By Steve Sunder
Dec. 5, 2018
Private-equity-backed networks are contacting many optometrists, asking for a meeting, and sometimes making tempting offers. It’s important to be proactive in these meetings, and not to get so overwhelmed that you forget to ask crucial questions. Here are the key questions to ask.
How the PE Spiel Typically Begins
The typical PE marketing talking points focus on appealing to the experienced OD, who is close to retirement, and tired of practice administration, staffing issues, insurance headaches, and wants to get value for their practice now, rather than waiting to get value from a sale in the distant future.
PE reps often discuss how they will take over all the management issues that have been dogging the doctor, so the OD can focus solely on patient care as an employee. To top that off, they then usually will note the substantial financial value for their practice that the firm may be able to offer.
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Get Critical Questions In Upfront
There are many questions to ask such as:
Practice value. How is the valuation of my practice calculated?
Financial documents. What financial documents are required? It is reasonable, and typical, for a PE firm to request profit and loss statements for 3-5 years and tax returns.
Time to deal close. Time frame from initial contact to closing? It should be no more than three months.
Equity. Is equity part of the purchase agreement? If so, is this equity tied to the doctor’s length of employment with the PE firm? What happens when the PE sells, is the equity transferable? Can the doctor sell their equity position back to the PE? What happens to your equity position if the PE ceases to exist, or files bankruptcy?
Purchase price. Is the purchase price funded in aggregate at the time of closing, or a set of equal installments over a set number of years? Is the full purchase contingent on the doctor’s length of employment with the PE firm? What happens if the doctor leaves the firm before completing their term? Typically, there is an initial partial payment made at closing with the remaining balance paid yearly over the next three years. Tax considerations should be discussed with your CPA, and is highly recommended. Negotiation of the purchase agreement may be warranted to protect your investment.
Retirement. Is the purchase price significant enough to allow the doctor to retire and meet their financial goals? If you are five years, or closer, to retirement this may be a feasible option, however, if you are 7- 10 years, or longer, to retirement then it may be more financially rewarding to retain your ownership of the practice, continue with your officer compensation, continue to reinvest back into the practice with new technology and business growth where your practice value will drive a higher purchase price through the standard sales process at the time of executing your exit strategy.
Assets & Liabilities. What assets/liabilities will be purchased? Normally this includes equipment (including, without limitation, the electronic medical records system), fixtures, leasehold improvements, furnishings (excluding artwork), inventory and supplies, charts, patient records and lists, telephone numbers, prepaid expenses, informal trade names, and practice goodwill.
Employment agreement. What are the terms and length of employment? Are there productivity and performance requirements in the employment agreement? If new systems are put in place, is the productivity levels adjusted due to the learning curve? Typical term length will be 3-5 years where new performance and productivity demands may be stated as the firm is looking for a return on their investment. Normally, consolidation of systems includes deployment of standard operating systems with the firm’s adopted systems.
Non-Compete. Is there a non-compete agreement and restrictive covenant? What are the terms, such as length of non-compete and distance from any PE practice/business? The firm wishes to protect their investment, so that a typical non-compete can be up to five years and 15 miles from any current or future firm’s business locations. You’ll be prohibited from soliciting any patients or employees of the practice and firm during this time.
Real estate. Do you own the physical location or is it leased? If owned, is the facility being purchased separately by the PE firm? If it is a lease, will you be removed from the current lease with a new lease executed with the firm and landlord? Will you be indemnified from the current lease? Normally the PE firm won’t acquire your real estate, but they should execute a new lease for the facility, and indemnify you.
Staff. What about staff retention? Will same, or higher, salaries be offered with benefits? How are annual reviews to be performed? What is the structure of the new administration, and will staff have a voice? Typically, staff are retained as they are the support production for the doctor where salaries might be negotiated. Typical corporate HR structure for reviews is annually.
Office Technology. Will current systems change, such as EHR, billing, patient notification systems, etc.? Or will the firm retain current systems? Is training provided, and what time frame will be allowed for learning new systems? Standard operating systems are deployed throughout the business for consolidated reporting and measurements.
Malpractice Insurance. Will malpractice, and other practice liability, be paid for by the firm? What about tail coverage? As in most corporate environments, new medical liability insurance is usually provided, however, you must insist on tail coverage to protect yourself from past occurrences.
>>Click HERE, or the image on the left, to download the full report “Private Equity Takes Root,” which includes a workbook portion “The Decision Tree” on determining whether or not it makes good business sense to partner with a private-equity-backed firm.>>
Steve Sunder is a health-care consultant with over 20 years experience in the eyecare industry at a multi-location practice, and as a consultant to other practices. To contact him: firstname.lastname@example.org