We have all seen the headlines: Another successful practice and its ASC are acquired by a private equity (PE) firm. Recently, we’ve seen PE-backed Omni Eye Services acquire Kremer Eye Center in Pennsylvania, Shore Capital Partner’s subsidiary EyeSouth Partners purchase Florida Eye Microsurgical Institute, among others. If you wonder whether PE acquisition is right for your ASC and practice, here are some pros and cons to consider.

The Upside

Going with a PE investor has its advantages. For the practices they acquire, PE firms offer these strengths:

1. Access to capital: Private equity provides the necessary capital for practices that have an aggressive expansion strategy. Robert B. Nelson, PA-C, is executive director of Island Eye Surgicenter in Westbury, NY, which was purchased by Blue Sea Capital in 2017. He explains, “With our PE partners, we have access to funding for acquisitions of capital equipment. Although the purchases are deeply scrutinized, if we establish a clear need and a reasonable ROI, the funds are indeed available.”
2. Opportunities to monetize equity: “Before private equity entered the ophthalmic industry, the value of ‘good will’ had greatly diminished,” says Maureen Waddle, MBA, principal and senior consultant at BSM Consulting. “PE restored owners’ ability to monetize their equity.”
3. Opportunity to scale-up the business: With the resources and management expertise provided by PE, practices can more easily expand and duplicate their success. Nelson says, “As administrators, we’ve adjusted to a new way of conducting business that is much more granular and in the weeds. We work with very bright analysts at the PE company and the many consulting firms it has retained to perform day-to-day analyses of our current and projected performance, as well as potential areas for growth.”
4. Succession planning guidance: PE firms have the resources and expertise to help facilitate the retirement of physicians while sustaining the business.
5. Expertise: “The business of operating a practice and ASC has increased in complexity for a variety of reasons, including regulatory burden,” says Waddle. “Practices and ASCs can lean on PE firms to help practices meet changing needs, remain compliant, and develop leadership skills for physicians and managers. This can be a welcome feature for those who are fatigued by regulatory and administrative burdens.”
6. Up-front payment: Practice and ASC owners receive a bulk payment at the close of the sale. John Pinto, president of J. Pinto & Associates, an ophthalmology practice management firm based in Southern California, helps his clients evaluate that income. “They need to make sure the up-front, non-revocable funds from the transaction will take them over their personal financial finish line,” he explains. “The principals considering it may be retiring in a few years or a decade, and the last thing they need is a transaction in which income drops and they can’t fund their retirement the way they had envisioned it.”
7. Freedom to be a surgeon: After acquisition by a PE firm, much can change, especially administratively, but physicians still see patients and perform surgery. Nelson says that, in his experience, “The transition has been relatively benign for surgeons. The performance expectations are high for sure, with monthly, quarterly, and annual goals for growth for each of them to meet, but their day-to-day work hasn’t changed much.”

The Downside

While PE ownership has its advantages, it is not for every practice. Consider how important these factors are to you.

1. Lower long-term profits: “While the upfront cash is very attractive in some of these transactions, if you calculate long-term earnings, you’ll find the physician-owners don’t achieve the same level of profitability because they have sold a percentage of the profits,” says Waddle. Those profits, she explains, are based on physician-owners gaining equity in the newly formed management company as part of the transaction. The only way the physicians can hope to have the same long-term profits is if the new entity outperforms and grows more rapidly than the practice would have done on its own. For this reason, younger physicians are typically not interested in a sale.
2. Provider commitments and restrictive covenants: The business firm can’t generate revenue without the physicians. Waddle warns that physicians are frequently asked to sign agreements with long-term commitments and restrictive covenants. If a surgeon wants to leave the group, but continue practicing, he or she would need to move and possibly even pay penalties.
3. Loss of control: If you’ve built a practice or helped grow one, it can be difficult to hand it over to strangers. The company culture changes, and its success can as well.
   “Most firms apply a light touch. They’re only in the business of buying successful practices, and they don’t want to do anything to change that in a negative way. But there will be changes, and, after a few years, they might flip their aggregated practices into another PE or the public market,” notes Pinto. “Before you sell, be certain that you’ll feel comfortable with the potential loss of control over the enterprise. It is possible that in new hands, the practice may be poorly handled, fade away, or fail. Those outcomes are best received by people who aren’t emotionally attached to the company post transaction and, instead, are happy being financially set for life, regardless of the outcome.”
4. Short-term partnership: The nature of PE funds is that they invest for a short period of time, during which they drive growth and high-percentage returns for their investors. The PE firm then sells after an average of 7 years, says Waddle. “Our industry has already seen early investors sell their majority position in the management company they’ve formed to another PE firm,” she says. “For instance, Varsity Healthcare Partners, which entered the market in 2014 with its acquisition of Katzen Eye Group to form Eyecare Service Partners (ESP), sold its majority interest in ESP to Harvest Partners in 2017.”
5. Pressure to perform: Private equity firms have promised their investors a certain return on investment. Therefore, an “off year” is not an option. Practices and ASCs need to grow at a rapid rate to meet the demand for high returns. For some, this is not a big change, because they have already been driven to perform this way. For practices and surgery centers not used to this mentality, it can feel daunting.

The Big Decision

If you think a PE purchase might be good for you, your partners, and your practice as a whole, then learning more about PE firms and what they offer should help you make a final decision. As you conduct your research, remember that you’re not obligated to follow through on a sale.

“Always think strategically,” Waddle advises. “Too often, the amount of money being offered clouds the decision-making process. Rather than focusing on the check, you need to be clear on the vision for your organization and consider whether a PE firm is the right match to ensure you will achieve that vision.”

Nelson adds, “Our physician partners and leadership team chose a mid-sized PE firm that had a vision for our growth that was aligned with our goals and focused on us. It felt like a good match at the time and has proven to be so.”

Because many PE firms are fairly new, Pinto advises his clients to learn more about them by talking to physicians in practices the firm has already acquired.

“Ask physicians about their experience working with the firm and ask administrators and department heads what life has been like since the deal was done. After having these conversations, I’ve had some clients move forward, while others opt to remain independent or look into other potential buyers.”

Even if you’re still on the fence, good advisors can help you evaluate PE firms. Find lawyers, accountants, and business consultants who have prior PE experience. If you decide to sell, they can help you avoid pitfalls and assist with the very time-consuming due diligence process required for sale.

Expert advisors also can help you avoid wasting time pursuing a mismatched partnership. Their goal is to help clients make choices that satisfy them, whether that means selling or remaining independent. ■

Reference

1. 2018 Physician Practice Consolidation: A Year in Review, February 11, 2019. JD Supra. Available at: https://www.jdsupra.com/legalnews/2018-physician-practice-consolidation-a-81280/ ; last accessed April 4, 2019.