What to Know about Private Equity Offers

NDP Founder and Cain Watters Partner Charles Loretto recently wrote an article for the Seattle Study Club Journal titled, “What You Need to Know Before Considering a Private Equity Offer.”

In his role at Cain Watters and NDP, Charles is seeing more and more private practitioners receiving offers from and selling their practices to private equity (PE) firms. This is because they sometimes offer multiples four- to six-times the practice’s EBITDA. However, Charles warns owners to make sure they clearly understand their personal financial situation, the terms of the offer and how the sale could impact them now and in the future. Here are the factors to look at carefully:

  • Time and value of money – would you earn just as much if you remained owner as long as you are committed?
  • Owner tax planning – as an owner you have many more tax strategies than that of a W2 employee
  • Pension planning
  • Uncertainty about the withheld balance of a sale – Will you ever get the final installment of your offer?
  • Loss of control – Often the longer PE owns your practice the less control and voice you have
  • Personal stress

He says, “A sale is more than what you get – it’s also what you miss out on.” So, how do you know if the PE offer is worth it? Here’s an overview of things to consider:

  • Know your opportunity cost – what benefits will you lose in the deal? This is more than your salary and taxable income – consider pension contributions, meals and entertainment, auto deductions, insurance deductions, other discretionary expenses and the value of non-cash expenses (all which lower your taxable income).
  • Figure out your EBITDA, or as we say, the true cash flow of the practice through normalization of the business.
  • Understand the multiplier – factors such as location, finish out, patient flow and technology could impact this.
  • Consider the non-financial requirements of the deal – Most PE firms require a work-back guarantee of three years, and sometimes five.
  • Be aware of contingency and sale stipulations for payment – sellers do not typically receive 100 percent of the sale right away and sometimes the remaining percentage could be at risk based on future commitment and practice stability/growth.

In conclusion, every PE offer should be weighed against the owner’s long-term goals. There will be many instances where PE models make sense and many where it won’t. Not all deals are as good as they sound and being educated about the big picture as well as the details can set you up for success. To hear more on the topic from Charles, listen to our recent episode of Transition Talk where we cover the basics of a PE offer!

To access a copy of the full article, click here.