Mike White: Why So Many Founders Still Undervalue Their Financials

Craig Castelli:
Welcome to the Close M&A Podcast with Caber Hill Advisors. I’m your host, Craig Castelli. And today my guest is Mike White. Mike’s a partner at the accounting firm CLA. I’ve known Mike through the healthcare industry for a number of years. I think one of the best ways to describe Mike is he’s not your typical accountant. I think he describes himself as a bit more of a sales or BD guy than the stereotype of the introvert. So Mike, I think that’s a really good place to start. Where did this come from?

Mike White:
It’s natural progression and I think all of us in the entrepreneurship world, and really if I got down to the core of it, I really describe myself more as an entrepreneur, thinking of the business owner and as business owners and entrepreneurs, we’re always selling. And I don’t know that I realized as much as I did, granted I started my firm super young. And so I realized real quick, if you want to eat, you need to go shake hands, kiss babies and get to know people. But more importantly, meeting folks like you along the way, it’s like my success isn’t there without folks like you. And all our other friends in this industry that support us to what we do. So the sales side of it just became a natural progression. But as you just mentioned, most CPAs, including my lovely wife, is very introverted. They don’t want to work a room, they don’t want to go to a conference. And for us, it’s natural. It’s a great conversation starter and work through it.

Craig Castelli:
So this came pretty naturally to you from day one, or did you have to force yourself out there a little bit?

Mike White:
It really did come naturally. I always knew I was in the wrong box. My journey started Texas Tech, undergrad, grad, ’04 graduate, and I started doing accounting really out of the gate. I had a good buddy that had a plumbing business, so I started on healthcare and the service and he was just trying to build a QuickBooks file and he didn’t know how to do it. So I was my first client and I did that while I was working at PwC and then I went into a bank, good old cost analyst. I wasn’t related to anybody. I didn’t go to Texas A&M and I wasn’t from East Texas. So checked all the wrong boxes and didn’t have the VP title, but it was a great journey. But through that process, I just had a passion. I knew I wasn’t going down that traditional path of analysts to senior vice president, to CFO, and I just never thought that was my path. So in helping people, and I think this is where you and I share a passion, you get to help people in their journey. And for me, we started the firm at 24 years old, 25 years old, somewhere in that range. Now it’s just blurring together after 20 years. And I knew we had something special of looking at the world a little differently. And I think that’s why you launched your organization as well.

Craig Castelli:
It is. Yeah. I mean, I’ve told the story a million times, but, you know, I went the journey from corporate M&A to a small firm that was a good transitional place to deciding I wanted to pursue a different vision and launching Caber Hill. For me, it was interesting because, and I don’t know if I’ve told this story on the close before, Siemens was a fantastic place to start a career. And I was on this really cool trajectory where I was involved in some big global projects at a very young age and it really was going to take a push to get me to do something entrepreneurial. Then I got fired. So there was the push that I needed. I say fired somewhat tongue in cheek. That’s a longer story for another time. As they were looking to divest a business unit and there were a lot of changes, I decided I wanted to go right when they were going left and couldn’t have made a better decision. I’m grateful for everything I learned there and the structure and the foundation and even more grateful where

Mike White:
I am today. Yeah, no, it is such a good … Those pivots, I tell people all the time, you’re going to have doors open in your life and you’ve got to choose which door you’re going to go through. Do you go through the one that doesn’t feel comfortable and like, man, yeah, that looks awesome, but I just don’t know if I’m cut out for it or do you want to go down this path? And there’s not a wrong decision. Everybody’s life is their own and their journey’s their journey, but it goes into so much of the M&A conversation. I always say, “Well, what do you want to do when you grow up? What’s the end goal in mind here and let’s build towards that. ” And that’s the fun of this whole thing.

Craig Castelli:
Yeah. So let’s go back in time a little bit and talk about the build of your own firm because you are a service provider, you advise a lot of other businesses, but you did all this yourself. You built a firm to what, 60 people, something like that before selling to CLA.

Mike White:
We were a top 400 firm out of 45,000 firms before I sold, which I honestly didn’t realize until a year and a half after I sold when I saw one of the brokers speaking at a conference and he went through the size firms at various stages. They’re like, “Oh, wow, I was in that range. That’s amazing.” But yeah, what’s funny is everybody knows me about the CPA firm, but I’ve actually had five other business builds and exits in this journey. So everything from motorcycle dealerships to wealth advisory practices to payroll and medical billing company, tried to charter a bank back in the day that turned into a merger, if you will. And we had an exit event last, well, two years ago now to a public traded bank. So yeah, there’s a lot of things beyond just the traditional CPA route of hats I get to wear.
But starting on the CPA side, started with that one client and I got to a point where it was too big for myself. I was doing too much of the handholding, if you will, and that was a unique time. It was 07. And as you remember, 07 to 08, there was a change in the banking world. I was lucky enough, and we won’t get into too many details. I opened the right door at the right time and I was able to get a loan and I acquired a small little CPA firm that’s tax heavy. I didn’t do taxes and I was like, great, I can do my accounting advisory world in that tax practice and we could grow it. And we closed 12/31/07 and for a little four person shop, they had been in the same office space for 25 years and in four months we had to move. And then nine months after that, we had to move again. And then 15 months after that, we moved again. And we just kept being in that progression of growth where we were talking to entrepreneurs for the things that their advisors should. Let’s not just talk about building an income statement and balance sheet. Let’s talk about what they mean once we build them. Let’s put a budget in place. Let’s talk about the KPIs and the widgets that move your business. And that’s really what matters to so many of entrepreneurs, as you know. We all sell time in our life. It’s just like, what is that widget though? So that was our journey and it really resonated with the marketplace. One of the things I think about is I had two other acquisitions in the CPA consultancy world. I got into healthcare in 2009, 2010 when I acquired a 62-year-old healthcare consult firm that was 85% dental, which we’ll get into dental later, but that’s certainly how I launched into that. And being in the market with Cain Watters and four or five other great dental CPA firms here, I had to look at what they weren’t doing and that’s of course consolidation and DSO, MSO and that whole world. So that’s the 20-year story, or I guess 15 of it, we’ll talk about the CLA merger, but the 15-year story of the start of the journey, which was fun.

Craig Castelli:
Well, and that’s what I think your clients have really come to appreciate about you is that they can turn to you for more than just advice on the connection between financial statements, that you do have the right network and the right understanding of how deals are going down, who’s doing well, who’s making mistakes. And in the various clients that we’ve shared, it’s been a number obviously at this point, not just you. I mean, a lot of great guys who take the same approach on the team, they can really come in and add a lot more to that conversation.

Mike White:
And I think it all starts with, and this is where you’re starting, right? In the M&A world, you’re starting with what brings you here today? What’s the goal? Is this a, I want out in nine months, 12 months, or hey, I think I need to do something, but I got five to seven years left in me. And somewhere in between you figure out the magic sauce in your world. So you and I work together on the quality of earnings to the sale process, whether it’s buy side, sell side, but a lot of it gets down to quality of financials, where’s your target market, if you will, your avatar because you weren’t always healthcare either.

Craig Castelli:
Right. And as a firm, I mean, it’s a very important leg of the stool, but it’s one of a few different legs of the stool. So I’ve learned more about industrial businesses and facility services businesses and business services providers over the last 12 years than I ever had until I recruited other people into the firm who were experts there, know a thousand times more than I do about those spaces, but had to get smart on them as we built too.

Mike White:
Yeah. Ever find one of those industries like I should have gone down that path.

Craig Castelli:
It’s funny that we’re actually, I mean, there definitely are some where it’s like, wow, that was quick and we may have missed the boat on that one. But also we were working with landscapers and HVAC companies and roofers before they were sexy. Pre-COVID, nobody wanted to buy these things and now private equity can’t shovel money into those deals fast enough.

Mike White:
It’s such an interesting world. And I think people don’t understand the MSO, the world that we deal with, management service organization, it’s not just medical service organization, it’s a replicable model. We’ve seen it in every vertical from motorcycle, I sold their dealerships to a group that had a bunch of locations. Same with the wealth advisory and the same with the medical billing company. It all went to other groups that were consolidating at various stages of that path. But it allows you to rinse and repeat. It’s a little different widget. And of course in the healthcare world, there’s a lot of different vernacular and insurance and nuances from the laws and stuff that drive it a little different.

Craig Castelli:
I’ll tell you the one that has stuck with me because I think I misinterpreted your question a second ago, but pest control is a business that I think I will own one at some point in my lifetime, not only living in a successful world, am I jealous of everybody else’s recurring revenue, but having some experiences and seeing what those things trade for, I mean, that is a great business though.

Mike White:
Home services, it’s such a sexy industry and I think it will be. If we really got into the deeper time of where AI, we started, I think before we kicked on the recording about AI and automation and it’s going to change your world and it’s certainly going to change mine probably a little faster, but the tools we’re getting to use, home service is going to be real sexy. And some of the conversations we’re having with high school students and junior high, it’s like, what do you want to do when you grow up? I mean, don’t discount the plumber who’s going to be making four or 500,000 a year because people don’t want that job and we’re going to need them desperately. So same with pest control, pool cleaner, I mean, you name it, landscapers. So some of the sexiest jobs pay well or unsexy jobs.

Craig Castelli:
The trades allow you to start earning an income faster, avoid any sort of student loan, really. And have a nice career, and that’s before we see what private equity’s paying for some of these businesses. Add that factor to it if you have any bit of the entrepreneurial spirit, there’s a time opportunity. And you can’t AI most of that away.

Mike White:
You can’t. You can certainly do research. You can certainly do a lot of things that help you get a leg up. But I agree, pest control or any of the home services, because they all bolt on together as well, pest and lawn, and of course pool bolt- roofing to general construction to make gutters, you name it, they’re going to work together.

Craig Castelli:
Right. One is going to connect to the next and exactly. So all right, I want to ask one last question about your own entrepreneurial journey here, and then we’ll get into what people really want to hear, which is M&A today type discussion, but what was the inflection point? What made you decide now’s the time to sell my own business?

Mike White:
Yeah, it was such an interesting time. There was a litany of events. I used to say comedy, but it really wasn’t great circumstances. At that point, I was in my early 30s and I’ll fast forward a little bit before the event. I sold at 35, 36 years old, but at that point we had started succession planning, meaning I always intended to sell internally. Of course, private equity wasn’t in the accounting world like it was today or is today. Very heavily today, 75% of the top 20 firms have already sold the private equity, crazy stat. And for my world, I had a lovely Irishman who’s still a dear friend, partner, if you will. And I started bringing on two others, a tax partner and a consulting partner. And within two months of each other, one turned terminal awfully and the other one just wanted to actually go do M&A and that wasn’t a vertical that we wanted to go into and explore and it just was a passion. So I’m like, “Hey, that’s great. Go do your thing and we’ll work.” At that time, we had just opened a second office where he was supposed to run that office. So all of a sudden we had 75 employees and two people and Eddie was an Irishman, UK chartered accountant, Texas CPA, but he had been public accounting 30 years and he’s like, “I want to retire in two years.” And we didn’t have a plan. So it was one of those things where it’s like, well, let’s go look. I mean, do we acquire up and continue to grow and build this platform? Do we go lateral and just bring that operations person that I desperately needed or do we just sell out? And we said, “We’ll explore.” And we went down that path and the offers being in my mid 30s, growing a firm as I did, every firm was very interested, which was great. So it gave us options and it gave Eddie a path to retirement for himself, which he’s still a client actually. He went to work as a CFO for a contractor. So that’s what ultimately triggered the event and it was interesting. It was a interesting time. It was pre-COVID, which I look back and I think, well, that would’ve been a tough time. But more importantly, we were also at that inflection point where so many of our clients were also outgrowing us. I hated to say that where we were still a good firm, certainly in the dental world, but the likes of MB2 and DECA and some wonderful firms that trusted us, but once they sold the PE, PE needed a big firm name and we didn’t have it. So we were losing great clients and great relationships to something we just couldn’t service. So that’s when we went down that path. We had a great merger with CLA and we knew QEs was going to be, quality of earnings was going to be a big deal. We did 200 a year the first three years at CLA in dental alone, which was a third of all QEs. So we knew there was a need there and we certainly fulfilled it, which I know you’ve gotten to work with a lot of my QE team.

Craig Castelli:
Oh yeah, they’re fantastic. So point blank, if you’re a seller and you don’t do a sell side QOE before going to market, are you an idiot? I’ll just ask you bluntly. Are you making a huge mistake?

Mike White:
I do. I think there’s two avenues. You and I look at enough financial statements every single day to realize business owners don’t value accounting. And I’ve been doing this kind of educational training for 20 years now and I feel like some days I’m still doing the same conversation I did 20 years ago, but it’s a new crop. And so yes, I always give extreme examples, but I give one and we didn’t even do a quality earnings on this one. We just did an accounting cleanup and we had gotten brought in by another broker in New England. This was a large dental group. I’m like, Mike, I think there’s something here. We’re at a hundred million valuation today, but there’s something here. We’re just not telling the story and people are getting scared off by these financials. So they ended up selling for 132 million after three months of bookkeeping cleanup. And I am sure if we did a full quality of earnings, which they didn’t want to invest in, they probably would’ve uncovered more. And it’s that level of unfortunate underinvestment in the financial process, the financial statements that I think is so critical to that. So yes, quality of earnings sell side, it’s fifty fifty of our work and I think they’re so valuable, but just take care of your financials day-to-day and it’ll make that process a lot easier.

Craig Castelli:
Yeah. Well, I’ll tell a story about some work you did for a mutual client that led actually to them pausing to go into market, but for the right reasons, business was showing a modest decline and the business owner couldn’t really put his finger on it. “Well, I think we may feel a recession sooner than the rest of the country, so maybe that’s what’s happening, it’s this, it’s that. “And it was, I think Paul and Andrew were working on this one and they dug in and they’re like, ” Actually we discovered they changed the way that they’re billing patients when insurance doesn’t cover the full bill and they just started writing everything off instead of sending the bill to the patients. It’s like, oh, well, that’s maybe 10% on average of each bill out there that you just decided not to collect even if you’re growing volume that’s going to have an impact on the revenue. “We were able to sit down with the business owner and say,” What’s the ramifications of you reversing this policy and going back to how you were doing things?” They could then take the corrective action and we need the time for that to flow all the way through 12 months of a P&L, but all of a sudden ambiguity became crystal clear.

Mike White:
Yeah, it really is so critical. And I challenge entrepreneurs and business owners, even if they’re in that three to five-year window, let’s just start getting the foundation. Let’s level set. Where are you today? What are your financials telling you? You and I deal with the world of complexity, so there’s multiple locations, there’s cash to accrual conversions, there’s all these things they need to contend with. And a lot of times, especially in healthcare, there’s patient credits they don’t even know because they’re not on the balance sheet as they should be. There’s unhidden gift card liabilities and all the other things, insurance, contractual adjustments, those things will catch up to you at the closing table real fast and wipe out your cash and people don’t understand those ramifications.

Craig Castelli:
They bring up an interesting point because the balance sheet is so much less well understood by the average business owner. Yes, it is. They pay zero attention to it. Even if the P&L is somewhat sloppy or somewhat disorganized, they generally can tell you what’s going on there, whereas they probably have little idea what’s happening on their balance sheet.

Mike White:
I gave a presentation on Saturday. It was actually thankfully a conference here in town and I start with every presentation, look, if the balance sheet isn’t correct, the P&L can’t be. And I tell people all the time, look, between your intercompany loans, between your own reconciled accounts, between your AmEx that says negative 80,000, well, that tells me you probably have 100,000 in charges that weren’t booked. I said, all of those things stem from the balance sheet and we’ve got to start there. And that becomes the biggest part of the conversation. Let’s clean it up, tell the story the proper way. And I think a lot of people say, look, most business owners, and you know this, are leading their financial statements with their tax advice because they don’t want to pay taxes. And I tell people, look, you’re spending a dollar to save 30 cents, but more importantly, that dollar may actually be worth $8, if you really think about it times 12 months. So what does that look like to you? Is it still worth 30 cents?

Craig Castelli:
Yeah. And I think there’s merit to the strategy that they’re deploying. That’s the typical advice that they receive is to operate to minimize taxes. And if they’re going to own the business for another 30 years, who can blame them, that’s probably how they should be playing the game. But at some point, either because you’re growing rapidly enough, you need to move from the, let’s stay in the practice world, the practice finance group at the bank to the middle market group at the bank where they’re going to require at least reviewed financials, perhaps moving you to GAAP. You want to keep financing your growth, you need adult financials. You want to eventually sell. They need to be polished if you want to maximize value.

Mike White:
And there’s an inflection point in every one of those. And I’ll tell you, they’re fairly close in every vertical and every health, non-health, all the stuff that you and I live in and banks tend to be five, seven and a half million before they want to review in debt and 10 million before they want to audit. They’ll give you a year grace, but ultimately you’ve got to convert to accrual in order to accomplish that. And when you start thinking about that structure, it’s like, guys, it’s a bigger lift. And there are some advisors out there that saying, “Oh, I can do it in 30 minutes.” And it’s like, yeah, those aren’t going to be accurate. So I’ve seen a lot of these podcasts coming up as some new advisors coming to market and it’s like, “Oh yeah, I can do your cash to accrual in half an hour.” And it’s like, I’d love to see what those look like.

Craig Castelli:
Yeah, it’s one year’s AR minus the other year’s AR and an approximation of everything else.

Mike White:
Yeah, a bingo for sure. But when you start looking at, and this kind of gets into the bigger conversation where I’m sure some people want to hear is, I mean, ’25, ’26 has been an interesting time. What have you been seeing?

Craig Castelli:
Man, you took the words out of my mouth. So 25 started completely off to the races for us. Our Q1 top of funnel activity was all time high since we started measuring it the way that we’re measuring it right now. And I mean, it was a result of the election. Regardless of what you think about the outcome of the election, there was this general pro- business sentiment and that fed our pipeline and everybody else’s. And then we hit April 2nd, liberation date and the tariff announcements and it really didn’t matter how tariff exposed your business was, you could hear a pin drop. Bank stopped lending and we all took a quarter off. And so on a cash basis, it wasn’t a great year for us because not a ton of deals ended up closing the second half of the year. The pipeline though did refill. We closed a really, really nice deal Q1 of this year. I think we as a firm, we’re small, we’re not a high volume shop. We have six or eight under LOI right now, a bunch of new deals coming to market and everybody I talked to is busy and we can see it from new pitches all the way through to stuff in market. There’s a real hunger from private equity as an overall asset class to put money to work because as you talk to individual PE partners, they didn’t hit their goals for capital deployment in 2025 either. And 24 wasn’t the best for that as it was. So they’re hungry to put money to work. They have funds that they need to deploy. There’s some pent-up demand on the sell side and this year is starting to play out really like we thought last year would. And for the most part, it doesn’t matter the sector. I mean, there are some sectors where that are hotter, some that are a little more challenging and maybe we can get into that in a little bit, but by and large we’re very excited about how this year’s going.

Mike White:
No, and it’s great. And you’re right, I think 2024 people took off to get the administration decision, whatever it was and whether you’re happy or not what the decision was. 2025, everybody’s like, great, like you said, business-friendly, let’s go. And I think there was a combination of liberation day and the rates didn’t come down as quickly as everybody thought they would. And valuations, even where rates were, people were still commanding a higher valuation that the market wasn’t ready to see. Fast forward over the last 12 months, we also saw a lot of DSOs not performing, not onboarding some of the acquisitions, maybe overpaying some of the downline acquisitions. The large deal here on North Texas, we won’t name names, but that was a underperformance on going to market by a lot. And I think that reset some valuations, which then got people to pause. And then you start going down that path. I think people are excited about this year. This year reminds me of what COVID year was where everybody stopped, COVID, awful timeframe. 2021 massive and 2022 massive. Well, 25 and 26 is the same. These private equity groups have to deploy their three to five-year capital, so they have to get it to work and they’re going to push as much as they can and try to do it, but it’s going to be an interesting time, which is to us, we’re seeing the crop of new emerging groups and businesses as well, willing to do a more of a perpetual type fund, which is interesting to see.

Craig Castelli:
Yeah. I think whether you look at the perpetual funds or you just look at the opportunities for the entrepreneur-led groups, the founder out there who’s trying to grow via acquisition is very tough to compete against PE backed groups. I mean, what we saw with valuations was the size premium shrink and major compression between what a group with five million of EBITDA sales for and what a group with 50 million of EBITDA sales for. So if you are the little guy watching your peers valuations just rise faster than you’re able to spend, it’s tough to make acquisitions those stop, you become a little more competitive. I think the other thing people need to realize is that while valuations have come down a little bit from those 21, 22 peaks, we’re still sitting around the 90th percentile of all time highs. So yes, did you maybe miss a boat not selling in 21? Sure. Hopefully you put enough money away because you owned the business for a few more years, then it offsets it and it’s still a really, really strong time to maximize value for a business.

Mike White:
And right there, I think you said it so well where people truly, we all get hung up on EBITDA, right? But the reality is you’re selling a multiple of your cashflow you’re willing to leave behind. I tell people this all the time, yes, you’re absolutely right. You missed the boat maybe, but you had three to four years of really good earnings. Now you compound that on maybe a one turndown, you’re still ahead. And when you start looking at this of what are you going to do? You going to try to just hold on for 10 more years waiting for it to turn around? I mean, you’ll end up making more money. That’s fine just because your yearly earnings, but at some point you’ve got to decide, do you want to just take some chips off the table or reset? And that’s where

Craig Castelli:
It goes. Or own the business a lot longer and don’t worry about who you sell to it. That advice is in contradiction to how I make a living, but that’s the reality for some people. Some people are not necessarily cut out to sell and then keep running a business for somebody else for a number of years or their business is so profitable that perhaps there’s only a few years of cashflow that they need to retain in order to offset what they might sell for, at least the cash portion of the deal and it’s not for everybody.

Mike White:
No, it’s not. And I’ve tell people this, I say, “Look, you have an incredible living. It’s a, I don’t want to say the lifestyle business term. However, you’ve got great systems and processes. Hire an executive or two, take a small pay cut and just let the thing run because you’re going to sell, go to market again against what you do and of course go for me helping them on the QE, but sit back and just let the dividend come in. Otherwise, you’re going to sell, put it in a dividend, hopefully producing stock and do the same thing, but you know this business and you can step back in if you needed to. So there is a balance there and I think we will see more of that. At least some of the earlier conversations I’ve had this year, we’ve seen more interested in that path, so it should be fun.

Craig Castelli:
Yeah, definitely. So where’s the heat right now? What are the specialties in healthcare where you’re seeing either the biggest multiples or just the most overall interest?

Mike White:
I think there’s still some interest. Obviously, dental’s going to come back around at some point. I think it’s certainly been softer the last couple years. There was a boom in MedSpa, aesthetics, cosmetic surgery. I think what was interesting about that is the market saw how well and resilient they did out of COVID. I think what’s interesting, the market over time realized it’s very early days. We are first, second inning. And the conference I was at on Saturday was an aesthetics conference. I got another one here in two weeks in Vegas. I look at this group and they’re mostly one to three locations and you have platforms chasing them and it’s like it’s just a bolt-on. And so it’s harder to, and I think that’s a longer play, which is great. I described aesthetics where dental was 10 years ago and I think there’s a long play there. I think behavioral health is a new sexy thing we’re seeing a little bit more of. I say new, it’s been around a while, but it’s evolved as we know. There’s things called PPEX now we’re starting to pop up. That’s a spinoff of home health. Home health has certainly continued to demand a high multiple, granted lower valuation or lower EBITDAs so it gets a little bit skewed, but I still think there’s a lot of opportunity. But I think what’s going to be real interesting, especially in the healthcare space, is how the Medicaid cuts at the federal level trickle down to the states and then what the PPO insurances do to follow suit. And I tell people all the time, even if they’re not Medicaid, I say, “Well, how are Once your sensitivity analysis of this cut comes in, this is a 15% federal Medicaid cut on the first pass. You’re like, “Oh, I’m not Medicaid.” It’s like, “Yeah, but a lot of insurance is a percentage of 110% of Medicaid rate, 120% of Medicaid.” So effectively, they’re going to lower just like Medicaid will. So that’s what I’m spending a lot of time this year is running sensitivity analysis and seeing what that looks like for folks and having those conversations. But there’s definitely some new stuff. Again, behavioral health and PPEC and autism or industries I’ve been checking out in the home health or the healthcare side.

Craig Castelli:
Yeah. I’ll add infusion to that list. Infusion is very odd. Big multiples for some of those groups right now, even as add-ons. We just saw a deal in the healthcare staffing space specifically with locums that was very, very attractive multiple. So there’s a lot of areas outside of the tried and true. Touch on that Medicaid and PPO comment a little bit more. Who do you think has the most risk of rate cuts in a situation like that?

Mike White:
Right now, if you’re in California and not heard about the bill that’s on the table for July of this year, it’s a 60 to 70% cut to Medicaid to some of the major CPT codes of Medicaid. So terrifying. And I believe there’s one state on New England side as well or in the New England quadrangle. That’s also something similar. I don’t recall if it’s Mass or somewhere in there, but California is the conversation that I keep hearing about and one of my larger groups that’s just crushing it right now. Yeah, I was on the call with them last week and we’re running sensitivity analysis very potential 30, 50 and 70% cut and see what that looks like, which would be just devastating.

Craig Castelli:
Is that in dental?

Mike White:
Dental. Yeah. Dental, Medicaid. Having Medicaid. It’s not one of those things so you can just flip over to PPO.

Craig Castelli:
Right well yeah, not an essay.

Mike White:
Yeah. Yep. So you start looking at that, but I look at this beyond that, the federal cut that came through with the tax bill was approximately 15% of the federal budget. And even as of last week, the administration saying, look, healthcare’s not our problem. And even with this new War Spending Act, again, wherever you are politically doesn’t matter. Even with this new one, they talked about further cuts to healthcare last week and said that should be a state problem. Well, states aren’t cut out for this. And especially in a state like Texas here in Florida where we’re constantly reducing taxes and talking about now getting rid of property tax, which as a homeowner, great, but what are we going to do? And that’s the concern I see. And it’s probably why I’ve also been diversifying not just healthcare this year and looking at other verticals as well.

Craig Castelli:
Yeah. I mean, we have seen a little more growth outside of healthcare in our own firm. Some of that is just the way the team has grown, but some of it too is just the volume’s been elsewhere. Some of the tried and true healthcare services investors aren’t adding practice groups to their portfolios right now until they can cycle some of the existing holdings through that capital, but they’ve still raised the capital. They sell to deploy, they had to deploy it somewhere.

Mike White:
So going back to the beginning of our conversation, I mean, what are you hearing from the market in the same vein on the Medicaid side? Are they concerned? Are they just going to push it to the side? Are they just going to push through and try to build in their valuations? What are you seeing?

Craig Castelli:
Honestly, I haven’t heard a lot of chatter about it.

Mike White:
That’s good.

Craig Castelli:
I think most of the market is reacting the way that you’re describing a lot of practice owners reacting where it’s not a big ripple. California being the center of the bullseye there is also the most polarizing state for a lot of investors. A lot of groups just prefer not to own companies in California because of the politics, because of the employement laws-

Mike White:
The benefits, the healthcare…

Craig Castelli:
Yeah, whatever the reason may be. So there’s not a spot like this been shined on it yet with deals that we’ve brought to market.

Mike White:
Yeah. No, that’s interesting. No, and that’s good to hear and we shouldn’t talk much more about it so nobody sees this.

Craig Castelli:
Right. Yeah. But I think there’s a broader focus on certain types of reimbursement risk. And I think when you look at … My theory as to why a lot of the practice holdings in portfolios have not traded is because they had to overspend on the add-ons without really solving for owner-doctor succession. They made a bunch of promises to these doctors about the value of role at equity. And then they realized when they go to sell that business again, they can’t just have all of these founders cash out without a strong second layer of doctors who’ve already taken over their roles in the businesses. Some groups did it really well, some didn’t. And the upmarket PE firms look at that and they’re like, “We don’t want to pay you top dollar for this business. You need to fix that, then come talk to us.” But I think as a secondary concern, I mean, there’s a lot of discussion when you talk with investors, we like healthcare, we don’t like reimbursement risk. Show us areas of healthcare that don’t have that reimbursement risk exposure.That’s where you’ve seen a lot of capital going into … MedSpa is a big one, but even outside of that, everybody wants revenue cycle management right now. There’s a big AI play there that I think is also fuel in it, but even just tried and true, anything compliance credentialing is very, very big right now. I mean, outside of healthcare, private equity loves what they call tick, testing, inspection and compliance and that are just recurring revenue mandated by law, unlikely to change. And there’s a huge aspect to that and growing to provide that service to hospitals, health systems, even down to the practice level. So ton of interest around those areas as well.

Mike White:
And you look at radiology, I think it’s high on the list of AI automation and scans and all that stuff. I was watching the news on the gym at the gym this morning talking about just that. I think that’s the closest of all medical to be able to help AI help, if you will. You’re still going to need a clinical provider there, but still it changes the game.

Craig Castelli:
I have a good friend who’s a radiologist who would punch me if I agreed with you, but I think I agree with you.

Mike White:
Look, it’s a supplemental. I think it’s not going to … I’m not one of the folks that, and I love me some AI, but I’m not one of those folks that says tomorrow the world’s going to shut off. But I am one of those that’s telling my 18-year-old niece that you need to be playing with it today. So as you get into college and you learn how to learn, I mean, that’s what college was about for us. We learned how to learn and this is just a new tool that’s going to help you progress that further. So let me ask you, from an inflection point standpoint, I get the question all the time. I’m sure you do too. And pick the top two or three verticals that we’ve talked about today. Where does that person, is it, I don’t want to say location count. So is it revenue EBITDA? Hey, if they’re at this point, they need to decide are they investing more in their business or are they going to go to market? And is it different across the verticals you’ve seen? So home services, dental, and pick another healthcare one.

Craig Castelli:
Yeah. So I think across the board, five million of EBITDA is a pretty important inflection point because at two to three, you might be a platform, but the interest is pretty diluted. You don’t have a ton of high quality investors that will focus on your business. Five, you will. So that’s when your options really expand in terms of what you can do. You can keep growing, you can sell as an add-on, you can sell as a new platform and to have all three of those options at your table, I think really it opens up so much, but it forces you to think about what you really want to do, how much more risk you want to take, how much you like your autonomy. So size-wise, that’s the case. But to your earlier comment on MedSpa, you really kind of have those opportunities at two to three million at MedSpa right now. But you did in Autism five, seven years ago because there just aren’t that many businesses of scale. MedSpa’s still kind of the Wild West. We have some learning to do as to who are ultimately going to be the winners and losers in that space, but you are able to capitalize on that at a smaller size.

Mike White:
Home services, what do you think?

Craig Castelli:
Home services is interesting because it has some areas of home services that were hot have cooled a little bit. You look at roofing as a prime example in 22, 23, even a little bit into 24, private equity firms couldn’t throw money at roofing companies fast enough. Then you saw a lot of legislation change around what home insurers can charge for roof portions of homeowners insurance.
And homeowners all of a sudden became, they bore a lot more responsibility for paying out of pocket for a roof replacement. Whereas in the past, homeowners would pay for everything. I think this was part some abuse of the system, part of an increase in all the natural disasters that were causing these roofs to be replaced, or at least causing the roofing companies to call homeowners and say, “You may be eligible.” So all of a sudden that’s a more challenging dynamic, whereas your pest control is pretty stable, pretty steady, a little more mature in the acquisition cycle. So I think with a lot of those businesses, with the pest control it’s 10 million in recurring revenue, you get 10 million in recurring revenue, you’re talking about a multiple that’s a couple times that revenue almost independent of what your EBITDA is, you’re a platform for somebody and you have those same options there. If you’re talking about a home builder, you need to be 50 to 100 million of EBITDA for somebody to take you seriously because it’s so cyclical and so project-based. And so it’s just much more I think variance to answer that question in a sector like that.

Mike White:
No, I mean, it’s such a great … Because you’re getting the question too of where am I on this lifecycle of should I be going to market? We go back to the, did I miss a window? Not necessarily. I even look at that five million almost inched up a little bit and I tell people the 10 million really is the new 11 to that next inflection point. I also tell people it’s usually of buyers at both sides, people that want to grow up too and their fund is up to five million and then the five million and upfund and same thing at 10 million as well. So you have, I don’t want to say double, but you do have the people that are competing at a common inflection point of the business. So it’s fun to watch these transitions, if you will.

Craig Castelli:
Yeah, absolutely. Well, Mike, this has been a lot of fun. It’s been a pleasure having you on here. Thank you. If anybody wants to get in touch with you or learn more about CLA, where should they go?

Mike White:
Yeah, so long email, but my name’s simple. So mike.white@claconnect.com or probably just look up at the latest conference. I’m 6’8″. As you could probably tell on this screen, I’m filling most of it up right now and just around and I’d love to talk to anybody. And look, I have the flexibility at CLA to train, educate, and again, you get back to BD but really have those first conversations within the firm. So it’s fun. But I appreciate the time and thanks so much.

Craig Castelli:
Well, look him up. He’s very generous for this time. Yeah, no, thank you for joining. It’s been fun. Thanks everyone for watching us on The Close.