How to Set Up an Exit Strategy for your Plastic Surgery Practice or Medical Spa
If you own a plastic surgery practice with or without a medical spa, you are in a high-demand space right now for private equity companies who are interested in acquisition.
- Are you prepared with an exit strategy?
- If a private equity/acquisition company approached you today, would you know what multipliers they would be looking for?
- Would you get the most money based on how your practice financials are structured?
- Do you know how to increase the value of your practice?
If you are already an APX client, you are likely in great shape since everything we do–from setting up your financials correctly, restructuring your Chart of Accounts, getting you on a sustainable compensation plan, helping you establish a positive team culture, and ensuring your policies and procedures are in order—is helping set you up for success if/when private equity firms approach you.
If you are not currently an APX client, our Director of Consulting Christy Perry interviewed a panel of experts to help guide you as your practice approaches the maturity stage, so you understand the terminology and the steps involved to create an exit strategy. Christy spoke with a panel of experts including:
- Izhak Musli is Co-CEO of APX Platform and has personally gone through four acquisitions of companies he started or served in a C-Suite role. In 2016, he developed the first business intelligence dashboard for aesthetic practices and has analyzed hundreds of practice’s data.
- Leslie Tracey is the Principal and Founder of Tracey Donavan. Her area of expertise is helping aesthetic practices prepare for retirement as well as business planning and risk management.
- Ben Hernandez is Managing Partner at Skytale Group, which specializes in strategic management consulting and offers clients corporate level financial analysis and guidance.
We hope you find this discussion informative.
Q: Izhak, why the Sudden Demand for Aesthetic Practices Among Private Equity?
A: It may seem sudden that everyone is trying to buy aesthetic practices right now, but it really isn’t. Aesthetic practices have been very steady and recession proof/pandemic proof to some degree—and have continued to grow and flourish when other businesses are crashing. There are a few other factors as well. Aesthetic practices often have a recurring revenue element, like SaaS (Software as a Service) companies via membership programs, loyalty programs, packaged procedures, or treatments if you also own a medical sap. All these are very attractive to buyers and make the projection of your financials easy to analyze. Most plastic surgery practices are cash-based, and everything is prepaid, so you don’t have to wait for money to come in. Another factor is with an aging population, there is an ever-growing demand to look younger and better. Finally, most aesthetic practices are run by non-business professionals. So, when a private equity firm comes in, they see all the opportunity for growth which is tremendous. Depending on how you structure your deal, you may reap the benefits of that too with dividends or staying on as some sort of partner for a period.
The most important thing to know, from my perspective, is that the due diligence process is like going under a microscope. They are going to focus on your conversion rates, look at your most profitable procedures and services. So, you need to prepare ideally 3-5 years in advance from your target sale date. With APX, we help our clients to get everything set up financially the right way from the start and analyze your financials, so you know exactly what your revenue per hour is, what your profit per procedure is, getting all your transactions into your Profit & Loss Statements and balance sheets, etc. When you are set up correctly, you won’t need to spend weeks or months trying to prepare and chase data and forget a lot of factors that can potentially increase your valuation. You can then confidently shop around with multiple buyers because you are prepared.
Q: Leslie, your area of expertise is managing the “What ifs.” Can you elaborate on that?
A: At the end of the day the reason we sell our practices is we want to ensure that we have enough money to live out those long 20 or 30 years of retirement. We want to make sure we have enough funds for our family to keep their lifestyle going. We want to build a retirement income strategy that supports that. Planning for an exit should be gradual and thoughtful so it is almost a nonevent when it happens. I hear a lot of plastic surgeons say they want to retire and sell their practice within the next year. That is not how it works. You must prepare not only for your voluntary exit, but the involuntary ones as well.
Exit planning is the process of developing a written plan for the day you decide, or you’re forced to step down from your leadership role in your practice due to voluntary or involuntary departure.
Which is where the “What ifs” can come into play. You have employees, family, and patients relying on you. A plastic surgeon client of mine recently became disabled with a neurological disorder causing tremors in her hands, so she could no longer operate. Because we had a plan in place, luckily, she still has an income stream.
The Big 5 to prepare for are:
- Death (including estate planning, durable power of attorney, health care proxy, irrevocable living trusts)
- Disability (review your disability policy often to make sure it will generate the income you need to sustain you and your family)
- Divorce (how would a divorce affect business – especially important if you have a partnership in the practice)
- Departure (retirement or just wanting to exit the business)
According to the Exit Planning Institute State of Owner Readiness Survey:
- 83% of practice owners have no written succession plan.
- 60% of physicians said they would retire today if they could.
- 49% have done no exit planning at all.
Q: Wow those statistics are eye-opening, Leslie. What are some factors to consider when planning an exit strategy?
A: Three major things to consider when planning for your exit:
- Are you a lifestyle business owner, or are you a value accelerator? What are your primary goals for your business? You want to start with the end in mind. So, if you are a lifestyle business owner and you just want to take cash out of your business when you retire, you need to make sure you’re working with your financial advisor and putting money away just like everybody else.
If you want to sell your practice in the future, you will need to have a professional organization that is going to support you in getting a good multiplier of whatever your profit is.
It’s important to have a Buy Sell Agreement in place—especially if you have a business partner(s). A Buy Sell Agreement is a legally binding agreement that requires one party to sell and another party to buy a particular ownership interest in your business in the case of a triggering event, such as death or disability.
- What is the next stage of your life going to look like? Timewise, workwise. Maybe you own the building and will rent it out to the new people who take over. You want to ask yourself questions, such as:
- What are you doing to set up recurring revenue?
- What are you doing to make sure you’re maximizing your margins before you exit?
- Do you have a good senior management team in place, or does everything fall on you?
- When you sell your practice, is that money going to fund everything?
- Do you run your health insurance, car, phone, etc., through your business that will no longer be tax write offs?
- What are you going to do next?
A good exit plan should be documented and communicated so your family and management team know about it.
- Get crystal clear on your financials. APX does a great job of making sure you are looking at your financials and operating in a way that is profitable.
Q: Ben, you talk with potential buyers every day. Can you lift the curtain a little bit and explain what plastic surgery practices should be doing to prepare in advance?
A: Ideally, the time to start preparing is five years out before you plan to exit. The three “must haves” for your professional support team are a good CPA, legal team, and operation team (both internal and outsourced). You want to put together a team that supports your business size. So, when it comes time to sell, you can show a buyer that you have a professional business and are measuring what is going on. You want a legal team that really specializes in mergers & acquisitions in the healthcare space. In addition, you may want to have a wealth/tax manager and an investment banker on your team.
An important factor practice owners should be doing now is to define their goals. Your story defines your sales process. Think about:
- What makes your practice unique?
- What is your “secret sauce”?
- Where have you been and where do you want to go?
- Why should they invest in you?
- Why do you want to sell?
You’ll also want to think about:
- What is your ideal future post sale?
- Do you want to expand vs. status quo vs. an exit?
Finally, you need to start asking yourself these questions now – five years out ideally – as a typical exit takes years. Investors are investing in people, not just the business, and they require lengthy employment agreements typically post sale (on average 4-5 years). Businesses that can run independently will likely allow for an earlier exit.
Q: Ben, can you please explain a little bit about EBITDA and what the sales process entails?
A: Sure. EBITDA is short for earnings before interest, taxes, depreciation, and amortization. It is one of the most widely used measures of a company’s financial health and ability to generate cash. It is the foundation for the valuation of your business and a rough way to determine cash flow, which is ultimately what investors are looking at.
When you are ready to sell, it feels a bit like a congressional hearing. They are going to ask you every question in the book as they want to ultimately understand your business. They are going to ask clinical, operational, marketing, and financial questions. Ask yourself as you analyze your business, things like:
- How do you hire?
- How do you fire?
- Do you have Standard Operating Procedures (SOPs) in place?
- How does, for example, location number five still look and feel like location number one?
- What is your provider concentration? If you are the only surgeon that’s a bigger risk. If you have five surgeons that reduces the risk.
- What is your employee turnover rate?
- Do you have a forecast?
- Do you measure KPIs?
To learn more about how APX Platform can help you with your financials, so you are set up for success from the start to better prepare for an exit strategy, we invite you to schedule a demo here.