Private Equity Terms: Key Definitions Ophthalmologists Should Know
There’s a saying that trends come back around every twenty years or so. That’s definitely the case with fashion, (have you noticed the return of 1990s crop tops, “choker” necklaces, and combat boots?) But there’s another 90s trend that’s coming around again—and it will affect a lot more than what you (or more likely, your kids) wear. It’s private equity investment in ophthalmology practices, and it’s back it a big way.
Not sure exactly what private equity is? We won’t tell. Put simply, private equity is capital not traded on a public exchange. Private equity investors or firms directly invest in privately-owned companies. Below, a few more words you’re sure to be hearing amid the private equity buzz…
7 Private Equity Terms to Know
Dissenter Shareholder’s Rights
It varies by state, but this legislation effectively allows a shareholder to say “I don’t want to do the deal. Buy me out at fair market value.” It gives physician partners an easy out if they don’t want to be part of a merger or acquisition.
A comprehensive review a buyer or seller conducts to evaluate a merger or acquisition. PE firms sometimes to try to manage the due diligence process for the target practice, says attorney Caroline Patterson, who spoke about PE at last year’s AAO conference. Be careful, she warns. It’s going to be tempting hand off due diligence because your staff is stretched, but you need to monitor the process.
Be sure to talk to practices that have been purchased, and not necessarily the ones the PE firm has given as references, recommends attorney Mark Abruzzo, who co-preseted alongside Patterson. In some cases, doctors at previously purchased practices have been incentivized to provide good reviews, he notes.
Short for Earnings Before Interest, Depreciation, Taxes, and Amortization, this is the basis for the price a PE firm will pay for a practice. Practices are valued at a multiple of EBITDA, and that multiple is negotiated. Most PE firms are paying a 5-6x multiple of EBITDA, notes Abruzzo. A higher multiple sounds better, but PE investors often structure those deals differently, so you essentially end up in the same place as the 5-6x deals, he explains. If your operating expenses include physician compensation, PE firms will pull that amount out for valuation purposes. This is called “normalized EBIDTA.”
Letter of Intent
Known as an LOI, this document outlines the terms of a deal. Conduct your due diligence before signing an LOI, Patterson advises, and make sure that what you’ve agreed on verbally is accurately represented in the LOI. Abruzzo gives an example about one firm that verbalized a 5-year employment term, but the LOI listed ten years.
A no-shop agreement is typically part of an LOI and it prohibits the buyer or seller from soliciting an offer from outside parties. A PE firm will likely require a no-shop agreement because shopping the deal to other investors drives the purchase price up, says Patterson. Most ask for a 90-day no-shop period, she adds.
This is an attractive “prime player” that a PE firm can build around, adding additional acquisitions. Abruzzo uses a sports analogy to further explain: It’s similar to when a team signs a superstar player to a high-dollar contract, and then brings in additional, supporting players to complete the team.
You’re probably used to employment non-competes—they’re a standard part of physician employment agreements. Sale non-competes are a little bit different. They still protect the purchaser’s interests by preventing a seller from leaving and entering into competition. However, courts are much stricter when enforcing non-competes entered into in connection with the sale of a business. “It’s very different if you take a lot of money and agree not to compete,” says Abruzzo.
Drop a line for our sales representative to get in touch with you
Revenue cycle management success: Learn these key factors
- 23 Jun 2022
Your ophthalmic practice should be leaning heavily on its revenue cycle management plan. RCM can help your practice minimize errors, increase the chances you will get paid, and tamp down on the siz...
What to look for in an EHR system for multilocation optometry
- 16 Jun 2022
Having multiple locations for your optometry practice can have some massive benefits – you get more coverage area, more staff with deeper expertise, saved money on service and platform fees, increa...
Make sure you ask these critical security questions before choosing an EHR provider
- 14 Jun 2022
The benefits of electronic health records to your healthcare practice are clear – you can save time, automate tedious tasks, keep patients happy with simple scheduling and automatic reminders, and ...