Private equity is once again showing a strong interest in acquiring medical practices and healthcare businesses. This wave of acquisitions differs significantly from the activity seen in the 1990s, where public companies focused on aggregating gross income to boost stock prices. Today, private equity investors aim to maximize profitability by achieving efficiencies, consolidating large groups for leverage, and developing new income streams. While stock options, warrants, or shares may be part of the deal, many transactions are all-cash, often based on earnings. To secure the full price, sellers typically must remain involved in the business to maintain or even increase revenues.
Physicians, in particular, need to understand the nature of these deals and the factors that influence them. “Private equity” refers to private investors, usually a group pooling their capital, who purchase a portion or all of a company. These investments are notably larger than those from venture capital firms and do not involve publicly traded entities. The goal of private equity is to invest in mature businesses, enhance their profitability, and eventually sell their ownership stake to another buyer within three to five years. In contrast, venture capital firms often invest in start-ups, acquire complete ownership, and seek control over the company.
Key Issues for Sellers:
- Buyer Experience: Sellers should evaluate the buyer’s experience in their specific industry. Since buyers promise to grow the seller’s profitability, it’s crucial to confirm that they have a successful track record in similar businesses. Sellers should also seek detailed plans on how the buyer intends to achieve growth.
- Impact on the Seller: It’s important for sellers to understand how the acquisition will affect their income, their operations and their business operations. Will there be significant cultural changes? Will there be major shifts at the executive level? What kind of control will the buyer exert? What effective voice will the seller have in the issues that direct impact them? Speaking with other businesses that have been acquired by the same buyer can offer valuable insights into what to expect post-acquisition. If the past is any predictor of the future, the happiest sellers in these transaction are the ones who have an eye on retirement within he next 3-5 years.
- Buyer Plans: The timing of additional investment rounds is critical, especially if the transaction involves stock options or warrants. If the buyer is in the early stages of their investment cycle, it could take several years before any stock has real value, as the initial phase often involves significant debt accrual. And that says nothing at all about dilution or the subordinated nature of the interest. Unless the sellers pick the right buyer, the sellers with stock or warrants will likely just paper a bedroom closet with them!
Understanding these factors can help physicians and other healthcare business owners navigate the complexities of selling to private equity and ensure they make informed decisions that align with their goals.
By: Jeff Cohen
Founder, Florida Healthcare Law Firm
