The Private Equity Demand for “Eyes, Skin, and Teeth”

It has never been a better time to be an owner of an ophthalmology, dermatology, or dental practice who is looking to sell.

Over the last few years, demand for these types of medical practices among private equity firms has soared, causing a strong increase in valuations. Consequently, consolidation is the new reality as practice owners look to take advantage of the market and the potential benefits of partnering with a private equity investor.

This trend is likely to continue this year, making now an opportune time to consider a merger or sale.

Why the Demand?

The medical industry is vast, but private equity investors have focused more intensely on ophthalmology, dermatology, and dentistry compared to other types of small- to mid-sized medical practices for three primary reasons.

1. Demographic Changes

As referenced in our previous blog post, 10,000 Baby Boomers are turning 65 every day and that trend is set to continue for 12 years. Numerous chronic conditions associated with aging will require increased ocular, dermatological, and dental care.

2. Recurrent Patient Bases

Most ophthalmologist, dermatologists, and dentists have relatively recurring patient bases compared to other medical specialties. If a patient is receiving quality care he or she is unlikely to go through the hassle of changing providers. This recurrent patient base ensures consistent monthly patient encounters and ultimately consistent revenues; which helps to minimize the financials risks for private equity investors.

3. Elective / “Cash Pay” Procedures

Lastly, these specialties offer numerous elective procedures (i.e. refractive surgery, skin rejuvenation, cosmetic dentistry, etc.) that are typically “cash pay” and as a result more profitable than general/non-elective treatments that are covered by insurance carriers.

Why Consider a Merger or Acquisition?

There are several considerations that medical practice owners need to take into account when deciding to sell or partner with a private equity firm.

1.  Operational Convenience

Most doctors find that managing a practice is arduous. The administrative and regulatory requirements take up a significant amount of time, distracting from the goal of providing excellent patient care. A private equity investor will have the team and resources needed to handle the numerous back office functions such as: HR, compliance, and provider credentialing as well as the experience to help improve workflow processes.

2. Cost Control and Growth

We are seeing a move 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 push down fixed costs like staffing and rent. Larger practices also have an advantage when it comes to negotiating with medical supply vendors, insurers, electronic health information storage providers, and so on compared to small practices and solo practitioners.

When these lower overhead costs are combined with an influx of capital from investors, a potent combination for growth emerges.

3. Cashing Out

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. Given the large number of PE firms targeting investments in the space, practice owners have the luxury to be very selective with whom they chose to partner with.

This combination of increased competition among investors and fewer potential acquisition targets has caused valuations to rise considerably. Therefore, doctors nearing the end of their careers as well as younger physicians looking for operational support are finding 2018 to be a great time to consider a private equity transaction.

Why an Advisor is Necessary

Due diligence is a significant factor in healthcare M&A due to the strict regulatory restrictions in the space. Prospective investors will investigate the details of a practice’s cash flow, patient volume, malpractice exposure, debt, contracts, staffing, and so on.

Hiring an experienced M&A advisor and putting together a deal team well in advance of a transaction is the best way to ensure every consideration is addressed and ultimately a successful deal is executed.

Furthermore, with the large number of PE firms out there looking to invest, it’s important to have an advisor who knows the landscape, who can help ensure that the best offer is found, and who can effectively manage the obstacles that will inevitably come up during the course of a transaction.

The Symmetrical team has decades of experience successfully handling M&A transactions, including sell-side medical M&A. If you are a medical practice owner and are looking to sell or take on an investor, contact us today.

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