A Deeper Understanding of a Private Equity Buyer

EBITDA FamilyPrivate equity investors have seen the light and have been consistently investing in the modern healthcare industry over the recent years.  It is important for prospective sellers to understand how private equity investors can impact their business, and what the process is that private equity investors have to go through in order to even set up the initial deal.  The Ambulatory M&A Advisor takes a close look at the ways that private equity investors approach a healthcare transaction deal, the importance of working with a private equity company that is comfortable in a specific field, and what specific things to look out for as far as purchase price and Fair Market Value (FMV).

Ann Bittinger, attorney and owner of The Bittinger Law Firm thinks that private equity investors have a greater impact on the company, both short-term and long-term; whereas other companies might look at a transaction in the way of how it can help other aspects of an existing healthcare business, private equity companies may not have that same perspective.

“Depending on the private equity company’s portfolio, there could be some synergy between different ventures that they own.  A question that should be asked to give some background perspective is, “What kind of a private equity company is involved in the transaction?”” Bittinger asks.

“Is it one that works predominantly in healthcare or not?  If it is not one that works predominantly in healthcare or it does not have a lot of healthcare portfolios, my concern is that since healthcare is a business like no other, the government regulation is like no other.  If they are not experienced in the type of healthcare organization that they are buying, and in the state that they are buying; what they might expect to be a quick buy turns into a regulatory nightmare.”

From the perspective of wanting to get a deal done, Bittinger says one might think that a private equity buy is easier than an existing healthcare company buying another healthcare company.  That is what private equity companies do…they buy companies all day, she says.

However, if their legal team and management team is not experienced in the healthcare sector, they are not going to know what questions to ask and the transaction can quickly become more complicated.

“I have been retained by companies that are going to sell to private equity.  They retain me to talk to the private equity company about Medicare compliance, the Stark Law, referral situations etc.  Sometimes my clients, the sellers, want me to write opinion letters or assessment letters on the legal status from a healthcare standpoint.  Usually, that is not the kind of thing that another healthcare company would request.  The seller might not expect some of the legal fees that it takes to satisfy the curiosity of the private equity buyer,” Bittinger says.

John Fanburg partner with the law firm Brach Eichler says that from the perspective of the seller, the seller is concerned about the long-term nature of the relationship.

“What I mean by that is when a medical practice, large or small is selling, they are still engaging in an ongoing relationship through a management service agreement based upon corporate practice of medicine.  Because the private equity firm cannot practice medicine, it needs to maintain an ongoing relationship with the selling physicians to continue practicing medicine, to continue to bill and collect, and to continue to ensure a steady income to the private equity firm,” Fanburg says.


Purchasing at FMV and Getting Paid

Bittinger says that a lot of times the private equity companies can go higher than FMV, because the transaction does not have the ongoing referral situation seen in other types of healthcare transactions.

“The apples to oranges comparison is, healthcare organizations that are simply expanding and bringing more into their mix of services would expect referrals from the entity that they are buying.  If we are talking about that sort of a transaction where it is bringing into the existing mix to supplement the existing services and income, you are going to have a referral situation that would require FMV and commercial reasonableness under the Federal Anti-kickback Statute and perhaps the Stark Law,”  Bittinger says.

“That does not apply to most private equity companies.  Again, it depends on how the transaction is acquired and where it is going to go.  However, for the most of the time there are no concerns from Federal and state statute on commercial reasonableness and FMV.  That being said, the market should act as a control that in effect in a roundabout way, might have the same push down on the actual sales price.”

Mark Norris, managing director at Tucker and Meltzer Valuation Advisors says that in the case of private equity buyers, they can, in fact pay more than FMV for a healthcare practice.

“Basically, a not-for-profit entity, which many hospitals are, cannot pay more than FMV for an acquisition.  Since private equity groups are non not-for-profit entities, they do not have to comply with that regulation.  Therefore, they can structure an acquisition any way that they want to,” Norris explains.

In an example that Norris gives comparing a private equity firm and a not-for-profit hospital targeting the same medical practice acquisition, Norris explains that the hospital is limited to FMV in its purchase price, whereas the private equity firm can pay whatever they want.

Norris says that although there aren’t really any regulations on how much a private equity group can pay for a medical practice, they won’t pay more than what makes economic sense.

Fanburg says that depending upon the state, the equity firm can charge the medical practice a percentage of revenue, or it has to be geared towards a fee per procedure or a blend.  That is how they basically share in the revenue structured legally with the medical group in many of the states.

Fanburg says that currently, it is a good time for sellers to seek out private equity for their next transaction partner.

“From what I understand, a lot of private equity investors are sitting with a lot of cash right now.  Because of how healthcare is a significant portion of our country’s economy, because of the regulated nature of it, it is a viable industry that is not going away,” Fanburg says.

“Whereas technology could change other industries, right now you still need healthcare to be provided by physicians.   People are still getting sick and need doctors.”

If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.

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