Due diligence needed before entering private equity partnership
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Private equity acquisition of ophthalmology practices remains robust and to me appears sustainable.
Thirty-two years ago, after 10 years of full-time ophthalmology practice at the University of Minnesota and Minneapolis VA Hospital, I founded Minnesota Eye Consultants (MEC). My goal was to build an integrated MD/OD academic private practice that provided quality eye care, conducted meaningful research and supported education of fellows and colleagues. Starting in 1989 with one office, one ophthalmologist fellow, seven employees and myself, over the ensuing 32 years we have grown to five offices, four of which have practice-owned ASCs with two to three operating rooms. Today, eye care at MEC is provided by 15 ophthalmologists, 14 optometrists, two physicians assistants and about 300 support staff.
About 20 years ago, we partnered with a physician practice management company (PPMC), Vision 21. That business model proved to be flawed, and after 5 years, we dissolved the relationship. One positive part of the PPMC experience was access to capital for growth without partner capital calls or partner-guaranteed bank loans. Five years ago, MEC partnered with Waud Capital Partners of Chicago and helped found Unifeye Vision Partners. I will share a few of my impressions.
Because I have experienced both, I can state unequivocally the private equity (PE) ophthalmology practice acquisition and consolidation business model is different from the now-failed PPMC business model. In the PPMC model, ophthalmology practices traded a share of their go-forward revenues to the PPMC in return for publicly traded stock. The PPMC was not a partner/owner in the go-forward practice. In the PE acquisition model, the ophthalmology practice sells its practice to a PE company. The selling ophthalmologist typically co-invests with the PE company in the go-forward entity, but the majority owner and controlling party is the PE firm.
The ophthalmologist is selling the practice. This is a major decision and deserves thoughtful consideration. If a few years later the selling ophthalmologist becomes disenchanted with the PE partner, it is the now employee ophthalmologist who will be leaving the practice, not the PE company, which is now the practice majority owner. And noncompete clauses will usually require the leaving ophthalmologist to relocate or stop practice and wait for a 1- to 3-year noncompete to expire if they want to practice nearby. So, while one is always free to leave, it can be painful and expensive. It is wise to fully understand the personal and family consequences of such an exit.
On the positive side, partnering with a PE company has provided our practice access to capital without personal partner guarantees. This has accelerated our ability to grow our practice and build or remodel facilities. We doctors were also buffered by our PE partner from the financial challenges of the pandemic. My partners at MEC would have experienced a significant capital call to keep MEC afloat if not for the solid financial support of our well-capitalized PE owner. Clinically, we continue to practice as before and remain well supported in our mission to provide high-quality eye care, teach our colleagues and fellows, and perform meaningful research. In our business planning, we have added some amazingly bright and experienced business partners to our decision-making process, and that has clearly been a positive.
However, in every partnership there is some loss of individual control and necessity to compromise. The fiercely independent solo private practice ophthalmologist will likely be frustrated by the need to now discuss and justify their plans to add an associate, build a new office, add a new line of service or acquire an expensive piece of capital equipment. I spent about 2 years of my career in solo private practice, and it was in many ways nice to make decisions with no need to discuss them with others. On the other hand, corporate America has learned that the input of a diverse and experienced board of directors enhances the quality of decision-making.
After careful evaluation by several financial experts, I believe all my partners, young and old, are financially better off following our PE transaction, but that presumes careful tax-sheltered investment of the cash received, rather than spending it, and the ability of the go-forward PE/practice partnership to grow value and generate a successful recapitalization every 4 to 7 years. These two potentially positive financial wins will vary from one individual doctor and one partnership to another.
I do not believe that partnering with PE will be ideal for every practice and suspect only 20% of practices will choose this pathway. In addition, there are only about 30% of today’s ophthalmology practices that a prudent PE company would be interested in owning. I am confident the private equity/private ophthalmology practice business model is sustainable and will prove positive for most doctors involved. I also expect there will be a few painful failures. The key to success, like in a marriage or any other important partnership, is careful due diligence, choosing your partner wisely, and working together to overcome challenges and grow meaningful value.
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