase the total addressable market of the med spa industry. What does that look like right now? Like, what are you all seeing that are the services that fit under that umbrella?
- [25:11]
Ben Hernandez
Yeah. So great question. The beauty of the medical aesthetic space is that it's projected to grow 10 to 12% over the next 10 years. And I mention that because that has to continue to be proven correct for investors to continue to be as excited as they are about the market. Other healthcare subsectors that are mature are growing at 3 to 4%. So let's start with that in mind. What this has been able to do is beyond the services that are being offered a few years ago within the med spa space, now they're very tangential and complimentary. Now you're getting wellness into it and the wellness market is just growing tremendously. And I, as a consumer, as a patient, people are starting to become a lot more interested in their health. So it's similar to, if you, you know, I've heard, I've heard it mentioned, like if you look at something, call it Botox 1.1.0, where people's like totally frozen face, so on and so forth, now it's leaning toward more natural. Now it's leaning toward more preventative. What can I do to look and stay the same age but still look, quote, unquote, normal, if you will. The wellness market absolutely addresses that. Where you feel good, you look good. So there's this health component to it. So what we're seeing flowing into medical aesthetics and it's very natural. Weight loss, we've already talked about, we think that is here to stay. When people start Feeling better, looking better, they'll start adding on additional services within metastatics. I think others that we're seeing a lot of interest in peptides, a lot of interest in NADs. I think anything like functional medicine wise is interesting to folks. And then you start talking about things like hrt. So hormone replacement therapy is a big one. I think that now people are being tested for asking about and on the female side, one that's very interesting that I think will come to fruition is anything menopause related. You know, right now there's a lot of interest in figuring that out and all of that flows very nicely into a lot of medical aesthetic practices. Again we talked about this earlier, Ricky. I think you have to make sure that one, you're comfortable with that, you have a history in that and then two, your patients are asking for that. But we've had a few now that own medical aesthetic practices that are adding that to their umbrella and it's been such a success because I as a patient am coming in for the health piece plus the looking piece and they complement each other very, very well.
- [27:51]
Ricky Schockley
Yeah, I guess that's kind of the beauty of the space is the category is very flexible.
- [27:57]
Ben Hernandez
It is.
- [27:58]
Ricky Schockley
So I think, I think it's about though understanding that and not being super rigid in your service portfolio. But like you said Ben, I still think like even putting my marketers hat on here is with some of these services you don't necessarily have broad mainstream appeal on some of them so they can be hard to market. So like you said, it kind of goes back to the devices. Make sure that these are things that you can start adding on to increase, you know, average revenue per year per patient. Those types of things cross selling and upselling. More so than like expecting a flood of business coming from the street cold for peptides. I don't know, that's been my experience. I don't know if that's what you all are seeing at this point. And as that matures, that changes. Those things become more mainstream, marketing becomes more effective. But oh, absolutely makes sense.
- [28:39]
Ben Hernandez
I think it has to complement your service offerings. I don't think you can skip like five different bridges at one point. But you know, just as a small example, we do have some, some clients or people that I know that maybe were offering for example injectables, but they also had big use in skin tightening or sculpting or something of that nature. Well, that kind of patient. Maybe something like medical weight losses of interest to them. Maybe something like, hey, I'm feeling More tired, hormone replacement therapy, whatever it may be, I think it has to make sense within your portfolio where it's a simple hop and skip to that additional service line and then you can continue to add onto it over time. But I think that you're absolutely right. I think that's so way to build your organization is to continue to meet that patient demand. Make sure that it fits your vision, of course, but make sure that you're meeting your patient demand into what they're asking for and give them a better experience.
- [29:37]
Ricky Schockley
Yeah. Such a simple way to put it. Meet your patient demand. Don't, don't wish something were true just because you wish it were true. In terms of like patient demand. Let's, let's make sure that we're offering things that people want. In terms of the changes in the market since last time we talked, it seems to me that the acquisition has, it was just really crazy there for a while. Maybe it's more leveled off and maybe in more of a healthy routine type of feel right now. In terms of the market, how do you see the changes over the last one to two years? What have you all seen how evaluations change? You mentioned some things that are like people learned the hard way. They skin their knees on realizing that provider retention was really important. Anything else that's changed in terms of valuations or those types of things since last time we talked about?
- [30:21]
Ben Hernandez
I think from a valuation perspective, if you are a healthy business, valuations have remained steady. They're very attractive. I think where valuations have changed or maybe even the ability to be acquired has changed is if you're a business with too much hair on it, investors might stay away from it or they might, you know, give you the valuation as they see it, which is, you know, adjusted for all the additional risk that they're seeing. I think from an investor based perspective, we've been in the consolidation phase now for a few years. They now know what to look for. They now have within their portfolio proof of what practices are doing well, which ones are not, and the ones that are not, they're asking why and they're figuring it out. The ones that are, they're asking why as well. So if you're a healthy business, valuations have absolutely remained. If you're, if you're not, then that's something that I would maybe look at tightening the business with before going to market. The other thing that has helped on keeping valuations steady is we've talked about the groups that have skinned their knees and changed their model a little. Bit what we didn't talk about is there are new buyers coming to market seemingly every day. So our buyer list is I think like 260, 270. Just in aesthetics by the way. So a lot of them are looking for that initial investment or which gets us, Ricky, into this really neat thing that we knew what happened. But it's starting to happen now. As you look at the initial investment, a lot of them like to cut checks that are, they have to be a minimum. Right. Which means that you have to have a certain size business. What we are seeing in this space is scale scarcity. We're not seeing a lot of businesses that have a lot of cash flow and if you have one of those tremendous value right now because there are a lot of investors looking for that. The other neat thing that it's done though that we didn't see a few years ago, but we were excited to see happen is now you're seeing these entrepreneurial minded founder owned businesses that are saying, wait a minute Ricky, are you telling me if I run this super efficient business and I add on additional practices and maybe I partner others and so maybe I own less percentage, but it's an ocean versus owning an entire pond. You're telling me that that's a good thing. So you have these people that are like waking up to the fact that you get compensated for a very efficient business and one that's de risked. So you're seeing a lot of people meeting that demand. Now that I think in a few years we're going to start seeing come to market, which is exciting.
- [32:58]
Ricky Schockley
Oh cool. Do you, do you see anything with practices that come to you and they're like, hey Ben, you know, I've got, I'm doing this great revenue number, I think I'm ready to sell. And you start crunching the numbers and go, nobody's going to buy this business. Are there any certain themes to people that engage in this conversation initially think they have a really sellable business but once you start digging, you find out there are some things missing. Any common threads there?
- [33:20]
Ben Hernandez
Oh, absolutely. It happens quite frequently I think. You know, you start with revenues, you said Ricky. But then the other thing that you want to make sure that you're accounting for is, you know, what's called an add back. And what that means is, you know, your profit number may or may not be correct by the way. We always have to adjust to get to true adjusted cash flow. That's totally normal. But like if you're running your boat through your business, your gym memberships if you're paying your children out of your business, we're going to add that back because that's not going to be normal operations when you sell. So that's a good thing. That's a plus. However, one big one is people, as a business owner, you can pay yourself however you want. And so to normalize that, to compare business A and B and have it be equitable, the way that you do it is you have to pay someone as a buyer as if they were an employee. So how much would it cost to replace you, if you will? So we always have to make that adjustment that's usually a hit because it's rare. When a business owner pays themselves on the P and L, they might take distributions, but on the P and L and then beyond that. So that's one thing that we often see where they're not taking that the account and they're disappointed by the true cash flow number. The other things is because it is a profitable market, you know, we see margins probably average 22% for a pretty well run business. They can be higher too. But because it is that way, we see a lot of waste. So, you know, unlike a restaurant, you're probably not looking at what's the price of the tomato and so forth, you know, so, so when we go through the P and L, we do see a lot of times that people aren't keeping up with their inventory correctly. We're seeing, you know, a lot of waste, a lot of spend on payroll. You know, people like to hire the same concept as with multiple locations. A lot of times you see people like, oh, I'm growing, I'm going to keep adding staff. Okay, well, are you keeping in touch with what should my payroll percentage be? Is it, is it in that 20, 25% range? Because if not every percentage point, you're killing margin on. So, you know, what we typically say to those businesses is we simply let them know, like depending on your mix, this should be your cogs, this should be your marketing percentage, this should be your retail, this should be your. And I know you can't do anything about this, but rent should be at a specific percentage point to get to that 22% margin. So yeah, we see that so frequently where businesses are, aren't being run efficiently from a cash flow perspective.
- [35:54]
Ricky Schockley
Hey there. Wanted to briefly interrupt the episode to make a quick ask. If you're a podcast listener, it would mean the world to us if you leave a review for the podcast, whether that's on itunes or Spotify, it's something I hadn't really remembered or thought of asking for. But it does help us show up more frequently so that we can reach more people with the information that we're providing. So it mean the world to us. If you'd leave a review on it, Itunes or Spotify. If you're listening on audio, if you're watching on YouTube, make sure to hit the subscribe button so you're in the loop for future videos and you don't miss any of the content that we're putting out. Would you run through those just top level numbers? So you mentioned like rent. We want to see a certain percentage labor cost relative to revenue. Do you have like, just like a very baseline. I know it's probably different. Every business is a little different. But just the baseline numbers. If you had to throw an out estimates on those.
- [36:42]
Ben Hernandez
Sure.
- [36:42]
Ricky Schockley
So everybody's scrambling for their pens and pads.
- [36:46]
Ben Hernandez
Yeah. Okay, let me see if I can think about this. If I'm starting from revenue, I'm probably saying, you know, retail sales, 10% minimum would be nice. And then if I'm moving down to cost of goods sold, a pretty good. In that early med spa that I mentioned, if you have a decent injectable, so on and so forth, like a pretty good cost of goods sold percentage would probably be in that 20%, maybe 25%. This is when you start averaging out. And I would break it down by the way, by service line so you. So you understand if cogs move, why are they moving? Meaning if you have injectables, break it down. Injectables 40%. If you have energy based devices. Energy based devices, 10%, whatever, start breaking that down. So you get to a nice little mix. And then from a payroll percentage, I think 25% is a pretty good payroll percentage. If you're breaking it down like you're supposed to support staff maybe should be, you know, 5% of that, 5% or so of that. Then 15 to 20% maybe is like true provider payroll. And then you move down to like marketing. Marketing's a tricky one. If you're still growing Fast, of that.
- [37:59]
Ricky Schockley
25% payroll, would that include owner pay or would that be separate of owner pay? Or that be the cost of like if their pay is included in that.
- [38:07]
Ben Hernandez
You're saying their pay would be included? Yes, correct.
- [38:10]
Ricky Schockley
Got it.
- [38:11]
Ben Hernandez
Question. Okay, yeah, because they should be producing that revenue to get to that. So that's a pretty healthy one. Marketing is tricky. If you're still growing very quickly, it should be higher than this. But if you're a Business that's somewhat stable, has a good brand, continues to grow. You know, we like to see marketing something around, you know, 5% or so, maybe a little bit higher. And then rent should be about 5% ideally. So you start kind of looking at those big buckets to get you to that, you know, 22% or so, maybe a little bit higher, and you can kind of see how you got there.
- [38:49]
Ricky Schockley
Is there one of those buckets that you see? Usually people are off the rails, like, oh, everybody's like 50% of people I talk to, their rent is way too expensive or their labor cost is too high of a percentage of revenue. Is there one that stands out?
- [39:00]
Ben Hernandez
Yeah, usually it's labor cost. Labor costs usually are a bit out of whack. And when you start talking to folks, they're like, oh yeah, this is why so on and so forth. Or maybe the provider's not ramping as expected. You know, maybe you plan for future growth that didn't come to fruition. Or we see this in a lot of business owners that are trying to step back a little bit is they, they over hire for themselves, like to replace themselves. And I think replacing yourself is great, by the way, but I think there's a way to do it. You should always be very cognizant of what is this person taking off my, my plate and is that value to me. So I think that's one that people, you know, should kind of keep and keep track of.
- [39:45]
Ricky Schockley
Yeah. Dan Martell has a book called Buy Back youk Time that's kind of popular in my circles. I don't know if you've heard of that book. Yeah, that's probably a really good way if you're an owner, to think about your replacement ladder and what, what things you should start handing off in order. And I'm assuming, Ben, the way to do that as an owner, you don't go like I'm in the business every day, every hour to I'm out of the business. It's how do I scale my schedule back? 20%, 30%, 50%? You should do that incrementally to make sure that your margins and your numbers are good in terms of your fulfillment capacity and capability.
- [40:13]
Ben Hernandez
Yeah, and that's a great point. If I'm a business owner wanting to step back, I would start with what do I not like to do? Or what am I not good at doing? I would list those out and that's what I would shed first. And then you, then you start thinking of the ones like to your example, Ricky, if You want to over time, not be a provider, not take on new patients. You can't cut it off today because then you would kill your business cash flow wise. But this is a great opportunity to start training your team, to start, you know, sharing some of your patients potentially. Or don't take on new patients, whatever the right formula is. But one important thing to do is I would always be forecasting out what happens if. How do I actually get to where I'm only treating 20% of the time versus 100% of the time, how do I get there? It can't be overnight to your example, how am I going to get there? Who's going to take on the additional workload to where from a revenue perspective, the business isn't suffering, it's simply shifting from revenue I produce to revenue that you're producing now.
- [41:22]
Ricky Schockley
Yeah. Awesome. I don't know if this is anecdotally our experience. I see a lot of husband wife teams in the space where wife comes in as like the primary injector. Husband's involved, involved on the business side, when you think of labor cost and kind of being this business needs to operate, 25% of revenue can be spent on payroll to operate this business from admin and leadership down to the front office staff. How does, how does that work? If you've got somebody that is, you know, let's say it's a husband and wife team. I would say there's two scenarios here. I'm curious about the husband and wife team where the husband is doing a lot of like business admin and operations. Are you trying to reverse engineer the replacement of those tasks that that person is doing?
- [41:58]
Ben Hernandez
Essentially, yes, absolutely. The way that we always think about it is if a buyer comes in, how are they going to see this person? And in the example you gave from a provider, the wife will absolutely be retained, of course, and they'll ask her to stay on, call it four years and they'll ask that, you know, the production continue to be what it is, that her work schedule be relatively the same on the husband's side of things, if he's, you know, chief of ops or something like that, at that point in time. What we look at before going to market and what investors look at as well is how important is Ricky to the organization. Right. So if Ricky were to leave in six months, is there a cultural thing there where people are going to be disappointed that he's no longer there? What are his responsibilities? Like, what truly are his responsibilities? And can we shed that over the next six months? So what we see in that case is we end up agreeing. This one is less of a science. Like if you're an injector owner, we just say 25% of production, for example, is what we're going to load the P and L with. If you are that kind of, hey, I help on operations or something like that, at that point in time, it's more of a salaried position. So what we're doing there is go ahead and list, this is what I'm responsible for. I do these things. And if you're wanting out of the business, then number one, there's going to be a salary attached to that. Like that has to happen. But then if you want to exit sooner rather than later, then at that point in time I might say, yeah, I help on payroll, but this person could take it. It would take me a month to train them. Yeah, I help on recruiting, but this person's really leading it. These are the small things I'm doing. So if you are wanting to exit, that would be a way to do it. If I have team members that can take on the responsibility, by the way, if you can prove that they've done that over time already, even easier with these to prove and then we can shorten that timeline, we can exit, in this example, the husband and there, there might be a thing where maybe they'll want you as a consultant for a number of months like that you might have to be open to, but that one's a lot easier to float out of the business.
- [44:15]
Ricky Schockley
So when people get to the phase where let's say they're the owner that's not involved in fulfillment, you have a leadership team, you're bigger, you're more established and you're looking at that. Is that payroll still it's 25% of total payroll to operate the business or is it production based payroll? Like you want 25% of your revenue on like production, which is like just the people that are actually performing service to clients.
- [44:36]
Ben Hernandez
Yeah. So if we're breaking it down that way, I would say 15 to 20% payroll for providers, 5 to 10% payroll for support staff.
- [44:46]
Ricky Schockley
Got it. Support staff would include like admin, like top level admin and leadership, plus like front desk. All of that's included in that bucket.
- [44:53]
Ben Hernandez
Exactly. To get to that 20 to 30% blend, depending on how much admin you need. I will, I will add a little caveat to that, Ricky. There's what we call the dark tunnel. So if you're a business that you know, because you mentioned executive Leadership. So at that point when you say that, I'm thinking of a more sophisticated business that maybe has, whether it's a COO or a director of ops, whatever, maybe it's a CEO at this point, even maybe it's a head of marketing or some director of marketing. If you're at that level where you're actually starting to build out a quote unquote management team, then at that point in time, the formula breaks a little bit. Not necessarily in a bad way, but you as an owner have to know you're reinvesting in your business. If you're going from two locations to, let's say, five, at that point in time, it looks very different at the, at the executive leadership level. So what happens while you're doing that is you're investing in people that are helping you get from here to there. And what that does is it. It crushes your profitability a little bit for a while. We see that as okay. If you as a business owner understand that you're now reinvesting in your business, you're not maybe cash flowing as much as you were before, before. But then this neat thing happens when you get to a certain amount of locations. If you're running efficiently now, you're taking over what's called operating leverage, which is that you have those fixed costs, if you will. Now you can maybe add location 6, location 7, location 8. You have the team already built for that. But while you're doing that, while you're going through that growth of investing in people to help you get there, that's what we call the dark tunnel. So. So, you know, some of those are a little bit flexible, depending on your strategy.
- [46:43]
Ricky Schockley
Yeah, cool. Awesome. Thanks for the insights. I thought that would be an interesting one to dig on because I know that's some nuance and some. Some detail. So. So we're talking like profit margins, a healthy med spa. The entire business needs to run and operate, meaning you can pay for replacement of every role. And we're shooting for somewhere around 20 to 25% profitability valuation. Still to this day, assuming that your numbers are real and they're correct, are. What did you say the multiple was again? Roughly just in the ballpark, like 46 or something.
- [47:15]
Ben Hernandez
A lot of it depends on, you know, like, cash flow. Some of the things that we talked about that are not only quantitative but qualitative. But I would say that ranges. If you're talking about a business that's profiting a million minimum, you're. So you're probably talking about 4 million minimum revenues, a million minimum to like let's say a business that's profiting 3 or 4 million. That's typically a decent range in well run founder owned businesses. You know, I'd say valuations there can range from, you know, maybe six to nine times of the cash flow depending on a million other things by the way, like where are you located? So like if you're in Florida versus California, we're going to get very different interest level because California is deemed as riskier. So there's a lot, there's a lot more to it than that. But, but those are some of the ranges that we're seeing for very well run businesses.
- [48:11]
Ricky Schockley
What's kind of interesting from this conversation I've realized is there's a lot more qualitative data in this analysis than just the quantitative data. I think even for me, I always think of business valuations and acquisitions as just being a matter of, of the math. But when you're doing due diligence, you're actually looking at how the business is run, you're analyzing the risk and you are making a somewhat subjective determination based on a lot of things that are going on in the day to day operations of the business. Is that a fair assessment? I think that's something I didn't necessarily realize prior to this conversation fully.
- [48:40]
Ben Hernandez
Oh yeah, on that, on that valuation scorecard I mentioned, I'd say that, you know, we have a very deep one, but the one that we typically put together just when we do a pitch, like I'd say maybe 8 or so of the 20 to 25, or what we consider to be qualitative. We talked about some of it, like reputation and brand strength. You know, we talk about like retention percentage from a customer perspective. That for us is probably our number one KPI is like patient retention. Because what that does is it speaks to operational plus service, right? Like how am I being greeted? Am I being treated well? Is the chairside manner good? When I'm leaving, are you remembering to stay in touch with me? I mean that's what that tells you. It's some of the softer things that we're talking about. You know, the market position of where, where it is located is super important. Like how do you train, how do you acquire your talent? Like these are things that buyers are asking about because they want to know how well oiled is this machine.
- [49:46]
Ricky Schockley
Yeah, yeah, that's cool. That's, that's really interesting to kind of see it from that perspective. I think this is probably a good segue. I mean you have people listening to this episode, hopefully, that are kind of in this situation and they want to know what the next steps are. At what point do you, Ben, and your team, like, get involved with the prospect? What does that typically look like?
- [50:05]
Ben Hernandez
Yeah, so, you know, the clients that we've sold, we, we remain friends with them and we keep in touch with them. And when we go to conferences or wherever, we love to keep in touch. So the reason I say that is I don't think it's ever too early to contact us. And the reason being that, and there's no pressure, we always love to educate first. We love to educate the market. We love what founder owners are doing. We're passionate about it. So one of the neat things, if you call us and you say, hey, I'm kind of interested in this, can you give me, like some sort of general guidance on what you think the value might be for my asset at that point in time? And it's complementary, we put what's called a pitch book together and in that we ask for some light requests and we'll say, okay, Ricky, we ran through this. Here's your cash flow. Here's, you know, some of the things that you might be able to work on in your business. Here are some things that investors are absolutely going to love. This is a general market valuation that we think would happen if you were to go to market today. And the other neat thing is we also break down the deal. So if someone's offering you $10 million, what does that mean? It doesn't mean 10 million cash and you leave. It actually means academic example, 7 million cash, you're rolling over 30% equity, you're staying four or five years. By the way. There's non compete, non solace. So we really try to bring it to life for them. And then, you know, there's a possibility where they say, you know what, that sounds great, let's maybe look at going to market together. And there are others who say, okay, I have some wood to chop, or this has been great. I think in two years, three years, I'll get there. And we love keeping in touch with them and being kind of helpful along the way. So I don't think it's ever too early. It's not uncommon for us to sign folks that we met three years ago. In fact, we recently signed one that was exactly that long and we were reminiscing and she and I couldn't believe it. So, yeah, it's never too early. We always like to be a resource and helpful.
- [52:06]
Ricky Schockley
Yeah, well, that's awesome. I'm going to make sure, Ben, we put all the links and everything in the show notes. Thank you so much for sharing and being an open book. I think this was an extremely valuable conversation. I know the audience will appreciate it. I appreciate it. And we'll hopefully see you again on the next one. Again, I'll put the show note links, but for those that are listening on audio. Ben, can you just wrap by sharing some of the places people can find you and explore next steps?
- [52:26]
Ben Hernandez
Absolutely. And thank you so much for having us on. We love the market, we love what you're doing, Ricky, so really appreciate the time and it's always great to see you. For us, if you want to get in touch with us, our website, skytailgroup.com it's s k y t a l e group.com is one way. There's some get in touch places and you can always reach me. My email is ben.hernandezkyetailgroup.com so I'm always happy to be a resource as well.
- [52:57]
Ricky Schockley
Yeah. Well, this was awesome. Thank you so much, Ben. And we'll hopefully have you again. Gotta make this at least an annual thing.
- [53:02]
Ben Hernandez
I would love that. We should just put a recurring calendar together.
- [53:04]
Ricky Schockley
Yeah, we should. All right, thanks so much, Ben. We'll see you on the next one. Thanks.
- [53:08]
Ben Hernandez
Thank you, Ricky. Really appreciate it.
- [53:12]
Ricky Schockley
Thanks everyone for tuning in. This podcast is a production of medspa Magic Marketing. If your med spa or aesthetic practice is in need of digital marketing services, help with advertising on Facebook, Instagram, Google lead generation, generation and booking more appointments, please visit Medspamagicmarketing.com.