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Lawyers for Dickinson Wright recently addressed some fundamental issues regarding private equity in healthcare at the Dickinson Wright Healthcare Law Summit. Here is a summary of what was discussed. Click here to watch the full webinar.
What is private equity?
The term “private equity” is broad and refers to family offices, limited partnerships and investment funds set up for a specific purpose, namely to invest in certain sectors. They come in many different shapes and sizes, and a large segment is designed specifically for healthcare transactions. The majority are interested in one of two varieties of transaction: controlled transactions, where private equity seeks to buy more than 50% of your business, or minority style funds, designed to help create the platform. , but take a minority stake in your company or platform. The most common factor that you need to remember – they have a fuse on their investment and have to return money to their investors within a specified time frame. This means that investors should be replaced every 3 to 5 years.
How does private equity differ in healthcare compared to other industries?
In the healthcare industry, strict regulations make any transaction more complex. Before starting the transaction, the healthcare entity should basically be split into two parts and then treated as a single unit for financial purposes, while respecting the regulatory authority that patient care should be delivered by practitioners without management interference.
How has the pandemic impacted private equity investments in healthcare?
Private equity groups have a known timeline that has not changed with the onset of the pandemic. Private equity has remained healthy, as has the banking sector, and as a result, there is a backlog of opportunities in the health care sector. On the contrary, the pandemic has accelerated the timelines for those wishing to sell or considering selling. However, in the case of companies that may have taken out Paycheck Protection Program (P3) loans or other government grants throughout the pandemic, these transactions may be more complex – but nothing can. to be overcome.
What are the primary health care regulations that affect private equity investments?
The practice of medicine or dentistry in business is one of the few primary health care rules dealt with by private equity; corporate practice means whether the particular state laws at issue will allow a management company with unauthorized owners to enter and have some control over that practice. In these cases, it is a question of structuring the company in such a way that the control of the management company is not impacted by its lack of authorization. A licensed physician must have control over the clinical aspects of the business, which means that the management company has a service contract that does not allow the management company to have a significant impact on the delivery of services.
Another regulatory aspect that must be considered are the STARK and anti-kickback laws, which should be addressed during the due diligence review and will affect the overall arrangement and structure of the purchase contract. They can come into play if items such as earn-outs are included in the document.
Should I be looking for a private equity investment?
While this question is largely personal in nature, there are some general tips to follow. It depends on the moment; Start-ups would be more secure using the funds at their disposal, as handing over part of the business to private equity can make it more difficult if your business goes bankrupt. However, if you are looking to grow at a faster rate, are looking to close a deal, or are looking to sell the business, finding a private equity partner may be the right choice.
If you decide to go ahead in finding a private equity partner, you need to be careful in choosing the right one. Before starting the process, ask yourself:
- How much control do I want over the practice?
- Can I give up some control?
Understanding what it means to have a private equity partner is vitally important before moving forward in the process.
How to find the right private equity partner?
Before you begin your search for a private equity partner, it helps to understand how the process works. Private equity partners are usually found through an investment banker with knowledge of the industry whose job is to match buyers and sellers, taking a fee in the process. The investment banker performs due diligence on your business, compiled in a Confidential Information Memorandum (CIM), which is then sent to a limited number of potential partners who may be a good candidate. Interested potential partners will respond with an Indication of Interest (IOI), in which case the field will be reduced to 6+ prospects. Meetings will take place with prospects over the course of a week or so, and it’s important to prepare with your own set of questions. It is imperative that you listen to your advisors throughout the process; they know this process and are there to help you get the best possible results.
Alternatively, a potential private equity partner can inquire outside of this process. If this happens, just call your investment banker, ask them to do their due diligence, and include it in the field if this is an appropriate option.
How do I prepare my healthcare practice for a possible private equity investment?
First, it is imperative to conduct a compliance review or audit of practices. Contact your lawyer and ask to be referred to qualified healthcare lawyers, and bring in a compliance team to understand where your business is from a healthcare law compliance perspective. Additionally, it is a good idea to hire a healthcare accounting firm to perform a review of your finances and report on the quality of earnings. This will ensure that all issues are resolved before the transaction. Doing your housework will ensure you get the highest possible price.
What is a letter of intent and is it necessary?
A Letter of Intent (LOI) sets the stage for the material conditions and is an important and necessary part of the process. This is the starting point for two parties entering into a transaction and includes an exclusivity clause for 60-90 days. They generally consist of three parts: the economics of the business, the history of the company and who will bear the risk if that history is wrong. During the negotiation process, both parties will constantly review the LOI for advice on drafting the purchase contract.
What are the popular private equity investment structures?
There are many different forms, but the most popular are control funds and minority investment funds. Control funds, in which the private equity partner buys 51% of the company and controls the board of directors, are the most common and consistent. Minority investment funds, where the private equity partner buys less than 51% of the business, offer room for growth and typically end with larger investments.
Will I still have control over my practice if I sell to PE?
You will maintain clinical control; you will continue to manage patient services, make decisions about the provision of health care to patients, manage the retention of medical records, etc. However, you will at least lose some control over the business aspect, as the board will take care of day-to-day business matters. Anything that will have a significant impact on the business side of the practice will require the agreement of your partner.
What are the most important sections of the purchase contract?
Healthcare aspects are fundamental, with potentially lengthy compensation requirements related to representatives and warranties, as well as regulatory compliance. The history of your business is also very important, as it contains factual statements about your practice and includes disclosures. While the purchase price is the most visible, the other sections are just as, if not more, important to understand.
What Kind of Due Diligence in My Practice Should I Expect?
The review will be thorough; it begins immediately and continues just before the signing of the purchase contract. It includes all aspects of the selling entity, including healthcare related parties, and a financial review will also be included.
What is “representations and guarantees†insurance?
The “Representations and Guarantees†insurance involves a third party in the transaction that the two original parties will turn to in the event that the company’s history is incorrect. The third party will investigate and underwrite damages, reducing the seller’s risk in the transaction while also increasing the final consideration. At this point, the majority of transactions involve this assurance.
What happens after the transaction closes or completes?
The practice is now under new management, with the private equity firm overseeing some aspects of the business. There will be many meetings with your new partners, and the consequences could involve a transition agreement.
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