Private Equity in Health Care: Answers to Industry Questions

Dickinson Wright Attorneys recently tackled some basic questions regarding private equity in health care during Dickinson Wright’s Health Law Summit. Below is a summary of what was discussed. Click here to view the full webinar.

What is private equity?

The term “private equity” is broad, referring to family offices, limited partnerships, and investment funds put together for specific purposes, namely to invest in certain sectors. They come in many different sizes and forms, and a large segment is specifically set up for healthcare transactions. The majority are interested in one of two varieties of transaction – controlled transactions, where private equity is looking to buy more than 50% of your company, or minority-styled funds, designed to help create the platform, but take a minority interest in your company or platform. The most common factor that you must remember – they have a fuse on their investment and must return money to their investors within a set period. This means that investors must be replaced every 3-5 years.

How does private equity differ in healthcare vs. other industries?

In the health care industry, stringent regulations make any transaction more complex. Prior to beginning the transaction, the health care entity must essentially be split into two pieces, then treated as one unit for financial purposes, while maintaining respect for the regulatory authority that patient care should be delivered by practitioners without interference from management.

How did the pandemic impact private equity investment in health care?

Private equity groups have a known timeline that didn’t change with the arrival of the pandemic. Private equity remained healthy, as did the banking industry, and as a result, there is a backlog of opportunities in the health care industry. If anything, the pandemic accelerated the timelines of those wishing to sell or thinking about selling. However, in the case of companies that may have taken Paycheck Protection Program (PPP) loans or other government grants throughout the course of the pandemic, those transactions may be more complex – but it’s nothing that can’t be overcome.

What are the primary health care regulations impacting private equity investment?

Corporate practice of medicine or dentistry is one of the handful of primary healthcare rules private equity deals with; corporate practice means whether the particular state laws at play will allow a management company with non-licensed owners to come in and have a degree of control over that practice. In these cases, the aim is to structure the company so that the management company’s control is not impacted by their lack of license. A licensed medical doctor must have control of the clinical aspects of the business, meaning the management company has a services agreement that doesn’t allow the management company to have a material impact on the provision of services.

Another regulatory aspect which must be considered are STARK and anti-kickback laws, which should be addressed during the due diligence review and will impact the overall arrangement and structure of the purchase agreement. They can come into play if items such as earn-outs are included in the document.

Should I seek private equity investment?

Though this question is largely personal in nature, there is some general advice to be followed. It depends on timing; early-stage businesses would be safer relying on the funds they have on hand, as giving away part of the company to private equity can make proceedings more difficult if your business fails. However, if you’re looking to grow at a faster rate, there’s a transaction you’re looking to close on, or if you’re looking to sell the business, finding a private equity partner can be the right choice.

If you decide to move forward in finding a private equity partner, you must be careful in choosing the correct one. Before starting the process, ask yourself:

  • How much control do I want over the practice?
  • Can I give up some control?

Truly understanding what it means to have a private equity partner is vitally important before moving forward in the process.

How do I find the right private equity partner?

Before beginning your search for a private equity partner, it helps to understand how the process works. Private equity partners are usually found through an investment banker with industry knowledge whose job it is to marry buyers and sellers, taking a fee in the process. The investment banker performs due diligence on your company, compiled into a confidential information memorandum (CIM), which is then sent to a limited number of potential partners who may be a good fit. Interested prospective partners will respond with an indication of interest (IOI), at which point the field will be narrowed down to 6+ prospects. Meetings will be held with the prospects over the course of a week or so, and it’s important to come prepared with your own set of questions. It’s imperative that you listen to your advisors throughout; they know this process and they’re here to help you get the best results possible.

Alternatively, a prospective private equity partner may inquire outside of this process. If this occurs, simply call your investment banker, have them perform due diligence, and include them in the field if they’re a suitable option.

How do I prepare my health care practice for possible private equity investment?

First, it is imperative to conduct a compliance review or audit of practice. Contact your lawyer and ask for referrals to knowledgeable health care attorneys, and bring in a compliance team to understand where your business is at from a health care law compliance perspective. Additionally, it’s a good idea to engage an accounting firm in the health care sector to perform a review of your finances and a quality of earnings report. This will ensure any issues are solved prior to the transaction. Completing your housekeeping will ensure you get the highest price possible.

What is a Letter of Intent and is it necessary?

A Letter of Intent (LOI) sets the stage for material terms and is an important, necessary part of the process. It is the starting point for two parties entering into a transaction and includes an exclusivity clause for 60-90 days. They generally consist of three parts: the economics of the deal, the story of the company, and who will bear the risk if that story is wrong. During the course of the negotiation process, both parties will constantly look back at the LOI for guidance in drafting the purchase agreement.

What are the popular structures of private equity investment?

There are many different forms, but the most popular are control funds and minority investment funds. Control funds, in which the private equity partner buys 51% of the company and controls the board of directors, are the most common and consistent. Minority investment funds, in which the private equity partner buys less than 51% of the company, provide room for growth and will usually end in larger investments.

Will I still have control over my practice if I sell to PE?

You will maintain clinical control; you will still handle patient service, make decisions over the provision of patient healthcare, handle the retention of medical records, etc. However, you will lose at least some control over the business side, as the board will handle day-to-day business matters. Anything that will significantly impact the business side of the practice will require your partner’s agreement.

What are the most important sections of the purchase agreement?

The health care aspects are fundamental, with potentially long-reaching indemnification requirements connected to reps and warranties, as well as regulation compliance. The story of your business is also quite important, as it contains factual statements about your practice and includes disclosures. Though the purchase price is most visible, the other sections are equally, if not more, important to understand.

What type of due diligence review of my practice should I expect?

The review will be extensive; it begins immediately and continues to just before the signing of the purchase agreement. It includes all aspects of the seller entity, including the healthcare portions, and a financial review will be included as well.

What is “reps and warranties” insurance?

“Reps and Warranties” insurance brings a third party into the transaction which the original two parties will look to in case the story of the business is incorrect. The third party will investigate and underwrite damages, reducing the seller’s risk in the transaction while also increasing the closing consideration. At this point, the majority of transactions involve this insurance.

What happens after closing, or the completion of the transaction?

The practice is now under new management, with the private equity company overseeing some aspects of the business. There will be plenty of meetings with your new partners, and the aftermath may involve a transition agreement.


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Scot Crow is a Member and General Corporate, M&A and Private Equity Practice Group Chair. He can be reached at 614-744-2585 or, and his biography can be accessed here.