CASE: E-730

DATE: 01/29/21

UNIFIED DENTAL CARE

Everything I've been taught from the neighborhood I grew up in, tells me when people have reactions
like he had, they're hiding something.
— Jason Jackson, CEO, Unified Dental Care 1

Jason Jackson nosed his car into a parking space at Al’s Diner, halfway up US-94 from Chicago
to Detroit. A thick layer of snow dusted the handful of cars already in the lot. After nearly two
years running the search fund Barah Capital with his partner Olaide Lawal, he knew the
conversation he was about to have at Al’s could make or break the deal they had been working on
for months. With time running out on Barah’s search, and another interested party potentially
waiting in the wings, Jackson had asked the seller to meet him literally halfway.

Everything was in place to purchase Unified Dental, a Michigan dentistry practice with five
dentists, seventy-five staff, and a healthy roster of clients across three locations. In many ways,
Unified Dental was the perfect acquisition for Jackson and Lawal, who were drawn to the potential
of building a larger network of dental practices through future acquisitions, paired with the chance
to positively impact a poorly served community outside Detroit.

However the seller, Dr. Ron Calloway, had caused apprehension about his credibility, starting with
a decade-old Medicare fraud conviction. Now, one of Barah Capital’s investors had raised
concerns about accounting irregularities regarding accounts receivable. Jackson and Lawal needed
to either accept the risks associated with the accounts receivable treatment, find a solution, or walk
from the deal.

Mitchel Scott (MBA ’19) and Lecturer in Management David Dodson prepared this case solely as the basis for class
discussion. This case study is based on actual events; however, liberties have been taken with elements of the case
such as names, places, dates, and data to lay the foundation for a discussion of the issues chronicled in the case.
Stanford GSB cases are not intended to serve as endorsements, sources of primary data, or illustrations of either
effective or ineffective handling of an administrative situation. Funding for this case was provided by the Stanford
Graduate School of Business. This case was reviewed and approved before publication by a company designate.

Copyright © 2021 by the Board of Trustees of the Leland Stanford Junior University. All Rights Reserved. Please
contact our distributors, Harvard Business Publishing (hbsp.harvard.edu) and The Case Centre (thecasecentre.org)
to order copies or request permission to reproduce materials. No part of this publication may be reproduced, stored
in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means––electronic, mechanical,
photocopying, recording, or otherwise––without the permission of the Stanford Graduate School of Business. Contact
us at: businesscases@stanford.edu or Case Writing Office, Stanford Graduate School of Business, Knight
Management Center, 655 Knight Way, Stanford University, Stanford, CA 94305-5015.
Unified Dental E-730 p. 2

BACKGROUND

Jackson and Lawal knew they would become friends and business partners early on, despite their
very different backgrounds. Lawal had grown up in Nigeria and trained as a civil engineer at the
University of Lagos. He had started a structural engineering business as an undergraduate, helping
to construct local restaurants. After immigrating to the U.S, Lawal worked as a consultant at
Accenture and in semi-conductor manufacturing, before attending business school at the
University of Illinois Urbana-Champaign.

Jackson grew up in Champaign’s Martin Luther King subdivision, a tough neighborhood with
limited resources. The youngest of five children, Jackson recalled his neighborhood as a place
that residents struggled to escape:

Case in point, I was going to church one Sunday with my mom and we heard gun
shots. We just parked our car to make sure that no one was close, and then drove
to church. When we came back, we saw a bullet hole in my bedroom window, at
head level. Had I been in the room, I might not be here anymore.

Many years later, Jackson had been sitting in the pews in his church, the largest in Champaign,
when his attention was drawn to a new face in the choir – a tall newcomer with a wide smile.
Jackson thought, “What is he so happy about? I have to meet this guy someday.”

Someday happened a month later, when Jackson gave a speech on career goals and community
impact to the church youth group. Lawal listened to Jackson’s talk, and recalled thinking, “Man,
such a great guy. I have to meet this guy.”

Lawal approached Jackson after the speech, and the two became friends. At the time Lawal was
in the last year of his MBA, at the same business school where Jackson would matriculate the
following year. They discovered they shared an interest in social impact projects, especially ones
that could benefit their Chicago community, and they were confident their partnership would be
in a not-for-profit venture.

After Lawal finished his MBA, and moved to San Diego, they spoke frequently by phone. Neither
of them had heard of search funds until a searcher presented to Jackson’s MBA class in 2014.
Jackson could barely wait until the end of class to call Lawal:

I called Olaide within 24 hours. I said “I found the thing that we’re going to work
on together.” This is what I can do, this is what you can do, and this is why we’re
going to be good together.

Lawal was deep into the process of starting a semi-conductor services business. But he could tell
from Jackson’s tone that he’d found something special.

I stayed up all night reading about search funds. Primers, cases, news articles. I
thought “this is such a grand venture to go on.” Partnerships can be tough, but Jason
Unified Dental E-730 p. 3

was such a straight shooter and I wanted to work with him. I knew we could do
business with the aim of actually still impacting people and communities.

Lawal called Jackson back the next morning to let him know he was in. The pair named their new
fund Barah Capital, and they quickly began the process of searching for investors.

UNIFIED DENTAL CARE

A year into their search, an investor suggested they look at the dental industry, which she described
as highly fragmented with large numbers of retiring owners looking for an exit. Jackson and Lawal
took her advice, and a few months later, Jackson met with a broker selling Unified Dental Care, a
dentistry practice in Detroit, Michigan.

Unified Dental seemed like a perfect fit: Lawal and Jackson had long been interested in businesses
that boosted underserved communities, and this dental practice was thriving in a neighborhood
that had seen little outside investment. In addition to community impact, Unified Dental had strong
cashflows, and appeared to be in a great financial position. But early on, the broker warned
Jackson "The seller had some very small fraud charges with Medicaid in the past. It was 10 years
ago, and only $1,000 worth of charges, but it was enough that when the last private equity fund
got into due diligence, they decided to walk away.”

Lawal and Jackson discussed the problem at length and decided that while they needed to diligence
the issue, finding $1,000 in incorrect charges at a multi-million-dollar revenue business was almost
an exoneration. Obviously, a seller with a fraud conviction sounded bad, and they didn’t like that
another investor had already looked at the deal and walked away. On the other hand, the amount
of fraud seemed almost comically small. It seemed likely a thorough investigation of any dental
practice could find something similar, if not a substantially greater sum. The more they learned
about this area of Detroit, and the impact of the dental practice in its community, the more Unified
Dental felt like a fit.

Later that month, Jackson met the seller, Dr. Ron Calloway, who described the Medicaid fraud
investigation as a classic case of government overreach, stressing how the issue had been resolved,
and was in the past. Jackson found him convincing, but was troubled by other behaviors he
observed in the meeting:

I remember thinking that I've never seen a dentist talk so fast. He seemed very
energetic to the point where I wondered, from people I've seen in my past, if the
guy was on drugs.

But I also thought maybe this was not such a bad sign for us. He has a company
that's doing $2 million in EBITDA, so if he can do that on drugs, then imagine what
we could do straight!

They asked for second opinions, but received conflicting advice. Jackson’s mentor from business
school, an emeritus accounting professor with a strong interest in their search, told them to
Unified Dental E-730 p. 4

continue with diligence; while Lawal consulted his former manager from the semi-conductor
industry, who told him in no uncertain terms to walk away. Torn, they agreed to proceed with
caution.

Jackson and Lawal felt they had identified a business that was thriving despite its manager, and
saw great financial opportunity in addition to the social impact of the business. But they had real
concerns over Calloway’s behavior and history. After speaking with their investors, they agreed
the best path forward would be an independent audit of Calloway’s recent billings and charts. If
he passed, they would proceed, but they needed the outside assurance given the circumstances.

However, an audit was an expensive proposition – it could easily cost more than $20,000, which
was outside their operating budget. If they paid for an audit, and it found problems that ended
the deal, they would have a hard time dilligencing additional companies in the future. They
decided to ask Calloway to foot the cost, with Jackson delivering the request by email:

If you will pay for the billing and chart audit upfront, then we'll move forward with
you. If we end up doing the deal, then we'll reimburse you on the deal expenses for
the billing and chart audit. If we don’t move forward, you can show the audit to
the next buyer, and maybe that will be helpful to you.

To their surprise, Calloway agreed almost immediately, suggesting he had nothing to hide. Now
they just needed an auditor. A fellow searcher had introduced Lawal to Steven Howard, an
independent auditor with decades of experience at the New York State Board of Dental
Examiners. Although the big audit firms employed licensed dentists as well as accountants like
Howard, they quoted Lawal nearly $10,000 more than Howard.

Lawal and Jackson wanted an option Dr. Calloway could afford. A few weeks later, Howard
called with his findings:

I’ve uncovered some things that look pretty questionable. There were a number of
procedures done on patients where when I look at the graphs and x-rays, I don’t
think those procedures needed to be done at all.

Howard, Calloway, Lawal and Jackson sat down in person to discuss the results. For each of the
six cases Howard presented, Dr. Calloway had a plausible response, and Howard backed down.
After the meeting, Howard told Lawal he had changed his mind. “To be honest, I’m not a doctor,
and Dr. Calloway seemed to have good explanations. These procedures didn’t seem right to me
at first, but I’m satisfied with his responses.”

A week later, Howard submitted his final report: Unified Dental had passed the audit. Jackson
and Lawal called in funds from their investors so they would be ready when the purchase
agreement was signed and the other paperwork was complete.
Unified Dental E-730 p. 5

ACCOUNTS RECEIVABLE: FRAUDULENT OR SLOPPY?

Unified Dental had large balances of accounts receivable, totaling nearly $1 million. These
accounts were due over the next 90 days, and Jackson and Lawal were planning to use these funds
as working capital in their early days as owners. Since the purchase price they had proposed to
Dr. Calloway was less than 2.5x last year’s $2 million in EBITDA, and they were buying accounts
worth $1 million as well, Jackson and Lawal believed they could quickly start seeing positive
returns on their investment.

Then they received a late-night email from their investor Mark McGraw, casting them into a world
of doubt.

McGraw had become a de facto leader on their board, despite his small ownership. As their
youngest board member, McGraw had become close with the searchers over the past few years,
and they saw him as an ally and champion. But he was also close with their larger institutional
investors, including Trent Donohue from Quiet Woods Partners, who had been very hands-off
throughout the last year of searching. Two months after the audit, and with less than two weeks
before the scheduled closing, McGraw emailed Jackson and Lawal:

The financials you sent over seem fishy. We’ve seen two sets of numbers
from the seller, two months apart, but the accounts receivable number is
always $1 million. Why would the seller be willing to give up that much
money? Doesn’t seem right. Trent from Quiet Woods called me last night
and pointed this out. He said I should be nervous about being on the board
if this transaction goes through. Please look into this.
-Mark

Jackson pulled up the financials they had received throughout the diligence process from Dr.
Calloway, and saw the problem was even worse than McGraw described:

The A/R reports had been static the whole time we’d been talking to the seller. It
was the same exact number, whether it was when we first looked at the deal in
October versus when we were looking at it again in December, or again in January.
Accounts receivable never changed. We felt so stupid we hadn’t found this
ourselves, and frustrated that our accounting firm had missed it too.

Jackson told Calloway they needed to meet and discuss further. Calloway suggested a diner he
knew from past road trips, halfway between the dental clinic and Jackson’s home in Chicago. A
few hours later, Jackson sat down in a sticky faux-leather booth across from Calloway, and
explained the situation.

Calloway said the problem was an artifact of bad accounting software. His reasoning was that the
way his dental software worked, closing the books each month would wipe out the trailing patient
balance that was existing and still owed, and it wouldn't carry over to the next month. They looked
at the software, and it appeared he was right, but that did not change the fact that Calloway had no
firm answer on how much he was due. Jackson was blunt with Calloway:
Unified Dental E-730 p. 6

Look, I'll be honest, I have a different relationship with you than my investors have,
but they're asking me, "how does this guy not know how much receivables he has?”
And it's very hard for me to explain that to them, because I don't know how you
don't know it.

Jackson repeated his question – how much were the accounts receivables really worth? For a split
second, Calloway looked away. Jackson continued:

I remember he looked away when I said that and I was like, "Damn, he's hiding
something." I didn't know what it was, but I knew it made him uncomfortable.
Everything I've been taught from the neighborhood I grew up in, tells me when
people have reactions like he had, they're hiding something.

Calloway’s subsequent responses did nothing to improve Jackson’s confidence, or help him
understand how much accounts receivable Barah Capital would really be buying. And
Calloway was now trying to increase the pressure to close the deal quickly, announcing there
was another buyer interested. Calloway wanted a clear answer from Jackson too – when would
they close the deal, and what were the final terms?

Jackson returned to Chicago, where Lawal was anxiously waiting to hear how the conversation
had gone. As soon as he stepped into their makeshift office, Jackson blurted: “I know he’s
lying to us. He wouldn’t meet my eyes.”

Lawal was less convinced: “People look away all the time. And even if he is hiding something,
the purchase agreement is the most aggressive I’ve ever seen because of the fraud charges.
He’s not going to be able to get away with anything without us cutting his earn out. Is this
enough to walk away from a great deal?”

They now had little confidence in how much working capital they were actually buying. This
could have a huge impact on their returns if they went ahead with the deal, or worse, create a cash
flow issue on day one. Jackson and Lawal mulled it over. They were twenty-two months into
their search, with an attractive acquisition target, purchasing funds in the bank, and a clear path to
strong returns even if the accounts receivable numbers were overstated. But there had been a lot
of bumps along the way with Calloway, and Jackson was quite confident he was hiding something.

They called McGraw for advice, and together they hatched the idea of reducing the purchase price
by the value of the accounts receivable. Lawal felt that it was going to be asking too much for the
seller to drop the price by the full value of the receivables (over $900,000 on a $5 million-dollar
deal) and instead suggested asking for a $500,000 reduction. “I know the saying, ‘pigs get fat,
hogs get slaughtered.’ We’re buying this thing at 2.5x EBITDA and now asking the seller for a
price change less than two weeks before closing. We have to give him something in return.”

Jackson was less generous, in part because he felt the seller wasn’t being truthful. Jackson wanted
to knock the full accounts receivable balance off their offer price. To sweeten the deal, he
Unified Dental E-730 p. 7

suggested paying Calloway whatever receivables they did manage to collect. If Calloway was
telling the truth, he would be paid back eventually.

McGraw felt either approach was reasonable but warned them that this might be the tip of the
iceberg. He also cautioned them on allowing a third party to collect from their patients and
insurance companies: “What if the guy is massively heavy handed, starts suing patients… no one
is going to distinguish between you and him.”

THE BOARD

Jackson and Lawal knew they had to address the accounts receivable issue with their board,
especially since it had been a board member who had first noticed something was wrong. But they
were also concerned about the approach Trent Donohue from Quiet Woods Capital had taken to
notify them.

There were over a dozen investors on their cap table (Exhibit 1), but many of them were largely
silent partners. Quiet Woods had been one of those investors, up until now, and Donohue had told
the searchers he would take a hands-off approach the moment he committed to their fund. Over
the past few years he had made little effort to get to know them, and rarely responded to their
emailed updates.

Jackson and Lawal were concerned Donohue had called McGraw, rather than speaking with them
directly. Jackson recalled:

The thing that was a bit upsetting to us is that we had never really spoken to Trent.
He invested in our search but we never talked to him after. He never reached out to
us and said, "Hey, you should look into this." He only reached out to Mark to tell
him to not be on our board.

McGraw had passed on the concerns immediately, but Jackson and Lawal were worried that
Donohue had shared his concerns more widely. They had no idea who else he had been talking
to, or what other issues he might have raised. There were multiple investors on their cap table who
had yet to respond to the news about the positive audit, including their largest investor Aspen
Spring Partners. Some combination of these investors backing out, or even just Aspen Springs
getting cold feet, would kill their deal and potentially their fund.

Clearly, they had to manage this situation carefully. And they knew they needed to communicate
what they had learned from the additional financial documents they had seen, as well as Dr.
Calloway’s explanation. But what was the right order to speak with their investors, or did it make
sense to update all the investors together?
Unified Dental E-730 p. 8

STUDY QUESTIONS

1. Assuming you are going to proceed with asking the seller for the concession, prepare to
meet with the seller again. Decide who should come to the meeting, and what the ask
would be. If you are willing to compromise, be prepared for negotiations.

2. What should Jason and Olaide tell their investors about the accounts receivable situation?
Who should they tell, how much, and in what order? For example, is it wise to say Jackson
has a hunch he is lying, or that he thinks the seller is showing signs of drug use?
Unified Dental E-730 p. 9

Exhibit 1
Cap Table for Barah Capital

Name Series A+B Units

Aspen Spring Partners 1,078,750
George and Kathy Thompson Family Trust 1,014,375
Force II Fund, LP 1,000,000
Acquisition Partners 6 728,750
Quiet Woods Partners 539,375
Baskin Hills Family Trust 539,375
James Stevens Trust 339,375
Ronald Kohler Trust 328,750
Trio Acquisition Partners, LLC 278,750
Ocean Waters Fund Two, LP 157,500
Mark McGraw 39,375
Gold Mountain Partnership 39,375
Quartz Hill Partners Holdings 39,375
James Block 39,375
Josh Reddick 25,000
Total 6,187,500

Source: Courtesy of Barah Capital, names have been fictionalized. Reproduced with permission.