As the title suggests, we'll spend this episode talking about who should and who should not sell their private practices to private equity investors, as well as the reasoning behind these distinctions. We'll discuss factors that make physicians and practices both desirable and undesirable to investors, as well as why not all Physicians that should consider selling to Private Equity.
Physicians that should consider a transaction:
Physicians that should think twice about a transaction:
Eric: I think it's universally appealing to physicians because it has a couple really good attributes. It has the opportunity to diversify one's risk, to kind of improve your total wealth situation. For a lot of practices, for strong practices, it's an opportunity to become independently wealthy.
Narrator: Welcome to PF Insights, hosted by the Leadership of Physicians First Healthcare Partners. If you're a physician practice owner or an ambulatory surgery center owner and you're wondering how to navigate the mergers and acquisitions ecosystem, this is the podcast for you.
Andy: Hello everyone, welcome back to PF Insights. This is your host, Andy Snyder. I'm a managing director at Physicians First Healthcare Partners. With me today, I have our managing partner, Eric Yetter.
Eric: Andy, how are you?
Andy: I'm doing well. Doing well. This, now, would be episode 12 for PF Insights. Today, we're going to talk about a very popular topic. Who should and who shouldn't be interested in ophthalmology acquisitions in this consolidation space? I think we're going to spend more time on who shouldn't, which may be kind of counterintuitive to what you would think would come from us, but there are many physicians out there who probably shouldn't be entertaining this idea right now.
Andy: But, before we get to that, let's start off with who should. This is going to be a little bit repetitive from earlier episodes, but, you know, what physicians are in a good spot for this type of transaction?
Eric: Yeah. You know, the good thing about this is that I think a lot of physicians are in a position where they should look at this. One of the things that we say ... and there are several different categories, but let's just kind of start with the obvious thing that we get asked about a lot, which is, you know, what's the right age to do this at?
Andy: We tell physicians, "If you are in the last 10 years, if you have 10 years or less left in your peak productivity, as a physician, you should really look at this." It definitely, I think, makes sense for somebody in that category.
Eric: Yeah, and by, 'peak productivity,' you'd mean, if you were someone who's working five, six days a week and you've kind of, even in your head, sometime in the next what, five, ten years, saying, "Oh, I want to throttle back to two days a week," that's-
Andy: Yeah, yeah.
Eric: ... that's you losing your peak productivity because when it comes to a transaction, they're looking at your trailing 12 months, and you want to make sure you haven't made that step before you entertain a transaction.
Andy: Yeah, and you want to be able to commit to doing what you're doing now for another five years at least, I think.
Eric: You want to make sure that you plan ahead when you're thinking about doing these things. So, we think that for somebody at that stage in their career, this is absolutely the case. It truthfully makes sense for younger physicians, too, a lot of the time. That's because, just from a financial perspective, the prices that are being paid for these practices are so good, where if, even if you're a young physician and you have 20 or even 30 years of career runway left, you can do one of these transactions, take that money, pay capital gains mostly on the proceeds, invest that money even at a conservative rate and come out ahead in the long run.
And the same is true with ... not the same is true, but there is additional value that you would receive from the stock that you get in the ophthalmology company if it's successful even beyond what I describe. So, from a financial perspective, it can make a lot of sense for a young physician who is at a profitable practice. We'll talk about it in a minute more about who it doesn't make sense for, but in terms of age, I think it doesn't make sense for a young physician who does not have a profitable practice, who they can't sell for a good price. Then it doesn't make sense.
But, for ones that are part of a very profitable practice, it can make sense for them purely from a financial perspective, barring other things.
The other categories that are really interesting to think about beyond just the money, are some of the problems that this can solve. So, for a lot of the physicians that reach out to us, this solves a succession planning problem for them. They have a great practice, highly profitable practice. And maybe they have associate physicians or young ... but they aren't really interested in partnership. If they are interested in partnership, they're interested in the, kind of financial components of partnership but not in running a practice. Maybe they don't have the capital to buy in. There are a lot of reasons why people run into that problem, but it can be a succession planning problem for people who don't have something in place.
We're seeing that a lot. We're seeing a lot of physicians come to us and say, "I don't think I'm going to be able to find someone who can replace me. I have great physicians, great doctors in my practice. They're great people. But they're not me. I'm an entrepreneur." This solves that problem for a lot of physicians.
Some, too, are tired of the administrative burden. Some are tired of dealing with HR. Tired of dealing with payroll and those kind of questions. Tired of dealing with running IT systems and those sorts of things that a lot of, you know, frankly, entrepreneurial physicians are doing because they feel very invested and they have a lot of operational control in their practices. A lot of them are kind of tired of that. They'd rather not do that for the next ten years. They'd rather just focus on seeing patients and focus on some high level things at the practice, but not deal with that nitty gritty. And it can help with that too.
The other one that's pretty interesting are the opportunities for entrepreneurial physicians. So, physicians that are highly entrepreneurial and want to do a little bit more than just run their own practice, this is an opportunity for them to. This is an opportunity to be a part of a larger ophthalmology company whose goal is to grow and who has a lot of fuel, both in the terms of financial and human capital, in terms of business experts and other people at the PE firm and the parent ophthalmology company, who are totally focused on growing.
The physicians can be a very big part of that. They can be a part of growing the company through acquisitions, through operational improvements, sharing some of the best practices they've created and implementing them in other places, and having some intangible reward, but also some tangible financial reward for deploying those skills. That's something that investors are very interested in too, and it's a great opportunity for some docs.
Andy: Right. So I'm hearing there on that last one, which, to me is particularly interesting, because you're taking a physician who may have had the idea of, "I want to have some regional mergers go on with physicians that I know in the surrounding area and then maybe we can kind of build our own platform and we're going to be more attractive and a bigger acquisition for a potential, could be private equity buyer, management company, that comes around and makes acquisition."
But what you're saying is, you could invert that a little bit and say, "Well, partnering with a financial backer is what's going to allow you to really go and make those acquisitions regionally," and then you're still going to be able to participate either way.
Eric: Yeah, yeah.
Andy: Right? [crosstalk 00:07:25] Because you've got to light the wick somehow.
Eric: Well, a lot of physicians who have ideas about doing that don't have the time or the money to do it. It takes a lot of money and a lot of time to build something like that. This is allowing a physician to essentially do that and participate in that with other people's money and other people's time. The time of the PE experts who would be involved in this.
So, yeah, I think that is being done in some scenarios, both at the physician practice level, but it's being done in a big way at the PE-backed level, where those types of growth plays are being deployed. It's really in interest of almost every PE investor, is to get a physician who has that mindset in their management group.
Andy: Well, that's great. That's happy. We're all glad that there's a lot of physicians out there that are good candidates for acquisition. That's actually why we do what we do, but we'd be lying if we were saying that everyone's a candidate for acquisition, because we've gone out, we've met with several practices that aren't a very good candidate for consolidation, transaction, acquisition, however you want to spell it out.
So, this'll be fun. But, let's hear it from you. Who are some bad candidates for acquisition?
Eric: Yeah. Well, I mean, look. This is kind of universally appealing, I think, to a lot of people. I said, "Universally appealing." I think it's universally appealing to physicians because it has a couple really good attributes. It has the opportunity to diversify one's risk, to kind of improve your total wealth situation. And for a lot of practices, for strong practices, it's an opportunity to become independently wealthy. For a lot of physicians, even young physicians who would not have had an opportunity to become independently wealthy, this is an opportunity to do that at a pretty young age for a lot of doctors.
It's a great way to exit or to start planning for exit if you're an older doctor. So, a lot of people are interested in this, but it's not a fit for all of them. It's just not. Some of them, it's not going to work out for some of them. And some people that we talk to, we can tell, I think, that they're just not a good candidate. I think there's a couple reasons for that and a lot of them are personality reasons.
If you're somebody who cannot give up control, who can't get comfortable with the idea that somebody else is going to own your business, your practice, your surgery center, whatever it is. Somebody else is going to own that. They're going to be 100% owner of that, and they're going to have a lot of control over it. You're going to retain full clinical autonomy and you're going to retain a lot of day-to-day operational autonomy, but at the end of the day, somebody else is going to own your practice. If you can't get comfortable with that, then you shouldn't do this. You're going to have a hard time, I think, and it's probably not worth the money to you to go through that.
If you can't stomach that, if you don't play well with others, for lack of a better word, or if you just don't want to do it. You like being in control, which is totally fine. I can understand and appreciate that in a lot of ways. It's probably not for you.
Andy: We've heard physicians say, "Yes, I understand they're going to acquire 100% of the practice. I am going to be moving from a physician-owner to the employment model. That's all great, but I'm still going to have a say and control over the financial decisions of the practice."
And you and I both have to look them in the eye and say, "Your considerations and your opinions are going to be heavily weighted on any decisions of the practice. This has been the practice that you optimized and got running going forward," but to sit there and say you have the final decision, that's-
Eric: You just don't!
Andy: ... that's not exactly how it works.
Eric: Yeah. And you've got to be honest with people about that. I mean, you just don't.
Andy: And Investors are going to be wary if you're making those type of demands on the front end after they've paid a very healthy multiple to acquire the business.
Eric: Yeah, yeah. I mean, it's 100% in the investor's interest to make sure that the physicians are happy. 100% in their interest. If the physicians aren't happy, they're going to lose a lot of money. So they will do everything they can to make sure the physicians are happy, but at the end of the day, they will have paid many, many millions of dollars for this and they will want the ability to control it. That's just part of the deal. You can't have it both ways.
Andy: Another group that I would lop into the side of people who probably shouldn't be looking into these acquisitions is someone who doesn't believe in the model going forward. Right?
Andy: There's upfront cash considerations. Sometimes there's earn-outs involved, and most of the times there's a stock portion on the back end as part of these transactions. Those physicians who sit there and say, "Okay, I'm going to weight this fully on just the upfront cash consideration and any equity you're going to give me, that means nothing to me, I'm going to count that as zero."
Andy: We've run into that a few times. Which is fine. That's their right to think like that, but I'm not sure why you'd be interested in joining a platform at a portfolio company where you're just going to value it at zero.
Eric: Yeah, I mean, I think that people who don't have any faith in the model, who don't really believe that this has a potential to be successful in a global sense and just kind of a PE-level sense, then I would think twice about doing it, because you're not going to get paid 100% of the consideration upfront. You're not going to get paid all cash on day one. There's going to be some held back because they have to keep you incentivized to stay on, whether that be in a form of stock, or it be in the form of some kind of a contingent payment that's legally acceptable. There's going to be something besides just 100% cash. If you don't believe in the model, then it's going to be hard for you, I think, to get comfortable with doing one of these transactions.
You're also not going to be able to just walk away, either. You're not going to be able to sell your practice and not show up the next day. You're going to need to show up for five years, probably, at least. You want to make sure that you like the whole thing. Otherwise, I think that you're going to end up wasting a lot of your time. I think you're going to end up going through this process with us or somebody else and you're going to realize that it's not the right thing.
So, before going down the road, I'd think about that, just on a high level, if this is something you're comfortable with or not. If you're not comfortable with it, that's totally fine, but it may make more sense for you to stay on your own.
Andy: The last group of people I'll bring up is simply the physicians who don't really have a profitable practice. By that, I mean, you take out the associates' salary and then you kind of normalize the partners salaries to [inaudible 00:14:34] ophthalmology, I don't know, 30 to 35% of production as their compensation, maybe up to 40% or a little higher for retina. If there's no profitability margin past that, there's really not much an investor can buy. It kind of disqualifies you from a transaction as well.
Eric: Yeah, I mean, look, it's a lot like any other business. I don't mean to draw a negative comparison, because I happen to think that all businesses are really interesting and good. Let's say you own a Taco Bell, right? I always use Taco Bell as an example.
Let's say that you have a Taco Bell and you're the owner of the Taco Bell, but you work in the Taco Bell every day and the Taco Bell only really makes enough money for you to pay yourself a reasonable salary. Let's say you pay yourself $60,000 a year. That's all the money that the Taco Bell makes. You can't really sell that to somebody else for very much. The kind of a Taco Bell that you can sell for a lot of money is one that makes a lot of money in excess of what it costs to pay that manager, that operator.
The same thing with true with a ophthalmology practice, because if you're selling your practice, eventually you're going to retire and you're going to have to be replaced by somebody else. There has to be some profitability left over after paying that person that the new owner can benefit from. Otherwise, it's not worth them to acquire it.
So, just like any other business, you have to have some profitability beyond a salary for a key person. For a lot of businesses, that's a manager, but in ophthalmology, it's an ophthalmologist. That's the difference between a financial candidate for this and a non-candidate.
Andy: All right, well, I think I'm going to wrap it up there. Today we talked about who should and who shouldn't be interested in ophthalmology acquisitions. We also talked about profitable Taco Bells.
Eric: We'll get into that in another episode.
Andy: It's probably a longer ... about who should and who shouldn't be interested in these acquisitions, it's probably a longer conversation than 10 minutes, whether you find yourself as someone in the category of who should, or who shouldn't. I encourage you to reach out to either of us. Go to our website, www.physiciansfirst.com. Find Eric and I's information. We'd love to talk about this a little bit further and discuss your personal situation.
Eric: Yeah. Absolutely.
Andy: Thank you for your time today. We'll catch you next time.