Private Equity and Your Practice

Paragon Perspective January 3, 2017

The private equity firm does the bulk of this research, but it is important for the business owner to complete due diligence on the private equity firm to make sure the partnership is a good fit. Working with an investment bank like Paragon Health Capital can ensure you get the most for your business as well as save you time and resources navigating the negotiation process with a private equity firm. With years of experience in both the financial and healthcare industries, Paragon can guide healthcare professionals through the sell process to ensure a smooth transition to the right kind of private equity buyer. Investment Process Steps

1.) Paragon sends a 1-2 page teaser document summarizing the practice for sale to targeted private equity firms.

2.) Interested private equity firms will receive a nondisclosure agreement or NDA before receiving the company’s investment bank prepared Confidential Information Memorandum, or CIM, a detailed description of the business’s operations, financial history and projections, and a history of the business.

3.) Private equity firms will perform initial due diligence after receiving the CIM – including discussions with the seller and conducting market research.

4.) After initial due diligence is complete, the private equity firm will submit an Indication of Interest, or IOI, a non-binding document outlining the range of deal pricing and structure based on the information contained in the CIM.

 

For healthcare professionals looking to sell their practice, private equity is an important option to consider. In this Paragon Perspective, Paragon Health Capital helps you understand what you need to know about working with a private equity firm to sell your practice. What is Private Equity?

A private equity fund is a limited partnership between the general partner, the private equity firm, and the limited partners, the investors. Private equity firms raise and manage an initial investment fund of capital raised from the limited partners or private investors. Investors are often pension funds, banks, insurance companies, university endowments, or high net worth individuals. As experts in investing in private companies, private equity firms then manage this fund to research and acquire several portfolio companies over the fund’s 5-10 year lifespan. Portfolio companies are grown and improved under the direction of the private equity firm, who then sell for a profit after holding the company for 3-7 years. The Investment Process

Business owners considering a sale to private equity will go through a series of steps before a deal’s completion. The negotiation process generally takes 4-6 months, with the bulk of this time being spent on “due-diligence” or research.

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Paragon Perspective January 3, 2017

5.) The seller will choose a select group of private equity firms to visit the company for management presentations.

6.) Following management presentations and subsequent diligence, the private equity firms will submit a Letter of Intent, or LOI, outlining their proposed offer and deal structure after further discussion with practice management.

7.) The seller will select the final private equity partner based on LOI purchase price and structure, fit with the private equity team, and long term strategy for the business.

8.) The private equity firm will complete detailed due diligence on the seller which includes preparation of a quality of earnings report, an industry study, legal due diligence and insurance review, among other items.

9.) After completing detailed due diligence, a final purchase contract will be negotiated to finalize the partnership.

Deal Structure Options

There are two main structures for a deal involving a private equity firm and a healthcare practice. Working with an investment bank can be helpful in determining the best choice for you and your practice to ensure that the success you’ve built continues.

• Partial Exit: Business owners looking to cash

in a portion of their business value while remaining involved with the management of the practice may be interested in a partial exit.

Furthermore, a partial exit maintaining a portion of the business allows business owners to keep a percentage of money invested in the practice and participate in the future growth of the company. This leaves them able to sell their remaining portion after the company is sold in 3-7 years, in most cases for a substantial increase. This is also known as “a second bite at the apple.” Paragon works with private equity firms that understand medical practices and are looking to work with (as opposed to just acquire and absorb) them to position them for optimal short-term growth and that ultimate “second bite.” • Full Exit: Physicians looking to completely exit

their business and pass along management of the practice entirely may be interested in a full exit. Depending on the deal, the private equity firm may require a transition period before retirement or moving on to a next step.

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Paragon Perspective January 3, 2017

1 "Private Equity: Engaging for Growth."www.bcgperspectives.com. Boston Consulting Group, 09 Jan. 2012.  

Our goal is your goal: securing that perfect balance of the best price, the optimal level of physician autonomy and helping ensure your practice – your life’s work – pursues the right option to grow to the next level for even greater rewards over time. Private Equity Ownership

After negotiating a sale to a private equity firm – what now? Physicians who chose the partial exit route are still very involved with the management and success of the practice; however, the private equity firm will use its resources, capital, and expertise to grow and improve the business over a 3-7 year period. Their goal is to build on the successful practice already in place and eventually sell the business for a profit which is then shared between investors and the original business owner if they are still a part of the practice. Private equity owned businesses are largely successful in this growth – and generally outperform comparable businesses. The clear majority of companies owned and sold by private equity firms become stronger and more valuable. The Boston Consulting Group conducted a study in 2012 finding that 70 percent of private equity deals generated an annual increase in earnings of at least 20 percent, and almost half of these deals generated annual growth of 50 percent or more.1

Why Private Equity?

1. Price – Private equity generally yields a much higher return than a sale to a hospital network uninterested in negotiations or partnering with the physician owner. Physicians selling to private equity firms will benefit from a dramatic reduction in their tax burden as well.

2. Practice – Private equity firms are dedicated to honoring and preserving the integrity of the practice. They’ll work together with the management to identify key strategic goals to reach longer term growth goals.

3. Incentivization – In most cases, general partners at a private equity firm have invested not only investor money, but their own money as well. They’ve also promised investors a strong return on their investment and their success in accomplishing that will determine the future success of the firm. This ensures an incentive for private equity firms to carefully consider what steps are in the best interest of the practice while ultimately meeting their goals.

4. Expertise – Private equity firms have access to a broad network of contacts and experts available for advisory council. They’re also able to draw on knowledge gained from growing and bettering their other portfolio companies. Physicians can trust their business expertise and dedicate more time to focus on their patients.

Why Now?

As a healthcare professional, it is an exciting and advantageous period to consider a sale to private equity. Valuations in the healthcare industry are at an all-time high, meaning there is no better time than now to cash in on your hard work building a successful practice. Private equity firms are increasingly interested in the healthcare industry due to:

• Diversified revenue stream with strong profitability margins

• Increasing elderly population • Ever-increasing healthcare costs with a steady

demand for care Selling to a private equity firm is an important consideration for physicians looking to sell their practices. Take advantage of the high valuations in this sell cycle with the help of Paragon Health Capital to navigate a deal with a private equity firm that will preserve the integrity of your practice and reward you for years of work in building your practice.

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