Preparing to Consider Private Equity Affiliation

Case Study One: Preparing to Consider Private Equity Affiliation

Background Description: The typical medical practice — management and the physicians — should spend significant preparatory time and effort understanding PE transactions and the overall ramifications of such transactions. This includes:

• Educational process. It is imperative to understand the typical PE deal and how it is structured and functions both pre- and post-transaction. PE transactions have many challenging features, and while we are not saying these are negative per se, they are different, so everyone within the practice should understand them.

• PE structural understanding. Further to the education process is understanding how the structure of a typical PE transaction is completed. The uniqueness of terms have much bearing on the receptivity of the participants and the acceptance of PE transactions.

• For example, the income scrape is not something most physicians understand, but it is an element of every transaction. Other functions of structure entail the sale of the practice and then reinvestment of some of those proceeds in a “Newco,” along with the short duration of the entire PE-sponsored partnership. These are all elements that demand more than just a passing understanding; their part in the transaction must be clear.

Areas of Consideration: A healthcare organization, particularly a medical practice, completing the educational process regarding how PE works should consider all affiliation options. For most practices, options include 1) staying private and independent, 2) affiliating with a health system through employment or a professional services agreement (PSA), and 3) merging with other healthcare entities and forming a large private entity.

A management services organization (MSO) can be created and be part of the strategy as well. Many of these structures could still enable a PE transaction later.

Overall Goals and Objectives: Goals and objectives should be clearly defined and understood. If a medical practice pursues a PE transaction/affiliation, the owners and/or administrators must have an unclouded vision of the “why” as well as the “what” and the “how” of PE affiliations. Overall goals and objectives should include the following factors:

• Economic factors.

• Strategic plans.

• Tactical plans.

• Succession plans.

• Access to capital.

• Growth strategies, including additional providers, locations, and services.

Potential Challenges: All the above circumstances create challenges, from economic to strategic to tactical. Giving up control is a major consideration. Division of value between older and younger physicians in the group is another challenge. While no different than many of the challenges confronting medical practices and other healthcare organizations with or without PE involved, PE transactions still create their own set of nuances.

Therefore, as a practice considers PE, it should first invest the time and resources, both internal and, if necessary, via external advisory services, to not just educate but fully understand the generalities and the specificities of seeking such a partner. Every healthcare organization contemplating PE should first spend the time and resources to not only understand but also determine if this form of affiliation is best for them.

Key Takeaways: A practice should not just go through the motions or jump directly into a PE process. There are too many “forks in the road” and other challenges that will cause a practice to cease any further efforts toward a PE sale. Fundamentally, these details should be reviewed and considered before making decisions. PE is not for everyone.

The following key takeaways should result from this first stage of work relative to the potential for a PE transaction:

• Complete sufficient analysis to determine go-forward plans regarding PE (i.e., “go” or “no go”).

• Determine the implementation processes derived with PE partners.

• Determine advisory services representation:

• Fees and scope of services.

• Process flow agreement.

• Targeted partner parameters defined.

• Viability of the continuance of process assessment and sell-side representation viability.

• Determine if the PE partnership is “right” for the practice now. Will it ever be? Are there other options, and are they better?

• Consider the cost of doing nothing.

• Determine if consensus can be reached among all partners, young and old?

• What are the deal killers? The must haves?

• Will key objectives be met?

• Do the rewards outweigh the risks?

• Are the economic factors potentially compelling?

• Is going to the next stage viable with an honest decision supporting the same?

• Will the advisory firm play a role as an independent expert in making such decisions?

• When should an outside advisor be used and to what extent?

Excerpted from Private Equity and Healthcare: Leadership, Economics, and Trends for the Future by Max Reiboldt, CPA.