Capital Raising Strategies for your UCB
Taking the step to expand your urgent care business is a huge move that requires dedication, a solid vision and above all, capital. The Ambulatory M&A Advisor talks with experts on capital raising strategies for your UCB. They examine the process of raising capital, working with outside partners and the different options they can offer you on your journey to expansion.
Bill Kennedy, director at Navigant Consulting says when raising capital to expand, there are several options open to entrepreneurs based on the size of their business.
“If you are 6-10 centers, what you have to do is make the leap from being a series of 6 centers to a unified company where a lender or an equity holder can look at an entire company and say the entire entity is cash flowing “X”; it is up and running, it is doing well and I can have access to all of the cash flow,” Kennedy says.
He adds that this can be difficult to do because typically what happens is that you, the owner have already pledged the assets of your individual centers and so obtaining enterprise wide financing is difficult.
“What you need to do is get common financing for the whole chain if you want to expand without having to put in a lot of equity. If you are at 6-10 urgent care centers, you are really not at the size where you could access a lot of sophisticated money,” Kennedy says.
Kennedy says as a 6-10 size chain an urgent care business is probably seeking capital of $3-5 million dollars, which, in his opinion, is not a lot of money to sophisticated investors.
“It’s hard to find people, and mezzanine lenders usually want to lend to bigger companies. Bigger companies just have more durability and staying power than smaller companies,” Kennedy says.
In the case of the smaller owners seeking capital to expand, Kennedy says they have the options to expand through banks, friends and family and angel investors. Kennedy says that angel investors are wealthy individuals willing to put money into ventures that appeal to them.
“If you find an angel investor that has faith in you, then you can get all sorts of things. There aren’t any rules involved because they are private investors using their own money,” Kennedy says.
Aaron Handler, partner at Elm Creek Partners, a company that is the majority owner of the largest group of urgent care centers out of southern Louisiana, Millennium Healthcare, explains the way that entrepreneurs can start the process of raising capital for their venture and preparing for the growth of their business.
“The process starts by having some semblance of a team that can actually execute on scaling the business; having a start on systems, and an underserved market that you have a competitive advantage in winning,” Handler says.
Handler says the specific team needed for raising the capital may be a little different for everyone but some absolute players include a CEO and some sort of back office staff.
“You need to have people who can oversee your centers clinically and a team that can efficiently manage your growing back office operations, because as you expand from a couple into a system, the requirements on you to manage it are different than if you are working in your business every day. You the physician entrepreneur can no longer oversee every single unit. So, you need a team and systems in place that allow that to happen. If you have that, you have the better chance of attracting capital,” Handler explains.
Handler says that the most important thing for physician owners to remember is the need to be cognizant of the enterprise they need to build if they really want to scale it. Handler says this is a different task than building a single unit or building an operating one or two units.
“There is a leap that you have to make there, and it involves recruiting the right kind of people, building the right kind of processes and having them run by a good team, because that’s what gets you from 3 units up to 10. If you can do that, you can establish a brand, can demonstrate an area that is underserved then you can have a real shot at attracting capital and ultimately selling your business,” he says.
Jay Bastian, senior vice president of acquisitions for National Retail Properties explains that simply leasing the real estate of your urgent care center can bring the result of a partial solution to freeing up expansion capital.
“We underwrite the value of the real estate, purchase the real estate from you and then you would lease it back from us. That would free up whatever equity you may have after paying off the bank debt you may have on those properties. So, that, in effect frees up capital for new development and expansion,” Bastian says.
Bastian explains his business model with this example.
“Say you bought land and built up an urgent care practice that cost a total of 2 million dollars. You went to the bank and the bank loaned you $1.5 million. You built this property, you’ve got a half million dollars of equity tied up. So, when I say free up capital, if we bought that property from you for 2 million dollars, you would pay the bank back and you would have half a million dollars of your equity in your pocket to use to grow your business,” Bastian says.
Bastian says in order to start this type of process that business owners can work with local real estate investors who may be familiar with your company or the property.
“There are a lot of local investors in most markets around the country that you can access through a commercial real estate broker. We tend to deal with urgent care chains that might have 20 plus units but the process would be the same. You are seeking an investor to kind of cash you out of the investment and real estate, and release you from the debt obligation,” Bastian says.
Bastian says this process of raising capital does create a long-term lease obligation, but there is no additional debt that is added to the business. Any investor is going to look for a lease with the tenant or the parent company on the hook to perform the obligations of the lease, Bastian says.
Bastian also discusses capital raising when producing a new property. In that situation, Bastian says there are the options of looking at either financing the building with equity and debt with the local bank, having a developer build a suit for you, or using a company like his to buy the land and fund the construction. Bastian explains these are the different scenarios for owner to get an urgent care center up and operating.
“The first approach is going to require you to have equity that you’re going to put into this building. You are going to go get bank debt, but you’re going to have to come up with 30-40 percent equity, to get the building financed,” Bastian says.
“The second approach is you’re going to have to find a real estate developer, maybe somebody that owns a property that will build a suit for you if you don’t have the capabilities to develop it yourself. That’s kind of a zero out of your pocket way to get a clinic built. The third approach would be to use an investor like us to buy the land and fund your construction of the building. That means you, the operator would have to have the ability to build the building or hire a contractor to build the building for you.”
Bastian says there are pros and cons of all capital raising options and they are numerous. According to Bastian, the pros and cons really depend on your own interest in growing vs owning real estate.
“If you want to preserve your equity capital, then you want to look for getting maximum proceeds out of the real estate. You also may be interested in building your own real estate portfolio up. Therefore, you would grow slower because you want to continue to own the real estates. It really depends on what your own objective is,” Bastian says.
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