What Dermatologists Need to Know Before Selling Their Practice to a Private Equity Acquirer
Posted on September 11th, 2019 by CIG
The private equity acquisition market has been heating up in recent years, and private dermatology practices whose physician-owners are in the market to sell stand to gain from the industry’s interest.
Part of the private equity market’s rush to acquire dermatology practices stems from a historically large surplus of cash– $2 trillion as of the end of 2018—waiting to be invested. Further, the increasing number of private-equity firms investing in dermatology practices, more than 30 firms by 2018, has set the stage for a continued roll-up strategy of small and mid-size practices, to expand footprints regionally and grow new markets. Slowing down new investment in some states may be Corporate Practice of Medicine (CPOM) laws prohibiting business corporations from employing physicians in the practice of medicine. They are a central component to medical practice deal structures but don’t exist in all states and vary in strictness within the states that they do exist in. Depending on the state in which your dermatology practice operates, you may have an easier or more difficult time completing your deal with a private equity firm depending on your state’s CPOM laws.
Generally, private equity investors want to invest in businesses that are already well run. When targeting dermatology practices for acquisition, private equity investors focus on three elements: cash flow, stability, and growth potential. Dermatology practice owners can review their practice’s overhead expenses, for instance, to find ways to cut costs and improve cash flow before approaching the private equity market. A thorough review of your practice’s financial metrics as compared to similarly sized practices near you should also give you an idea of how attractive your practice might be to a private equity buyer.
One risk factor that might scare private equity investors looking at dermatology practices is the lack of involvement of physician-owners post-sale. With physician productivity being an important source of revenue, agreements are typically put in place to retain physician-owners for a few years post-acquisition. In fact, many private equity firms are offering “participation” opportunities to the selling physicians, to retain equity in the practice until a later resale date.
With the increasing prevalence of private-equity buyers in the dermatology space, deal structures are becoming more stringent. Two features a physician-owner might expect to see in a private equity sale of his or her private dermatology practice are holdbacks and earnouts. Holdbacks, ranging from physician hours to breaching representations and warranties, are commonplace when dealing with financial sponsors. Holdbacks consist of buyers placing a portion of the purchase price in escrow for a defined period. Earnouts represent portions of the consideration that vary in amount based on performance.
In addition, new incentive programs are also being developed, some encouraged to reward physician-owners and some designed to entice younger associate physicians to stay with the practice. Younger physicians might be bogged down with higher education debt and may be uninterested in taking on more administrative responsibility. Private equity deals can be structured to alleviate the administrative responsibility of the practicing physicians as well as encourage associate physicians to remain with the practice with growth opportunities and tailored buy-in arrangements.
Whether you are considering selling your dermatology practice to a private equity buyer or just wonder how attractive your practice would be on the open market, CIG Capital Advisors’ business advisory services team can help. Schedule a complimentary custom consultation with a CIG professional here.