Author: Dana Jacoby

My conversation with Dr. Rick continued beyond the advice I had shared about what to look for in considering Private Equity firms. He wanted to know more about the process. At Vector Medical Group, we have worked with scores of physician practices throughout the transaction process. I reflected over many of those engagements and settled on three important points to share with Rick and his partners regarding a possible Private Equity transaction.

Are You Ready? Surprisingly, very few practices begin with this question. As in many things of life, there are a lot of assumptions that underly conversations between physician partners, management and stakeholders. Unfortunately, when those assumptions aren’t openly discussed, any alignment around a common vision for the future is extremely difficult. So the first question is whether the members of the practice are aligned in a vision for the future and ready to move in a new direction.

There will always be champions and detractors in every practice, whether the decision under consideration is a vacation schedule, the purchase of new technology or a change of ownership. The introduction of a Private Equity option will be doomed from the start unless the majority of the stakeholders are in agreement about the end result. The adage that “the game to win is between the ears” is never more true than at the beginning of this conversation.

The question, “Are you ready?” also extends beyond the visionary level to strategy and tactics. Does the firm know where to find the important documents such as by-laws, licenses, deeds and the like? Is the practice up-to-date with the relevant regulatory requirements and can the practice demonstrate compliance? Are the financial books and records accurate, timely and defensible? Are there “skeletons in the closet” such as write off’s for personal expenses, family employees or other issues that would not be favorable in a due diligence process? All of these factors should be addressed before jumping into a relationship with investment bankers and private equity investors.

What’s Your Practice Worth? Let’s assume that the practice is aligned and the partners are ready to transact. Where do we start the negotiations, and how do we know what is a fair price for the time, energy and effort that went into building the practice? In our experience at Vector, this is typically a question that has never been considered. Doctors are simply too busy treating patients and practicing medicine to give much thought to the fair market value of their practice.

To further complicate matters, a brief conversation with a typical finance professional will only confuse matters more. They use terms like Q of E, FMV and EBITA. Private Equity advisors will suggest “multiples” and “roll-backs.” And there will be the inevitable mention of “the second bite at the apple.” It’s important to have a very good understanding of what those terms mean and why they are relevant to the physicians.

The good news is that there are standard ways of valuing a practice based on the revenue, the outlook for the future and the risk. An Investment Banker will typically provide a valuation as a part of their engagement. Vector Medical Group has provided an independent valuation of hundreds of companies, and that unbiased calculation provides a foundation for discussions whether with an Investment Banker or a Private Equity firm. In future articles, we will share more about this process.

Who’s In Your Corner? The answer to this question can make a night-to-day difference in the outcome of a private equity transaction. Unfortunately, many physicians are concerned with the expenses involved in selling their practice. Investment Bankers will often charge a monthly retainer for their services, and they will request a percentage of the final sale price. Attorneys typically get paid by the hour. Likewise, accounting and audit firms will expect to be paid for their services. When those sums are added, it is a lot of money. It’s easy to understand why a group of doctors would choose to forgo good advice and representation.

However, nearly 100% of all physicians will transact once in their career. The finance and legal professionals do what they do every day. In many ways, it simply isn’t a fair situation. A good finance and legal team can make literally millions of dollars of difference in the final outcome. Similarly, they will know to look for the pitfalls and problems that can arise both during and after the sale. For example, there should be a very clear agreement on non-financial issues such as vacation time, hiring and partner selection, capital equipment and real property and other considerations.

We have seen transactions happen very well, and we have witnessed things going poorly. At Vector Medical Group, our primary concern is for the physician, their partners and stakeholders. Our advise is old but relevant, “Don’t be penny wise and pound foolish.”

Dr. Rick appreciated our conversation. We left him with some homework, and we left him with a path forward. Ultimately, these conversations are critical to future success. And we will share more in future posts.