Crucial Questions

Podcast 18.8: Why Do I Need An Investment Banker?

podcast_GEORGIA ARIAL 18.8The bottom line on this one is, you get more value from an investment  banker than the amount of money you pay in fees. That's been our experience and it has been confirmed in independent studies on the issue.

We've lived this many times but this is new territory for our clients. Of course they should ask this core question before they move forward. In this podcast we do our best to communicate the real issues you will be facing and how an investment banker will be an important and trusted guide to help you reach your goals

  • I could do this myself ... what benefits make an investment bank worth the cost? 0:00 - 10:40
  • The best have been shown to deliver higher offers that more than pay for their fees
  • They invest extensive amounts of time to secure a successful transaction
  • They handle unforeseen obstacles that will occur in due diligence with experience and professionalism
  • They help facilitate disagreements between partners that often occur during the process
  • How long does the transaction process take and what are the key steps? 10:41 - 18:00
  • Conservative a year .. can be 6 - 12 months depending on physician engagement
  • From start to finish ... an overview of our systematic process

 

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Transcript

Andy Snyder:

These are not simple transactions, so you do need someone on your side who's, one, seen the obstacles from previous deals that they can know to look out for, and then, two, when something arises that wasn't exactly as planned, we need a team in place to tackle it.

Speaker 2:

Welcome to PF Insights, hosted by the Leadership of PhysiciansFirst 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 Snyder:

Welcome to PF Insights, episode eight, a podcast brought to you by the leadership of PhysiciansFirst Healthcare Partners. I'm your host, Andy Snyder, a partner at PhysiciansFirst, and with me is Eric Yetter, managing partner at PhysiciansFirst.

Eric Yetter:

Hello.

Andy Snyder:

Hello, Eric.

Eric Yetter:

Happy to be here, Andy.

Andy Snyder:

All right. Well, we are continuing on with our series focused on ophthalmology practice investments and acquisitions. We've been answering crucial questions posed to us by our prospective physician clients, and while this next question isn't necessarily ophthalmology-specific, it's one we hear all the time, which is, “Why do I need an investment banker for this process?” I think that question stems from a lot of these ophthalmologists, and other physicians for that matter, are receiving mailers and cold calls about opportunities for acquisition and partnerships, and some of them say, “Okay, why do I need an investment banker for this?” Go ahead.

Eric Yetter:

You don't. You don't need an investment banker.

Andy Snyder:

That doesn't sound like good business for us.

Eric Yetter:

Yeah. No, look, you can do this yourself. You can sell your own house. You can paint your own house. You can mow your own lawn. You can clean your own house. You can change your own oil. And you can go see a primary care physician about a retina detachment. But that's not necessarily the smart thing to do.

 

The smart thing is to hire and use a specialist to do those things. But you can do them yourself, and we're not going to stop you from that. Nobody's going to stop you from that. And you probably can do a pretty good job, just like I could probably do a decent job painting my house. It would take me a lot of time to do it. I probably wouldn't do it quite as well, and importantly, if anything came up that was unexpected, I'd probably have some problems with that. There are a few reasons why I think you need an investment banker, or you should use an investment banker. There's really three. I like things in threes, and I like ABCs, so we'll do an ABC list.

Andy Snyder:

Oh, here we go. We got two minutes in and Eric's with his first list.

Eric Yetter:

Yeah.

Andy Snyder:

It's now a podcast.

Eric Yetter:

You got the list.

Andy Snyder:

Let's go.

Eric Yetter:

A. Money

 

Using an investment banker should increase the value of the transaction. The reason is through competition and through expertise. By driving a competitive process among multiple buyers, that should increase the value. We've seen it in our experience, and some academic study has been done and shown that statistically it does increase the price. For us, it increases the price more than what it costs to use us, which is good. That helps us.

Andy Snyder:

That's the business model right there.

Eric Yetter:

Yeah. That helps us do good business so that the money thing is obvious. It's just that if you reach out to the whole buyer field, you know what you're talking about, you do it professionally, you present the practice well, in the best light, you give a lot of data upfront so that the buyers are comfortable with it and you create competition among them to encourage them to offer their best price in order to move forward, you should get a better outcome. In my experience, I'm very confident that you do. That's reason A, is money.

 

Reason B is time. We can do this a lot faster. We've done it before. We know what we're doing. We understand ophthalmology. We understand GI. We understand surgery centers. We understand how practices work. We know how billing systems work. We know how the payers work. All that kind of stuff, we can understand and communicate that with the buyers. The process that we run is systematic. There are deadlines. There are dates that the buyers need to do certain things by, and we can just turn things around faster because this is our full-time job.

Andy Snyder:

Yeah.

Eric Yetter:

Our clients have patients.

Andy Snyder:

I like pointing that back to how you started of, you can do it yourself, but let's be honest here. Most physicians have one shot at doing this opportunity. If they're going to go through with the transaction, they're not looking to violate a non-compete and go back and start another practice and do this again 20 years from now. That's just not how it works.

Eric Yetter:

Yeah.

Andy Snyder:

So to have the investment bankers that have gone through this 50 times in their life, however many times they've gone through, it's going to be more efficient. You can count on that.

Eric Yetter:

Yeah, do it right. I don't know that we've done this 50 times. I don't think anybody has because this-

Andy Snyder:

Especially in the ophthalmology space.

Eric Yetter:

... Yeah, this is a new thing. But you want somebody who knows how this stuff works. We learned it first, and I think really importantly, as investors and as operators. We were on the buyers side, where we acquired and operated practices and surgery centers. That was really, I think, a great way to start. Then we started representing physicians.

 

The other people that do what we do are typically more generalist investment bankers and they've developed some expertise in physician practices, probably recently, once this is all started, which is fine. I think a lot of those people do a really good job too, but those are essentially the two choices that a physician has in terms of who they decide to work with.

Andy Snyder:

Right. I completely derailed you from your list by the way. A, was money.

Eric Yetter:

Oh, yeah.

Andy Snyder:

B, was time. And I interrupted you in time.

Eric Yetter:

C is obstacles. C is unforeseen obstacles. There are things that can and will happen that you can't anticipate in this. The benefit of working with somebody is two-fold. One, they've seen it before, hopefully. Two, is they can handle it. They have time to handle it. They have the capabilities to handle those types of problems. Let's talk about a couple examples of an obstacle that might come up.

 

Let's say that after the initial offer is made, let's say someone offers a physician a certain amount of money, and that's agreed to, then things go into due diligence. That's all about confirmation. That's about the buyer confirming that the profitability and all the other components that make up the value in the stability of the practice are really there, are real.

 

Things come up like that in that process, and they usually do. One financial statement might not match another report, or the billing system might have some data in it that's not right. Hopefully, in our experience, there's never been anything that's fraudulent or bad acts, but it's just information. It's the ability to understand and clear up informational difficulties. There's negotiating involved in that. There's communication, there's research. Sometimes you bring in third parties to help clear up that stuff, but those are things that the investment bank can help with, is to push that process along and not let it just get derailed.

Andy Snyder:

Yeah, I would say most of the time that situation is similar to someone being heavily audited for the past three years without any ... a few months in advance notice that it's going to happen. So it's not that anyone is doing anything fraudulent. I want to reiterate that. It's just that these are not simple transactions. They're not uncomplicated, so you do need someone on your side. Who's, one, seen obstacles from previous deals that they know to look out for and then, two, when something arises that wasn't exactly as planned, you need a team in place to tackle it.

Eric Yetter:

Yeah, yeah. Someone who's ready to do that for you.

 

Worse-case scenario with that is, and they could come up for a number of reasons, that it falls through. When you go start one of these transactions, you find a buyer, and you agree to do a deal or to look at doing a deal, but that's nonbinding. You say, “Okay, we're going to look at this together.” That's a letter of intent. That's what that lays out is that we're going to pursue a deal on certain terms, but we're not bound to each other to complete it.

 

After that letter of intent has been signed, and you're in the due diligence process, and we can talk about the different steps another time, but when you're in that due diligence process, both parties can change their mind. They both have the right to change their mind. The buyer might say, “Well, I'm still interested in this, but it's going have to be at a lower price than we initially talked about.” What are you going to do in that situation?

 

One of the things that an investment banker can do is to have somebody else in the background who can step in and do the deal instead, another buyer. That's part of the benefit that comes from having a structured process, that there are multiple parties interested, multiple parties are learning about and understanding investment, and ultimately bidding on it. So you have your first choice, but you have your second choice in case. I think it's valuable to have that. It's just understood that's an option. When the buyer understands that it's an option, they have less power to throw their weight around, for lack of a better word.

Andy Snyder:

Yeah, as a physician partner with a full-time job, I would say it's hard, if not impossible, to be lining up multiple offers-

Eric Yetter:

Yeah, it is.

Andy Snyder:

... simultaneously.

Eric Yetter:

It takes a lot of coordination. It's all we do, and it's pretty time-consuming for us.

Andy Snyder:

That's right.

Eric Yetter:

I think it would be very difficult to do it with a full clinical schedule. That's just an example of something that could go awry. There are a lot of things, and they're not possible to anticipate, not even worth trying to list out. But you want to have protection to address problems, and then you want to have fallback. If a fallback is available, you want to have a fallback in case the worst-case scenario happens.

 

Then, I think, another thing too is that there could be disagreements among partners. Partners can disagree about whether or not they should do the transaction. They can disagree about what the terms of the transaction should be. They can disagree about what each of them should be paid going forward. There's a lot of different things that partners can disagree about. I think that having a third party involved, either investment banker or then also an attorney can help with this too, they can help to, for lack of a better word, they can help to mediate those things … help the partners make a decision as a group.

Andy Snyder:

You've touched on a few steps of a process going into a transaction. I think the first question before we go into even more detail about that process is really, “How long is this process going to take?” If I'm Dr. Smith and I'm coming to you, picking up the phone, calling you on day one and I say, “Okay, yeah, I'm ready. We're ready to look into this.” How long until you think a deal is closed?

Eric Yetter:

I usually tell people a year. I think that's a conservative estimate, is 12 months. That means from the time that we agree to work together, me and one of my clients. From the time that we agree to work together until the time the transaction is closed. Conservative, a year. Probably could be as little as six months if everything goes very smoothly and the physicians are attentive and there's information available and the lawyers work quickly and all the different things that contribute to this. But a year is probably a safe assumption.

Andy Snyder:

Yeah. Now let's just walk through what that year and that process looks like. I'll get the ball rolling with this. I know this as well as you do.

 

Day one, we're signed up with a client. We're engaged with the client. We go and take a trip to their practice and we are onsite, sometimes for multiple days doing our front-end diligence.

Eric Yetter:

Yes.

Andy Snyder:

We're scanning in every contract. We're looking at every piece of financial data over the last three years, and we're basically turning the place inside out putting together our marketing materials, our prospectus that we're going to distribute to, really, a full spectrum of buyers that we've been weeding out and adding to over the last couple years who are interested in this ophthalmology space.

Eric Yetter:

We're trying to anticipate the things that they care about.

Andy Snyder:

Right.

Eric Yetter:

We're trying to anticipate and obtain the data points that are meaningful to them.

Andy Snyder:

Yeah.

Eric Yetter:

That's just based on experience

Andy Snyder:

Yeah, we're very knowledgeable about their investment profiles, and their geographic interests, and good synergies that would work between a practice that could be a potential investment for them.

Eric Yetter:

Yeah, true.

Andy Snyder:

Then at that point, we are distributing that prospectus, as said. Then we're asking for an indication of interest first, which is really we're giving them all a deadline to when they can submit the high-level acquisition structure, valuation, terms that they are looking at for this particular opportunity. Is that right?

Eric Yetter:

Yeah. That's the first competitive point. Right, so we create marketing materials. We send marketing materials to the buyers that have signed a confidentiality agreement to see them. Then those buyers have the opportunity to submit their indication of interest, their IOI is what we call it. That's a soft offer, saying “I'm interested in this and these are the terms that I'm interested in it on.” There's a lot of incentive for them to put their best foot forward there because we're not going to have all of them move ahead.

Andy Snyder:

Right.

Eric Yetter:

The idea is to thin the herd out. So we don't want the physicians to have to sit down and have a meeting with 10 different groups. It takes a lot of time, and they just, they're going to get real sick of that, so we try to get a smaller group of buyers that ultimately filters down from that initial IOI stage. It's in their incentive to put their best foot forward. Sometimes there's more back and forth about that to try to get them to what their real best offer is. Trying to find something that makes sense for both parties there, but essentially we're thinning the herd out after that stage.

Andy Snyder:

That's right. So we've gone from going onsite, doing our diligence, turn the place inside out. So all of a sudden, could be a couple months down the road now, the physician group has three offers that they want to entertain and now we're onto management meetings where we have those investors coming in and really pitching themselves why they would be a good partner going forward with the physicians.

Eric Yetter:

Yeah. That's the opportunity for physicians to meet the buyers that they're interested in face-to-face.

Andy Snyder:

Yeah.

Eric Yetter:

Typically, those happen at the physician's office or at some other location that makes sense. It's an opportunity for both parties to talk about themselves, talk about what's valuable about them. The investors are saying we've got great expertise in this, we know how to run ophthalmology practices, we're excited about developing the state you're in, or whatever it is. They have some pitch, and the physicians too. The physicians have a pitch that they don't need to rehearse. They don't need to practice for, but they know what's valuable about their practice. This is the opportunity for them to convey that too. Importantly, to convey the growth opportunities that they have.

Andy Snyder:

Yeah, just to fast forward, after those management meetings go through, typically more negotiations back and forth. We get to that letter of intent that you were talking about. Still, a nonbinding document but more of the actual expectations of the deal, including once one is signed, you go under exclusivity with one certain buyer, how long that diligence period is going to be from the signing to the LOI to close.

 

To me, we've already talked about that earlier in this podcast. It's why you have an investment banker. It's getting you through that diligence period on their side in a timely fashion and getting that deal to close.

Eric Yetter:

Yeah.

Andy Snyder:

That's why you have it.

Eric Yetter:

Yeah, just to back up. In most situations, you have several indications of interest. Then you have the management meetings. Then you will obtain several letters of intent, but you ultimately only choose one.

 

Because they are typically exclusive. You can only sign one. While most of it is nonbinding, certain provisions of it are binding, including, probably most importantly, the provision about exclusivity, which means that you're only going to work and communicate with and court one buyer, and that's the buyer that you signed that letter with, and it's for a certain period of time … typically, anywhere from 90 to 120 days that you agree to work with them exclusively so they can complete their due diligence. The lawyers can finalize documents. All those kinds of things happen during that period.

Andy Snyder:

Also, to be clear, we're on this podcast right now going through a typical investment banking process. This is our process too, but it's also what any qualified investment banker is going to do for you, right?

Eric Yetter:

Yeah, yeah. This is pretty standard. It's a structured process and, as far as I'm aware, it's what everyone is doing in terms of these types of transactions. It's not 100% locked in. We can make modifications to this, and sometimes we do.

Andy Snyder:

Yeah, that's right. I think this is just a teaser for what future clients can expect-

Eric Yetter:

Sure.

Andy Snyder:

... and just shedding a little more light. We're demystifying the investment banking process and how these acquisitions unfold.

Eric Yetter:

Yeah, exactly.

Andy Snyder:

All right. Well, I think that wraps it up for episode eight of PF Insights. Today's podcast was "Why Do I Need Investment Banker." We went over how you can do it yourself, how PhysiciansFirst could improve your outcome, what are the steps of this process, how long does this process take. Thank you for being with us today. I'm Andy Snyder. He's Eric Yetter. We'll see you next time.

Eric Yetter:

Thank you.

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