Your Practice: When is the Timing Right to Consider a Partnership?
- February 11, 2021
Prior to the Spring of 2020, physicians in many specialties were looking at—and doing deals—with private equity-backed physician practice platforms. In most of these transactions, monetization being the primary driver. All that changed when COVID came in March. Fast forward to today, and we see a dramatically changed physician practice landscape. Moreover, a change in physician motivations and buyer appetites has created another environment ripe for physician consolidation again.
Delivering excellent patient care while navigating the ever-changing waters of running a small business has always been a challenge. Add to that managing cash flow during the virtual practice shutdowns, PPP, re-engineering of COVID patient protocols, and keeping physicians and staff safe. The result is a 24/7 job, nothing like what was promised in medical school. As such, more physicians are now looking for the opportunity to go back to treating patients while someone else manages the business. Add to that the opportunity to take some chips off the table.
Change in Buyer Environment
The standard private equity model maximizes the use of leverage in the transaction. As such, banks provide the majority of the cash needed. Post-COVID, while interest rates are low, banks are much more unwilling to take the risk of financing these transactions. However, other buyers flush with cash (those not using leverage) such as health systems, insurance companies, and even employee stock ownership plans (ESOPs) are stepping in and taking advantage of the current economic situation.
Always Be Evaluating (ABE)
So, what does that mean to the individual physician? It could mean new opportunities for both monetization and “value creation” through consolidation. In advising physicians, we have coined the acronym ABE (ALWAYS BE EVALUATING) and tell our physician clients this should be an ongoing and never-ending exercise. As leveraged private equity deals become more challenging to get done, shift your focus to looking at other alternatives like health systems, large platform practices, and even new entrants to the health care field.
Look for a 1+1=3 Opportunity
In private equity transactions, physicians typically sell a portion of their earnings for upfront cash and equity in an ongoing venture they believe will grow. While this has a proven track record in other industries over the years, the biggest question in the physician business is how can you ensure the growth of the practice? Whether the growth is organic (seeing more patients, doing more cases adding ancillary business lines) or inorganic (buying additional practices), growth is absolutely necessary. Without substantial growth, the private equity deal fails. Alternatively, one of the “newer” transaction opportunities has the buyer bringing something to the table in addition to cash (e.g. managed care rates, new patients, covered lives). If the right buyer can be found, the physician may not be required to take a reduction in compensation. Literally 1+1=3. Ultimately, this means getting cash up front, not taking a pay cut, and ensuring survival as health care continues to evolve. Another option gaining traction recently is an ESOP. This allows the physicians to monetize while retaining control of the practice and providing an amazing benefit to their staff and employees.
The Bottom Line
If you can find the right combination of “cash upfront” and synergies to create a 1 + 1 = 3 equation, the timing amidst COVID and economic uncertainty may actually be the right time to consider a partnership.
We’re here to help. Give us a call today.
With over 30 years advising physicians, The Bloom team draws upon decades of industry experience to understand how various healthcare services and providers can add value to one another. Our team of experts is watching the events closely and prepared to assist medical practices and surgery centers with both operational and future considerations to ensure long term sustainability and success.
ROBERT GOETTLING, ESQ. Principal firstname.lastname@example.org 305-974-0700
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