Why Private Equity

Healthcare, News, Private Equity, Webinar

Physician’s Guide to PE

Learn what private equity is, as well as the benefits and drawbacks of a private equity partnership for healthcare practices. Raj Kothari provides insights on considerations, what you can expect after the transaction and explains about “the second bite of the apple” and more in this informative presentation.

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Why Private Equity Presentation PDF


Welcome and thank you for joining us for our webinar on an introduction to Private equity for Physician Practices.

Our disclaimer. This is not an offer to sell or offer securities or services. If there’s an offer for securities, they’ll be done with the prospectus and it’s done through Cascade Partners, BD, BD, LLC. So again, welcome. My name is Raj Kothari.

I’m a founding member of and Managing Director of Cascade Partners. I’ve spent my career helping organizations build value, some cases recapture value, and ultimately realize the value and the organization that they’ve created. I lead our health care practice here at Cascade Partners, and I really draw on my experience leading to different health care focused private equity funds. I’ve been a board member of both payors and providers, and I’ve been a transaction advisor across a variety of industries, including physician practices and specialties such as emergency medicine, dry neurology, pain, ophthalmology and a variety of other specialties.

And I use that experience hopefully to share some insights today with you all. So let’s face it. The paradigm has shifted. The business of health care has evolved, and you’re going to need to start thinking about the future differently if we’re going to be successful. And what’s the new world that we’re operating in within health care? Part of this is because I hear every day from physicians I’m working harder and making money each year, and that’s being driven by, you know, reimbursements are continue to decline.

Expenses, labor, technology, tools, they’re all going up. And at the same time, patients are demanding more from their providers, whether it’s online appointments, telehealth or access to you and your staff. And in most cases, it has very, very little reimbursement. And like many other businesses across almost any sector, it’s just getting much harder to business as we progress through into 2024.

And that’s having an impact, right? It’s having an impact on physicians today. Scale matters more than ever. Physician practice is our whole our fixed cost businesses. What I mean by that is as your revenue continues to grow, the cost associated with generating revenue traditionally don’t go up linearly. And so if I’m able to spread a greater base of revenue over that base of fixed cost, that’s one of the way fixed cost businesses can become more profitable and overcome some of these challenges.

And this is what many have shifted to. So, you know, this is the first time in 2022 this is AMA data is the first time ever that more than 50% of the physicians practicing don’t own their practices that they’re part of. And as you can see on the graph, right increasingly they’re becoming much larger practices with 50 and greater physicians and the number of small practices, ten and less is declining and it’s declining and accelerating pace.

So the reality is the scale is what’s an element of driving that? Because to realize that’s one of the ways they can build an organization that can sustain these pressures of declining revenue and increasing costs. At the same time, the physician new physicians mindset of change has to change. Younger docs are looking at this differently. They have more than dynamics influencing the path that they want to take, whether it’s that work life balance or just their entrepreneurial spirit, they’re looking for greater certainty, greater consistency, and they still have greater expectations.

On average, a new physician coming out of medical school is leaving with over $200,000 in educational debt. That makes it much harder for them to buy into a practice, buy into an ancillary service with their practice. They’re just looking for greater stability. That doesn’t stop them from wanting equity in being a partner, but the value of that partnership and that value of that equity in your practice has changed dramatically over the last 10 to 20 years.

And private equity is part of the reason that change. So the ability to do that, as has been done in the past, isn’t the same. And the reality is what we’re spending our day today talking mostly about private equity. You have options, right? You need to understand your goals, your risk tolerance and the needs that you your group has in order to figure out what that right path is.

But today, let’s spend our day just talking about what’s going on in private equity. That’s our focus and what we’re going to try to provide some insight on what that private equity partnership can look like. So let’s start out about talking about what is private equity. Reality is private equity is basically a group or company that gets money from outside investors in order to invest in private companies.

They use those dollars to buy and then grow those businesses over the next 4 to 7 years in order so they can sell the business again or the practice and generate a return from there for their investors that they got their money from. They do this by building the organization. They’re building the infrastructure to support growth, and they’re doing that growth either through organic building new clinics, opening new locations.

And they also do it through acquisitions. So you might say, okay, well, why why is private equity is interested in the physician? Well, the reality is it’s a large market. It’s over $300 billion in the in the physician provider market alone. And and the other dynamic is that world has changed what used to be a cost plus is obviously now fee for service world.

And it’s very fragmented and very inefficient. And those are two things that that private equity benefits from because they’re able to bring processes, experience and skill sets that they’ve honed in the businesses, commercial businesses and bring those to bear on the operations of physician practices. They also like them because health care is recession resistant, even with the dynamics of COVID and many clinics being shut down, most practices did very, very well in 2020.

And so as a whole, private equity likes that, that recession resistance that exist in physician practices. And lastly, there’s a lot of opportunities that generate revenue from adding specialties, adding ancillary services, and even driving the consumerism of health care has created an opportunity to generate multiple streams of revenue, and those exist within the physician practice world in a way that doesn’t exist in a lot of other industries.

So this is happening because there’s not a lot of sophisticated business practices in most physician practices, and that’s one of the areas that they’re private equity tends to be experts in because they’ve done this across hundreds of companies. The other side of it is running a physician practice today is getting more and more complex and trying to stay compliant with a growing number of federal and state regulations, as well as complying with the rules and obligations that payers have.

You can’t do this anymore with a staff person just helping schedule through billing at night. You need professional business leadership, driving very sophisticated activities within your practice from revenue cycle management to to marketing, driving patients and managing that flow. You know, being a great doc is a full time job. Being a great CEO is a full time job.

Guess what? You can’t do both. And there’s been a lot of success, hundreds of practices of explored and executed transactions to build scale and grow across a variety of specialties. And there’s been a lot of success and in some cases there’s been second and third bites of the apple as organization, like the ones right above have been able to grow, build, scale.

So more than once and physician partners have been able to drive that success curve along the way, that success is begetting more opportunities. So that’s wonderful for the private equity groups, but you’re like, Well, why would I partner with a private equity partner? Well, there are value added partners. They’re experienced in building businesses. That’s what their whole careers are.

The whole business model is all about and they haven’t done it once, but they’ve done it dozens or hundreds of times across a variety of businesses working to help them put the infrastructure, build the leadership team and go out and execute the growth strategy. Again, whether it’s organic and acquisitions that tend to drive that success. And they have the capital to put behind behind talk because those things take investments.

But as we’ll talk about a little bit later, you got to pick a good partner, so you’ve got to make sure you’ve got great alignment with your partner. And private equity by its model creates economic alignment. But you’ve got to make sure there’s more than just economic, cultural, philosophical, operational alignment as you think about a partner. We’ll talk a little bit more about that later.

They do create economic alignment because what you own and the private equity owned is the same stock and the same organization. And if they’re making money, you’re making money and they create that alignment to keep everybody involved in the organization. Many times I hear, Hey, this is great for the senior docs. They’re going to do a private equity deal, They’re going to get a huge payday and they’re eventually going to go retire.

I’m a young doc. I still got 20 years left in me. Why would I ever do this? And the reality is these opportunities can be great, not just for the docs in the later part of their career, but mid-career and even early career Physicians for four. If it’s done right, there’s the most economic opportunity for younger docs because they have the ability to participate in that, grow multiple times and take chips off the table along the way.

The challenges is a shift. It’s a shift from how most physicians have been trained or thought of. Hey, right. Cash flow is the most important thing. It’s a shifting from cash flow to thinking about how I create equity value. And younger physicians have the opportunity to create multiple opportunities to build equity value over time as they as organizations go through private equity partners and build scale.

Starting out as a single practice, growing a multiple or maybe a super regional and then ultimately maybe going to a national provider. Those steps along the way create fantastic revenue and growth opportunities for physicians to be successful and for mid-career, as it’s often about lowering the risk profile, it allows them to take chips off the table. That growth and that investment doesn’t have to come out of their pocket.

They’ve got a partner and allows them to go back and focus on what they’re excited about, which is focusing on their clinical activity rather than their administrative or operational duties that sometimes many practices have to deal with. So it creates opportunities for each type of physician, regardless of where they are in their career path. I look at it, I’m smart enough to know you all talk and hear all the different aspects of private equity.

The good, the bad and the ugly. I’m convinced that someone runs around it at residency programs around the country and saying how evil private equity is. The reality is there are bad private practices. There are bad private other bad physician partners, and they’re bad hospital partners. And yes, there are bad private equity partners, but there are also good private equity partners, just like there are good private practices, good physician partners and hospitals.

You have to learn about your partner and make sure that it’s a good fit and alignment with you and your organization. Well, let’s talk about that. If you’ve got to do your homework, you’ve got to look deeper than the money and understand what is my partner all about. They’re going to do a ton of due diligence on you as they learn about your organization and your practice and your culture.

And you’ve got to do the same and learning about them, right? You have to take the time to understand what motivates and drives the partner. And what have they been successful doing in the past? Take time together, both formally and informally. Call references. Talk to other physicians that are in their practices and even those that are no longer part of their practice.

So you get the real story of what kind of partner they are like and recognize, you know, in order to be able to do this, you have to be able to compare contrast. You know, I describe this often as speed dating before you getting married as you go through the process, evaluating partners. But you got to have options and take the time to get to know so you can figure out who matches up, creates that alignment in good times and in bad times.

And that is where it can help you be successful in the long run. As you look at that partnership opportunity. So as we transition, I get a lot of questions about, well, what’s my life going to be like the day after? And there’s not going to be a lot of changes right when they first start. They’re not going in to change everything right up front.

They’re going to take their time over time. The back office process will change because they’re trying to build scale, build infrastructure that will support growth. So your systems are going to change and your team is going to change because they’re going to work to bring in stronger business, more professionalized business leadership that has experience growing two, three, four X in size over time.

And most practices don’t have that talent in-house today. They’re going to focus on efficiency as well. Oftentimes, I hear physicians ask, well, are they just going to come in and cut costs in order to make profitability? No, they’re going to look at efficiencies, but they’re not looking just to cut costs. What they’re not going to do, though, is they’re not going to tell you how to practice medicine.

One. They’re not in the business of practicing medicine. That’s what the physician’s there. So they’re not going to tell you how to practice medicine. They’re not going to tell you what drugs you have to use or what equipment they might educate you about the cost dynamics and the impact. But the clinical decision is going to be up to the physician right there.

The private equity isn’t going to be running the business day to day. They’re going to hire a management team. That’s who’s going to be operating day to day. The private equity team is going to help at the app, at the at the strategic level, at the board level, setting the direction. And the other element is they’re not taking all the cash and distributing it to shareholders.

They’re going to use that cash and reinvest it in the business as we’re going to talk about it in a second. So as we move from kind of talking about the the private equity as a whole and what they’re looking for, you can’t have that conversation without diving a little bit into the deal. And we’re not going to talk about transactions themselves.

But I want to talk about the structure and the impact. The details of the deal and the opportunity can have for you. So the first area we’ve got to focus on is what’s the timeline of a private equity investment? As I said, they’re getting capital from outside sources and they have to return that capital with a return at some point.

Most private equity firms try to target a 4 to 7 year cycle from when they investing, growing and then beginning to exit those investments. So what you see on the slide above is that’s the typical cycle. What happens for you and what your experience depends on when you’re joining the private equity companies and that investment and where they are in their journey.

So if they just start if you’re the entry point, if they start building from you often was referred to as a platform, I’m right there at the foundation period. Platforms tend to be larger practices with a lot more infrastructure. So the basic bones are there from which to grow. And in those cases, they’re going to start by beginning to professionalize that management team, add resources to drive growth.

But they’re going to be building off of the tools and the components that you have today, and they tend to be more flexible because the path that the goals and the process haven’t all been defined yet. But if you’re a smaller practice or you’re joining in that middle period, that high growth phase, right, the intensity, the flexibility is lower at those stages because they have a rhythm, they have a cadence, they have a kick game plan that you’re using, they’re using to execute their growth platform.

So whether you’re being acquired or merging with an established, the flexibility is going to be less because there’s more behind what you’re partnering with. The positive side is there’s greater scale and you’re benefiting from that scale, whether that’s powering power or sophistication of systems. When you’re that first one, while you’re larger and you’re you’ve got more influence, your partner is learning about you and your specialty because they’re early in that investment.

So there are tradeoffs depending on where you are in that cycle. And one of the things we talked about earlier is the change that happens when you have a private equity partner. Right. And this is one of the biggest changes around profits today. The profits of your practice go to the shareholder, although they’re doing it through distributions or other payments.

At the end of the day, every year most practices don’t generate a profit. They’ve got a zero profit because they distribute to the partner after private equity comes into place. They’re no longer taking that cash to shareholders. Right. Because they’ve already we’ve we’ve true that up. We’ll talk about that in a minute. They’re taking that money and they’re reinvesting in the practice.

They’re are they’re investing in the practice to build the clinical operations, to add management system staff. They’re funding growth, they’re doing acquisitions, they’re opening up new clinics and new locations. And they’re also beginning to pay down debt when they do the transactions. That is often a component that’s owned at the corporate level, not at the individual level. And that debt is getting paid down and as we talk about next, that that actually works to your advantage, right?

Because what happens is you’re an owner in the organization that has both equity, you’re an equity owner in the organization that has that as well. And it’s kind of like a home mortgage as that debt gets paid down over time, your equity value increases, if nothing else changes. And so instead of using all that cash to do distributions, they’re using that cash to invest in the practice, grow the practice and pay down the debt, which is increasing the equity value that you own because now you’re a shareholder in this bigger entity.

And the concept of that can be a complicated one for folks to grasp, especially when they’ve run their business on a on a debt free basis. So let’s talk about a couple of the other important things to think about in the deal. Right. As I just said, you’re going to be a continue to be an owner, a shareholder in the new entity, typically, which is a medical service organization or an MSL, and that’s you.

And it’s the same ownership as your investment partner. And so that’s one of the elements that creates alignment because again, you’re going to have the same ownership at the same ownership level as your private equity partner. So if you’re making money in your equity, they’re making money and vice versa as long as your deal is structured properly, but recognize you’re going to have a non-compete in this area and that can often be a challenging element to understand and appreciate.

But the private equity partner doesn’t want to give you a whole bunch of money and then have you walk away. Company valuation ends up being a very important part of this. We’ll talk a little bit about how those play in decision making, who’s going to make the decisions right. The pre is going to drive the operational, the organizational decisions, and they’re going to do that through a board of directors.

But the clinical decisions are going to remain with physicians. But you might be you might be going from a group with five physician partners and ultimately becoming an organization that’s 50 or 100 physician partners. And in those cases, individual physicians aren’t going to get to make all the decisions, just like in any large organized nation. But physicians will be making decisions that drive physician behavior.

So whether that’s a clinical a clinical advisory board or a medical director, they’ll be a group that can help drive those decisions. And you’ll become an employee of the practice. Right? Today, you’ve been a shareholder. Going forward, you’re going to be an employee of the practice with a contract getting market compensation at the same time that you’re a shareholder and the MSL.

And one of the big elements for them and one of the key risks they’re worried about is making sure that you continue to produce and generate the revenue that you’ve been doing because the cash flow and the value that they’re defining is based on your ability to see patients. And guess what? There’s another non-compete that exists at this level.

All right. Let’s talk about everybody’s favorite topic, valuation. No doubt you’re the best practice ever. You have the most respected physicians and you’re worth a bazillion dollars. Well, the reality is that’s not always the case, right? So you’ve got to take the time and make sure that you’re backing that up. And the first place to start is around EBITDA.

What the heck is EBITDA if it does earnings before interest tax, depreciation and amortization? It’s a measure of cash flow and sometimes profitability, but not not precisely if it’s designed to be measured on a consistent basis, regardless of tax or ownership dynamics, like, Hey, do I have that or not have that, which don’t really affect the value of the business.

The other element is that practices typically run on a cash basis and the rest of the world runs out on accrual basis. There is a big difference here and it’s an important area to make sure you have your arms around as you’re thinking about your results because it is a consistent way to make sure there’s no fluctuations and provides the most consistent and reliable way of measuring across the different businesses.

So at the end, as I said before, most practices don’t generate any real profits because they bonus out the excess to shareholders. So how do we actually create EBIT? But that’s where valuations start from. Well, we look at it differently. Position shareholders are compensated in two ways. They get paid a market compensation as a provider and they also get distributions or profits as a shareholder.

Now sometimes those are blended into one track and it’s a hey, I take everything off at the end of the end of the day. But at its core, there’s really those two components because if you had an employee doc, you’d have to pay them market compensation. And since you’re a doc providing you have to get paid market compensation, but you’re also a shareholder and so you’re getting your distributions of the shareholder.

So when you make these adjustments and you go look through and get physicians to a market compensation, the bulk of the profit, or it becomes the majority of it, but that tends to be those profits as well as the success of your ancillary services. And this becomes the anchoring point from which valuations are based in most physician practices.

Now, once we’ve got that base, there are lots of things that influence that valuation range and those are the things that will drive well. Are you above the mean, below the mean or right at the mean? What’s the clinical reputation of the group? How much infrastructure do you have? Can it support growth? You have real leadership. How sticky are your referral sources?

All of those are the qualitative elements that go into evaluating a practice and determining what the multiple is. But really ultimately, how are they valuing that cash flow stream? How strong is it, how robust is it? Is it a premium or is it not? And it’s more than just be a great practice. You have to back that up with data and information that supports that.

You are the best practice. I’ve never met a practice that’s gone on me and said, The reality is you’ve got to back it up with the data and show this is why we’re strong practice, a superior practice in order to drive that valuation range based on the effort that the practices actually perform. So if you’re not making any money, it’s very hard to drive tremendous value as opposed to if you’re generating a lot of cash flow, that becomes much easier because at the end of the day, remember, the private equity investor is trying to generate a return for their investors and they do that by driving growth.

And they’re the same thing happens when they exit is they’re looking at what’s the value creation reputation. EBIDTA What’s those ranges? All of those come together to be able to provide that valuation and the things that influence valuation. So hopefully that gives at least a cheap to begin to think about how you can drive that within your practice.

So as we’ve talked about all this and the impact of private equity, please recognize that you have options. You have to determine what’s best for you and your team. And this will give you a sense of what some of those options are. But focus on what you want in that how to get there. Oftentimes practices are talking about, I’ve got to do this or that because they’re trying to accomplish an end goal.

Focus on your end goal, right? Determine your high level objectives and and what you want to get out of it and not a how to not how to get it done. You can turn to your advisors and partner to figure out how to get it done. Once you know what those objectives are, be open minded. The what is as a large number of opportunities more than you probably realize and how to accomplish those goals.

This is a big and complicated move and it’s difficult to undo. So put the time and thought process to figure out what risk tolerance do I have? What can I, what do I need? What are the benefits I’m looking for, and what are the drawbacks that I can live with? It’s amazing how just misalignment of expectations takes many folks off track because they expected one thing.

They didn’t ask the question. They got to the end and they were very surprised. So take those time to ask those questions. And as you’re going through this, remember, you have partners. You have partners today in your practice. It can’t be all about what you need. It’s got to be how do we craft a solution that meets the different objectives that our partners have?

And recognizing that I might not get everything I want, but the other partner might not be getting everything they want. It’s a balance. It’s a tradeoff. In order to get to a good solution. And many folks come to us and say, look, I can’t. We’ve got all these problems. We can’t do any of this. We can’t look at how we grow, how can we execute any of these alternatives?

And the reality is every practice has challenges. In the end, you’re going to have to find a new way of operating and these four here on the screen are just a couple of examples of how you can look at what your future might look like. And we stay the way we are. We try to grow on our own, do it.

We create a super group or do I find a private equity partner and help us achieve the results for what we’re trying to get done. So if you’re thinking about preparing to grow and go through this change, start by getting educated. Don’t rely on hearsay and what you heard in the golf course or what have you. Get professional advice and guidance and ask lots of questions.

Take your time. Right. But understand all of the elements before you dig into this. It’s going to take time to understand, as we talked about earlier, young docs, old docs, there are a lot of different controls and concerns and goals and that’s okay. Lay them out on the table, work to find solutions and a partner that understands those challenges so you can create a solution that works for your team.

You know, doing things the right way over a long time is what really matters. It’s not about what could be done. Everybody’s got plans and visions of grandeur is what have you done and what can you show that you’ve done well and as I said earlier, every practice thinks do the best, right, prove it, show the data. And that’s amazing how much a little humility goes a long way in building a partnership.

Get your house in order, clean up your books, get your billing and collections in the best place, your corporate records and your financial. Sometimes you’ve got to get outside help to look at those and say, Hey, are they really up to snuff? And it’s not up to snuff for you. It’s up to snuff for how the rest of the world looks at this.

This is a complex know that it’s going to take time and be ready for that. So in closing, let me leave you with a couple of thoughts. Right. This consolidation that’s happening within the private equity world is within the sorry, within the physician practice world that’s going to continue. Competition is going to increase. Whether you’re part of the private equity groups or you’re not, scale is going to be really important to you.

You have to figure out how you are going to grow. There’s no right way or wrong way. You’ve got to find what the answer is for you. And there’s nothing wrong with staying independent, but you’re going to have to figure out how you’re going to do that successfully. Often we get asked, Hey, is this over? Is that is all the hype of private equity?

And I’m getting on the train late. Train hasn’t left the station. There’s little there’s lots of opportunity. There’s still a tremendous amount of fragmentation in the market. There are practices that have been very successful with private equity partners, and there have been some that are very successful independently. So you have to figure out what really works for you.

But no matter what you do, you’re going to have to have real management expertise and forward thinking to be a successful practice. As you look out five and ten years into the future, at the end of the day, you have choices. But taking no action, you know, what’s what’s the saying, right? You know, the definition of insanity is doing the same thing and expecting a different result.

So if you’re not happy with what your organization is doing today, you’ve got to look at how you’re going to change. Well, I hope you enjoyed the discussion. I’m happy to answer any questions that folks may have posted in and in in the session. Let’s see. One of the questions that was asked is our P firms only interested in making money?

They’re going to make me do certain procedures, use specific drugs or certain equipment. So, yes, they’re focused on figuring out how to make money. But so were you as a practice. But what changes is they’re not going to tell you how to practice medicine. It’s not the goal of how our private equity works. They recognized years ago, they told docs what to do docs are just going to walk away, They’re going to educate, they’re going to provide information, but they’re going to let docs do what they’re going to do.

Where they are going to focus on is, Hey, how do we be more efficient, How do we schedule better, how do we optimize what we’re doing operationally, how do we improve collections, billing, etc.. Those are all things that private equity firms are going to look at as they began taking on a physician practice and looking to grow it.

Let’s see, you talked about we talked a lot about PE, what about selling the hospitals? So hospitals continue to be active, acquire practices. And I’ve sat on the board of hospitals and you know, you understand the thought process. But remember, a hospital is focused on making the hospital successful. They’re not as focused on making your GI practice the best GI practice in the world.

They’re focusing on how does that GI practice drive the success of my hospital. And that can create great opportunity for you if you have the right relationship with the hospital and that partnership. But at the end of the day, you know what? I always describe this hospital as focusing on what’s in the best interest of the hospital. As you’re building your practice, what what is best for your neurology, your ophthalmology practice is what you’re focused on.

And that’s where you’re driven because you’re focused. Private equity has the same art. They don’t create very many multi-specialty groups that typically are focused on single specialty groups and doing all the things they can within that specific specialty to make it successful, whether it’s new techniques, billing practices, expertise or what have you. That’s their singular focus. So for the right needs and goals and risk profile, a hospital can be a great solution, but their objectives don’t always line up with the specific objectives individual physicians have within the specialty and their growth and desire to grow.

One last question is, you know, do we have to do a private equity? Why can’t we just in, as I said a second ago, clearly staying independent is an option for practices and there are very successful practices that have stayed independent. The dynamic is you have to think about what’s your growth strategy. Staying in the pennant and staying stagnant.

Are two different things. If you’re thinking like, Hey, I can just keep doing what I’ve been doing for the last 15 years, I think that strategy is going to be challenged. The concepts of practice as having egalitarian where everybody is equal partner partners becomes more and more challenging. As your competitors get more nimble, they react and focus on the business of health care on a more timely and regular basis.

And as all the pressures we talked about in terms of costs and revenue impact, the ability to stay independent and stay stagnant, I think a challenge is all about how are we thinking about growth and building scale so we can compete successfully in the private equity world? Again, my name is Raj Kothari with Cascade Partners. I hope you enjoyed this webinar.

If you have additional questions or want to discuss any aspect of what we cover today, please feel free to reach out to me, either my phone number here or my email. As I said in the beginning, we’re happy to make the webinar available as well as the slide deck. If you just send me an email or

Thank you very much for joining us today and I hope you enjoyed the session.