16 March 2021
Practice Brokers and Real Estate Agents: Do They Have a Conflict of Interest?
Be careful regarding who brokers are working for.
By way of introducing the topic, over many years I assisted clients buying or selling their houses. Sometimes I bid for them at auction; sometimes I advised them during negotiations. I was not always successful, but there were occasions when ill-prepared agents and auctioneers created opportunity to exploit the moment on behalf of a client. There were buyer’s, markets seller’s markets and unpredictable markets. It was necessary to know a client’s instructions and absolute limit before bidding and to understand how badly they wanted a property—but advise them to stand well clear, and if the property was passed in to me as bidder during the subsequent negotiation, to not betray how badly they wanted that particular property. They were not to give the vendors agent the impression that they could unduly force up the price but rather to do so was to risk the sale.
Actual bidding tactics varied with knowledge of the property, the real estate market at the time and the other bidders. Under current Victorian rules, it is desirable to have the property passed into me so that I can negotiate within the client’s boundaries of price limit and desired time to settle; if the home is knocked down to me at an acceptable price that is even better. But if the auction turns out to be hot, with multiple bidders, and is set to rapidly move above the client’s price limit, there can be no choice but to drop out of the bidding and wait for another day. Bidding tactics have to take account of the actual situation, which is only apparent after an auction has begun. Sometimes the bidding has to be accelerated with quick counter bids and at other times has to be slowed. Bidders vary from those who are competent to those who make naive mistakes. If a property has passed in to me on behalf of my client, it has been most important to give the agent the thought that we might walk away from negotiations—which has happened on occasions.
Nothing concentrates an agent’s mindset more when dealing with their vendor than the thought that they are about to lose a valuable commission. Agents can be faced with a conflict of interest when it gets down to a final negotiation. 95 percent of a commission in hand is preferable to pushing hard to achieve the vendor’s price and risk losing 100 percent of a commission. The real estate industry’s mantra is to obtain listings and achieve sales. Often in this negotiation phase, after a property is passed in at auction, the agents will bring pressure on the vendor to accept a price below their limit and seal the deal. On occasions when the selling agents thought we were walking away from the negotiation, agents have begged me to stay while they conducted further negotiation with the vendor.
It is vital to read the auction. I recall bidding for a dentist who wished to purchase their practice premises which had been put up for sale by an astutely advised landlord. The dentist remained inside while the auction was conducted in the car park. The practice was located in a mini-medical precinct and the auction midweek. There were several other bidders who were clearly intent on buying the site for redevelopment. I had to ensure that the property was passed in to me so I could seal the deal, as the thought of my client not having the lease renewed and having to find alternate premises with fit out cost of three surgeries and associated structure would have been huge. The purchase was successful, and I pointed out to my client what the consequence of not sealing the matter would have been. In the event of a no sale the agent would quickly have been following up the other bidders seeking a sale and the dentist would have been left in a very awkward position.
Selling Practices
Some corporate buyers pay substantial fees to those who introduce vendors of good practices to them. It is important when engaging a broker to clarify whether they are in a position whereby they are receiving a fee from a corporate or corporates.
It is important if selling a practice that you and your professional adviser keep maximum control of the process. I recall an instance when, in the midst of a substantial negotiation, a fellow who was peripherally involved—having spotted the practice for the corporate—rang me to inquire where the matter was at. He was hurt when informed briskly that I was only interested in speaking to the buyer’s accountant and lawyer as he had no legal standing in the deal. The last thing my client or I wanted was a third party becoming involved in negotiation of the final details. The deal went through and I understand from a lawyer involved that the individual received an introducer’s fee of 2 percent of a very impressive sale price paid by the buyer!
Dream R?
My attention has been drawn to this organization’s web site, which is set out to suggest that it is a major player in the dental corporate world; however close examination suggests that dentists approached should be extremely cautious until the organization proves itself.
The central figure, Donald Fam, is a dentist who claims 18 years of experience and “leads 17 staff and partners!”. Let me break that down. In today’s world of many part time staff, it may not take a particularly large practice—or perhaps a couple of practices of modest size— with part time bookkeepers, receptionists sharing the front desk, infection control scout assistants, part time dentists, a part time hygienist or two and part time chairside assistants to add up to 17 staff. If there are partners, it raises the question of how much of the practice(s) does Fam actually own? The website tells us far too little about the scale of dental operations or the ability of the principal to successfully lead a corporate group.
We should take the array of other advisers shown on the website with a degree of caution as none are dentists—or if they have dental qualifications it is not apparent. The fact that they may have been successful in other professions doesn’t indicate that they are capable of conducting a large group of dental practices successfully. The information indicates scant knowledge of the business of corporatized dentistry. Nor does experience as a bank lender to dentists indicate a sufficiently deep knowledge of either the clinical or business aspects of dentistry.
The recent experience of the Smiles Inclusive disaster, and the late 2018 experience of another significant dental IPO being cancelled close to the intended date of opening of a prospectus because of the discovery of accounting problems, sound loud warnings of caution concerning corporate offers. There was also the selloff of New Zealand Abano’s Maven Group of Australian practices to overseas investors because Abano shareholders said that Australian dental practice acquisitions were no longer earnings accretive, although probably many earlier acquisitions remained profitable.
It is a mistake to sign up early.
There have been various ‘corporate’ approaches to dentists which have turned out to be mirages, with a number seeking dentists to agree to a proposal in advance of an IPO which is dependent on sufficient practices being rounded into a holding arrangement until the corporate concerned has rounded up enough practices. The only way to treat such approaches is to say, “go away and talk to me when you have the required number of practices signed up.”
There is never any advantage in being early to sign up; it can become a significant trap if matters drag on and interfere with other options.
Option Fees?
In other business situations, those granting what would in effect be a form of purchase option would be paid a meaningful fee for subjecting their practice/business to a possible buyout with no guarantee of completion.
What should dentists do if approached by a group with no established presence in the dental market?
I have long suggested that they tell the group to go away until they can demonstrate a successful track record of operating a substantial group of practices profitably, for a meaningful length of time and having done so through a public company structure, the results of which are subject to audit scrutiny.
The Dream R website has no meaningful information about the business plan of whoever the actual owner or owners of this business name are.
Remember that well-conducted privately owned and operated dental practices are much more profitable than the vast majority of corporate dental practices. No amount of corporate financial engineering can equip a dentist to drill two patient’s teeth simultaneously. Dentistry remains a dentist-to-patient business.
Overwhelmingly the most successful dental practices attract new patient referrals through the interpersonal skills of dentists bonding with existing patients. No amount of expensive corporate PR is going to replace the strength of effective chairside relationships, particularly by long term practice owners who have earned the trust of patients.
Co-Ownership Schemes Between Dental Corporates and Dentists Beware.
If approached by a corporate promoting a co-ownership arrangement with your practice, be aware that there are potentially huge pitfalls. Search for a dentist who was involved with the failed Smiles Inclusive Ltd, and ask them about how little control they had when that company got into serious financial difficulties. Co-ownership schemes are only as strong as their weakest link.
Greensill and Gupta
It is surprising that Greensill Capital’s collapse took so long. As we now know, Greensill Capital was doing the greater part of its business with Sanjeev Gupta’s business empire, which was largely built on previously insolvent businesses. Doing business on this scale with previously failing businesses was at best high risk. The repackaging of factored accounts into a type of investment bond and on selling them in financial markets reminds me of those dodgy investment bonds preceding the Global Financial Crisis, where American financiers packaged a toxic mix of good and bad house loans into financial products and on sold them. Readers will recall that this was one of the major causes of the GFC. Greensill’s activity was not large enough to cause another crisis of that magnitude, but it may be painful for those employed in Mr Gupta’s businesses. In Australia’s case that means the Whyalla steel mills.
Hiring Prominent Ex Politicians is a Warning Sign.
Greensill had ex-UK prime minister David Cameron and ex-Australian foreign minister Julie Bishop as paid advisers. Bishop was chair of Greensill Asia Pacific. The failed accountancy corporate, Harts Australasia, had ex-National Party leader Ian Sinclair as chair. Larry Anthony was a director of ABC Learning. Sargon Capital had ex-Labor Minister for Communications Stephen Conroy on its board and bankrupted Nathon Tinkler was advised by Mark Vaile. Going back in history, there was ex-Hawke/Keating Government Minister Gerry Hand’s involvement with a failed Casino Scheme in association with a senior Indonesian figure and the Paul Keating involvement with a substantial pig farming venture that went toxic. There were many more. The involvement of a former prominent politician in a business is generally not a good sign. Meanwhile, as the Crown Casino board is overwhelmed with resignations another prominent former politician, Helen Coonan has found herself running the company by default.
National Dental Care Ltd Preparing for IPO and Float?
Australian Financial review reports that National Dental Care Ltd is lining up for its second attempt to float via IPO and stock market listing later this year. NDC previously had to cancel a float in 2018 due to embarrassing problems with its accounts reportedly relating to its West Australian practices. It engaged Rothschild and Co investment bankers for strategic advice and subsequently appointed Wilsons and Bell Potter as joint lead managers for a potential share market float. We may expect that clients of those brokers will be approached as potential investors.
Based on the past history of professional roll ups listing on the stock market, nobody need be concerned about missing out. Reports have NDC on track to generate $150 Million in patient revenue and $20 million in EBITDA across 60 dental practices mainly located in WA, NSW and Qld.
According to reports NDC is modelling itself on Pacific Smiles Ltd. I note from recent statements to the stock market that Pacific Smiles has 102 practices with an average of four chairs per practice. It produced $21.2 Million EBITDA for the half year to 31 December 2020. Interestingly it is trading on an astronomically high PE of 32.4 times NPAT. This compares with a PE of 19.5 times NPAT for 1300 Smiles Ltd—a smaller but much better run company, in my opinion. Pacific Smiles share price peak was almost 6 years ago at $2.65 on 31 March 2015. Its grown its business with capital raisings, but its return to shareholders is poor compared with the smaller but better conducted 1300 Smiles.
Risk
There is ample history to indicate that these professional roll ups are a good deal more risky than the market perceives. Private equity investors tend to want to get their money out quickly at significant profit and move on. That leaves the important question: who will be the CEO long term and does that CEO and board have substantial dental experience?
About Graham Middleton.
I spent over 33 years advising healthcare professionals, having previously been a regular army officer then having spent two years as HR Director of The Victorian Attorney General’s Department. Prior to my Army career, I spent two years working for Shell, a valuable experience. I have a BA from ANU and an MBA from Monash, the latter crammed with finance, accounting and economics core and elective subjects.
I sold my equity in Synstrat group on 30 June 2020 and do not intend starting another business but have many friends in the Dental, Medical and Veterinary professions. Those who find my comments useful are invited to make a donation to the Delany Foundation, a registered charity which supports schools in Ghana, Kenya and Papua New Guinea. Contact is c/o Holy Cross College, 517 Victoria Road Ryde NSW or delanyfoundation.org.au
Best wishes to all
Graham Middleton
