As a practicing healthcare attorney for 37 years, I have seen more than my share of consolidations in various healthcare niches. One of the most active today is dermatology.
Dermatology practices, from small to large, are being aggressively pursued for acquisition by several companies (often called consolidators, aggregators, or roll-ups) and an increasing number of private equity funds. I have represented a number of dermatology practices in these transactions. I also speak to dermatology associations and societies on acquisition trends and models. Therefore, I thought it would be helpful to share my views on the state of the marketplace and what you should consider before reacting to these market changes.
10 KEY POINTS
- There is a lot of activity and many, if not most, groups have been approached by a company that wants to buy them.
- Acquirers are interested in you and are willing to pay significant amounts for your practice compared to other physician specialties and healthcare sectors. Some of the reasons include:
- You tend to be more diversified than many physician specialties, offering 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 positive in the view of any acquirer. It enhances sources of revenue and spreads risk.
- You are less dependent on payors than many other specialties and other types of healthcare providers and facilities since you have significant self-pay.
- Your practice will grow with an aging population but also appeals to younger people who are increasingly appearance conscious.
- You are often very entrepreneurial, which acquirers like because they will want you to help grow their business once you join them.
- Multiples are high now and although they may slip a bit, as they tend to do as a consolidation area grows more mature, they will remain strong for some time. This is actually a good time to carefully study your options and keep apprised of market trends.
Even if you are not looking to sell now, it makes sense to prepare your practice for a potential transaction in the future by doing the following:
- Make sure you are properly structured under state law and for maximum tax benefit at sale and have all of your organizational and other corporate documents in order (employment contracts, ownership agreements, etc.)
- Confirm your coding/billing practices and business relationships with vendors and referring physicians are compliant and that you are compliant in general.
- Have, where legally permissible, appropriate non-competes, non-disclosure and non-solicitation agreements in place with key clinical and non-clinical owners, professionals and staff.
- Have sound and accurate financial systems in place.
This kind of preparation in advance is likely to increase future offers and reduce your transaction expenses.
- You don’t need to sell. What is right for one practice may not be right for you. Independence and autonomy are not bad things. It is okay to want to keep practicing as you are and perhaps growing on your own. Independent groups will survive. This doesn’t mean, however, that you should not educate yourself about opportunities and be aware of risks to your practice, such as a large dermatology practice becoming established in your area either through a consolidation among local groups or through acquisitions by an outside party.
- If you are approached, don’t leap at the first opportunity, even if the purchase price is attractive. You are often better off if you assess multiple offers either yourself or through an investment banker.
- Be aware of companies that lowball your value. This is happening. Check out who you’re dealing with and their reputation in the dermatology community.
- Don’t give an inquiring party any confidential information without a confidentiality agreement in place.
- Make sure you carefully think about how to protect against unwanted disclosure of sale discussions which can lead to concern within your practice and loss of key personnel.
- Don’t sign anything until you know what it is and its implications. For example, most Letters of Intent contain an “exclusive dealing clause” which prohibits you from discussing a transaction with any other party for a period of time, often 90-120 days.
- Although purchase price is a critical element of picking a buyer, it is not the only important element. Others are:
- Do you like and trust them?
- Will there be a clash of cultures?
- Do they have regard for proper clinical practice?
- Does their strategic vision match yours?
- 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?
- If you leave, what non-compete restrictions will you be subject to?
I hope this information is a helpful guide on what to be thinking about now and in the future.