“Opportunity does not waste time with those who are unprepared.”
The quote by consultant Idowu Koyenikan is relevant for physician group founders who are contemplating using private capital to enter new markets, fund expansion, realize liquidity or recapitalize their practice.
What may be less well understood by physician founders is how they can make their practices more attractive to private investment firms before trying to obtain outside capital.
Knowing what investment firms are looking for when evaluating a potential investment can help founder-practitioners prepare and improve their prospects in advance of pursuing an outside investment.
Most private investment firms don’t expect smaller physician practices in which they invest to have top management talent on staff. Most private investment firms have networks of experienced executives they can tap to strengthen an existing management team if needed.
What they will expect, though, is that one or more founders at a practice will remain committed to working full time following an investment for at least a few years. The reason is successful physician-founders are known for generating significant revenue for their own practices. As such, keeping them actively engaged in the practice is considered crucial to long-term success.
Understanding due diligence
Most physicians will understand that before an investment is made a private investment firm will want to conduct due diligence on their practice. One way they do so is by reviewing key performance indicators (KPIs) that can provide visibility into a practice’s clinical efficiency and operational performance.
Patient volume and growth in patients per month, monthly visits per physician, number of procedures completed, payer mix, revenue generated per day, collection rates, net profit and revenue growth are all KPIs that are looked at closely. Reimbursement changes are also reviewed.
As many practitioners focus their time on treating patients, crucial back office tasks like marketing, scheduling, billing, collections, financial reporting, inventory tracking and payment processing can take a back seat to delivering care.
This is where private investment firms can add significant value by helping a practice group set up a common back-office infrastructure to perform these activities, so physicians can focus on providing patient care.
For business owners who are interested in maintaining their independence, it’s important to consider the type of financing a private investment firm will provide. While a private equity investment may sound tempting, it can also cause significant dilution in ownership as compared to a minority investment.
One option worth considering is structured capital—a combination of equity and mezzanine debt—that minimizes dilution and leaves management and/or owners owning the majority of their practice’s equity. This enables longtime founders and shareholders to “take chips off the table,” obtain new capital for growth and maintain majority ownership.
The good news is the flow of private capital into healthcare, which attracted more than $100 billion in private equity last year, isn’t slowing.
Securing an outside investment is significant and generally a once-in-lifetime event for many physician-founders. As data indicate, there’s no better time than the present for ensuring a practice is shipshape when it comes to attracting private capital. Planning ahead for what be the largest financial transaction in a physician founder’s lifetime would seem well worth the effort.
Jeffrey Stevenson is the managing partner at VSS.