Private equity vs strategic acquirers for PT practices: what changes

The short answer

How do private equity firms, strategic acquirers backed by private equity, and large privately held PT companies actually behave once they are at the table? Joseph Anzur, Managing Director of Mergers and Acquisitions at Martin Healthcare Advisors, explains the differences in structure and life after closing.

In this video:

• Private equity buying directly: a platform investment focused on structure, rollover equity, and earnouts. Typically interested in businesses with at least a couple million of EBITDA.
• Strategic backed by private equity: recruiting, HR, training, payroll, accounting, better payer contracts, and usually their own EMR. More support, and you are one of several companies in the platform.
• Large privately held company: often the owner negotiates directly, less cash up front, so structure matters. Often already in your market, with less change after closing.
• Choose on culture first, then structure, and the price will fall into place

Full transcript

The three paths look similar on paper. In the room, they behave completely differently.

Let's start with a private equity firm buying directly. They are buying a platform company, and they are underwriting for a certain return over a holding period range. This makes the negotiation less about price and more about structure. More specifically, how much equity you roll into this new company, and how much of the price sits in an earnout tied to future results. They have a rigorous quality of earnings, and most of what they push on moves risk to your side of the table. After closing, you are the platform. There's nothing to integrate into yet, so you keep more day-to-day control than most owners expect. What comes with it is a board, a budget, monthly reporting, and a mandate to grow, whether that's by acquisition, de novo, or same store. For some owners, that may work for them. For others, they may be looking for more support in other areas of the business. And finally, private equity firms interested in the sector are typically going to take an interest in practices with at least a couple million of EBITDA.

A strategic that is backed by private equity is an operating company with all the pieces already in place: recruiting, human resources, real training for clinical leaders, payroll and accounting systems, payer contracts that are typically better than yours, and in most cases their own EMR that you would be expected to transition onto over a period of time after a transaction. After closing, you feel that support, but there is definitely change. Typically, this change is working to get your company to the next level as it relates to systems and operational and financial standards. The real difference from a private equity deal is that you are one of several companies within the platform that they are growing. You might work with a regional leader or with someone near the top, depending on your transaction size. More help behind you and less pressure on you, because the whole plan is not riding on your company alone.

A large privately held practice is somewhat different. Many times, it is the owner from the acquiring company who is working on the deal, as opposed to a full deal team. There's typically less cash up front, so the structure of a deal with a large privately held company is very important. In many cases, it may be a company that is already in your market, so they'll already have a good understanding of how you operate in the market that you will both share. After closing, there's commonly less change than with a strategic company backed by private equity. In many cases, these companies have strong operating and financial systems, so they're able to help you improve your performance. And if there's an equity stake, that is positive for your future.

To summarize, when evaluating which acquirer is right for you, culture must be the leading factor, followed by structure, and ultimately the price will fall into place. So long as there is some balance between these three measures, you will, in just about every case, make the right decision on who the best partner will be for you.

Transcript lightly edited for readability.