Navigating the pros and cons of selling your medical practice to private equity

Anthony Venette: ©DeJoy & Co.

As the health care landscape continues to evolve, medical practitioners are increasingly contemplating selling their practices to private equity (PE) firms. As Medical Economics reported recently, the number of private equity deals in the health care sector rising rose six-fold to nearly 500 deals in 2021 from 75 deals in 2012, with continued growth expected in 2024.​ For specialties like dermatology and gastroenterology, these PE acquisitions have become particularly common, reflecting broader trends in the health care industry.

The appeal of private equity for doctors

As with many businesses, the potential for financial security is one of the most important reasons why professional practices sell to private equity. For many physicians, selling their practice to PE offers a lucrative exit strategy. Doing so allows them to monetize their life’s work, providing a comfortable cushion for retirement or other ventures. Selling to private equity acquisition often yields a higher price for the seller, than they’d get from an internal sale or by selling to another medical practice or to non-PE buyers. That’s attributed to the substantial capital and talent resources that PE firms have at their disposal. Again, the potential for a financial windfall can be particularly appealing for physicians nearing retirement or for those looking to reduce their involvement in the day-to-day management of their practices.

Additionally, private equity firms can offer sellers structured payment options, such as an upfront lump sum combined with earn-outs or equity in the acquiring entity. These options provide flexibility and can align with the seller’s long-term financial planning needs. This financial security is not only a reward for years of hard work but a way to ensure the continuity and growth of the practice under new ownership.

Enhancing practice operations via PE

Beyond financial security for the seller, private equity ownership can significantly enhance the operational aspects of a medical practice. These improvements can lead to increased efficiency, better patient care, and enhanced growth opportunities which can lead to increased profits and valuations. Key operational benefits of selling to PE include:

• Capital infusion: Private equity firms provide substantial capital, which can be pivotal for practices looking to modernize their facilities, invest in cutting-edge technology, invest in new types of software, and expand their services.
• Operational efficiency: PE firms bring a wealth of experience in streamlining operations, reducing costs, and improving profitability. They employ new practices in administration and patient management, often leading to better financial performance. This operational expertise can relieve physicians from the burdens of managing the business side of their practices, allowing them to focus more on patient care.
• Broader network and resources: Joining a PE-backed group provides access to a broader network of professionals and resources. This network can open doors to new opportunities, enhance the practice’s reputation, and increase patient referrals. The backing of a reputable PE firm can also bolster the practice’s market position, providing better negotiating leverage with insurers and suppliers.

Potential drawbacks and risks of selling to PE

However, the decision to sell to private equity is not without its downsides. One of the primary concerns is the potential loss of autonomy. Private equity firms, driven by the need to generate returns to investors, may implement changes that conflict with the practice’s culture or patient care philosophy. Physicians might find themselves at odds with new management styles and policies, leading to friction and dissatisfaction.

The pressure to improve profitability can also impact the quality of patient care. PE firms might push for cost-cutting measures that, if not carefully managed, could compromise the standard of care provided to patients. This focus on profitability over patient care can lead to ethical dilemmas and dissatisfaction among staff and patients.

Cultural shifts within the practice are another concern post-sale. The transition to PE ownership can bring significant changes to the workplace environment, affecting staff morale and patient relationships. Physicians and staff may struggle to adapt to new policies and management styles, leading to potential disruptions in service delivery.

A short-term focus on profits is another risk associated with PE ownership. Private equity firms typically aim to maximize the value of an acquisition within a five to seven-year window. This timeframe may not align with the long-term vision of the practice and its stakeholders. This short-term approach can lead to decisions that prioritize immediate gains over sustainable growth and development.

Moreover, while PE firms provide initial capital, they often finance the acquisition through debt. This financial burden can strain a medical practice’s resources and affect its long-term profitability. The added debt obligations can also limit the practice’s financial flexibility and resilience in facing future challenges.

Risky business

Even though PE firms regularly engage in acquisitions, it doesn’t mean that every deal goes well. Let’s say Dr. Smith's (fictional) Dermatology Clinic, a well-respected practice, was acquired by a private equity firm with the promise of financial security and growth. In reality, however, the PE firm implemented stringent cost-cutting measures, reducing consultation times and limiting the use of essential medical supplies. This led to a noticeable decline in the quality of patient care and clashed with the clinic's long-standing patient-centered philosophy, causing frustration among the physicians.

The new management's aggressive policies created a stressful work environment, significantly lowering staff morale. Key personnel, unable to adapt to the new culture, chose to leave, further disrupting service delivery. Additionally, the PE firm's focus on short-term profits over long-term sustainability resulted in deferred investments in technology and equipment maintenance, leading to operational inefficiencies.

The acquisition was largely financed through debt, placing a financial strain on the clinic. The added debt burden limited the clinic’s financial flexibility, making it difficult to invest in necessary improvements or to weather economic downturns. This case underscores the risks of selling to private equity without ensuring the buyer’s and seller’s goals and values are aligned.

6 critical considerations

When considering a sale to private equity, it is essential to weigh the potential benefits against the risks carefully. Due diligence is crucial to ensure the decision to sell aligns with your practice's goals and values. Below are six key considerations to guide you through this process:

Research the PE Firm: Investigate the firm's track record, management style, and long-term strategy. Ensure that the PE firm’s vision for your practice aligns with your goals and values.

Engage Legal and Financial Advisors: Experienced advisors can help navigate the complexities of the transaction, ensuring that your interests are protected and that the deal is structured favorably. They can also assist in understanding the tax implications and financial impacts of the sale.

Impact on Patient Care and Reputation: Consider how the sale will affect patient care and the practice’s reputation. Ensure that the PE firm's goals align with maintaining high standards of care and ethical practice.

Communication with Staff and Patients: Transparent communication about the potential sale and its implications is essential for maintaining trust and stability among staff and patients.

Understand the PE Firm’s Exit Strategy: Know how the PE firm plans to grow the practice, the expected timeline for their investment, and what will happen when it decides to exit.

Explore Alternative Transition Strategies: Consider other transition options that might better suit your long-term goals. An internal transition to younger doctors in your practice may align more closely with your goals than a sale to PE.

Selling your medical practice to PE can offer significant financial and operational benefits, but it is not without its challenges. A successful transaction is based on thoroughly understanding how the goals and culture of the prospective PE firm align with those of your practice. By engaging experienced legal and financial advisors, understanding the implications for patient care and practice reputation, and by maintaining transparent communication with staff and patients, you can better position yourself to make an informed choice that supports both your immediate and long-term objectives.

Conclusion
Ultimately, the decision to sell to private equity should be guided by a clear understanding of your practice’s needs and goals, as well as a commitment to maintaining the high standards of care and service that have defined your professional journey. By weighing the pros and cons carefully, you can ensure that your practice continues to thrive under new ownership, providing lasting value to both you and your patients. If you decide to sell, make sure you have an experienced guide by your side.

Anthony Venette, CPA/ABV is a Senior Manager, Business Valuation & Advisory, DeJoy & Co., CPAs & Advisors in Rochester, New York. He provides business valuation and advisory services to corporate and individual clients of DeJoy.