The Whys And Hows Of Seeking Private Equity Investment: From Urgent Care To Long-Term Care

By Bradley M Smith, ATP, CMAA

Volume 2 Issue 9, April 28, 2015

Today, private equity groups (PEGs) have a growing presence as buyers of lower middle market healthcare companies.  Why?  They see the continuing expansion and diversification of healthcare opportunities, ranging from a local group of urgent care centers with wellness options to an array of senior living services with exceptional life quality.  PEGs have increasingly moved “downstream” to healthcare companies with annual adjusted EBITDA as low as $500,000, which are regarded as “tuck ins” to existing operating platforms.

Why would a seller of a healthcare company want to consider a PEG as a buyer? Here are three good reasons:

  • It allows the business owner to de-leverage their current risk through a partial cash-out (aka “taking some chips off the table”) of their equity.
  • PEGs typically want the owner and senior management to continue in an operational role while the PEG supplies the cash to grow the company.  This option can help the seller increase the value of their remaining equity while receiving a salary to manage the company in the interim.
  • When the PEG decides to sell the company at a future date, the original owner will then have a chance to cash out of their remaining equity (aka “a second bite of the apple”).

With these “whys” in mind, here are some practical “hows” to make your healthcare business more attractive to a PEG:

  • Have a strong management team in place – PEGs often place as much value on your team’s potential for even greater success (the future) as they do on financial performance to date (the past).
  • Present a clear path to success – PEGs may be less knowledgeable about your market dynamics than a strategic buyer, but your ability to project an understandable picture of the future (e.g. business plan) increases your credibility and, ultimately, your value.
  • Nurture organic scalability – Enhance your options and opportunities to grow even though you may not choose to act aggressively on them for good reasons like limited cash flow.
  • Identify opportunities to grow through acquisition – Specifically identify what could be horizontal (companies with services/products like yours) and vertical (complementary companies) acquisitions. Again, you may not choose to act on these possibilities, but knowing about them is part of presenting a path to success.
  • Be articulate about your strengths and weaknesses – Every business has competitive advantages and disadvantages and being honest about them helps a PEG representative assess the opportunity. Additionally, PEGs have many resources and often they can compensate your weaknesses.
  • Be willing to put money where your mouth is – Keeping a strong equity stake in the new venture not only shows good faith, it proves that you are willing to stake your money on future earnings of the company.

If you take these practical steps, there is huge value for your healthcare business, even if you don’t ultimately transact with a PEG buyer.  There is inherent value in any situation when you focus on the future.