We spend a lot of time on the road each year and have the good fortune to be able to speak in front of many diverse audiences, so it’s really nice to have an opportunity “to be a student” from time to time. One of those times is our annual trip to “Chiberia” in February for the McGuireWoods HealthCare Private Equity Conference.
We always learn a ton at this conference and 2019 was no exception – so much that we’re having to break it into two separate blogs. Let’s dig in on the first one that will shed some light on the Economic Outlook for 2019 as well as Considerations for Building an Exit Strategy…
McGuireWoods puts on a “healthcare conference” and it covers a wide range of funding interests (senior debt, mezzanine capital, private equity, etc.) every bit as much as it covers a wide range of healthcare verticals (behavioral health, hospital, dermatology, ophthalmology, veterinary, etc.). The dental industry (devices, technology, etc.) and dental services (clinical practice) is only a small subset of the entire 48 hours.
That being said, dental always seems to draw a high level of interest given its relative size. Or maybe that’s just me trying to feel self-important. Regardless, here’s what you need to know.
Outlook for 2019 & Beyond
We’ve all been living through quite a robust time over the last 8+ years. How long can the run continue? Is there any upside left? Who has the best crystal ball?
Well, a panel discussion of senior lenders revealed some positive sentiments. There was some discussion around the 2018 Q4 market correction as a potential forecast of a recession being closer than expected, but the consensus seemed to be that we have at least another few good years ahead of us and they see institutions aligning around that as a strategy. The balance of 2018 reflected that sentiment, and there’s still an abundance of capital to be sourced.
Middle Market lenders are also seeing a lot of success as these deal sizes continue to go smaller. This is especially good news for our industry as many emerging groups hit a “debt funding wall” around $2MM in exposure (see our blog on this topic HERE). Overall there’s a continued focus across healthcare and heading down market in highly fragmented verticals (dental, vet, dermatology, etc.) where there’s an opportunity for add-ons and roll ups. Michael Young, Managing Director of CIT Group, gave an especially rosy outlook in saying, “Demographics continues to be the tide that lifts all boats in healthcare and the silver tsunami hasn’t even truly hit yet.”
So, if the outlook is fairly positive for our industry, our followers could continue to operate their business successfully or they might conclude that now is the perfect time to “take some chips off the table” while valuations are at an all-time high and explore a sale.
Considerations for Building an Exit Strategy
If 2019 is your year to exit, here are some things to keep in mind.
Preparation: we heard on multiple occasions (and can share from first-hand experience) that a disorganized seller is the enemy of value. A sale process is lengthy and intricate, so sellers that have disorganized data rooms; are unprepared for answers; and have no idea how change of control impacts contracts and leases can be the root cause of dragging out the process. The advice here is to choose a sell-side advisor carefully as they can often guide you through this quagmire. Ed Nakayama, Vice President at William Blair & Company, condensed things pretty nicely, saying: “Pick three broad buckets:
- General business building – if you’re selling a growth story, then have the infrastructure, systems and people to support the story; have a robust business development function with a pipeline, strong compliance is a key diligence issue here.
- Housekeeping and internal improvement – if you are implementing a new ERP system, changing any contracts, etc., then ideally have those behind you to maintain efficiencies before going to market.
- Identifying risks to the business – if any of you operations might face scrutiny (upside or downside), are they impacting large parts of your revenue? If so, think through pointed questions and answers ahead of time, and make sure you convey that they the changes you’re making are sustainable.”
Legal: focus on legal housekeeping items in the 12-month “lead-up phase” in order to minimize disruption as you have no idea how long it’ll ultimately take. Look at:
- Corporate governance documents – accurate, up to date and complete?
- Capitalization table – partners versus equity holders going forward but aren’t yet?
- Other relevant documents – update all permits and licenses, and conduct your own lien and litigation search
Do all of it before going to market as it is much easier to do at outset versus at closing if you find out you have to clean up anything.
Financial: businesses that scale quickly need their stories to be told clearly and cleanly. Your financial model should involve a Quality of Earnings report (“QofE”) prior to sale because it will help to substantiate the valuation. If you can prove out the unit economics of a de novo strategy, you can occasionally get proforma credit. Think of the 12-month lead up to exit as a period focused on creating a “path to value” in terms of executing your game plan.
Marketing: IT and analytics usually help grow top line revenue because they substantiate consumer-driven metrics (lifetime value of the patient, marketing ROI, etc.). More and more group dental practices are employing these systems (like RevenueWell, for example). If you can quantify the value they bring, then that’s a differentiator to the buy-side and something they’re often willing to pay a premium for. Healthcare is becoming much more consumer-driven, so how are you capitalizing on that trend?
Clinical: Count on a major chart audit being part of any buy-side diligence process. You should be doing your own as part of your internal compliance program, but be sure the access to information is easy and at the ready.
Revenue & Margin: High EBITDA-margin group practices often have some degree of high margin services as part of their procedure mix. The buy-side will perceive some risks around these high margin parts of the business. For example: significant cash pay patients in a recession environment could create concerns around how to weather economic cycles. High margin revenue streams are a feature, but also a risk from an investor context, so you need to be able to answer those risk-related concerns.
Special thanks to Bart Walker and all of the great people at McGuireWoods for hosting us in Chicago. We look forward to seeing everyone at the conference again next year.
If you’d like to discuss any topics in this blog or related to any other trends in our industry, please feel free to contact me at Perrin@TUSK-Partners.com TUSK provides industry-leading resources for Group Dental Practices and DSOs. We help our clients START, GROW and SELL their Group Dental Practice or DSO. For more details, visit our website HERE or feel free to download our Overview of Services.