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What are the pros and cons of private equity?
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Look at the potential impact before acting
Despite the seemingly attractive benefits of selling your practice to a private equity firm, one must first weigh the risks. Most obvious is relinquishing control of executive decision-making. Along with this comes risk of change in practice culture, risk of change in the quality of care rendered to the patients, risk of losing valued staff and physicians, and overall risk in the future success of the practice that has taken so much time and effort to build.
There is a fundamental lack of alignment between the PE business model and the average successful practice. Most financially successful practices have been slowly and steadily built by putting patients first and letting profits follow. Typically, doctor/owners have been responsible for the success with their unilateral decision-making. However, in the PE model, maximizing profits/EBIDTA in a short 3- to 5-year window, followed by sale of the asset to a larger entity, is the primary goal. The principals who buy the practice must show accretive EBIDTA and sell the asset at a higher multiple before getting paid and advancing to a higher position in their organization. Regardless of what they say, this is all business. One must be ready to give up control and have faith that the new owner, or the owner after that, and so on, will be a good steward of patient care and practice culture.
Most PE firms require doctors/sellers to roll at least 30% of the sale proceeds back into the new entity as an incentive to make the new entity successful. The sellers do not get back this money until the practice is sold again. However, this money is at risk if circumstances prevent a “second bite” at a higher valuation. In a liquidation event, when the asset is sold at a lower value than its purchase value, there is commonly a “waterfall” of payment, wherein first the bank gets back its money, then the PE firm, then the original physician/owners — if there is any money left.
There are also quality-of-life issues that can arise. Employment agreements must be negotiated and renewed from time to time. Vacation time, clinic schedule hours, number of patient slots and staff support may all be at risk of change, depending on who is the latest owner and management team. This is a huge departure from having complete control over workplace lifestyle.
Furthermore, there will likely be restrictive covenants and noncompete clauses in the employment agreements that would prevent a surgeon who may be unhappy with the new environment from leaving the PE-owned entity and starting in practice nearby. And even if a surgeon were to leave the practice, uproot their family and leave the area, the documents typically call for a “haircut,” with forfeiture of some or all of the sale proceeds that were rolled back into the new PE-owned practice entity.
These are just a few of the potential impacts for surgeons to consider as they weigh the merits and disadvantages of an exit transaction to a PE firm. As with any decision, one must consider their own unique situation and what is the best pathway toward success and how that success is measured.
Robert J. Weinstock, MD, is an OSN Technology Board Member. Disclosure: Weinstock reports no relevant financial disclosures.
Private equity part of the changing environment
Recently there has been a great deal of interest in private equity and its involvement in ophthalmology. A year ago, our practice made the decision to partner with private equity. This decision was made after more than a year of consideration, evaluation and debate. In the end, the decision was unanimous by all of my partners.
Our decision was based on several fundamental principles. The future of medicine is in transition, and there are forces surrounding us that wish to dictate the way we practice. Private practice has always been good for patients and good for ophthalmologists. I enjoy the relationships with my patients, my partners, the advanced technology and the entrepreneurial spirit. All things considered, I would gratefully continue along the same course. I am certain that owners of mom and pop hardware stores, food stores and internal medicine practices had similar plans, but Home Depot, Costco and hospitals have had alternative ideas. The forces of insurance companies, hospitals and the government have changed the environment in which we work. With notable exceptions, it appears the era of the small ophthalmology practice is coming to an end, and consolidation seems inevitable. I could work for a hospital, HMO or insurance company and give up my autonomy and practice ownership, or I could grow large enough to be at the bargaining table myself. The cost of growing large enough is prohibitive, which is why private equity was the best option for me.
Private equity brings to mind an exit strategy, which for some ophthalmologists may be the best way to monetize decades of practice growth. For others it is an opportunity to join a network with access to the latest and best education and technology. In our practice, private equity has also removed two major obstacles: We no longer have to buy out senior partners, and young ophthalmologists have dramatically smaller buy-ins to become partners. I am hard-pressed to recommend to any young ophthalmologist that investing in a small practice is wise. Now, all of our partners, associates and future partners will have the ability to own part of Spectrum Vision Partners. I predict that while private equity is not for everyone, it will be successful for our group and many others. We live in a changing environment, and we must adapt to change.
Eric D. Donnenfeld, MD, is an OSN/Cornea External Disease Board Member. Disclosure: Donnenfeld reports he is a partner in Spectrum Vision Partners.