Tips For Working With a Private Equity Firm in Your Transaction
Getting into a deal and working with a private equity firm can be a lucrative decision for a physician owner. However, these types of transactions can be different from the typical buyers on the market. The Ambulatory M&A Advisor takes a deeper look at what sellers can expect when working with private equity, and what private equity’s expectations are for the sellers.
“You have to define the type of entity that is being sold. Within the healthcare space there are licensed entities and unlicensed entities. The answer is slightly different depending on the seller and the type of healthcare industry sub group that the target company is in. There are certain things that cut across those distinctions,” says Brian Platton, member of Health Law section of Mintz Levin.
“If you have never sold to a private equity investor, you have to understand the mindset of the private equity investor. The private equity investor doesn’t approach the target entity with the same mindset as an entrepreneur, or founders or the operating people running the target. These people are used to having to raise to finance the growth of the entity.”
Platton explains that private equity approaches a purchase or investment from an efficiency perspective, and finds out what they can do to make the business more efficient, and grow the target to the point where they can have a liquidity event within their preferred window. They may accomplish this by rolling the target up with other similar or complimentary businesses, selling the target to a strategic buyer, taking it public, or selling the target to another private equity investor.
Platton says this is a very different mindset from the founder/ entrepreneur mindset, or even the early stage operating mindset, which generally manages in order to get it to the next milestone, and ultimately, to the point where they are self sufficient in terms of financing.
Oftentimes private equity brings to the relationship a history within the target’s industry sub-group, relevant experience, new relationships and methods that the founder/entrepreneurs can’t really have access to on their own, Platton says.
Geoff Cockrell, partner with McGuireWoods says that explaining what to expect in a private equity deal does not lend itself to a clean answer. Cockrell says this is in part due to some private equity buyers are harder negotiators, some strategics are harder negotiators.
“As far as post closing changes, some funds, part of their MO is that they have a bench of strong managers that they are looking for a company that is constrained by the owner’s ability to take it to the next level. They will come in and part of the expectation of the deal is that the private equity buyer is going to be bringing in management that has the experience and skill set to do that,” Cockrell says.
“Other private equity funds are not built that way, and they are looking for a strong internal management team that they can then back. It depends on what the end goal is for the private equity fund when it comes to how they will go through with the negotiations and post closing processes.”
Platton says that post-transaction, the size of the position to be taken by the private equity firm, and whether the position is taken directly in the entity delivering services or a management entity is important.
“Sometimes, a private equity investor will find a core healthcare practitioner or vehicle that they want to build around because they think that person or vehicle will attract others. Usually, these are practitioners or vehicles that are known, that have demonstrated good business skills and/or prospects, but have been held back by a lack of capital; sometimes the private equity investor or purchaser will keep that core person or vehicle at the center of the professional side of the operations. Sometimes not; it is too varied to give it a one size fits all answer,” Platton says.
What is Private Equity Looking For?
“Private equity companies seem to be primarily looking for strong management and strong financials. Private equity companies that are looking at health care industry targets are increasingly sophisticated and knowledgeable about the business of health care and the associated risks,” Jeffrey L. Kapp, partner with Jones Day says.
“The consolidation of health care providers has been going on long enough that oftentimes it’s not the first urgent care or ASC that a private equity company is buying. More often than not at this stage of the game they are adding to a platform. They have been through this a few times and have a pretty good idea of what the main areas of concern would be from a healthcare perspective. When I look at these deals, I really look at them as having a business component and a healthcare component and you can’t give either component short shrift. You have to know how they work together in order to get the best result.”
Cockrell says private equity interest almost always centers on strong management with the caveat that their idea is to bring in management; however this is the minority set up. The majority setup usually depends on a strong management team to back. Then, beyond that, he thinks that private equity buyers are often looking for a set up where what they bring to the table can really drive growth.
“For example, if it is a type of healthcare business where if you add capital you can grow through acquisitions; that is a recipe where they can be successful. One of the characteristics that fit with that is a varied unconsolidated market. For example, like all of the deals currently seen in dental space. It has a very fragmented market, and so a number of funds have acquired platforms,” Cockrell says.
“The idea is that once they have something of a certain scale, they can grow it by acquiring smaller practices in that fragmented industry. There are several benefits to this. One of them is multiple arbitrages where you are buying smaller practices at a lower multiple of their income. You can buy a bunch of small things at a lower multiple and sell them all at a higher multiple. You see that model in dental, dermatology, anesthesia, urgent care, where people have access to smaller deals in a fragmented market.”
Preparation and Gaining Leverage
Kapp says the success of a private equity transaction from the seller’s side often depends on how well prepared the seller is.
“If the seller has engaged legal counsel and financial advisors or investment bankers, the seller usually go in with their eyes pretty wide open and with a decent idea of what the value of their business is going to be and the challenges that may exist in closing the deal,” Kapp says.
“One of the things that I advise my clients on the sell side is to make sure that from a healthcare regulatory perspective that they have all of their ducks in a row and have, in essence, done a reverse due diligence on themselves so they will be able to see what a potential buyer will see.”
When trying to gain leverage as a seller, Kapp says one of the key parts is trying to keep the bidding field open for as long as reasonably possible.
“A lot of these sellers are in a good position by virtue of the fact that there is money out there that is looking to be spent. If you can delay entering into an exclusive arrangement until you feel like you have gotten the best purchase price or other terms, that is probably a buyer’s best moment of power,” Kapp says.
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.