Dermatology practices across the country are being frequently, and often aggressively, approached by strategic and private equity buyers seeking to purchase a part, or all, of the practice. McDonald Hopkins has been involved in over a dozen such transactions in the past three years and other dermatology practices continue to reach out about possible transactions. Further, dermatology associations and societies have asked us to provide educational content on the subject matter, so it is clearly a front-and-center issue for the specialty.
Given the number of transactions completed and being considered, and the very significant implications of a transaction, we want to provide insights and recommendations to dermatology practitioners that may be contemplating a transaction. Also included below are the thoughts and recommendations of Tom Ferkovic, CEO of Medic Management Group, LLC, a national consultant for dermatology practices, and Craig Lawson and Patrick Krause of MHT Partners, an investment bank that has represented multiple dermatology practices in sales transactions.
Why is this Happening?
- You tend to be more diversified than many physician specialties. Dermatology practices often offer not only dermatology services, but also ancillary services and products of various types. You own surgery centers. You often are involved in clinical trials. Diversification is attractive in the view of any potential purchaser. It increases revenue sources and spreads risk.
- You are less dependent on payors than many other specialties and other types of healthcare providers and facilities because you have a significant self-pay population (to the extent you offer significant cosmetic services).
- Your practice will grow with an aging population, but also appeals to younger people who are increasingly conscious of their appearance.
- You are often very entrepreneurial, which acquirers like because they expect you to continue to grow the business once you join them.
11 Considerations in Practice Planning and Assessing Whether to Sell
- You do not need to sell. Independence and practice autonomy are legitimate reasons not to sell. Independent practices can survive in the current market, but you do need to be sensitive to the potential threat of well-funded practices forming around you.
“The decision starts with a personal and business assessment of ‘what do you want, personally and professionally?’ The vision for your and the practice’s future should be developed before you go to market. This requires some planning and thought. Invest the time to think about your clinical goals, financial goals, and family goals,” says Ferkovic.
- You can grow your practice organically or through consolidation with other practices that may have other market, operational, and clinical advantages. This can have a variety of economic, operational and clinical advantages. In addition, increasing a group’s size through consolidation often allows you to sell at a higher multiple due to the group’s larger size (if you decide to sell later).
- You do not need to sell now – you can sell at a later date. The market for your practice is not going to disappear. However, multiples may drop and if you are large enough to be purchased as the platform practice in your area or as a buyer’s first acquisition in your area, you likely will get a higher multiple than from an “add-on” sale.
Lawson states, “The fact of the matter is that in today’s hot M&A market (which is cyclical), there are less potential ‘platform’ practices (‘exceptional, diversified practices’) than there is demand for these practices and, as such, this ‘scarcity’ breeds competitive bidding from investors. As is oftentimes the case in M&A, larger scale (all else being equal) means larger value. Generally speaking, practices with the following ‘normalized EBITDA’ will garner the following multiples: <$3 million – 5-7x, $3-5 million – 7-9x, $5-10 million – 9-10x, >$10 million >10x.”
Ferkovic states, “Regardless of a pending sale or transaction, the goal of the practice must be to run it efficiently, profitably and with good procedures. If you can run the practice as a ‘best practice’ model, it not only will be worth more when ready to sell, but, you will do well financially during the life of the practice. It may seem like a simple idea, however, many practices learn that the high values they heard about were for practices that were exceptionally run, not those that decided to sell because they needed a lifeline.”
- In most instances, you should not sell to the first buyer that comes along. The exception is if the offer is clearly market competitive in terms of purchase price and post-sale compensation and benefits, and the buyer is a good cultural fit. You are generally better off seeking offers from multiple buyers as this may enhance the purchase price and other financial terms (salary, bonus, etc.), as well as exposing you to alternative cultures and practice models.
- Avoid buyers that pressure you:
- To not engage with other buyers and try to lock you into an exclusive dealing agreement before you are comfortable in selecting them as your first choice.
- To move forward with a transaction before you are ready or at a pace that is unreasonable.
- To not engage an investment banker or lawyer.
- Do not test the market unless you have a consensus by the owners that you want to sell. Trying to complete a successful deal without a consensus is likely to result in a very long process, if a sale is completed at all. Do not play out group disagreements or issues in front of buyers. Also, if you pull out of a market process in a way that potential buyers feel indicates that you were not engaged in a serious process, you may damage your ability to engage with those buyers at a later date.
- Make sure you are aware of the complexity of due diligence and the types of data, information, and materials potential buyers will want to see. These should be in good order, ideally, before going to market to avoid delays in the process. Lack of timely and organized responses to due diligence requests can have a negative impact on outcome.
“In particular, two diligence items have outsized importance from a financial and clinical diligence perspective. On the financial side, a ‘quality of earnings’ (‘Q of E’) analysis from a recognized accounting firm will convert your financials from a cash basis to accrual accounting basis, as well as ‘normalize’ for any inconsistencies, one-time occurrences, off market dynamics, etc. Normalizing physician compensation (particularly ‘owner’ physician compensation) is an important analytic drill addressed by the Q of E. From the clinical side, a ‘code review’ by a nationally recognized consultancy will be key for investors confirming your coding and billing are in line with market practices,” says Krause.
- Try to identify and correct any material issues or deficiencies prior to going to market. “Per the comment above, a Q of E and code review can both help illuminate areas for relative improvement,” says Krause. It is always better for you to detect (and, hopefully correct) problem areas than having potential buyer detect them. Surprise issues can negatively impact purchase price or deal competition.
- Carefully consider when and how you will disclose the transaction process to non-owners and the financial incentives, if any, that you intend to offer them to remain with the practice after the transaction. There can be a disconnect and diverging interests between owner-dermatologists and employee-dermatologists that need to be accounted for to mitigate deal disruption and conflict between owners and non-owner physicians.
- Do your own due diligence on the buyers. This can take a variety of forms and would intensify as the possibility of a deal becomes more certain. Talking to other dermatologists who have sold to the buyer is critical.
According Ferkovic, “The process does not end when you sign the papers and cash a check. You will be asked to work in the practice and continue to meet goals and growth targets. Be sure you are comfortable with your new partners. Success will require a team and you need to be clinically, operationally, and strategically on the same page with your new partners/employers.”
- Do not sign a letter of intent without having it reviewed by counsel and, if applicable, the investment banker. Though not legally binding, it does set the stage for primary deal terms, so you want it to be complete and accurate. Also, most letters of intent contain exclusive dealing restrictions of 90-120 days which would end your ability to negotiate with other potential buyers during that period.
Factors to Consider in Selecting a Buyer
- Do they have a high regard for proper clinical practice?
- Does the buyer’s strategic vision match yours?
- What are the purchase price and terms – amount, portion paid in cash, portion attributable to ownership in buyer entity, earn out or at-risk amounts?
- Will there be a clash of cultures?
- Do you respect the other doctors who have already joined?
- What happens to your staff and practice location(s)?
- How long do you have to commit to be employed?
- What are the key financial and other terms of employment?
- Do they have the appropriate advisors working for them (e.g., healthcare attorneys, etc.)?
- If you leave, to what non-compete restrictions will you be subject?