By Ben Hernandez, Skytale Group
For most current or aspiring medical spa owners, legal considerations are the primary reason for contemplating a management service organization (MSO). In most states, medical procedures must be performed by physicians or physician-owned organizations. Therefore, for a non-doctor to own or take part in a medical spa, an MSO must be set up. This allows the clinical aspects of a medical spa to be owned by and overseen by a doctor, while the non-clinical aspects can be performed by non-doctors (the MSO entity).
Beyond legal considerations, however, are there any benefits in setting up your organization as an MSO? The answer is a resounding “yes.” Allowing non-doctors to participate in the medical spa industry attracts talent that may otherwise not be available to a medical spa. Also, setting up a MSO creates a potential to scale and find efficiencies in processes and cost. Finally, setting up a MSO helps promote interest from investors, such as private equity groups (PEGs).
Setting up an MSO allows medical and administrative separation. While the “S” in MSO stands for “service,” you also can think of the “S” as “support.” In a medical spa, it’s difficult for a doctor to be responsible for billing, training and marketing on top of all of the clinical work. A MSO model allows a management company to bring in talented, experienced people to carry out administrative and business responsibilities. This allows the doctor to focus on the patients.
A management services agreement (MSA) will ultimately dictate the responsibilities for the management company—they may include human resources (HR), accounting, finance, marketing and billing. For example, a bookkeeper or head of finance should be able to determine and execute on the flow of funds that take place between the management company entity and the clinical entity. They should provide the clinic with accurate books, forecasted financials two to three years out, and cash flow to ensure any capital expenditure plans are accounted for. The doctor and owners should have a clear picture as to how they are performing.
The MSO creates clear responsibilities like these in order to attract people with talent and experience to complement the doctor’s clinical experience. Organizations set up this way from the beginning have the potential to operate far more efficiently and are more capable of scaling.
Potential to Scale
Once you have a MSO structure and your team is in place, adding more medical spas to your MSO becomes more streamlined and cost-effective. Depending on the size and number of medical spas, this can mean anything from a couple locations sharing one bookkeeper to 10 clinics being supported by one HR team, one IT team, one marketing team, one call center and one training team. Depending on size, these are functions you can centralize or outsource to third parties until you are large enough to bring them in-house.
As this takes place, the unit cost for each individual hired by the management company lessens. This also has an inverse cost relationship with suppliers and vendors, translating to lower costs for expenses such as clinical supplies, office supplies and finance. As this transformation takes place, your organization, at a clinical level, can continue to focus more on its patients than it previously did. This improvement in efficiencies, effectiveness and knowledge of your space and patients, in turn, attracts outside investment from larger MSOs to PEGs.
Interest from PEGs
We can look at the history of industries, such as medicine, veterinary and dental to predict what will continue to happen in the medical spa space. These industries have transformed. Before, the landscape was extremely fragmented. Over time, they started consolidating because of operational and cost efficiencies. These spaces are each at different consolidation life cycles—for example, medical is far more consolidated than dental, although dental is catching up—but all are going through it.
PEGs typically pay a multiple based on earnings before interest, taxation, depreciation and amortization (EBITDA). Depending on what you want in your exit, this is another intriguing aspect of the MSO model. PEGs are interested in everything from how much growth is still left in your organization to what risk profile your organization has from a regulatory standpoint to what your secret sauce or recipe for success is.
A one-location practice with a $350,000 EBITDA, for example, may sell for a three-times multiple, while a 10-location practice with a $4 million EBITDA may go for a ten-times multiple. Other factors that may be considered include:
- How much growth is still left in your organization? Is the PEG buying an organization that has matured and, therefore, is already paying for all the growth? Or is it buying an organization that is growing by double-digits and plans to continue to do so over the next few years? At this level, you should have three-, five- and 10-year plans as to where the organization is going next and should have future financial forecasts tying that vision to the numbers.
- What is your organization’s risk profile? Legal compliance is part of the reason for starting an MSO in the first place. Has your organization taken the proper steps to ensure all legal and regulatory requirements are being met? Added risk will have an adverse effect and potentially even cause PEGs to back off.
- What is your secret sauce and recipe for success? This will come to light, as it is a combination of how you have performed in the past and your plans for the future for continued growth and success. Is your model a de novo model, an acquisition model or a hybrid? Can you present to PEGs you have a clear vision and approach to each? Is your focus in a specific city, state or region? Within that focus, is your market urban, suburban or both? Is your target patient 35 to 54 years old, or are you starting to see opportunity and growth in the 18-to-34 segment? How are you reaching both? How are you able to attract and retain key team members, from doctors to C-suite at the management level?
Starting a MSO may have first entered your mind as a legal must, but as you execute on the model, know that it can potentially also open an exciting journey to future team members, growth and, eventually, partners.
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Ben Hernandez is a partner at Skytale Group who specializes in strategic management consulting for various service industries. He also offers his clients corporate-level financial analysis and guidance. As a co-founder of Skytale Group, Hernandez is passionate about leading an organization that people are proud to work with. He serves his clients not only with years of experience and service industry expertise, but also through upholding the Skytale core values of integrity, excellence, teamwork and fun. He loves to help small business owners achieve their dreams, aspirations and visions. Previously, Hernandez has worked with an international investment banking group, a financial services and advisory institution, a hedge fund, and CPA and advisory firms.