To Sell or Not To Sell: Strategic Options and Realizing Value
Is this the right time to make a change? Here’s what you need to know.
By Clint Bundy
An important first step for a practice owner is to assess if now is the right time to bring on a capital partner or consider a sale. Motivation is the foundation for any transaction, and it could be that now is not the right time to sell or raise capital for a physician owner. In 2017, Fran Cook-Bolden, MD, a well-recognized dermatologist based in New York City, elected to sell her practice to a private equity-backed platform. When asked when a practice owner knows the right time to sell, Dr. Cook-Bolden stated, “When it’s the right time to sell, you will know it! Don’t ignore the signs.” She further elaborated that examples of reasons to sell could include “your quality of life has taken a nose dive,” or the business finances are leaving a practice owner in a position where “there’s none left for you at the end.” Whatever the motivation may be, “it is probably time to seriously consider selling and not waiting until everything crashes,” she adds.
Aside from choosing to not make any changes to a practice’s ownership structure, physician owners have a multitude of other avenues to consider.
Strategic Options Available to Practice Owner(s)
Strategic Buyers. Industry, or strategic, buyers are very active in the market and serve as a legitimate option for a seller. A strategic buyer will acquire another practice as a means of adding to the buyer’s geographic coverage, capabilities, employee talent, and client base. Examples of strategic buyers could include other dermatology practices, hospital systems, or specialty physicians groups. Pat McElgunn, a physician and partner with Piedmont Plastic Surgery & Dermatology, a consolidator of practices in the Southeastern US, stated that a strategic buyer can, “make a lot of sense to a physician who wants to sell and remain active after the transaction closes.” A strategic buyer can assume “operational responsibilities, scale the practice, make the operations more efficient,” and obtain other combination benefits that benefit both the buyer and the physicians. Finally, Dr. McElgunn added, it is also possible for a strategic buyer to offer a selling physician the opportunity to share in the growth of the practice, including, “if the seller elects to join the strategic buyer’s organization as a partner.”
Private Equity Buyers. Private equity groups are investment funds, managed by finance and operating professionals, that are focused on acquiring a majority equity position in a dermatology group. The physicians can elect to retain a minority equity position in the practice, and the private equity group and physicians partner to grow the practice. Means of growth could include acquiring other practices (i.e., add-on acquisitions), hiring new providers, and enhancing the services and capabilities of the practice. The private equity group will target a three- to seven-year hold period before the larger practice is re-sold, allowing capital and returns to be provided to investors and physician partners. The private equity owner can build the operational and administrative team that will allow the physicians to focus primarily on clinical responsibilities. As Jack Resnick, MD recently stated in a JAMA Dermatology article, there are obvious reasons why dermatologists would consider selling to private equity groups, including receiving “astonishingly large cash offers” and removing the burden on the physicians of “running a medical practice.”1
Debt and Minority Equity. There are situations where a dermatology group needs capital and a strategic partner but does not want to sell a majority equity or 100 percent position in the practice. There are healthcare-focused capital providers that can acquire minority equity, or provide a combination of debt and minority equity, to dermatology practices. Lee Ballew, a Director with Capital Alignment Partners, a Debt & Minority Equity investment group based in Nashville, states, “Many physicians today are seeking avenues to monetize a portion of their practice value and align themselves with a capital partner while not giving up control of their practice. In these instances, a Debt & Minority Equity group offers a unique solution for physicians to bring in a private equity partner while not selling a majority stake in their business.” Furthermore, Ballew added that with the right Debt & Minority Equity partner, “Practice owners are able to have access to capital for future tuck-in acquisitions, buy out retiring physicians, and have a partner that is experienced in capital markets and positioning companies to maximize value.”
Depending on the situation, it is possible that a dermatology practice could explore multiple options at once. Before beginning a marketing process, it is important for a practice owner to assess his or her needs and the options best for the situation and physician. Dr. Cook-Bolden stated that important items to assess include whether or not a doctor wants to stay on after transaction close and what the buyer’s “culture” is like. She added that this will, “potentially be your new (revamped old) home,” so do your homework before starting a process.
Dermatology owners are often receiving direct calls from strategic and private equity buyers interested in acquiring them. In some cases, the owners elect to negotiate one-on-one with these buyers and close a transaction without the presence of advisors and other buyers. The other option for a practice owner is to run a structured process that involves multiple buyers, timelines, key advisors, and a competitive element. The end-goal of a structured process is to maximize value and terms for the practice owner and find best fit for the organization all while maintaining order and discipline through this effort.
Process & Timeline
From the start of a marketing process to the closing date, the sale of a practice can take five to 12 months, depending on the circumstances. The steps in a sale include the compilation of confidential marketing materials and data room contents, finalizing confidentiality agreements with buyers, scheduling and completing buyer-seller meetings, receiving Indications of Interest and Letters of Intent, working through due diligence, and closing the transaction.
The details of each phase are important, as a structured process is based on the principles of organization and competition. Rick Cooper, an attorney with McDonald Hopkins and a healthcare and M&A specialist, indicated that, “before going to market, a seller should fully understand the process and their responsibilities under it. Following a sound process is critical. Otherwise, a transaction can be significantly delayed or even derailed.” Furthermore, Mr. Cooper added, “importantly, preparation for the process should begin well before going to market, such as making sure all items and information that will be requested in due diligence are in good order.”
Establish a Key Advisor Team
The team that a practice owner hires, and the process that a practice runs in a sale or capital raise, will determine the strength of success and outcome.
Members of a Key Advisor Team include:
• Investment Banker. Advisor, experienced in the dermatology market, that manages the sale process, delivers buyer options, and drives best value and terms for a seller.
• Corporate and M&A Attorney. Experienced attorney that focuses primarily on Mergers & Acquisitions transactions and has a track record in healthcare.
• Accountant/CFO. A company accountant, or a company Chief Financial Officer (CFO), can assist during the critical financial diligence portion of a sale process.
• Wealth and Tax Advisor(s). Professionals assist the owner in minimizing transaction taxes through pre-sale initiatives and advise on how to best invest post-sale tax proceeds.
1. Resneck, Jack, M.D. “Dermatology Practice Consolidation Fueled by Private Equity Investment, Potential Consequences for the Specialty and Patients,” JAMA Dermatology. Published online Nov. 21, 2017. DOI:10.1001/jamadermatol.2017.5558