When selling your practice to a Private Equity Corporation, you will be faced with a choice. Do you sell 100% ownership and become an employee or do you retain a minority interest in your practice and become their business partner.
I will focus on some important aspects of a joint venture deal.
Who Manages the Practice?
Although you will probably be asked to become the Chief Medical Officer, the corporation will assume most of the management duties. They will be responsible for employee retention, payroll management, employee recruitment, and managing inventory. As a partner you will be responsible for a portion of the managerial costs. Typically, the corporation charges the partnership 3-4% of gross revenue as a management fee. If you are a 35% partner, you will be responsible to pay 35% of that fee.
Upon taking over the practice management, many of my clients realized a 30-40% reduction in cost of goods sold immediately after closing. This is primarily due to the corporation’s leverage with purchasing medical supplies and negotiating lab contracts. When the cost of goods sold are decreased, the bottom line increases dramatically.
Most joint venture partnerships include quarterly profit distributions. Every three months, as a partner you will receive a percentage of net income. You should understand that the majority partner does have the power to manipulate purchasing and spending. Past owners may find this lack of control disturbing, but it is in the interest of all involved to keep the practice growing and profitable. I advise sellers to avoid partnerships where they do not receive quarterly distributions.
All joint venture partnerships should have a defined exit date. Relying on the future recapitalization of the parent company for an exit date is not advisable. You have no control over the parent company, for you are only a small fraction of their revenue. I recommend a defined Put Date and EBITDA multiple. The Put Date guarantees that you can force the buyer to buy out your remaining portion of the company on a set date at a set multiple. The put date is usually 2-3 years after closing.
TPSG understands the intricacies of corporate negotiations. Over the last fifteen years we have helped hundreds of veterinarians market their practice. TPSG will put your interests first.
Article by Dr. Crank