Private Equity Sponsors and your Transaction
“Most of these deals are valued based on the multiple of the platform’s EBITDA, and so the ability to sell an interest in an existing platform for a multiple of that EBITDA and receive that on day 1, as opposed to over the years that it would take to otherwise receive that EBITDA or those distributions, is obviously of value to one that is interested in selling,” Kaye says.
Kaye says that besides alleviating financial risk, there are also added favorable tax advantages of getting capital gains treatment on those proceeds at 20 percent, relative to being taxed at closer to 40 percent on ordinary income. Kaye explains that at this point, your transaction becomes a “very attractive deal.”
Kaye adds that the ability to grow and expand the business is also a reason to pair up with a private equity sponsor.
“A number of the players that are out there, grew organically and may be coming up on their ability to deploy significant amounts of additional capital to either grow another 10,15, 20 additional units; each unit representing a location,” Kaye explains. “Or, they may find that in light of all of the regulatory matters that are arising, the need to create a more sophisticated infrastructure requires capital as well.”
Kaye says the ability to bring on a sponsor that can help with the deployment of said capital, flipping it and figuring out the best and brightest ways to do so, is certainly what makes it attractive to consider partnering with a private equity sponsor.
“When picking a partner, what we’re finding is, it’s not just about the money. Certainly you’re looking for an organization or private equity fund that has experience. Experience either comes from being in the urgent care space itself, or potentially being in some other line of health care that may still bring an attractive level of expertise, and may sit well and create synergies for that urgent care or that urgent care platform,” Kaye says. “By way of an example, a number of private equity sponsors have investments in health systems.”
Kaye says that additional, professional expertise, directly correlates with the urgent care industry, or may otherwise create some synergies for the urgent care industry. He says these factors are something he sees on the selling side of a transaction.
“A number of founders of urgent care platforms are looking for in terms of not just capital, but also that additional, professional expertise,” Kaye says.
Blayne Rush, president of Ambulatory Alliances also speaks up about the need for private equity sponsors to be experienced in the urgent care industry.
Rush explains that private equity sponsors without sufficient experience in the field are being forced to buy into the market, build themselves up to be the highest bidder, and this does not always result in a winning situation for the seller.
“That’s not always going to be your best partner. Some of those experiences are in this market now. There are a couple of platforms that were early in with private equity and attractive competitors but there is not a whole lot to them right now; because one in particular had two private equity backers early and are now calling needing a bridge loan,” Rush says. “Those guys can impede your ability to grow, and hurt your business as well as help your business. You’ve got to make sure you know who you are getting in bed with.”
Scott Witter, director of business development, M&A at U.S. HealthWorks gives his perspective on the use of private equity groups on the market.
“I’m talking to potential sellers all day long and the private equity groups are really there to help that entrepreneurial owner that is looking to grow. They’ve gotten themselves to the point of improving concepts, improving business models,” Witter says.
According to Witter, pre-sale, a company may have a decent management team and possibly a few flaws here and there. Witter says the thing that most don’t have is capital, or don’t want to risk the capital to really support and aggressive growth plan for their business. This is where private equity groups come into play.
“Maybe they are at about 10 or 15 clinics. The private equity is there to support you to get to 30, 50, 60 clinics across a few years,” Witter says.
However, Witter echoes Rush’s remarks about being careful when selecting a strategic or private equity group to work with.
“There are some phenomenal private equity groups out there but there are plenty that aren’t going to be the right fit for that particular entrepreneur. They might not be bringing the right expertise to the table; it might be just a bad personality fit, who knows. Not every private equity acquisition is a success,” Witter says.
Witter says he has seen a few deals proceed with matches that weren’t ideal fits. The results ended with the management teams turning over or the actual portfolio acquisition turned back onto the market within a short period of time.
Witter says it is beneficial to have legal counsel or members of the board with established relationships with buyers and act as a “matchmaker” in the process in order to figure out who is the right fit for your business.
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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