The Mechanics of a Private Equity Strategic Partnership
Having been employed successfully in several other healthcare sectors, the private equity partnership model is well proven and is a very viable alternative for orthopedic practices.
Here is how it works.
Transactions in orthopedics are structured very much like the time tested and successful transactions in other sectors of physician services.
It all starts with valuation.
Valuation is determined by a “multiple” applied to adjusted EBITDA (earnings before interest taxes depreciation and amortization).
A practice’s adjusted EBITDA is calculated using a predetermined, acceptable reduction in compensation for all shareholder physicians. A typical private practice will distribute nearly all of its profits to the shareholders, resulting in an annual net income of zero. Private equity groups will look to acquire a profitable business. To create one, shareholder physicians will forego a piece of their compensation/distributions to create a “profit” in which they will receive a multiple of in the form of deal proceeds at close. Most private equity groups will generally look to acquire anywhere from 55 – 80% of the practice, with the remaining equity kept by the physicians.
These transactions commonly provide groups with a significant cash proceeds event, no threat of claw back on these proceeds, and, importantly, equity in a growing business backed by a large financial institution.
Private equity partners do not expect to take over the day-to-day operations of the business, and prefer to rely on existing management to run that side of the business. They will look to collaborate with the management team to make board level decisions on the best way to grow the practice.
Most private equity investors approach a clinic investment as a way to use their capital to refine internal antistructure and thereby support a larger enterprise. The key element in all this is working with the current management team to understand what additional support they need, what additional locations through both de novo expansion and acquisitions make sense and how to capitalize on ancillary service offerings at all locations (such as ASC, MRI, urgent care centers, PT locations, DME, pharmacy, etc.).
Strong private equity backers can help practices pursue all the above strategies in some capacity, and will work with the shareholders to determine which initiatives will have the most meaningful impact on the business.
Recent Orthopedic Private Equity Transactions
The first orthopedic private equity transaction was put together in April 2017 when Boston-based Candescent Partners recapitalized The Southeastern Spine Institute (SSI) in Mount Pleasant, South Carolina (Provident Healthcare Partners represented the shareholders of The Southeastern Spine Institute in this transaction).
Southeastern Spine was a 12 physician, 1 location, spine focused orthopedic practice outside of Charleston.
Prior to the transaction, SSI was the largest provider of spine care to the state of South Carolina, but had its sights set on a much grander scale. The shareholders at SSI with the help of Candescent partners, are now able to expand from their one location into neighboring cities and states through both acquisition as well as de novo expansion.
