Is this a good time to sell?
Prior to Covid, central banks around the world had already embarked on the largest monetary expansion in human history as a result of the 2008 crisis.
Since the start of Covid, many more trillions of dollars have been printed. This is creating a lot more of capital that needs to be invested. Prior to the pandemic, private equity funds were already sitting on records amount of capital (dry powder), and the current capital raising environment seems to indicate that a lot more is set to come online.
As such, private equity funds are eager to put money to work, especially in healthcare given the uncertain economic environment. What we have seen so far is that multiples have not changed much but the deal structures have adapted. While cash and rollover equity have been standard deal components, deferred proceeds based on getting back to pre-Covid productivity levels are fairly common now.
Other than this new deal component, the market is returning to normalcy.
I think my numbers will look better next year. Should I wait?
Deals are usually valued on the most recent last 12 months of financial performance. However, due to Covid, we may not see 12 months of normal performance well into 2022 and possibly 2023, at which point the economic uncertainty is too great to forecast what the state of the market will be then.
More generally, you want to go to market while your business is growing, not when it reached a plateau. Private equity funds are attracted by growth. In addition, it is our role to get you paid for future growth opportunities that are in place today. We achieve this through proforma adjustments to your P&L to show what it would be with these new opportunities in place. If anything, a growth story will always attract higher multiples, and if we can’t support solid proforma adjustments, we can argue for deferred proceeds based on hitting your performance target post-transaction (i.e. an earnout). Under this scenario, you can lock in a strong multiple and receive additional proceeds when you do in fact achieve the growth you had forecasted.
What is private equity?
Private equity, or PE, refers to the pool of capital managed by a team of acquisitions and operations professionals on behalf of large investors such as pension funds or family offices. The name comes from the fact that these funds invest in private companies, or take public companies private.
Private equity funds have been increasingly drawn to healthcare because of the aging baby boomer population and the abundant opportunities for consolidation.
How are private equity partnerships different than outright sales?
In an outright sale, the transition is accompanied by the transfer of 100% of the equity. All proceeds are generally paid in cash at close and operations are integrated into the acquirer’s company.
In a PE partnership, not all of the equity is purchased at once. Instead, a PE group will seek to acquire a controlling interest (51% or more) while leaving a material share (10% to 49%) of equity with the seller. The idea is to have the seller participate and partake in the equity value creation post-transaction.
What is the difference between platform and add-on acquisitions?
Platforms refer to the first investment a private equity group will make in an industry. Add-ons refer to the subsequent and oftentimes smaller acquisitions executed from/added to the platform.
To be considered a platform, provider groups must generally produce $3m of EBITDA at a minimum. Add-ons do not have this size requirement.
How is my group going to be valued?
Two concepts are important here, EBITDA and multiple.
EBITDA stands for Earnings Before Interest Taxes, Depreciation & Amortization. It is an approximate measure of cash flow. Conceptually, it is the dollar amount available for debt service and dividends every year.
However, partners tend to distribute all income available, thus leaving very little “Earnings” on the income statement. As such, EBITDA is the difference between what partners are currently taking home versus what their market salary would be for their clinical role, usually expressed as a percent of collections. The concept also applies to owners who are not actively caring for patients but are involved in running the business instead. For them, a fair compensation for administrative duties is estimated.
Valuation then becomes a function of EBITDA times a multiple. For example, provider groups with $1m to $3m of EBITDA tend to be valued between 8x and 10x EBITDA.
We have created a calculator to help you estimate your valuation. You can access it here: What is my practice worth?
What will my role be post-transaction?
We always advocate for transaction terms that are best tailored to your objectives. As such, we come to you with a blank sheet of paper and ask instead: what do you want to do post-transaction?
While most buyer look for a period of time in which the owners help transition the business, the scope ranges from short-term consulting agreements to multi-year employment agreements.
Depending on your desired level of involvement going forward, we will recommend different options. However, all capital partners will be happy to relieve you from common administrative tasks and allow you to focus more on what is important to you.
What is Alkaline's role?
While we are referred to as an investment bank, it is simpler to think of us as brokers. As the name implies, we are intermediaries who connect and advise sellers and buyers of healthcare businesses.
We offer two approaches to transacting:
Competitive: we solicit multiple buyers at once in a structured process
Single-Buyer: we rapidly arrange for an exclusive conversation with a single buyer
Generally, the competitive approach is best when there is a large number of potential suitors (e.g. the selling company is large enough to be any private equity funds’ first investment in the specialty, i.e. a platform, or there are a lot of existing buyers looking for similar companies, i.e. add-ons).
How long is the process?
In either case, once we reach the offer stage, consider about 2-4 months of diligence to close the transaction.
So, what are next steps?
We first want to understand your needs and objectives. As such, everything starts with a conference call between you and us. We can also use the call to discuss the level of activity in your specialty and the general mechanics of transactions.
Once you get a sense of the market’s level of interest in groups like yours, and we get to better understand your profile, we can then decide on the best course of action, rather be the competitive or single-buyer model.
Regardless, we will always guide you and support you throughout the entire process.
Please feel free to initiate the conversation and contact us directly!