Author: Dana Jacoby
It was a busy Monday morning. The call came from a successful physician that I knew well. He was leading a practice in a specialty with which I was very familiar. “I had two random Private Equity firms cold-call me over the weekend. They were talking big numbers. Dana, I know you know this market. Can I get your advice?”
These stories are true, and these events are not isolated. With the rapid increase in “dry powder” which is simply money waiting to buy something valuable, medical practices are high on the list of possible investments. Consequently, doctors and medical practice managers are receiving a lot of attention. Sometimes, it’s welcome.
“Rick,” I explained. “As a general rule, if a private equity firm is cold-calling you, its probably not the group you want to engage. Like everything in life, there is a right and a wrong way to make this happen.” As we talked, I outlined a few considerations for him.
Reputation Matters: Just as there are right and wrong ways to do things, there are good and bad investment partners. One important way to ascertain whether these will be good partners is to ask. I’m always surprised by the number of physicians who find themselves in “bad deals” and tell me that they never dug into the private equity firm. The numbers were big, the practice was scrambling to complete due diligence and the partners felt like they were on the defensive to “sell” their practice and close the transaction. Some of the questions that are good to ask are:
- Who would we know that has done business with you? Will you share your references?
- Do you currently own any other practices in our specialty or do you have a track record of doing deals in our area of practice?
- What is your track record of getting to the “Second Bite” – that promised second transaction where practices are combined and then sold to a larger private equity firm or strategic partner.
A legitimate investor will know the specialty. They will have history, experience and an understanding of what it takes to be successful in the practice of orthopedics, gastro-enterology, urology, dermatology or whatever space is relevant. They may still be investors in a “platform” of practices, or they may have built a platform and transacted a second time. Mostly, they won’t be afraid to credential themselves.
Size Matters: A semi-truck, a box-van and a pickup all move materials. But each is useful in different settings. Likewise, there are private equity firms that specialize in practice investments in different size segments. For our purposes at Vector, we work with medical practices that are growing but have smaller “top-line” revenues and define those companies as making less than $50 million. The middle-market clients we work with will have gross revenues between $50 million and $500 million. Larger capital transactions exceed $500 million and receive the attention of very sophisticated buyers.
Private equity firms tend to specialize along those general market segments. The reason is that smaller transactions require less in the way of due diligence, less complicated negotiations and less risk. The larger investments demand more time, more accountants, more attorneys and more experience. Some of the smaller private equity firms don’t have those resources available. The larger firms may not find it worth their while to transact smaller investments. It isn’t “good or bad.” It’s just how things are. So find the firm that fits.
Trust Is Essential: Over the course of any investment transaction, there are many pitfalls that can detour or completely derail the deal. That is true for physicians and medical practices looking at private equity investments, as well. When the late night calls, the disagreements between shareholders or the earnings surprises come – and they will – it is essential that there is a high degree of trust between the physicians and the investors. Our best advice from the literally billions of dollars of transactions that Vector has helped to close is, “take your time and get to know each other.” Humans are incredibly intuitive. We run into problems when we ignore our intuition
Beginning an investment transaction with a good understanding of the players involved is the first step in something that is beneficial and perhaps life changing for a physician. Our next article shares three insights into a practice’s preparation for discussions with potential investment partners. Stay tuned…