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PURSUING A PARTNERSHIP with a private equity firm can provide a practice with opportunities to drive growth by utilizing access to capital, key industry relationships, and expertise in creating efficient operations. The private equity firm's investment strategy focuses on providing a desired return on investment for the partners. The strategic initiatives include refining the internal infrastructure and defining growth objectives, consolidating the market locally and regionally, establishing regional hubs, and exploring exit strategies for a second liquidity event. Private equity firms may be in the form of financial partners or strategic partners. Financial partners usually focus on provid- ing capital to help a practice expand with a plan of short term aggregation and a quick exit strategy for a second sale. Strategic partners sustain continued involvement in the practice operations that's part of a larger business plan in the healthcare sector, not just an "invest and exit" strategy. TRANSACTION MOTIVATIONS Private equity capital can provide practices with the needed investment in infrastructure for growth including information technology, hiring supplemental management or acquiring work- ing capital for internal growth, and expansion of services. High quality and efficient practices can leverage risk-based contracts or shared savings arrangements, while a larger aggregation of practices provides economies of scale and leverages contract negotiations with payors. The practice's net income going forward improves with the investment in its infrastructure, growth and business operations. Physician shareholders can mitigate personal risk by shifting capital investment and debt away from personal guarantees. Operational and financial business risks due to uncontrollable outside influences will be diversified away from shareholders. Physicians benefit from a large up-front cash payment while retaining a percentage of equity going forward, allowing them to participate in the accelerated growth of the company. The potential exists for a subsequent liquidity event for a second cash buyout down the road. Most private equity groups will want physicians to retain some level of ownership to ensure they remain financially tied and motivated to the group. DEAL STRUCTURE Transactions with private equity groups will be based on the practice's adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). Adjusted EBITDA provides a buyer with a normalized cash flow by adding back one-time non-recurring expenses, expenses varying from the market rate (compensation, rent to owners) and discretionary non-business expenses of the owners. The valuation of a group's purchase price will be based on the multiple of EBITDA a buyer is willing to pay. For example, a $2 million EBITDA with a 6 times multiple results in a $12 million purchase price. The exact multiple will be based on a variety of factors, including but not limited to size, ancillaries, growth, geography and existing management expertise. Additional factors in the valuation may include hard assets, accounts receivable, trained work force and goodwill. An experienced CPA with business valuation experience should be utilized for such calculations. The practice should consider having its own valuation performed. HOSPITAL VERSUS PRIVATE EQUITY ACQUISITIONS A key difference between hospital and private equity acquisitions is that there is less of a concern about "down-stream" referrals in private equity transactions. The reduced compliance risk allows for more flexibility in any valuation approach and can sometimes result in a significantly higher purchase price and compensation package. In addition, often it's easier to align the business and clinical interests of the practice with a private equity firm rather than navigating the political and competitive relationships with a hospital system. When preparing to consider a private equity acquisition, do your homework in advance and perform a self-assessment of your compliance issues, update organizational documents, and know your market and competition. When evaluating potential partners, do your due diligence to understand their expertise in your practice area, their investment approach and strategy, and their overall cultural fit to your organization. Fred Luecke is the Practice Leader of Healthcare and Accounting Services at CBIZ, MHM, LLC and Mayer Hoffman McCann PC, an independent CPA firm in Northeast Ohio. n What Does It Really Mean? BY FRED LUECKE, CPA, CMPE Private Equity Acquisitions in Healthcare 2 2