Selling to private-equity firms
Private-equity purchases are financed by investors who essentially want to “flip” practices – that is, they want to make them more profitable and then sell them to someone else. The private-equity firm starts by buying a “platform” practice, which forms the core of the venture. It then buys smaller practices that will be managed by the platform practice.
The number of private-equity deals increased continually through 2019, then plummeted in March because of COVID-19, but by the summer, activity began to rise again.
Physicians are very intrigued about selling to private-equity firms because they are known to pay the most for practices. But private-equity buyers focus on a fairly narrow group of specialties.
Generally, Sean Tinsley said, private-equity firms only look for pain, dermatology, and ophthalmology practices, but they have been starting to branch out to specialties such as gastroenterology. In 2018, there were only two private-equity deals for gastroenterology practices, but in 2019, there were 16, according to one assessment.
Private-equity firms buy very few of the practices they initially review, according to Mr. Fanburg. “Private equity negotiates with dozens or even hundreds of physician practices at a time, with only 1%-5% of those practices actually being acquired.”
The private-equity firm’s upfront payment to selling physicians is quite high, but then the physicians become employees of the new group and earn much less in compensation than they earned on this own.
“In order for the venture to get any value out of the acquisition, the doctors have to make less going forward than they did historically,” Mr. Dietrich said. That freed-up money boosts the value of the venture.
When the platform practice is sold – usually after 5 years or so – “chances are the management team will be replaced,” Mr. Fanburg said. “There could be new policies and objectives, which could mean a bumpy ride for physicians.”
Do you really want to sell?
“When a group of physicians comes to me asking for help selling their practice, my first question is, Why are you doing this?” Mr. Fanburg said. “You need a better reason for selling than just the money.
“Once you make the leap, there is a certain amount of autonomy you lose,” he continued. “The sale gives you an economic boost, but it may not be enough for the long haul. If you stay on with the buyer, your compensation is often lower. That makes sense if you’re retiring, but not if you’re a younger physician with many years of practice in the years ahead.
“When physicians say they see no other way out except to sell,” Mr. Fanburg said, “I tell them that their buyer will see a path to future growth for your practice. If you think reimbursements are getting worse, why are the buyers pressing ahead?”
A version of this article originally appeared on Medscape.com.