The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference is authored by our colleagues Alyssa Campbell and Amanda Roenius.
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Structuring PPM and DPM Transactions for Maximum Success: Tackling Front-End Issues
By Alyssa Campbell and Amanda Roenius
In order to structure physician practice management (“PPM”) and dental practice management (“DPM”) transactions for maximum success, it is important to tackle certain key issues, such as tax planning and management team assessments, on the front end, according to experts who spoke on a panel at the 17th Annual Healthcare and Life Sciences Private Equity & Finance Conference, held in Chicago earlier this year.
Experts on the panel included Russell Bryan, Managing Director at Bailey Southwell & Co. LLC, Jon Fidler, President and Chief Executive Officer at Fidler and Associates; Gerald Thomas, Partner at McGuireWoods LLP, and Matt Wolf, Director and Senior Healthcare Analyst at RSM.
Here are several key points from the panel discussion:
1. When making a deal, considering the ongoing partnership is key. Whether a fund is considering acquisition price, compensation, or structuring, experts agree that it is imperative to consider that buyer and seller will be partners going forward. As a buyer, communication with the seller is necessary to understand historic culture and how that culture will affect integration, negotiations, and compensation expectations among the physician/dentist sellers. Determining whether the acquisition makes sense for a platform (both financially and culturally) is imperative to ensuring long-term success and bottom-line growth.
2. When preparing a letter of intent (“LOI”), some items benefit from specificity while others do not. It is important for buyers to identify certain expectations around structure (specifically with respect to whether the deal involves the purchase of assets versus equity and any known expectations for conversions). Rollover equity and known investment terms (including governance expectations) should also be included in the LOI. Further, buyers serve themselves well by setting forth compensation and non-compete terms in the LOI so as to avoid lengthy negotiations later in the process. On the other hand, other specific structuring considerations, such as go-forward benefits or the makeup of a governing board, can often be worked out in the later stages of a transaction. To the extent possible, locking in high-value negotiation items at the LOI stage minimizes negotiation time and helps prevent seller deal fatigue.
3. Looping in certain third-party specialists during the LOI phase may save time and money down the road. As noted in point 2, locking in high-value negotiation items at the LOI stage is a way to better position the transaction for success—the same is true for engaging certain specialists. For example, tax considerations can have a great impact on the structure of PPM and DPM transactions. To the extent key issues are addressed up front, buyers are likely to find themselves saving long-term time and expense by considering unique structuring considerations at the front end and including them in the LOI.
4. Physician compensation models are evolving. As competition in and consolidation of the healthcare sector continues, so too does the importance of thoughtful approaches to physician compensation models. Compensation is often key to alignment and, as such, should be explored as a front-end item. While rollover equity remains a frequently used structure, funds are looking to newer models that provide autonomy over disbursement of economics (e.g., pooled compensation) as well as incentives that draw in the younger physician pool (e.g., bonus pools). Exploring these models in the beginning will better position a transaction for success.
5. Strong executive teams foster growth and prosperity. The market for executive team members is competitive, but it’s essential that a platform’s executives are aligned with the sponsor’s vision and investment goals. Ensuring executive team buy-in from the beginning is essential for go-forward success and growing a platform. Experts encourage buyers to have transparent, upfront discussions regarding future goals at the outset of a transaction to best ensure a cohesive process and go-forward strategy.