A recent blog post by Foley suggests that private equity investors are showing an increased interest in the cardiology space. Trends in the United States like obesity and an aging population increase the need for cardiologists along with vascular surgeons and endovascular specialists; additionally, these practices drive high-margin procedures – all of which are attractive to private equity.
With increased attention to the space, it’s important for you – the doctor – to familiarize yourself with the ABCs of PE.
What is private equity?
Private Equity (“PE”) is a type of investor that buys private businesses with the intention of growing and optimizing them over a 3-5 year period to increase their value and then sell it for significantly more than they invested.
How does PE work with physician practices?
Typically, a PE firm will purchase a practice for a multiple of the practice’s EBITDA (an acronym for profits – more on that below). At the closing of the sale, the firm will usually pay the practice owners 70-80% of the purchase price in cash. 20%-30% is re-invested for a future exit. The physicians retain partial ownership with the intention of aligning interests with their PE partners. Typically, the firm will also take control of the practice, which could include moving the practice onto a parent company’s platform, reducing physician owner pay to a percent of collections, switching EMRs, changing staffing, and negotiating a better fee schedule.
What is EBITDA and how is it different from net income?
EBITDA is how PE likes to measure a practice’s profit. It stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is an important concept for practice owners to understand because private equity will use a multiple of EBITDA to determine the financial value of your practice. (E.g., a practice with EBITDA of $1m valued at a multiple of 5x is worth $5m.) Unlike net income, adjusted EBITDA will use accrual (i.e., not cash) basis accounting, apply a set percentage of collections for physician owner compensation, and add back personal expenses and other one-time expenses that will likely not continue after the sale.
What are enterprise and equity value?
Enterprise value is the total value of a business inclusive of any debt or cash. In private equity, enterprise value is frequently calculated as the EBITDA times some multiplier. To get the equity value (i.e., the value that a physician would get in a transaction), you would subtract the debt and cash.
How can you determine a proper EBITDA multiple? Generally, the more predictable and diversified the practice’s EBITDA and the higher the growth prospects, the better the multiple. Platform practices—the few with the scale, track record and infrastructure to readily support the addition of smaller or needier practices (“add-on” practices)—get the highest multiples. Most of the typical four-physician private practices with endovascular labs are add-on practices, and PE firms have been paying 4-6x (hospital systems pay 1-2x, insurance companies pay 2-4x) for them, expecting to sell for 12-16x at a future exit.
LifeFlow Partners takes an alternative approach to traditional private equity. We provide the same resources and benefits as a PE-backed organization, without selling at too low of an EBITDA or too low of an EBITDA multiple. Learn how to benefit from every stage of your practice growth here.