Private equity (PE) investment in health-care practices has been a key driver of the change we’ve witnessed in the US health-care system, including ophthalmology, during the last decade. According to the American Investment Council, PE investments in health care have risen from $41.5 billion in 2010 to more than $200 billion in 2022, with a total of $750 billion invested over the last 10 years.

One of those who have felt the impact is Dr. Matthew Zimm, a Pennsylvania ophthalmologist who completed a PE partnership with Ridgemont Equity Partners-backed Sunvera Group in 2022. “The administrative burdens of being a doctor get bigger every year, and insurance companies put roadblocks in our way when we are trying to focus on the patient. We looked at multiple potential partnerships, and Sunvera was a very good fit for us in many ways. Just a short time into our partnership, we are already seeing the structures that Sunvera has in place to make the transition easier. Wheels are turning to help us learn about how to build and grow the practice with input from me. It was an easy decision in the end and finding the right partner was the key.”

Dr. Zimm hired our firm to help him evaluate the different PE firms that were interested in his practice and to negotiate the best deal.

Although PE investment activity is widely reported with varying levels of praise and scrutiny, less often is there an objective focus given to how the pros and cons of a PE transaction can be evaluated for doctors and their staff. So, how can doctors determine whether working with a PE investor is right for them? And how can they evaluate their practice to understand its true value as well as how a PE partnership might affect operations, staffing and benefits after the transaction?

Our team at Physician Growth Partners works with physicians across the country every day. During the past 5 years, we have guided more than 50 practices through successful PE transactions, including more than 15 eye-care practices. One of the most important aspects of our work is talking with doctors, listening and educating them on options to meet the practice’s goals and succession plans. By doing so, we help them understand what type of partner can best fit their needs, then run a transaction process aimed at ensuring those goals are met. After all, if doctors aren’t more satisfied in their work after a transaction (whether that comes through additional financial, operational or administrative resources), no amount of money will make selling a practice worthwhile.

Let’s look at a few questions that every doctor considering PE needs to consider and understand.

HOW DO I KNOW IF PE IS RIGHT FOR MY PRACTICE?

There are three boxes that must be checked, beyond economics, to determine that a PE transaction makes sense for a practice.

1. Is clinical autonomy maintained? Thorough due diligence is crucial in every practice transaction … on both sides of the table. It is essential to conduct as much due diligence on the potential buyer as they would on the target practice. This involves asking pertinent questions about how they work with partner practices, what type of support and administrative services they offer, verifying the information provided with practices and physicians who have previously partnered with them, whether in eye care or another specialty. This reverse due diligence, combined with robust negotiations regarding post-close governance control, safeguards clinical autonomy.

Our team does this verification in which we interview other practices that have partnered with various PE sponsors in the past. Many of these sponsors are ones that we have evaluated or worked with before, so we know quite a bit about their standards and their ability to support the partner practices that they work with.

2. Does the PE firm and/or the platform they back provide adequate resources to drive sustainable, clinical outcome focused growth? Can the PE partner demonstrate immediate economies of scale? Do they possess experienced human capital across all essential processes and functional departments? Additionally, their capacity and willingness to fund future capital expenditure projects, such as expanding locations, introducing ancillary services, or upgrading systems, should be evaluated. This is done by looking at practices they have previously partnered with and assessing what guarantees they are willing to put into an agreement. It is also important to inquire about their existing payor relationships and negotiation expertise, which can potentially provide reimbursement leverage. Assessing additional resources beyond the practice’s current capabilities is crucial in determining whether the deal benefits the practice overall.

3. Does the current financial performance/provider alignment of the buyer and their previous experience with similar investments show a track record of success? When we examine a potential practice partner, we want to see PE firms that have a history of building sustainable platforms leading to an eventual, successful exit. We look for concrete examples of value-added growth and, more importantly, provider alignment. Provider alignment — in terms of the PE-provider relationship both at closing and in years following — is the key to success. Examining how the PE firm has achieved this (by looking at historical provider recruitment and attrition) is critical. For example, one key benchmark is demonstrating that associate providers receive attention throughout the transaction process and come out in a better position than when the group was independent.

If these three considerations — autonomy, resources and track record — cannot be successfully validated, then a deal probably will not make sense in the long run.

HOW DO I EVALUATE MY PRACTICE IN PREPARATION FOR A PE TRANSACTION?

Our main goal in the evaluation process is to thoroughly understand each shareholder’s unique practice goals/succession plans. We also look closely at the practice’s historical trajectory and go-forward objectives, what role each provider wants to play in a post-transaction environment, and how the current practice team can help achieve those objectives vs where most additional support is needed. All that information is then packaged to show the strategic options available to the practice and outline a process that is tailored to ensure all transaction goals can be met.

HOW DO I CALCULATE THE VALUE OF MY PRACTICE?

Outside of understanding the qualitative components surrounding goals and succession plans, we evaluate the practice’s historical financial performance, look at in-process or near-term initiatives that may affect future performance, and these following attributes:

• Size
• Geography
• Service offerings
• Clinical model
• Management team/infrastructure

With financials, we do not look only at Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Taken alone, this is the net earnings of the practice, plus the expenses for interest, state and federal income taxes, depreciation and amortization added back in.

Instead, we look at historical financial performance on an “adjusted” basis. This involves the removal of all one-time or non-recurring expenses (ie, shareholder personal expenses, one-time repairs), normalization of any timing discrepancies from a reimbursement or expense perspective and adjusting shareholder compensation to market level (a percentage of net collections typically ranging from 30%-35% in the eye-care space).

Additionally, the market will currently pay forward-looking credit for any current or upcoming initiatives that are in process over the next 12 months. We work closely with practices to understand what initiatives are in place, what can be best quantified and defended, and utilize our experience to present a “forward-looking” EBITDA.

To calculate EBITDA or the overall value of practice, this is highly differentiated based on the type of practice, its size, previous investment, etc.

HOW WILL THIS AFFECT PRACTICE STAFF AND THEIR BENEFITS?

In a PE deal, staff and their benefits should only be affected if there is a demonstrated improvement compared to their historical access. Ensuring employee continuity and satisfaction is vital for the long-term success of the practice. We prioritize negotiating written agreements to maintain key employees and their benefits. It is essential to conduct thorough due diligence on the PE firm as their past actions are a reliable indicator of their approach in similar future situations. Both parties should share the objective of prioritizing employee well-being in this regard.

HOW WILL THIS AFFECT MY ABILITY TO RECRUIT STAFF AND DOCTORS?

The right PE partner can bring resources that enhance a practice’s ability to recruit new professionals. Competitive compensation packages, the ability for a physician to practice the full scope of medicine, research and academic opportunities, a path to partnership with no buy-in (or minimized buy-in), plus equity incentives are among the attractions that are part of a PE deal.

Additionally, infrastructure within the new organization will streamline the physician recruitment process by providing a dedicated recruiting team to drive process, access to large databases of candidates, relationships with residency programs and better market data. With staff the same benefits apply, along with potential equity opportunities for key managerial employees.

PE groups rely on sustainable practice growth for a return on investment. This necessitates a continued focus on attracting top doctors and support staff. Therefore, substantial resources are dedicated to enhancing recruitment capabilities, including capital, dedicated staff and infrastructure.

WHAT HAPPENS WHEN THE PE FIRM SELLS AGAIN?

In a perfect world, nothing will “happen” other than experiencing an additional liquidity event where a shareholder sells a portion of his retained equity in exchange for cash. If the right PE partner is chosen and they sell a couple of years down the line to a bigger PE firm, or a strategic buyer, minimal to no changes should occur.

CONCLUSION

Not all PE firms are created equal in terms of past success, value, growth plans, etc. It is important for a practice to be comfortable with a firm’s approach to ensure the best cultural and operational fit. You can only be comfortable with a particular firm’s approach to the extent that you have been able to vet it against other options. There is much more to a PE transaction than closing economics, since the deal terms will guide the future of practice operations, how the providers will work and be compensated, plus additional investment and growth.

By considering the above questions, you’ll be well equipped to make a decision on whether PE is right for you.

Additionally, an advisory team can help you explore all your options to achieve the most favorable outcome that meets the practice’s immediate and long-term goals. Also, they can help you develop a clear picture of their practice’s value, market the practice to attract the best investment partners, evaluate the pros and cons of each potential deal, and then negotiate an excellent agreement that all parties are satisfied with. OM

Michael Kroin is the co-founder, CEO and managing partner at Physician Growth Partners in Chicago. Mr. Kroin started his career as a health-care investment banker. He holds an MBA in Finance and a BA in Accounting from Indiana University. Contact him at mkroin@physiciangrowthpartners.com.

Ezra Simons is the co-founder and managing partner at Physician Growth Partners in Chicago. Mr. Simons began his career as a health-care investment banker. He holds a BA in Finance from Indiana University. Contact him at esimons@physiciangrowthpartners.com.