Eyeworld Daily News

EW SHOW DAILY 12 ASCRS News Tuesday, April 17, 2018 by Liz Hillman EyeWorld Staff Writer during negotiations. Agreeing on a valuation can speed up due diligence and takes some of the emotion out of these earlier negotiations, he said. Another piece of advice he offered is to not think of your part- nership with private equity as an open checkbook. Understand how much budget will be available, Mr. Rosenberg said. "These guys are very prudent, they don't have any prob- lem spending," he added, but will do so on things that increase value and growth. Allison Shuren, Arnold & Por- ter Kaye Scholer, Washington, D.C., shared her thoughts on the process as well. First, you need to realize that the attorneys for the private equity firm will leave no stone unturned when looking at the practice for ele- ments that might raise risk. As such, "find your own landmines first and figure out how you can clean them up," she said. Practices also need to realize that the risk tolerance is different for private equity companies; you may lose control over legal issues of your practice and they might make changes to various aspects of your practice, such as the way you pay your co-managers, Ms. Shuren said. Finally, Matt Owens, Arnold & Porter Kaye Scholer, shared his thoughts on points that could im- pact overall valuation. Practices with more than one owner, for example, need to make sure they agree with how the proceeds of the transaction will be shared among them. Also consider what the after-tax number of the valuation will be; how your practice is structured can affect how it's taxed, for example. There are other caveats that can affect valua- tion, such as whether the practice is debt- or cash-free and the potential for the company to put a portion of the funds into escrow or holdbacks for a year or two to protect itself in case of any unexpected legal issues that could come back to the seller as a liability. EW Editors' note: The sources have no financial interests related to their comments. Two-part session on private equity looks at interest in the market, negotiations, and regulatory and transactional components T here is $1 trillion sitting on the sidelines and ready for investment, said Daniel Chambers, COE, Dallas. With the stock market in its largest bull run in history, major fund managers are looking at other areas in which they could invest, he continued. Healthcare is one of those plac- es, being especially attractive as a "defensive industry," one that would sustain even during a recession, should one occur. Because private equity is showing exponentially increased interest in ophthalmology, Mr. Chambers said the topic is some- thing he wanted to bring to Annual Meeting attendees in this two-part session. Philip Isham, ECP Advisor Group, Tampa/St. Petersburg, Flori- da, and Brent Wilde, Minnesota Eye Consultants, Minneapolis, spoke in the first part of the Sunday after- noon session, sharing thoughts on the current state of private equity in ophthalmology and, in Mr. Wilde's case, his practice's experience in partnering with private equity. The first thing to understand in this phenomenon, Mr. Isham said, is what a private equity group does. "They look to buy into a suc- cessfully operating business and look to build it and scale it and sell it, and that's how they provide returns to contributors," he explained. Taking a step back, private eq- uity has been involved in medicine since 1996, first getting involved with dental practices, Mr. Isham said. Even after more than 2 decades of private equity in that sector, he noted that private equity is only involved in 30% of dental practices. It hasn't consumed the vertical. Why is private equity interested in ophthalmology? There are several reasons, according to Mr. Isham: an aging population that will drive steady increased demand; a frag- mented market ripe for consolida- tion; it's primarily outpatient based as a specialty; physician/supply im- balance; multiple profit streams and cash pay opportunities; the ability to apply data analytics and transition to value-based reimbursement; and, of course, they have cash to invest. A private equity partner will first look to partner with a platform practice that they can then add onto and grow through acquisitions and capital investment. Characteristics of a platform practice, Mr. Isham said, include having multiple sub- specialties, having a large hold on the regional market and a referral stream, having profit margins under control, and having a surgery center. Minnesota Eye Consultants, where Mr. Wilde is president, is a platform practice that partnered with private equity more than a year ago, thinking that if it teamed up with other practices, "we'd be stronger together than on our own and lead to more success," Mr. Wilde said. Mr. Chambers said some might say that private equity partnership is an exit strategy for senior owners to cash out while young owners don't get much of anything. Mr. Wilde said you have to develop a path for new physician partnership opportunities; while it might be less of a percentage of ownership than before, they are provided the opportunity to become a part owner through buy-in. Mr. Wilde said the practice didn't see a cutback in physician engagement or workflow after part- nership with private equity. "They're as involved as they ever were. They can back out a little on the finance stuff, finding ways to fund things, but I haven't seen any slowdown or change," he said. Mr. Isham said practices need to have a strategic plan. You need to know where you want to go, where you want to be years down the road, and how you're going to get there, he said. This plan might involve investigating interest from private equity, but it might not. There are other strategies, such as manage- ment services organizations, stra- tegic alliances with other provider groups, or joining clinically integrat- ed networks. Experts offered specific advice on negotiations and the transaction- al process in the second part of the private equity session. Mark Rosenberg, American Vision Partners, Phoenix, Arizona, offered several tips. One was to un- derstand that there are two phases to negotiations. The first are the negotiations you go through as you interview and decide which private equity firm you want to partner with. The second negotiation is your letter of intent, the phase before you get into definitive documents. When negotiating your letter of intent, Mr. Rosenberg advised using a specific value vs. a specific multiple, as the latter can cause the valuation of the practice to fluctuate Private equity: Why, when, and how Mr. Isham speaks about why private equity is interested in ophthalmology.

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