Private equity investment in healthcare has grown dramatically in the last 10 years. The explosive growth we are witnessing is being driven by a perfect storm composed of a multitude of factors. Projected increases in healthcare spending, an aging population in need of care, a supply and demand imbalance from a provider perspective, and uninvested capital (dry powder) already dedicated to healthcare services focused private equity funds have created an environment ripe for continued, accelerated activity.
The state of the market is leading many medical practice owners to consider the short and long-term strategies they should pursue. With that in mind, if you’re thinking of selling to a private equity firm, there are a number of points to consider when negotiating the term sheet and definitive agreements.
We sit down with Ezra Simons, Managing Partner of Physician Growth Partners – a healthcare investment banking firm focused exclusively on the Physician Practice Management space and representing independent physician owners in transactions with private equity. He shares insights on 3 of the most common questions when it comes to private equity.
QUESTION 1: WHEN DOES IT MAKE SENSE TO THINK ABOUT SELLING A MEDICAL PRACTICE?
If you’re thinking about selling your practice, you need to first consider your goals – are you seeking a partner for growth, to solve an administrative headache, or simply for succession planning?
You then need to consider your timeline. It’s critical to understand when you will move, why (new provider hires, new locations, new services, etc.) now, and how current circumstances will drive value with respect to both maximizing economics and deal structure. If you are looking to sell in the near-term (as soon as tomorrow to within 2 years), you need to focus on the following:
- Ensure strong provider employment agreements. Don’t create transaction-related exposure that would allow associates to leave if the PE path is pursued. It is critical your physicians stay with you during the transition and are happy to go to work the day after the deal closes. Provider alignment is the #1 priority in PPM transactions. Be sure to have formal, written, employment agreements with every provider who generates revenue for your practice. It is best if they incorporate an assignment provision that allows them to be transferred over to an investor without needing to renegotiate.
- Establish a partnership/alignment track if one doesn’t already exist. Consider proactively aligning with your associates. More provider alignment yields stronger interest from potential private equity groups. If a partnership track does exist, ensure providers who will still be on it post-transaction are taken care of and do not feel like the rug is pulled out from under them (this does not need to be handled until you are closer to closing a transaction but is important to consider)
- Continue making decisions as if you weren’t going to pursue a transaction. If you were already considering key initiatives such as new provider hires, new location openings, acquisition opportunities, service line expansion, etc. it’s wise to continue on that path, but be more aggressive in your timing. The market is willing to give 12 months of credit for all initiatives in-place so strategic initiatives in process can make your practice more attractive.
- Look at your financials from the buyer’s perspective. Any personal/discretionary expenses can continue to be run through, but track those expenses independently from true operating costs (have your accountant separate them or put them “below the line”. Additionally, track one-time/non-recurring costs as they’re incurred as buyers will give you credit in the form of an “add-back”.
- Fill any glaring holes from a leadership and infrastructure perspective. If the practice has any weak spots operationally, pursuing a solution in advance of approaching the marketplace can drive value from the buyer universe in the form of the multiple they are willing to pay.
If you have 3-5 years:
- Align with your providers. Make sure you’re aligned with your existing physician base. At the same time create an environment that will allow you to attract and seamlessly align with future hires.
- Invest in infrastructure and human capital. Implementing efficient infrastructure and the right talent helps your practice grow sustainability. You’ll also want to invest in your management team to shore up your positioning and quality of the operation.
- Evaluate service line expansion/ancillary enhancement opportunities. You have a window to enhance your offering…if there are any ancillary services that are currently being referred out – evaluate whether it is possible to capture those in-house in accretive manner.
- Evaluate potential acquisitions or partnerships with other groups that make sense from a service offering or geographic standpoint.
- Control overhead and track profitability. Seek to use your peer group, medical group management association (MGMA), and other practice management resources to benchmark your overhead and operating costs against peers and evaluate whether any changes to your profile (staffing mix, etc.) make sense.
- Implement processes that drive cost efficiencies. Assess vendor spend and where it makes sense to manage functions internally or outsource. Certain vendors may cost money up front, but can ultimately have a strong return on investment. For example, outsourcing certain functions of your practice like call handling, inbound lead management, and patient reactivation can drive cost efficiencies and a greater ROI versus hiring more staff.
- Pay-off Debt. Now is the time to get rid of any low-hanging fruit debt that is sitting on the balance sheet. You will be expected to deliver a debt-free business in conjunction with any private equity transaction.
If you have 5-10 years:
You have more time to maximize your practice value by investing in key areas:
- Marketing strategy/brand equity: how will you continue to attract new patients
- Patient retention and re-activation
- Acquisitions of other practices in your current/adjacent markets
- Referral network development/expansion
- Equipment: purchase the new laser, upgrade outdated equipment, etc.
- Technology: get your CRM management system in order, make sure PM/EMR systems are clean and navigable
- Refresh the office space: invest in making the experience inviting for patients
- Expand services: if there are lines of ways to expand the services you offer this would be the time. A comprehensive service offering that leaves nothing on the table is very attractive to potential partners.
QUESTION 2: WHAT SHOULD YOU CONSIDER WHEN ENTERING A PARTNERSHIP WITH A PE FIRM?
Determine how long physicians and management may be retained. Typically, both groups are required to stay on for approximately 5 years to ensure success on both sides of the partnership. While there is flexibility surrounding that fact, it is extremely important to consider the feasibility of staying committed for a ~5-year time period from both a clinical and operational perspective.
Do your due diligence. Check references of all PE firms you are evaluating. What success have they had historically (specialty agnostic)? How was that success achieved? How is it comparable to the strategy you are looking to pursue? To that point, conduct research to understand the broader strategy the potential partner is pursuing. Interview multiple groups to vet the strategy, historical success, and overall partnership fit.
Don’t leave room for surprises. Negotiate all key aspects of the “deal” upfront so you are not surprised about a decision that is made after closing that you did not expect or would have changed your appetite to do the deal. This means aligning on key interests, agreeing on what is working well and is what is needed to continue managing your firm successfully – such as key vendors, partnerships, and software systems.
QUESTION 3: WHAT ARE THE MAJOR PITFALLS OR RED FLAGS TO AVOID?
Work with a professional. You are on the other side of a professional investor who is out to get a good deal and you need to bring the same level of experience to the table that is not limited to your lawyer. Physicians who do not engage an advisor with experience in the PPM space, running competitive processes with a relevant buyer universe, always leave value, deal terms, and their future on the table.
Set realistic expectations about navigating the process smoothly and being satisfied with the outcome attained. There is so much talk about things like multiples paid, what one group’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) was, and what those two inputs led to in the form of economics. But without all the details, you have to take what someone else says worth a grain of salt. Having an advisor you can turn to who has experience in the space, that can look at your practice from both a financial and operational perspective and deliver you a valuation range based on that experience is crucial in developing realistic, achievable expectations. Without realistic expectations, a multitude of unnecessary problems can arise throughout the transaction process.
Don’t make decisions just because of a potential transaction. Choosing to do something solely because a transaction is being pursued (or going to be pursued) is not recommended. For example, don’t begin hiring providers just because there is an opportunity to receive EBITDA credit.
Keep it on the down-low. Be careful about sharing information with potential buyers before officially pursuing a process. Information needs to be shared selectively and appropriately to position the narrative and story. You only have one chance to get a process right.
ABOUT PHYSICIAN GROWTH PARTNERS
Since its inception in 2018, PGP has completed over 30 transactions and serves as the most active investment banking firm in the physician practice management space. PGP’s differentiated approach emphasizes senior-level involvement at every stage of the process, client education from start to finish, and the prioritization of partnership/cultural fit at the same level as economics in every transaction. To learn more, visit www.physiciangrowthpartners.com.