Private Equity in Eyecare: Two Sides of the Coin
By Kate Gettinger, OD May 19, 2020
Now, more than ever, it may be critical for you to analyze the performance of your practice and evaluate how it compares to the rest of the industry. You may be considering selling your practice, whether it be to secure a more financially stable business position, or in order to receive a much-needed income stimulus, or perhaps you’ve decided to retire and can’t find an associate or individual buyer.
If you are considering selling, one of the major players in the game are private equity firms. These groups have been on a rise in the eye care community, and as such there has been some general confusion about whether or not this is a good thing. Depending on how you look at it, private equity firms can be a savior or a saboteur.
What Are Private Equity Groups?
Private equity firms are comprised of professional investors that buy up small businesses that they perceive have the opportunity for growth. The firms will often make changes to the purchased practice in order to increase its revenue. After a period of time during which the practice value has grown, the private equity firm will often sell the practice for a profit.
Because of this, most private equity firms will concentrate efforts on drastically increasing short and mid-term profits in order to make for a more appealing future practice sale. This may result in staffing changes, equipment replacement, or implementing new procedures into the business.
Private equity firms have turned their attention to eye care in recent years due to the increasing need for ocular health management as the country’s population ages and more demand is placed on our vision from increased screen time use. Both optometry and ophthalmology practices have seen interest from private equity firms in recent years and this attention isn’t going away anytime soon.
"According to ASCO, the average graduate in 2017 has an average student loan debt of $174,165, compared to $99,208 for a 2002 graduate. This can create a significant hurdle when it comes to buying a private practice after graduation"
What Are The Advantages of Private Equity Firms?
Currently, the traditional mode of practice sale from a retiring doctor to an associate doctor or young graduate is simply not happening as frequently as it used to occur. Many retiring professionals or those looking to sell find a stark lack of interest from individual buyers.
Many young ODs are struggling to acquire practices because they lack the initial capital required to buy a practice outright due to student loan debt or they have difficulty finding opportunities that allow them to grow their profession. According to ASCO, the average graduate in 2017 has an average student loan debt of $174,165, compared to $99,208 for a 2002 graduate. This can create a significant hurdle when it comes to buying a private practice after graduation.
Private equity firms can offer an appealing solution for both of these parties. For the seller, the private equity firm presents an appealing financial deal, with enough competition between firms to give higher sale prices.
For the young OD, the firm creates a role that allows for more flexibility and independence than a traditional small practice may permit, oftentimes with a much less intimidating entry point price. Doctors are also able to focus on primary care and avoid the headaches of business management that come with owning your own practice.
Private equity firms can take a lot of the stress out of business management. Most practicing doctors don’t have much experience with business classes other than maybe a one hour course in optometry school. For many doctors, there is no appeal to having to deal with the hassle of managing a business. Private equity firms thus can be seen as beneficial for handling the business aspects of a practice and allowing a doctor to focus on patient care.
If a practice has been struggling to perform, a private equity firm may be able to invest the capital necessary to rejuvenate the practice and bring it back to life. Private equity firms consist of skilled investors who have their fingers on the pulse of the industry, so they often know what features of a practice will have the highest return on investment and where to focus energy in order to start turning a profit.
In the healthcare business, expertise can make the difference between success and failure. With the constant evolution of technology, research practices, treatments, and patient expectations, it can be difficult to keep up on your own. Private equity firms utilize experts in marketing, technology, human resources, managed care, and claims processing to make the most of a practice’s profitability.
What Are the Disadvantages of Private Equity Firms?
While private equity firms can seem appealing in many ways, they come with their fair share of downsides.
First of all, the same competition among private equity firms that drives up the selling price of a practice and appeals to the selling doctor in turn makes the acquisition of a practice all the more difficult for an individual buyer. The individual buyer now has to compete with big businesses comprised of experienced investors.
If an OD owns a practice, he or she stands to make a much greater share of the profit. Private equity firms invariable take a significant portion of profits in order to pay out investors and to contribute to other investments. As a sole owner, a doctor can make a significantly higher income than if working as a contracted doctor through the private equity firm.
As doctors, if a private equity firm purchases our practice we can usually expect to see a decrease in salary. If you are the selling doctor, this is often offset by the purchase of the practice itself. For other doctors in the practice, however, the acquisition can mean for a reworking of employment contracts that may be less appealing than the previous offer.
Private equity firms often make drastic changes to a practice in order to increase profitability. This may mean completely replacing staff, no matter how long personnel have been loyal to the brand. Firms can easily overlook the human component of the acquisition and be quick to enact changes that can significantly disrupt the lives of your staff.
Not all private equity firms are created equal. Some demonstrate an interest in partnering with ODs in order to make compromises appealing to both parties. Others are less inclined in the individuals involved and seek to protect the interest of investors above all else.
If you sell to a private equity firm, you will lose your ability to make independent decisions about your practice. Changes may be enacted that make your work environment unpleasant and you may not have the option to leave due to contract agreements.
If you are considering selling to a private equity firm, it is crucial to do your research and determine what sort of acquisition strategy the firm abides by and make certain that this sale won’t conflict with your personal interests.