Quick Look: Defining private equity
In the fast-paced environment of private equity, there are terms every physician should know. Here is a quick-reference guide to those terms and their definitions, compiled with insight from Candace S. Simerson, FASOA, COE, CMPE, president of iCandy Consulting LLC, and Shareef Mahdavi, president of SM2 Strategic.
Adjusted EBITDA: Adjustments made to EBITDA that a buyer will pay a multiple on; adjusting shareholder compensation to a real market rate and adjusting for one-time expenses or discretionary items that need to be added back in.
Bites of the apple: The first bite is initial private equity buying process; the second bite is another sales transaction later down the road.
Bolt-on: Strategy to add additional practices to an established platform practice (see ‘platform practice’) in a specific market. Investors provide capital for the platform practice to acquire other smaller MD, OD or specialty practices such as retina.
Broker: Individual who works to facilitate a transaction between an MD practice and a potential buyer. Typically does not have the training, licensing or qualification of an investment banker. May be appropriate for smaller transactions under $5 million.
Cash pay services: Premium offerings from LASIK, premium cataract lens options, cosmetic procedures, advanced diagnostics and retail opportunities such as optical, contact lenses and products.
EBITDA: Earnings before interest, taxes, depreciation and amortization (also see ‘adjusted EBITDA’.)
Economies of scale: Goal following acquisition of practices by a common ownership group. Intended to create efficiencies by combining certain operations that are replicated in individual practices. Examples: Call center, billing, EHR and marketing.
Financial advisor: Each partner should consult a financial advisor to protect personal interest and understand risk in these transactions.
Geographic synergies: Building a practice in a geographic area to capture referrals previously lost as well as operating efficiencies that are achievable when practices are combined. Often achieved via the hub-and-spoke model.
Growth strategy: Each private equity investment firm has its own growth strategy, so physicians must know if that is acquisition-based (see ‘bolt-on’ and ‘hub-and-spoke’) or internally focusing on growing EBITDA.
Hub-and-spoke: See Bolt-on.
Investment bank: Firm with individuals that structure the deal between buyer and seller. Will serve to prepare the practice and its financials prior to “taking to market” and soliciting interest under confidentiality from potential buyers. Critical for transactions greater than $5 million. More expensive than using a broker, yet provides the resources to make sure the deal gets accomplished.
Mergers and acquisitions (M&A) attorney: A specialized attorney dealing with mergers and acquisitions. Preferably should focus mainly on medical practices. Provides protection for the practice and its physician owners, representing their interest in a transaction.
Platform practice: A large-scale practice is the basis for a private equity deal. Ideally, it has around $3 million or more EBITDA with eight to 10 physicians. Buyers will use this as a basis for bolt-on or hub-and-spoke growth.
Quality of earnings: Report developed prior to any deal to give a practice and potential buyer the true EBITDA value. Put together by the investment bankers and often re-validated by the private equity firm during the due diligence phase.
Tuck-in: See Bolt-on.
Valuation of the practice: A calculation of the practice value by an independent party allow the partners to understand the true value of the practice. Experts recommend conducting this prior to pursuing a private equity partner. One of the activities performed by the investment banker.