Ask yourself these 5 important questions before accelerating discussions with your private equity suitor.
Private equity may be the perfect solution for your planned exit from practice ownership. That said, for many segments within the healthcare space, P/E buyers can be highly aggressive in their self-marketing and communication of initial valuations. If you are considering serious conversations with a potential financial buyer, there are questions you should be asking yourself, your partners, your advisors, and any P/E firm that is expressing interest in you. Below are just a few to help you get started.1 Do I really understand what Private Equity is?
Private equity funds vary in size and focus. They raise capital from individual and institutional investors with the objective of using the funds to acquire companies, or in this case, physician practices. Targeting different ranges of financial return and time frames for returning capital to their investors, P/E funds look for investment opportunities that have valuation upside with future exit opportunity. Valuation upside in acquisition of physician practices may come from such things as consolidation, scale, vertical integration, improved execution, payor contracting, productivity improvements, etc. Exits typically come in the form of sale of the improved, integrated, or consolidated practice to another equity fund at a later date.2 What will my net proceeds be?
Now is a good time to talk with your tax advisor to ensure you thoroughly understand the financial details of an acquisition. Make sure that you’re clear on the tax implications of a potential sale. Ask for advice regarding structuring considerations. Do your financial planning. Essentially, make sure that the math works for you. But don’t stop there. Check that any financial partners in your practice have done the same. Communication and planning at early stages prevent future surprises.3 What is a “roll over” requirement and how does that affect me?
In most private equity transactions, sellers are required to “re-invest” a portion of their sales proceeds into the transaction. Simplified, you roll over 20-40% of your interest, becoming a minority partner in the acquiring entity. A buyer requires this to ensure that you remain financially invested and engaged in the practice on a post-transaction basis. Expect to be pitched the positive elements of additional return when the practice sells at a later date for even higher return. Balance this perspective by understanding the financial implication of deferred returns. Realize that there may be risks as well – future gains are not guaranteed, minority partner interest may be diluted, underperformance could result in capital calls, and so on.4 How will my compensation change after a transaction?
In simple terms, your potential acquiror is valuing your practice based on the cash flow they believe they can generate from your work, your market, your network, and/or your verticals. Your production relative to compensation is likely a big part of that equation. In most transactions, you will be trading a portion of your future earnings and distributions for cash today. Make sure that you understand the compensation philosophy of your potential acquiror. Additionally, understand what they will expect from you in terms of productivity, reporting, and communication. Cash today provides security and may lessen risk, but you may very well find yourself working harder for less compensation after closing. Be sure to know all the terms, including required duration, of your future employment arrangement.5 Who will I be working for?
In most cases, independent practice ownership groups have consciously chosen to work for themselves and enjoyed certain levels of entrepreneurial freedom. You, by choice, have consciously avoided elements of institutional oversight, accountability, and reporting rigor. Life after a transaction is likely to be different. When considering sale, make sure to understand your buyer’s plans for governance and decision making. Who will you report to, what will board composition look like, and what will decision rights be? Understanding the degree to which physicians and medical professionals are involved as investors, board members, and active partners (vs. hired “advisors”) should be of interest to you.
Alignment with a private equity buyer may be an ideal outcome for you and your partners. You’ll know for sure based on a thorough evaluation of this option and others. At MMG, we help our clients ask the right questions and ensure that they are answered objectively and rationally. Without bias, we help practice owners refine their personal and professional priorities, align partner interests, evaluate possible options, and execute to successful outcomes. If you have interest in further discussion on this topic, please reach out to Jerry Kelsheimer at email@example.com or Ronnen Isakov at firstname.lastname@example.org.
Jerry L. Kelsheimer is President of Medic Management Group and MMG Healthcare Solutions. His background includes extensive work in areas including leadership development, strategic planning, process improvement, and capital markets / financial management. MMG is a national provider of advisory and consulting competencies, transaction support services, and back office administrative support to independent and system owned physician practice groups.