4 Tips for Vetting a Private Equity Firm for Healthcare
Firsthand advice from a doctor who walked away from his own deal
If you are a practicing independent physician or dentist, you already know that Private Equity Firms (PE) have zeroed in on your industry in recent decades. You likely have colleagues who have sold their practices to PE or maybe you have even considered it for yourself. And why wouldn’t you? Sometimes it seems like everybody is doing it, so it must be great right? Part of that sentence is true. It does seem like a lot of providers are selling to PE, but the outcome is often far from great.
To date, private medical practices have been targeted most aggressively but dental groups are rapidly catching up. An American Medical Association survey showed that around 75 percent of physicians were owner operators in 1983 but dropped to a mere 47 percent by 2018 and is still plummeting. PE firms have swooped up a quarter of dental groups and that number is rising every day. What is the big deal?
For starters, your future as an independent doctor depends on maintaining the value of your practice for your own benefit and ensuring you can give quality care to your patients. All of that is jeopardized as soon as you sign on with a PE firm. You no longer own your own business, but you are still required to work there under the supervision of a corporate entity. And that is just one of the major pitfalls that many providers realize too late.
We recently had a chance to chat with one of our dental members who is a partner in an oral surgery group and extensively vetted two separate Private Equity Firms last year. Thanks to their relentless due diligence, they were able to walk away before they made the biggest mistake of their careers. Even though we are not naming names, you will come away with a better understanding of your negotiating power and how to approach a PE who is interested in purchasing your practice.
Stepping Inside the Process
As an owner of a private practice chances are you routinely receive emails urging you to sell your business to an MSO, DSO, or PE. Even if you have staunchly ignored them in the past, higher regulatory standards and lower reimbursement rates have some physicians and dentists questioning their choice. It is natural to wonder if it would just be easier to sell your practice and leave all that responsibility behind. That is part of what led our member (we’ll call him Dr. L) to begin vetting some PE firms in the first place. His experience was nothing if not educational.
Dr. L and his partner actually vetted two PE firms to see how they differed and if one might offer better terms than the other. They found both firm representatives to be pleasant and generally had nothing negative to say about their interactions with them. That said, the longer they continued meeting with the PE reps, the more unsettling details were revealed. From this process, Dr. L was able to formulate a few tips for other provider owners thinking of going down the consolidation route, so they are prepared.
- Ask a LOT of questions – Dr. L and his partner wanted to understand as much of what they were signing up for as possible, which is natural when dealing with such a huge financial decision. They kept coming back to the table with more questions which prompted one representative to comment that “most doctors don’t ask so many questions.” Hopefully, you are as shocked as our member was. When you are deciding whether to sell your business or not, you should know every aspect of what comes next. Ask as many questions as you can think of and when you run out, do more research to think of more.
- Take your time – Just remember, this process runs on your schedule, not the people trying to buy your practice. Just like any negotiation, settling with the first offer is likely a bad idea. Just remember, these PE firms will take your practice and multiply its value by 40x just from banding it together with other practices in the public market. You have all the negotiating power so you should make sure you are getting a fair amount of money after taxes to make the deal worthwhile. You’d be surprised how many doctors just take the first offer thinking that’s the best they can get.
- Get a financial expert to look over the offer – As intelligent as you doctors are, the world of finance is a specialty of its own and takes a different kind of expertise. These deals are so complex with equity offerings and such, it is surprising how many practice owners sign on the dotted line without getting the advice of an expert. Here’s where it gets tricky. Many PE firms don’t want you to show the offer to anyone else, especially someone with a background in finance. They actually create penalties for doing that which begs the question, “What are they hiding?”
- Do the math – Most offers start with a 1:1 match of a single year’s revenue for the practice. Unless you are planning to retire almost immediately, that sum will most certainly not pay off. Especially when you consider the high percentage of taxes that must be paid when selling such a large asset. Most businesses get 5:1 or even 7:1 on their annual revenue offers because there is money to be earned in the future. For whatever reason, medical and dental practices generally do not get that consideration despite the PE representative knowing how much more a practice will be worth later in the public market. In the end, it is always the doctors who are at risk of being taken advantage of in these deals.
This article is not meant to imply that all PE firms are out to manipulate and cheat doctors, but they are trying to make the best deal for their own profit margin. We are simply saying, know your value. It is a mistake to think you should jump at an offer because your practice will never be worth as much in the future. These deals are so complicated, you have to do your homework to make it will enhance your future rather than make your life harder. Better than 9 times out of 10, provider owners like Dr. L who utilize these tips walk away from their own deal knowing that it just isn’t right for them.
Download a comprehensive cheat sheet of questions right here.
Does that fix all the reasons they considered selling in the first place? Probably not.
The good news is, there are solutions for all the frustrations that come with running a practice and a way for you to reverse engineer that public market value to benefit yourself and your partners rather than some corporation’s stakeholders. HPA offers consulting and discounted external services through both our equity and non-equity memberships. Contact our team at HPA today to find out how membership can reduce headaches and make a positive difference in your practice.