Key Things for a Physician Practice to Consider When Navigating the Private Equity Process

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By Michael White

Private equity interest in healthcare continues to grow as COVID-related problems continue to be headwinds to other industries. Private equity is viewing the dislocation associated with COVID as a time to be opportunistic and proactively put money to work throughout the healthcare landscape. In fact, according to a new study by the Physicians Advocacy Institute, only 30 percent of physicians in the United States practiced medicine independently at the beginning of 2021, with the balance employed by hospital systems or other corporate entities.  

As a physician or practice administrator, chances are you have received numerous emails or calls from private-equity investors wanting to talk about your business. Valuations across healthcare and almost all sub sectors within are near all-time highs as investors continue to look for quality assets with strong growth prospects.

It is also likely that some of your friends or colleagues may be involved in a transaction with an investor right now. You may also have second-hand experience with private equity deals or other knowledge of transactions – but no transaction is the same. 

Here are seven key considerations when evaluating investor interest in your practice:

  • Speed and certainty of close. Simply put, time kills deals. You can be promised a lot of cash, but if the private equity firm is not equipped to get the deal done and close quickly, everyone is just spinning their wheels. 
  • Retained equity. Is there an opportunity for key shareholders to maintain some level of ownership of the practice? An opportunity for a “second bite” – i.e., selling retained equity when the practice changes hands again – can make the deal more valuable to you. Private equity investors are seeking investments that can generate value accretion over time through a combination of both organic and acquisitive growth.
  • Tax Implications. Is the transaction being structured in the most tax efficient manner, and what is the shareholder take-home value? Remember to stay on top of any  potential tax code changes that may be on the horizon with the new administration. 
  • Strategic fit / alignment. Does the investor’s future plans for the company align with those of the shareholders? 
  • Value-add of the investor. What industry experience does the investor have, and how are they going to drive value for the business? This is particularly important when shareholders are retaining equity in the practice.
  • Post-acquisition environment. How does the investor’s culture align with that of the practice? Do you like each other?
  • Stay bonuses for key management / staff. The team in physician practices is perhaps more important than in traditional sectors of the economy. Is the practice’s key management team being incentivized to continue with the business post-transaction?

Your attention to the structure and approach of the private equity process will maximize your earnings power and tangible value of your practice. Transparency and sharing of data should be fluid every step of the way, so final analysis and negotiation should go as quickly as possible. 

An investment banker advisor can provide the necessary guidance. They can produce professional marketing materials and leverage industry connections to ensure materials highlight items buyers want to see. Their team will perform buyer research to find the optimal partners and solicit and review the first, second and final round of bids and ensure serious investors convert their indications of interest (IOI) to letters of intent (LOI). They can also arrange and administer management presentations and any necessary site visits.  

It’s especially risky to take the first fair valuation you are offered. Many times these exclusive deals end up, after many months of negotiations, with each party too far apart on how much cash will change hands at closing, contract agreements and other components of the deal. However, when you work with an advisor, it’s not uncommon to have multiple bids to compare and contrast.

Final due diligence and closing should be accomplished as quickly as possible. When you have successfully vetted and made your final partner selection, giving preference to companies that complete quality of earnings, working paper reviews, environmental reviews, IP diligence, etc. you’ve reduced time and risk to close. The chosen investor will meet your criteria for cultural fit, price, financing commitments, due diligence needs and contract terms.  

When you fully evaluate all aspects of a deal and take part in a competitive, formal process with multiple investors, you have that tension, leverage and drive to an outcome that’s most beneficial to you. 

About Michael White

Michael White is managing director for the healthcare practice of Founders Advisors, a merger, acquisition and strategic advisory firm focused on serving middle-market companies across the nation in the healthcare, technology, business services, consumer, energy and industrial industries. Michael has more than 20 years of experience advising healthcare clients on a range of strategic alternatives, including IPOs, public and private equity and debt capital raises, joint ventures, licensing and buy-side and sell-side mergers and acquisitions. In order to provide securities-related services discussed herein, certain principals of Founders Advisors are licensed with Founders M&A Advisory, LLC, member of FINRA & SiPC. Founders M&A Advisory is a wholly-owned subsidiary of Founders Advisors. Neither Founders M&A Advisory nor Founders Advisors provide investment advice.

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