4/28/22
Zed Williamson

Selling Your Medical Practice to Private Equity

Looking to sell your practice or partner with a private equity firm to scale? Learn how it works and whether it's right for your goals.

Private practice doctor meeting with patient

Changes in the healthcare landscape are making it more difficult to operate companies, creating a need for owners to consider strategic alternatives. Should you consider selling your medical practice to private equity?  

Perhaps, but it’s not for everyone.

Market consolidation is decreasing practice owners’ negotiating power with vendors and key counterparts. Plus, regulatory changes are increasing administrative burdens, and owners need to invest to keep pace with advancing technology if they want to maintain the highest level of service.

As a result, more physicians and owners are turning to private equity groups. And even though mergers and acquisitions are at an all-time high (and providing above-average valuations!), it can still be challenging to know where to start.

We recently hosted a webinar on this topic as part of the Growth Driven Practice Series. Learn how private equity works in healthcare, what to watch out for if selling to private equity, and how to navigate this process with confidence and ensure the best outcome for you and your company.

Otherwise, read on . . .

First, what is private equity?

Like many industry terms, the term private equity is used about as loosely as the word healthcare. It could mean something slightly different depending on who you talk to. However, generally speaking, private equity is an alternative asset class, and adds to the list of finance options for physicians.

Private equity comes in many forms, but it’s typically run by a private equity firm, and organized as a partnership. Funds come from major outside investors like pension funds, university endowments, high net worth individuals, or family offices.

Private equity investments and acquisitions are sometimes private, sometimes public, and they use a combination of debt and equity. This is what you often times hear referred to as a leverage buyout or an LBO. The leverage, or the amount of debt that can be put into a company, will help drive the returns that the private equity investors are looking for.

Lately, private equity investment in healthcare is soaring, and more physicians are weighing their options with it. The first step is learning how it works.

How does private equity work?

Private equity groups work by acquiring a stable company (or a large portion of it) with low capital needs, using financial leverage (debt).

From there, PE groups execute a growth plan, working with your company to increase cash flows and mitigate risk factors over the next 3to 7 years, before they sell it for a substantial return (generally aiming fora 20-30% return). In this process, they look to invest in a basket of companies, maximizing their funds and increasing benefits between companies.

What do private equity groups look for in a medical practice?

One of the things private equity companies are concerned about is “how certain are future cash flows for this medical practice?”

If you have high certainty of future cash flows and lower rates, you're likely to be able to borrow more money and you're likely to have a higher valuation. One example of this is whether you have a predictable flow of patients.

While their organic growth initiatives lead to the largest profits when they sell, private equity groups can still earn a sizeable return without growth.

Sometimes these work as an acquisition, but they tend to work best when they’re organized as a partnership. Each group is different, so you won’t have the best culture fit with everyone.

That means you’ll benefit from scouting out your options, rather than going with the first group you talk to. Remember, you’ll be working with them hand in hand for the next several years. Sometimes the equity group that’s willing to pay you the most isn’t as good a fit for you as one offering less.

If you select a firm whose values or vision don’t align with yours, you run a higher risk of sacrificing quality of patient care for the sake of business growth. 

Types of private equity investment styles

Every group is different, but any private equity group generally falls under one of three different investment styles.

  • Asset managers are passive investors who take a hands-off approach
  • Advisory style investors are active at a strategic level, sitting on the board, meeting customers and vendors, but not involved in the day-to-day management
  • Active management investors, as the name implies, take an active role in day-to-day management, and are willing to bring in their own management team to supplement the existing management team

For a medical practice, what are the benefits of working with private equity?

After private equity groups make an initial platform investment, they work with practices to add additional investments to get the benefits of scale, such as new equipment and labs, or access to new specialists.

This could also lead to adding ancillary services, creating new revenue streams for the practice.

As they acquire multiple practices, these companies can all benefit from new integrations and adopting each other’s best practices.

Additionally, if you have younger and older generations of physicians, private equity enables the more senior physicians to get the most out of the transaction, even though they don’t intend to stay on another 20 to 30 years like younger physicians might.

When do I know I’m ready to start the private equity process?

As a rule of thumb, you’re best off starting the private equity process once you have at least $2 million in Earnings, Before Interest,Taxes, Depreciation, and Amortization (EBITDA). This is the level where the broadest universe of private equity groups are able to participate (although some want higher numbers).

To get a better sense of whether your practice is ready to start this process, you may need to start following different operations and accounting practices than you may be used to.

On the question of age, you’re never too young to start: you can use private equity to scale your business multiples times over your career, if you so choose.

You’ll want to make sure you’re maximizing best practices for your business by yourself before you partner up, though, because otherwise you’ll be sharing those easy profit boosts with the private equity group.

Your practice needs to have a strong business core to get the most from private equity. It’s a bit like gasoline: pour it on a small flame and it’ll extinguish it, but pour it on a large flame and it’ll fuel intense growth.

Watch the full “Selling to Private Equity” webinar to learn key information before you get started

In the webinar, TrackableMed CEO Zed Williamson speaks with Founders Advisors Healthcare Managing Director, Michael White, about everything physicians and practice owners should know before getting involved with private equity groups. 

When you watch the webinar replay, you’ll learn

  • How you can get started with private equity
  • More details on how private equity works
  • Counterintuitive advice on how to proceed with a private equity group, allowing you to maximize potential earnings while still providing the best future for your practice
  • How your practice will be valued, using a valuation framework, and how EBIDTA factors into the multiple you’re offered
  • How physician/owner compensation works, and why having lower earnings in the short run can benefit you massively on the long run, diversifying your wealth in the process.
  • Which qualitative value-drivers (from company performance and risk management to documentation and controls) set your practice apart for a higher valuation and set you up for the best exit possible.Each item here contributes to raising the multiple you’re offered.
  • Why your current accounting practices might be crippling your potential business growth