Should your Med Spa be a MSO?
For most Med Spa owners or aspiring Med Spa owners, the primary reason for contemplating a Management Service Organization (MSO) is legal considerations. 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? In our opinion, the answer is a resounding yes. Allowing non-doctors to participate in the medical spa industry attracts non-doctor talent that may otherwise not be available to a medical spa. Setting up an MSO allows for a potential to scale and find efficiencies in processes and cost. Finally, setting up an MSO helps promote interest from investors, such as private equity.
Setting up an MSO allows medical and administrative separation. While the S in the MSO represents “Service” we like to also think of the S as “Support.” In a Med Spa, it’s difficult for a doctor to be responsible for billing, training, and marketing on top of all of the clinical work. An MSO model allows a management company to bring in talented, experienced people in place 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, but they may include HR, accounting, finance, marketing, and billing. Here’s an 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 an MSO structure and your team is in place, adding additional clinics to your MSO becomes more streamlined and cost effective. Depending on size and number of clinics, this can mean anything from a couple clinics sharing one bookkeeper to ten 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 in things such as clinical supplies, office supplies, and finance. As this transformation takes place, your organization at clinical level can continue to focus more on its patients and know 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 Private Equity Groups (PEGs).
Interest from PEGs
We can look at the history of industries like 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, though dental is catching up), but all are going through it.
PEGs typically pay a multiple based on EBITDA. Depending on what you want in your exit, this is also another intriguing aspect behind 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 compliance and regulatory lens, to what your secret sauce or recipe for success is.
A one location practice with a $350,000 EBITDA, for example, may for a 3x multiple while a ten-location practice with a $4,000,000 EBITDA may go for a 10x 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 in double digit percentage growth and plans to continue to do so over the next few years? At this level, you should have a 3, 5, and 10-year plan 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?
Part of the reason for starting an MSO in the first place is for legal compliance. Has your organization taken the proper steps to ensure all legal and regulatory compliance and laws are being met? Added risk profile 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 on how you have performed in the past as well as what your plans are for the future for continued growth and success. Is your model a de novo model, 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 the 35 to 54-year-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 an MSO may have first entered your mind as a legal must do, but as you execute on the model, know that it has potentially also opened an exciting journey to future team members, growth, and eventually partners.