How Private Equity Firms Are Changing the Face of Healthcare-Mahesh Saladi, PECFO

Private equity (PE) firms acquire physician practices in a variety of ways. Some PE firms will directly acquire a practice, while others will invest in a management company that owns and operates physician practices. In either case, the PE firm will typically take a minority ownership stake in the practice, with the remaining ownership stake held by the physicians who work in the practice.

The modus operandi of PE firms when acquiring physician practices is to identify practices that are well-managed, have a compelling reputation, and are in a growing market. PE firms are also looking for practices that have the potential for growth, either through organic growth or through acquisition of other practices.

Once a PE firm has identified a potential target, it will typically conduct due diligence on the practice. This due diligence will include a review of the practice's financial statements, operations, and patient demographics. PE firms will also meet with the practice's physicians and staff to get their input on the potential acquisition.

If the PE firm decides to proceed with an acquisition, it will negotiate a purchase price with the practice's owners. The purchase price will be based on a variety of factors, including the practice's revenue, expenses, and growth potential.

After the acquisition, the PE firm will typically work with the practice's management team to improve the practice's operations and profitability. This may involve implementing new management systems, investing in new technology, or acquiring other practices.

There are a few pros and cons to physician practices being acquired by PE firms. Some of the pros include:

• Access to capital: PE firms can provide physician practices with access to capital that they may not be able to obtain on their own. This capital can be used to invest in new equipment, hire fresh staff, or expand the practice's operations.
• Expertise: PE firms have a wealth of experience in the healthcare industry. This expertise can be invaluable to physician practices, as they can help the practices to improve their operations and profitability.
• Growth potential: PE firms are typically looking for businesses that have the potential for growth. This can be a good thing for physician practices, as it means that PE firms may be willing to invest in the practice's growth.

However, there are also some cons to physician practices being acquired by PE firms. Some of the cons include:

• Increased financial pressure: PE firms are typically looking for a return on their investment. This means that they may put pressure on physician practices to improve their profitability. This can lead to increased stress for physicians and staff, as they may feel pressured to see more patients or perform more procedures.
• Loss of control: When a PE firm acquires a physician practice, the physicians typically lose control of the practice. This can be a difficult adjustment for physicians, as they may no longer have the same level of autonomy.
• Changes in culture: PE firms may bring in new management and implement new policies and procedures. This can lead to changes in the practice's culture, which can be disruptive for physicians and staff.

Physician practices that are considering being acquired by a PE firm should carefully weigh the pros and cons before deciding. It is important to understand the potential impact of the acquisition on the practice's operations, culture, and financial well-being.

The valuation of a physician practice is typically based on a multiple of the practice's revenue. The multiple used will vary depending on the practice's size, location, and growth potential. For example, a small practice in a rural area may be valued at a lower multiple than a large practice in a metropolitan area.

The obligations of physicians after acquisition will vary depending on the terms of the acquisition agreement. However, physicians typically will be required to continue working on the practice for a period after the acquisition. Physicians may also be required to meet certain performance goals.

Here are some additional things to consider when a PE firm is acquiring a physician practice:

• The PE firm's investment goals: What are the PE firm's investment goals for the practice? Are they looking to improve the practice's operations and profitability, or are they looking to sell the practice at a profit in a few years?
• The PE firm's management team: Who will be managing the practice after the acquisition? Do you have confidence in the PE firm's management team?
• The PE firm's track record: What is the PE firm's record of accomplishment of acquiring and managing physician practices? Have they been successful in the past?

It is important to do your research and ask questions before deciding whether to sell your practice to a PE firm.

As always, the team at Physician "Rx" wing of Private Equity CFO, LLC is available if you need any assistance in transacting with Private Equity Funds.