What to Consider Before Selling Your Practice to a Private Equity Firm
A private equity firm reached out to you about buying your healthcare practice. What’s next?
The number of private equity (PE) firms buying healthcare practices has increased dramatically over the past decade. When a PE firm offers to buy a practice, it can substantially benefit the practice owners. The benefits of selling to a PE firm can include a large payout for the practice owners, additional IT support, new internal legal support teams, and other enhancements to the practice infrastructure.
All this, coupled with the relief of handing some of the regulatory and administrative burdens of your practice operations to another entity, may seem too good to pass up. But benefits aside, many considerations come into play when negotiating with a private equity firm. This article discusses a few big-picture topics you need to address before moving forward with such an arrangement.
Determine the value of your business and have an understanding of EBITDA.
Your practice’s value is much more than the office space and materials. You are selling your knowledge, skills, goodwill, existing contracts, and potentially some intellectual property. These factors should all go into your practice’s valuation and be at the forefront of negotiations.
You should also have a basic understanding of EBITDA, which stands for “earnings before interest, taxes, depreciation, and amortization.” As the name suggests, the EBITDA is the business’s net income with interests, taxes, depreciation, and amortization added back to the final number.
PE firms use this number to compare profitability among practices across industries. Simply put, this metric reveals profitability and will be part of the value determination when negotiating with a PE firm.
Understand the private equity firm’s proposed business model.
PE firms may approach the buyout in two different ways. In the first model, the PE firm will propose merging your small practice into a larger, pre-existing business. In the second model, the PE firm will try to obtain an ownership stake in your practice. If it is the latter, the ownership interest may be either a minority or a majority interest.
The structure of the deal will impact the practice owners’ bottom line. For instance, if your practice is merging entirely into a larger business entity, you may become an employee instead of an owner with interest. Even if you remain a partial owner in the practice, the deal may leave you with less flexibility regarding your preferred specialty and less autonomy in controlling the management of the business.
Note any non-competition agreements.
It is not unusual for private equity firms to restrict practice professionals to providing only certain services aligned with the PE firm’s interests. Thus, you need to become well versed in non-competition clauses (also known as “non-competes”).
Generally speaking, a non-compete is a clause under which one party agrees not to enter or start a similar profession or trade in competition against another party. However, in this context, the non-compete clause usually limits the professional to a specific field or niche practice area agreed to by the parties. This can significantly limit the scope of your work and your ability to operate outside the arrangement.
Whether such a restriction can be enforced will vary by state law. But if the restriction is enforceable in the state where you practice, you need to fully understand the scope of the clause before signing on the dotted line.
See our related article, “What Happens to the Restrictive Covenants in Employment Contracts During a Merger or Acquisition?”
Consider relevant regulations.
It is common for practices to enter into management services agreements (MSAs) with PE firms or third-party management companies as part of the buying process. An MSA is a contract that facilitates the business relationship between two distinct entities: a non-physician business entity (the management company) and a medical practice. This agreement clarifies that the two parties are separate entities working together on a joint business venture but with distinct responsibilities. The medical practice operates and controls the healthcare-related aspects of the operations while the management company handles the business matters.
Thus, as part of the buying process, practices need to be careful not to run afoul of the corporate practice of medicine rules and fee-splitting prohibition in the state where they operate and work with an experienced attorney to ensure their MSA complies with state law.
See our related articles:
Consider the consequences of the sale for patients and staff.
You likely entered your specific field because you cared about patient care and wanted to contribute to the healthcare needs of your community. However, while PE firms can boost your bottom line and streamline the operational side of your practice, PE firm priorities are typically not patient and community needs but, instead, the financial gain for the investors.
Negotiations with a private equity firm should include open and honest conversations about why entering this agreement will work for you and your patients. Additionally, the decision will affect staff, management, and other practice professionals. Therefore, in your negotiations, you should be clear about any desire to keep workforce members in their current positions and ask for assurances.
Work with experienced counsel.
Selling to a PE firm requires several legal documents to effectuate the transaction. Whether you are at the beginning stages of negotiation, need an MSA, or have general questions about the process, it’s critical that you work with an experienced healthcare attorney who is privy to the regulatory requirements involved.
For most healthcare professionals, selling their practice may be the most significant transaction of their professional life. However, that’s not the case for PE firms — they work on such transactions every day.
Thus, you should come to the table prepared with a team to support your best interests. If you need legal assistance on these matters and live in one of the states where we practice, set up a free consultation.
This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.