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Navigating Offers from MSOs and Private Equity

Unsolicited offers are a regular occurrence in private equity-backed marketplaces. Private equity purchases a platform or group of practices and then must feed and grow that platform to increase underlying profit, so it can be sold approximately five years down the line. The manner of growth varies, but ultimately, the most efficient path is to purchase existing profitable practices, which are then incorporated into the broader business. Gaining access to these additional businesses can be difficult in a less mature marketplace, especially when a fully mature business development team hasn’t been built out yet.

In situations like this, many newer groups will rely heavily on what are often known as “unsolicited offers.” These offers come in many forms such as mailers, phone calls, emails, door-to-door visits, referrals, etc. But in almost all cases, they rely on limited data, usually a P&L for the last 12 months, to present an unsolicited offer for the purchase or partnership of your practice.

To truly understand the risks associated with an unsolicited offer, one must first unpack the tenets of a private equity investment strategy. At its core, their entire goal is to purchase as many individual practices at the lowest possible price, combine those assets with other similar practices, and sell them off as a bundled package for the highest possible price. The price discrepancy between buy and sell is called “arbitrage,” and it’s how PE groups make their money and secure additional funding for future investments.

practice valuation

With that in mind, there are numerous parts of the deal process that can degrade the value of your practice, lowering the overall investment the PE groups have to pay at the front end. This is not to say that there’s some evil, nefarious “being” trying to plan this strategy out. It simply is what it is, and groups are looking for discounted deals, especially ones in which they can control the flow of data, participants, and narrative with the seller. If you are in a situation where you’re “negotiating” with a PE-backed MSO, just understand that they may be absolutely amazing people, but ultimately, they were formed to make money for their investment partners. In many cases, that will benefit you in the long term. However, short term, it can have a significant impact on the value of the practice you’re contemplating selling.

The Fix

While it will certainly sound a little bit self-serving, the fix to this is having proper representation at the table. You would never go to court in a significant legal action without an attorney at your hip, arguing your side of the story. Why would you jeopardize the value of your life’s work in a sales process by entering that foray without an advocate? From the beginning of the sales process through closing, you should have an advocate at your side that understands the underlying financials of the business, can argue the mechanisms that drive profitability, and will properly communicate the long-term market value of the business you’ve built. All, while running a process that is both comprehensive and competitive to ensure you’ve had a chance to see the entire market, understand the full value of your business across multiple platforms, and can negotiate with multiple buyers at the closing table. Quite simply, it is the only way to ensure that you capture the full value of the practice you’ve spent your life building. And what is the downside? There is none. Market research clearly indicates that sales transactions that have a seller advocate (broker) involved transact at between 20-40% higher overall transaction value NET OF FEES. It’s a win/win situation for every practice owner.

Next Steps

If you’d like to understand the true value of your practice, and what your options are when it comes to selling, reach out to Tusk for a free market analysis of your practice. We’ll discuss the opportunity that exists within your business and how to maximize that value in a sales process.