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Private Equity Considerations in Physician Acquisitions

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Private equity firms have entered the healthcare arena in the past few years, and their presence is continuing to accelerate. To give some perspective, an article from Modern Healthcare regarding 2019 activity states, “There were 45 physician practice transactions that were announced or closed in the first quarter, which is on pace to surpass the 181 deals reported last year.” With 45 deals announced/closed in the first quarter, physician practices should be made aware of private equity firm partnerships and ultimately understand why a private equity firm may want to buy your physician practice.

Private equity firms focus on the fundamental value of earning an annual rate of return of 20% or more with each of their investments. With that, they see tremendous value in physician practices as they are well-managed, have an established reputation in the community and can provide great value to their firm’s investment portfolio. Private equity firms are specifically targeting specialty physician practices such as Orthopedics, Gastroenterology and Urology. If your physician practice has the opportunity to be in a business relationship with a private equity firm, there are three important factors to consider.

  1. Transformation of the Healthcare Environment
    In the current landscape for physician practices, two important influences are always present: quality and cost. Ultimately, the goal is to improve the quality of their respective practice while at the same time reducing the costs associated with it. Private equity firms provide an opportunity to offer capital to enhance quality as well as advise management on how to reduce costs.
  2. Enhanced Management Experience
    Most owners of physician practices may fail to invest in the necessary management structure that could provide them with growth opportunities and increased revenue for their practice. With the addition of a private equity partner, they will primarily focus on the management structure while the owner can focus on the specific care to the patients of their practice. With this plan in place, the private equity firm can develop a road map to provide legal or financial expertise thus improving the efficiency of the physician practice.
  3. Determine if a Private Equity Investment is Right for You
    Not all physician practices will have the opportunity to work with a private equity firm. Private equity firms often focus on a single specialty in the physician space, and will want to partner with the physician practice having a purchasing agreement of 60% to 80% of the practice. Therefore, the owner of the physician practice has to decide whether they will give up control of the practice to be in business with the firm.

If your physician practice is considering a partnership with a private equity firm, reach out to a Withum healthcare professional to discuss the benefits and risks further prior to making this decision for your practice.

Healthcare Services
Author: Eric Cooper, CPA | ecooper@withum.com

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