PracticalDermatology

Bundy Group is an investment bank and advisory firm specializing in the physician practice sector, which includes dermatology and aesthetics. Our team wanted to provide Practical Dermatology® readers with an update on key takeaways from the 2023 American Academy of Dermatology (AAD) Conference in New Orleans.

The AAD conference drew a substantial crowd, which included dermatology practice owners, financial sponsors, and executives of active strategic buyer platforms in the industry. During the conference, we held numerous meetings with CEOs and corporate development directors, all serving in organizations supported by financial sponsors, to better understand buyer sentiment for the dermatology and aesthetics sector in the current economic climate. In addition, and immediately after the conference, Bundy Group initiated a survey with the most active buyers in the segment. These highly experienced professionals expressed enthusiasm about the state of the market and continued growth in the dermatology and aesthetics market, but there are some considerations to note.

Impact of Financing Market on Dermatology and Aesthetics Market

One of the key topics from the conference was the current macroeconomic environment, including discussion of recession and how it might affect dermatology and cosmetic practices today. Owners and seasoned buyers were concerned about the potential negative impact on practices owing to the recent credit market challenges and the consequences from the Silicon Valley Bank implosion and First Republic Bank failures. As one seasoned executive with a strategic platform stated, rising interest rates and tightening lending restrictions will “make us more selective in what practices we buy, as we can’t have foot faults in these conditions.” The executive further added, “Our main lender is still supportive of our acquisition focus and growth efforts and will provide funding, but it has tightened our credit line from $50 million to $25 million over the past few months.”

Where’s the Talent?

Dermatology practices are still finding it difficult to find employees and support, which includes talented employee dermatologists and midlevel and administrative staff. According to Wendy Lewis, president of Wendy Lewis Co, a New York City-based boutique marketing communications group that specializes in the beauty, health, and wellness sectors, “Staffing continues to be a big challenge for all practitioners, as today’s employees are less likely to be loyal to employers and have set the bar quite high to stay long term. Turnover of key staff members can have a significant impact on practices in terms of the loss of institutional memory, the inherent costs of training, and stress it puts on the staff and practitioners.”

At the conference, we also heard from practice owners and strategic buyers about the challenges of recruiting talented providers to secondary markets and rural areas. As a recruiter for a strategic platform commented, “The young dermatologists often want to move to the large metropolitan markets, which presents challenges for our national organization.”

Post-Conference Survey: Takeaways

Bundy Group’s post-conference survey validated insights that Mr. Bundy received at AAD, with several new and enlightening takeaways. There were 9 respondents, all in an executive positions and highly experienced in dermatology and aesthetics acquisitions, who answered the questions and provided added insights.

The Economy and Dermatology Market

A majority of respondents are planning for a recession in the next 12 months. However, these industry players are expecting the dermatology and aesthetics markets to continue to grow during this same timeframe. Furthermore, each of these organizations is planning for its own business to grow in the next year. The participants’ confidence appears to validate the recession resiliency of the dermatology and aesthetics market.

Merger and Acquisitions: Continued Momentum

The respondents signaled continued and strong interest in acquisitions. They believe that the dermatology and aesthetics markets still have the capability of consolidation, as the respondents indicated the industry is only halfway through its aggregation cycle. Furthermore, on a scale of 1 to 5 (1 = not looking for acquisitions; 5 = aggressively looking for acquisitions), the average and median response was 4, indicating that merger and acquisitions is alive and well with the brand name buyers in the dermatology and aesthetics industries. However, 4 of 9 respondents stated that current events in the financing markets have decreased their appetite for acquisitions. As one executive stated, “Rising interest rates have resulted in our taking a more conservative approach to acquisitions, as we are now placing an increased emphasis on quality, growing practices.”

Practice Valuations and Deal Structure

Common questions that the Bundy Group receives from practice owners include, “What are the valuation multiples for practices today?” and, “Are they decreasing?” These are topics that the Bundy Group is immersed in when we are representing an owner in a sale, as our firm’s goal is maximizing the practice’s valuation. Most survey respondents revealed that they expect dermatology practice valuations to decrease during the next 12 months compared with current levels. One executive stated that he believes “valuation multiples will decrease by 0.5x to 1.0x.”¹ Another respondent stated that, “High-quality assets will fetch historical valuations, but less attractive or higher risk transactions will see valuations reduced and less demand overall.”

Although the subject of valuation is on everyone’s mind, an equally important topic is what compromises a practice’s valuation. Upfront cash from a buyer to a seller is an obvious component, but there is also creative structuring that can be used, which includes equity reinvestment by a seller,² seller note,³ or earn-out.⁴ Buyers can, and sometimes do, use creative structuring to minimize risk and ensure the seller has a vested interest in future success of the practice. As one respondent stated, “We are asking for higher equity rollover from sellers today, such as 25% to 30% vs 15% to 25% in the past.”

Feedback from the Bundy Group meetings at the conference and the post-conference survey indicate a strong level of enthusiasm, both from a practice owner’s perspective and a buyer’s perspective. The multibillion-dollar dermatology and aesthetics markets continues to thrive and evolve, but macroeconomic headwinds could place some pressure on practice owners and consolidators. Judging by the robust performance of Bundy Group clients, coupled with the strong interest we are receiving in our current client engagements, our team sees no momentu loss in the dermatology and aesthetics industries.

Footnotes

1. For example, if a transaction value/adjusted earnings before interest, taxes, depreciation and amortization valuation multiple today is 11.0x, then the respondent is indicating the multiple could decrease to 10.5x or 10.0x.

2. This refers to when a seller opts to reinvest a portion of the transaction proceeds back into either the practice or a buyer’s stock.

3. This refers to when the buyer and seller agree that the buyer will pay to the seller consideration in the form of a loan (ie, principal and interest payments for an agreed-on period).

4. The seller is paid consideration in the future when the practice achieves agreed on financial performance objectives.

Disclosure: Views and opinions expressed by The Bundy Group are not endorsed by the American Academy of Dermatology (AAD).