AT A GLANCE:
- Private equity applies to investments in mature and often successful businesses, including medical practices.
- Private equity firms look for private practices with potential value (ie, those they can shape without the need for much management).
- Practices looking for a potential investment from a private equity firm should consult with an investment banker and legal counsel.
Many private retina practices have recently shown interest in entering into negotiations with private equity firms as a means of growing and capitalizing on their established business models. There is often confusion regarding the role of private equity firms versus that of venture capital firms, and it is not uncommon to see the terms used interchangeably. To clarify, private equity applies to investments in mature and often successful businesses, including medical practices. Venture capital is more often involved in investing in cutting-edge technologies.
For retina specialists, the prospect of selling one’s practice, or a significant share of one’s practice, to a private equity firm comes with a long list of pros and cons. This article aims to provide an accurate assessment of the role of private equity in the medical community by analyzing the benefits and the risks.
“THERE ARE BENEFITS AND DRAWBACKS TO ANY BUSINESS AGREEMENT. BEFORE SELLING SOME OR ALL OF A PRACTICE TO A PRIVATE EQUITY FIRM, THE PRACTICE PARTNERS SHOULD INVESTIGATE THE FIRM TO WHICH THEY ARE THINKING OF SELLING.”
The Good and The Bad
The relationship between a private equity firm and a medical practice is sometimes called a partnership, but it is really a transaction. The owners of a practice are selling their company, or a significant share of it, and private equity firms look at these transactions no differently than they would any other. In selling your practice, you become an employee rather than the employer, and you subsequently lose a lot of the freedom and job security that comes with ownership.
Why are some retina practices now seeking such arrangements? It is expensive to expand a practice. It requires increased overhead, additional staff, and the ability to keep up with the speed of progress. It may also entail new practice management strategies or the purchase of a new electronic health record system. These adjustments are also costly.
When practices sell to private equity firms, there are sometimes multiple payouts associated with the original sale and any successive resales. A private equity firm offers a practice a buyout in exchange for a percentage of the business. As the firm builds and repackages the practice, there are opportunities for resale to other investors. By maintaining a stake in the practice, the physician shares in any of its long-term successes or failures. It is important to note that subsequent payments from these additional sales cannot be counted on during the initial consideration, as the market may change. As such, there may be a substantial difference between entering into a private equity partnership at age 40 versus doing so at age 60.
Then and Now
Private equity is not a new concept in the US health care industry. The strategy first rose to prominence in the 1980s and 1990s due to a general feeling of uncertainty about the future, similar to what many physicians are experiencing today. At the time, doctors were concerned about managed care, increasing government regulation, decreasing reimbursement, and whether their practices could remain financially viable.
Private equity firms began buying up practices and consolidating them for resale. Unlike today, however, there was not enough money in the health care industry to support this kind of business management, and the firms lacked the necessary understanding of the industry to guide practices appropriately. Today’s private equity firms have a better idea of what to look for in a medical facility based on a purportedly better understanding of both the industry and the long-term market. The uncertain future of health care policy, once again, has left private practices open to buyouts.
For private equity firms currently looking to acquire private practices, the name of the game is potential value. These firms are looking for a base upon which they can build: a practice they can shape into a platform without the need for a lot of management or oversight. This hands-off approach represents the ideal situation, but, as was demonstrated in the 1990s, not every practice fits this model.
Practices interested in a private equity buyout should consult with an investment banker to find out whether their organization is appealing and, if not, what steps could be taken to make it attractive to investors. Because a private equity buyout is a business contract, legal counsel is also essential to the selling party. These consultations offer valuable perspective on the operational efficiency and profitability of the practice overall.
Do Your Homework
There are benefits and drawbacks to any business agreement. Before selling some or all of a practice to a private equity firm, the practice partners should investigate the firm to which they are thinking of selling. Does it have experience in the medical field? In the ophthalmic realm? Have its previous projects been successful? If possible, the partners should also consult with other practitioners who have gone down the private equity route. To better understand the risks, we urge private practice retina specialists to do their due diligence before entering into one of these arrangements. pen to buyouts.