High Private Equity Demand for Specialty Medical Practices
It is a great time to be the owner of a small- to mid-size specialty practice who is looking to sell. Over the last few years, and particularly within the last 12 months, demand for orthopedics, urology, gastroenterology, radiology, ophthalmology, dermatology, and dental practices among private equity firms has grown, causing a strong increase in valuations. Consequently, consolidation is the new reality as practice owners take advantage of the market and the benefits of operational investors.
We expect this trend to continue, making now an opportune time to consider a merger or sale.
Why the Demand?
One of the primary factors fueling the increase in demand is the growth of the medical industry as a whole. The U.S. population is aging, and as baby boomers reach retirement age, it is causing a consistently growing demand for medical services. Healthcare spending is rising faster than GDP. This is reflected in the recent increase in medical employment.
Secondly, practices are becoming more complex and more expensive to run. Managing compliance and regulation requirements can be challenging, particularly with changing reimbursement rates. As physician groups look to expand to serve additional patients, recruit more physicians, or demand higher payment, they need to fund growth. Modern Healthcare reports that private equity is competing with hospital systems and large physician organizations for these opportunities.
And last but not least, healthcare is a particularly attractive area for investment due to the nature of the industry itself. Healthcare is a relatively recession-proof industry (demand remains constant even during economic downturns). Many small- to mid-sized specialty providers are not professionally managed and remain fragmented. Investors have an opportunity to create value by increasing efficiencies and consolidating investments.
Why Consider a Merger or Acquisition?
Medical practice owners should consider these factors when deciding to sell or take on a PE firm as an investor.
1. Operational Convenience
The administrative and regulatory requirements of managing a practice of any size take up a significant amount of time, distracting from the goal of providing excellent care. Many practices are bringing on an operating group to help lift the burden of running a practice.
2. Cost Control and Growth
We are seeing a trend toward value-based care across the healthcare industry, which necessitates cost control. With that in mind, more and more practices are looking to consolidation as a way to manage fixed costs like staffing and rent. Consolidation also allows for more efficient negotiation with medical supply vendors, insurers, electronic health information storage providers, and so on. When these lower overhead costs are combined with an influx in capital from PE investors, a potent catalyst for growth is created.
3. Rising Valuations
Because M&A activity for these types of medical practices has seen such a steady increase since 2012, the number of PE firms in the market has increased along with the amount of consolidation in the industry. The combination of higher competition among investors and fewer investment options has caused valuations to rise considerably. Therefore, doctors nearing the end of their careers are finding now to be a great time to cash out.
Why an Advisor is Necessary
Due diligence is a significant factor in healthcare M&A due to the strict regulatory restrictions. Hiring an experienced M&A and legal advisor from the very beginning is the best way to ensure every consideration is addressed and a potential buyer doesn’t back out months into a deal.
Furthermore, due to a large number of PE firms looking to invest, it is important to have an advisor who knows the landscape, who can help ensure that the best offer is found, and who can properly manage the details of the transaction. Even with all the benefits mentioned above, there are still significant points to consider when contemplating taking on private equity investment. From the type of resources a particular PE firm can provide, to the level of involvement in the day-to-day operations, the sellers of the practice need to fully understand what they’re getting into. A potentially meaningful component of many private equity transactions is the equity rollover stake sellers and other physicians in the practice may receive. Partnering with the right PE buyer to increase the retained equity value can be a significant “second bite of the apple” after the initial sale of the practice.
The Symmetrical team has decades of experience successfully handling M&A transactions, including sell-side healthcare M&A. If you are a medical practice owner and are looking to sell or take on an investor, feel free to reach out for a confidential discussion around what options you may have.