Qualities of a Solid Private Equity Firm

Urgent Care M&A Broker TeamIn an industry where the choices of who to sell your urgent care business to are continually growing, knowing what you want and what to look for are very important steps to take before even seeking out a potential buyer.  One of the earliest and biggest players in the market among sellers is the private equity group.  The Ambulatory M&A Advisor and development and legal experts give some tips on the qualities to look for, as well as look out for when examining whether or not a private equity entity is the right partner for your business.

Todd Kelly, partner, Jones Day Dallas Office says that there are several qualities that a seller should look for when considering a private equity firm.

Kelly says the first question involves what the healthcare seller wants for themselves in the future.  Kelly says a healthcare enterprise owner could be looking to sell out or that enterprise owner could be looking to roll over an ownership interest and continue in a co-ownership arrangement, a partnership with a lowercase “p”,” Kelly  says.

The first thing to consider if an owner intends to roll over an interest, Kelly says, is that culture trumps cash, and culture may eat cash.

“Culture will dominate and should be a preeminent consideration.  If you don’t feel like you get along with the person, then you are probably not going to be successful in business with the person,” Kelly says.

Kelly adds that at this point most sellers should understand that someone who is looking to sell a part of their business and have a private equity investor involved is going to be carefully investigated and scrutinized by the prospective investor.

“The business owner should not be embarrassed, reluctant, or hesitant to conduct diligence and investigation on the prospective private equity investor.  It’s a two way street.  Generally speaking, and currently, healthcare is a pretty hot market.  There is a lot of interest in healthcare and private equity is comparatively newer to healthcare.  I think that more attention has been focused on healthcare by ACA.  There is more money going into the sector and there is more private equity as well as strategic interest than there was ten years ago,” Kelly says, urging sellers to take the initiative to perform their own diligence on prospective buyers.

“Investigate the culture, don’t be embarrassed to conduct diligence, find out if you get along with people,” he says.

Jared Kesselheim, partner with Bain Capital Ventures stresses the importance of seller diligence when he says that when private equity partner likely comes in and depending on the contract, there may be pieces of it where you don’t have as much control as you have had before.

“The partner may have preferred stock that gets paid out in downside cases. It may have approval rights on selling the business.  Because of those things, that’s why you want to do the home work up front to make sure you and the partner are aligned.  It is much more so than investing in some public stock where you can buy in and sell out the next day.  These are marriages; you better do the work up front to make sure that it’s a successful marriage,” Kesselheim says.

Kelly says the next quality to look for are resources.

“Are you really only looking for cash, or are you looking for a somewhat longer term growth strategy and partnership.  The likelihood is, that it’s the latter, because you are going to try to enhance the value of your business, grow your business, perhaps even expand upon the nature of the products and services offered by your business,” Kelly says.

In order to accomplish any future goals with your business, Kelly says you need an organization that has resources to commit to your business beyond the initial cash investment.

One example of a prime resource is expertise.  Kelly says expertise is uniquely important in the healthcare industry because if you are a healthcare provider, you are so closely bound to reimbursement programs.  He says  it is helpful, perhaps essential, to be able to work with someone who is familiar with an understanding of the billing and reimbursement, regulatory structure and climate in the United States, and understands and recognizes that billing and reimbursement regulation will change from time to time.

“Look for somebody who has a feel for the healthcare market, some connections in the market, some ability to expand your horizons beyond where they are currently in respect to your business.  You need somebody who complements  and enhances the capabilities of current management and ownership,” Kelly says.

“For example, by being able to conduct financial modeling and forecasting.  By having an understanding of the balance sheet and how potentially to restructure the balance sheet and make the most effective use of the resources that the private equity organization brings to the table beyond the investment capital. “

Kelly’s third big point for sellers is that they possess an understanding of their own life cycle as well as   the lifecycle and resources of a prospective private equity partner.

Kelly advises to ask oneself: What is the business owner’s time horizon?  How much longer am I willing to work, to build, expand, grow, and enhance the value of this business?

“You want to look at your perspective partner as well.  What is its time horizon?  You may have a fund that is investing in you that has been in existence for X years and has a limited time horizon left in that fund.  This may suggest that your private equity partner will be looking for an exit in a few years.  That may be fully compatible with the desires and expectations of the business operator, or it may be incompatible with the desires and expectations of the business operator who wants more runway to grow, develop and expand the business with a private equity partner,” Kelly says.

Josh Kaye, partner at DLA Piper says there are several reasons why an urgent care platform would be interested in partnering with a private equity firm to expand their business.  He says that a partnership should be based on more qualities than a dollar amount that is paid.

“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.

Kesselheim says if you are fully selling out, meaning selling your whole stake there are different considerations than taking on a partner.  It’s a bit of a spectrum, but if you are selling your company, then usually much more of the priority is on your delivering your shareholder value to your shareholders by getting the highest price, he says.

“ If you are bringing on an investment partner but are continuing to grow the business and staying involved, then valuation is certainly one piece of the puzzle, but not the only one.  You are trying to find a partner with a shared vision for growth, an aligned expectation for what success means and the timeline to achieve that success, and a track record of investing in and around your space so that you have someone knowledgeable,” Kesselheim says, echoing Kelly’s opnion.

“ Hopefully some amount of ability to add additional value, whether it’s through introduction to potential customers or partners, or providing resources to help think through strategic opportunities for the company, which could include, product strategy, market strategy, potential M&A opportunities, and hopefully a balance sheet to continue to support the business as well.”


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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