Cascade Conversations
Join the team at Cascade Partners and their network of trusted advisors as they work to demystify details, terminology and strategies in the world of acquisitions, divestitures and financings.
Cascade Conversations
Episode 03: Healthcare M&A Deal Dynamics and Compliance
Join Cascade Partners Managing Director Raj Kothari and McDonald Hopkins Health Care Practice Chair Elizabeth Sullivan as they discuss the unique dynamics in healthcare transactions. Learn about the financial and legal aspects of balancing compliance and regulatory considerations relating to M&A transactions and why you need financial and legal consultants in the initial stages of any financial transaction to advocate for the best interests of yourself, your team, and your practice.
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00;00;00;12 - 00;00;15;13
Announcer
Welcome to Cascade Conversations. Join the team at Cascade Partners and their network of trusted advisers as they work to demystify details terminology and strategies in the world of acquisitions, divestitures, and financings.
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Rajesh U Kothari: Managing Director - Cascade Partners
Welcome to another Cascade conversation. Today we're going to talk about some of the unique dynamics of a transaction in the health care sector. I'm Raj Kothari, managing director and founder of Cascade Partners. And joining me today is Elizabeth Sullivan. She's the chair of McDonald Hopkins Health Care Practice. Thanks for joining us today, Liz.
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Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Absolutely. Thanks so much for having me.
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Rajesh U Kothari: Managing Director - Cascade Partners
Yeah. We’re really looking forward to this conversation and drawing on some of your great insights and experience helping clients get through that a little bit more complicated nature of health care transactions And so, you know, look at when we do this, we spend a lot of time working on, you know, doing things preemptively like quality of earnings and doing some due diligence upfront to make sure we're really positioning our clients.
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Rajesh U Kothari: Managing Director - Cascade Partners
And I know this is important to you as well. Can you talk about some of the areas that you particularly focus on from a health care point of view and why you think it's so important for clients to think about these things in advance?
00;01;15;22 - 00;01;39;17
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Absolutely. OK, so Raj, you are speaking my language, right? As you alluded to, my practice is primarily compliance counseling and health care, regulatory work. So, I'm doing this on a day-to-day basis. With our provider clients. But because we have a robust health care M&A practice, a lot of what I do is also doing this work in the context of M&A and transactions for our clients.
00;01;39;25 - 00;02;06;17
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
And so, you know, when I whenever we get involved with these sorts of deals, there are a couple of things that we're looking for immediately. And it does depend on provider. So, I know we're going to talk a lot about physician practices today, but of course, we both work with all sorts of other providers. And so, in that sense, some of these are universal and some of them are unique to the different types of providers.
00;02;06;28 - 00;02;33;06
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
So, for our physician practices, one of the things that is important right out of the gate and probably is a big part of what you do is billing, right? Billing practices. So, this is important right off the bat. There's a compliance component to it, but there's also a component to it of what is the value proposition, right? So that's one of the things that we will want to understand right away.
00;02;33;06 - 00;03;03;02
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
What are the billing practices, how is the practice structured, what types of clinicians are involved? You know, all of those sorts of things are critical because they impact not only sort of what is the health of the organization, of the practice from a transactional perspective, but also from a compliance standpoint. Another thing that I am often interested in, and this really does this really is sort of the health care component is business relationships.
00;03;03;08 - 00;03;23;19
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
So, when we're talking about a physician practice, you know, the practice and they say, well, we don't really have any of those relationships, we don't really have any written contracts with anybody else, we don't what exactly are you looking for? And so, two of the areas that pop up a lot in our transactions that we're dealing with sort of in the course of diligence is real estate.
00;03;24;01 - 00;03;45;19
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
And also, just generally something that seems very innocuous and very simple, but, you know, maybe holiday gifts or other things, other types of things that a practice may do with referral sources. Or community contacts and things like that. So, with respect to real estate, you know, many groups, you know, own a medical building or they have a lease in a medical building.
00;03;45;27 - 00;04;08;20
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
And one thing that often just isn't something that occurs to everybody sort of on the front end is who are they leasing from or who are they leasing to? And if they're leasing from or leasing to a referral source, then that is a financial arrangement with a referral source. And it does implicate the stark law doesn't mean it's a violation, just means the stark law is implicated.
00;04;08;29 - 00;04;29;24
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Exactly. And so, it is sometimes surprising for clients when we get into a deal, how long it takes to kind of sort through that, particularly if there are multiple locations or it's a complex structure. And so, trying to get out ahead of that and have the answers ready and be confident in the answers really helps in the transaction.
00;04;30;03 - 00;04;54;28
Rajesh U Kothari: Managing Director - Cascade Partners
So, we're big believers in that, right? You know, if you can identify, gosh, that we are we start complying, you know, are we anti-kickback? Do we do all those things ahead of time? And even if the answer is we didn't quite do it. Right. Right. Then we have the opportunity to structure it and convey the message we want as opposed to having our partner buyer or the other side identify.
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Rajesh U Kothari: Managing Director - Cascade Partners
And then we're jammed into a corner.
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Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Absolutely.
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Rajesh U Kothari: Managing Director - Cascade Partners
I mean, I'm working through it right now and it's you know, I have a few extra gray hairs as we work through these issues because we couldn't we couldn't get enough information to identify it upfront.
00;05;07;17 - 00;05;33;05
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Right. Right. And I think your point is exactly sort of the takeaway that I hope everyone would have. It's not doom and gloom. It's not the end of the world. But if you can either solve the problem before you go to market right or identify it and be prepared and know how you're going to handle it and how you are going to discuss it, position it and not get caught flat footed, that's going to make the process and the experience much better.
00;05;33;14 - 00;05;41;01
Rajesh U Kothari: Managing Director - Cascade Partners
Our airline is the best. Defense is a great offense. Absolutely. And we are. And we operate completely kind of in that in that vein.
00;05;41;01 - 00;06;15;00
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Absolutely. So, all right. We're 100% on the same page there. And then I think this is probably a little bit of repetitive because we are just the real estate really is a good example. But if a group has ancillary service lines, if they have a relationship, if there's an AC involved sort of any of those other unique possibly, you know, really important from a value standpoint, but complex or again, unique arrangements.
00;06;15;00 - 00;06;39;19
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
We want to see those in advance and try to figure out what's going on with those. And sometimes, you know, we will only be involved in the transaction. We weren't the health care attorneys that were setting those things up. And that's OK. You know, we're here to facilitate. So, if we can connect with regulatory counsel and sort of serve as a second level or the trans, you know, maybe the translators from regulatory counsel to the deal counsel, we'll do that as well.
00;06;40;07 - 00;07;03;07
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
And that's I would say those are the things that we're focused on the physician practice side with providers, other types of providers. We do a lot of work with clinical laboratories, behavioral health facilities, home health care and business arrangements are often more important. So, you know, sort of variation on the same theme but also sales and marketing teams.
00;07;03;07 - 00;07;33;02
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
We want to understand that right away when we're talking about other types of providers and licensure because that's going to impact deal timing potentially. So, we want to know that. Absolutely. And then I would say the last thing that I had on here that I wanted to note for other types of providers is their payer arrangements, because it does depend on deal structure, but sort of the health of those and how those are structured really may impact deal structure, may impact price.
00;07;33;02 - 00;07;42;29
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
All those things sort of come into play. So those are the things that right out of the gate we are looking at when we get involved and hope that it's not too much under the hood for the client right away.
00;07;42;29 - 00;08;04;29
Rajesh U Kothari: Managing Director - Cascade Partners
Well, you know, our experience is it's usually too much for the client because they're not. Well, this is just the way we've always run the facility. Is, you know, when that partner is coming in, that new buyer is stepping in and they might have a much bigger enterprise. So that level of risk doesn't work for them. Or they just have a different risk tolerance and they're just not willing to take that out.
00;08;04;29 - 00;08;26;22
Rajesh U Kothari: Managing Director - Cascade Partners
And honestly, at some point they get larger and larger. They get on the radar screen of the regulators, right? Whether it's whether it's the government regulators or even payers. Right. Doing their own audit. So the risk profile change of that and that's hard. That's hard for entrepreneurs to understand. Well, how does this fit? I've run it this way, but helping them understand, hey, these are the implications.
00;08;26;22 - 00;08;33;12
Rajesh U Kothari: Managing Director - Cascade Partners
This is what it can mean in the back and then why the risk profile is different can usually get them get them through that.
00;08;33;15 - 00;08;57;25
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
That is such a good point. I mean, I really think you are making a great point. We do get into that a lot where we're you know; we it might feel almost adversarial. And that's not the intent. We you know, we want to remind folks that we're here to facilitate and we're here to help but because of the risk tolerance and the risk profile, sometimes we are doing that translation, or we have to provide these things just to bring the buyer's team along.
00;08;57;25 - 00;09;00;21
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
And get them comfortable. So, I absolutely think.
00;09;01;09 - 00;09;06;14
Rajesh U Kothari: Managing Director - Cascade Partners
We're definitely going to take a conservative position that they're the buyer. Right. And so you got to think.
00;09;08;00 - 00;09;38;11
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
So, switching gears a little bit, unless there's anything else we want to talk about there, I thought that was just a really, really exciting component. OK, I know. I'm going to want to like that little piece is probably going to come out. OK, can I OK, so switching gears a little bit, one of the things I wanted to ask you about, Raj, was, you know, more more and more practices are evolving, and private equity just continues to be such a large player and it will continue to be.
00;09;39;05 - 00;09;57;22
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
So around that issue. There's increasing discussions around compensation, compensation structures and how all of that fits together. So, what types of things, what types of conversations are you having with clients or what types of trends are you seeing with respect to compensation? And private equity models?
00;09;58;03 - 00;10;37;00
Rajesh U Kothari: Managing Director - Cascade Partners
Yeah, so, you know, compensation is always a sensitive subject for everybody. And and when we work with providers and shareholder providers, in particular, we have to help them understand that really, they're getting two forms of compensation, right? They're getting paid as a provider and they're getting paid as a shareholder. Now, those may come in one check, and they may not make the distinction internally, but in reality, they're getting paid those two buckets of compensation and we found it's important to help separate those so they can see because the beauty of a private equity transaction is they're going to continue to get paid as a provider that's not going to change.
00;10;37;00 - 00;11;02;16
Rajesh U Kothari: Managing Director - Cascade Partners
They're going to continue to serve that role. And it's important for them to know and understand that that compensation is going to continue and then they freak out because it's like, well, hold it, I was making all this money and you're telling me I'm only going to make this much. And it's reminding them that this component, they're getting paid as a shareholder and in exchange for that, they're going to get a bunch of cash, a closing, and they're going to continue to own a piece of the organization going forward.
00;11;02;16 - 00;11;25;22
Rajesh U Kothari: Managing Director - Cascade Partners
Right. So sometimes breaking those component styles has been really helpful for our clients to think through. And when we talk about compensation, we always talk about, hey, let's get to the market. And usually, a shareholder is our above average producers. They're, you know, they're more experienced. So, we are we're typically trying to take them towards that, you know, two thirds, 75th percentile of where the market is.
00;11;26;03 - 00;11;47;08
Rajesh U Kothari: Managing Director - Cascade Partners
But when you go off of market data and you look at what they're doing with their own associate, that it gives a very honest and credible metric to use internally and with the private equity partners to say, Hey, this is where the market is, this is what it's going to take to replace because that shareholder compensation becomes a big part of the cash flow.
00;11;47;16 - 00;12;11;21
Rajesh U Kothari: Managing Director - Cascade Partners
That becomes part of what the practice is going to be valued at. Right. And when you break it down and look at it before tax and after tax, it has a significant impact. Today it's about a 20 plus percent impact. And oftentimes physicians are cash flow their role is about cash flow. And they think in terms of cash flow, they're like, well, I was, I was making this much and now you're telling me I'm going to make that.
00;12;12;00 - 00;12;36;27
Rajesh U Kothari: Managing Director - Cascade Partners
And when we take them back and show them what it means after tax, the distance between the two numbers are actually much, much closer than they realize. And that's one of the tools that we've used to help them get more comfortable. But you've seen it, I'm sure, in the deals that you've worked on, right? Some are doing the production percent of collections production model where you kill, if you will, the others are doing, hey, let's do a shared component.
00;12;36;27 - 00;13;04;22
Rajesh U Kothari: Managing Director - Cascade Partners
And increasingly we're seeing, you know, these earnings before physician compensation bonus pools, right? Trying to keep the physicians aligned with the cost structure, incentivize on the cost structure, you know, an OK model. I think it's a challenge and one of the things we remind our private equity partners, AMA, and our physician clients, is when they have control over that, that expense side that makes some sense.
00;13;04;22 - 00;13;12;07
Rajesh U Kothari: Managing Director - Cascade Partners
When they don't, that can be a hard thing. So, you know, part of the partner is driving the operations of the practice.
00;13;12;10 - 00;13;13;00
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Absolutely.
00;13;13;01 - 00;13;25;25
Rajesh U Kothari: Managing Director - Cascade Partners
So, you know, it becomes a very important conversation. It's one we have early and often with our clients because it takes time to process it and digest it. And understand what it means to them personally.
00;13;26;03 - 00;13;26;15
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Right.
00;13;27;00 - 00;13;43;02
Rajesh U Kothari: Managing Director - Cascade Partners
So, when they're meeting with that partner for the first time and they're talking about it, they're like, OK, I've really thought through this, and I and I can ask them more thoughtful questions and the impactful questions. Then the initial reaction of, holy cow, what do you mean? My compensation is going to change.
00;13;43;07 - 00;14;05;09
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Yeah. I mean, I think that's so insightful, and I think that's a way that you are really preparing your clients for that conversation because we do, as you noted, we see that and we see that sort of hesitation and wow, this is so different from my day-to-day practice, not necessarily appreciating. Right. You are also we're talking about the cash at closing, which is part of that.
00;14;05;14 - 00;14;27;04
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
But then, you know, being able to understand how this is going to work on the go forward, particularly for folks who are in a practice where, as you said, they didn't have to think about these sorts of things. They were just looking at sort of cash flow. It's a huge step. That's a huge win as far as preparing your clients to go through that process and be knowledgeable.
00;14;27;10 - 00;14;51;13
Rajesh U Kothari: Managing Director - Cascade Partners
As we're talking about compensation. Right. One of the natural elements is roll over equity, right? Become a very significant part of the value creation for the physicians. And as we're looking at these deals, increasingly we're seeing claw back and other provisions that are putting strings and attachments to the equity that the physician owns. And that's part of their real consideration.
00;14;51;21 - 00;15;00;05
Rajesh U Kothari: Managing Director - Cascade Partners
How are you guys looking at that? How are you guys approaching those conversations with your clients about the claw back and elements of the rollover?
00;15;00;09 - 00;15;27;10
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Right. Well, you know, it's interesting as you think about it. And some of our discussion has already touched on these points. But when you think about the physician and the value of the transaction equity as part of that. Right. And those are dollars that aren't coming in somewhere else. And so, what we've tried to do with clients and tried to counsel them on is help them to understand when is this going to be in effect or when would these forfeitures take place.
00;15;27;16 - 00;16;03;04
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
So, whether oftentimes where we're seeing it is with termination or productivity based on historical productivity. And so essentially the provisions are usually drafted based on one of those points. But what it comes down to, I think it's sort of boiling that down to a more basic concept is what are the terms of the departure of the physician? Is it something that was for cause on or was it meaning that?
00;16;03;04 - 00;16;27;11
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Is there a reason that the relationship was terminated, that both parties sort of negotiated, that they agree that this would be an appropriate situation? Or is it something that feels inequitable to one side or the other? So, I think this is something that as we were sort of preparing for this, you know, you shared some of your insight with respect to what you're seeing.
00;16;27;15 - 00;16;33;06
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
And I thought some of that was very interesting and insightful. So, I don't know if you want to share some of the things that you're seeing as well.
00;16;33;10 - 00;16;33;24
Rajesh U Kothari: Managing Director - Cascade Partners
Yeah, I mean.
00;16;33;25 - 00;16;34;25
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
That's the situation. Yeah.
00;16;34;25 - 00;16;57;17
Rajesh U Kothari: Managing Director - Cascade Partners
I mean, I think you said it well, it's really you know, the term we're all using is good leaver badly. Right? Did you leave for a good reason? Yeah, right. Something that wasn't in your control, something else that happened you died. But, you know, they call it a good leader. It's not so good for that. But its meaning how it impacts that equity value and badly is I, I want to cross the street and I'm going to set up a competitive operation, you know that.
00;16;57;25 - 00;17;18;19
Rajesh U Kothari: Managing Director - Cascade Partners
Hey, that's reasonable. Say, gosh, that, that was completely in my control, and I did that, and that's diminishing value. But there are a lot of variables, and not all of it is in the control of the physician. And so, you know, it's a relatively new strategy since COVID that folks have been trying to go after this. There's claw back provisions.
00;17;18;19 - 00;17;44;12
Rajesh U Kothari: Managing Director - Cascade Partners
And, you know, I always try to point out it's a two-way street, right? They want the doc, right? They're buying that cash flow. The doc generates all that volume. The single biggest fear is the day after closing. The physicians are working last or leave. And that's a very legitimate, fair concern. Absolutely. But in turn, the docs make it a very significant bet with that rollover equity that the partner they're picking is the one that's going to take them to the finish line.
00;17;44;23 - 00;18;06;10
Rajesh U Kothari: Managing Director - Cascade Partners
And, you know, the private equity guys can't guarantee there that they can't even guarantee the management staying. And so, we always feel it's a little it's a little one sided and so you describe kind of managing that term, making sure that that that it winds up investing over time. So as time goes on their ability to crawl back goes down further and further.
00;18;06;20 - 00;18;33;06
Rajesh U Kothari: Managing Director - Cascade Partners
We totally agree. And that those are really critical things. And in fact, we try to negotiate those upfront we work with them. We work with you and your team to make sure as part of that all alive where we've got maximum leverage, we're like, let's be specific. What's, what's a good lever, right? What's a bad lever? Let's not be generic because, you know, firing people because they did bad as an employee, hey, that's an employer's discretion, right?
00;18;33;13 - 00;19;01;14
Rajesh U Kothari: Managing Director - Cascade Partners
But when it impacts your equity, that really changes the implications. And we are working harder and harder to separate those two. So, if you have all the causes you want, we didn't follow your rules. You want to fire us. That's great. That can't be a reason that you're taking back my equity. That's just a different scale. And so that's a lot of times that we're thinking about it and helping approach and sharing the other side, the private equity partner that, hey, is this really balanced?
00;19;01;14 - 00;19;03;22
Rajesh U Kothari: Managing Director - Cascade Partners
Is this really a fair position?
00;19;04;00 - 00;19;20;08
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Right. And I think I think you're right. It's a situation where both advisors are going to be aligned. Right? So, you've kind of you're digging into that detail and then on our side, what we're trying to do is really craft that language in a way that it makes it clear these are the places that, you know, there is going to be a forfeiture.
00;19;20;08 - 00;19;38;23
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
And these are the places where no, that is protected and that's going to be safe. And I think your point to really be detailed with it is important. And I think it's a really good point. And I think you know, as this continues to evolve to the extent that this is something that is coming up more and more and we're seeing more of it, it's.
00;19;38;23 - 00;19;39;05
Rajesh U Kothari: Managing Director - Cascade Partners
Not going.
00;19;39;05 - 00;19;49;02
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Away. Right? Then there's more experience and that helps us draft and negotiate that. That's that circumstance better for our clients.
00;19;49;03 - 00;19;54;13
Rajesh U Kothari: Managing Director - Cascade Partners
When we were talking about. Right, all by itself in its own little box. It sounds reasonable.
00;19;55;00 - 00;19;56;05
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Right, exactly.
00;19;56;06 - 00;20;17;22
Rajesh U Kothari: Managing Director - Cascade Partners
And you know, what you and I are often doing is helping our clients understand you got to put it in the bigger box and in the bigger box. It's not quite as reasonable or at least we don't think it's quite as reasonable. And, you know, having that discussion upfront and early and often, the drive alignment, it becomes a significant negotiating point, there's no doubt.
00;20;18;16 - 00;20;26;23
Rajesh U Kothari: Managing Director - Cascade Partners
But, you know, folks have to realize if that equity is more and more at risk, the value of it to the physician is lower. So why do they want to roll as much?
00;20;26;28 - 00;20;27;08
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Right.
00;20;27;12 - 00;20;38;28
Rajesh U Kothari: Managing Director - Cascade Partners
And I think that's the other side that people have to realize is the more claws you put out, the less they're going to want to roll. And that that's the opposite incentive that I think the private equity partners try to try to achieve with all this.
00;20;39;01 - 00;20;41;17
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Yeah, absolutely. I think that's right.
00;20;42;26 - 00;21;10;25
Rajesh U Kothari: Managing Director - Cascade Partners
So, look at, you know, as part of this, we talked about good lever and bad lever non-competes, non, non-solicits it's our critical components, but I'm not sure everybody really realizes that. You know, there are three or four of these elements in every transaction, right? I have my non-compete as a selling shareholder. I have my non-compete as an employee and I have my non-compete as a new shareholder in the new company.
00;21;11;07 - 00;21;21;13
Rajesh U Kothari: Managing Director - Cascade Partners
How are you guys thinking about those differently or how do you help clients negotiate those differently? Yeah, because they have different risk and different parameters and different implications.
00;21;21;13 - 00;21;47;06
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Sure. That's an excellent question. I mean, I think for us, you know, it does come a lot. It does relate to what is what are what is this what is the nature of that restriction? Right. And so, we talked a lot already about sort of the claw back of the rollover. And so, in that circumstance, we're talking about a situation where a physician is taking a risk.
00;21;47;06 - 00;22;10;23
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Right. And that's something that's important to them. It's part of you know, it's part of sort of the larger transaction, the value that's there. And so, I think that is a place where we want to be very careful and thoughtful, as you said, about the details and the circumstances upon which that's going to go into effect. And the same is true obviously when we're talking about any of these restrictions.
00;22;11;17 - 00;22;28;03
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
But I think, you know, when we're talking about, you know, when we're talking about sort of employment, whether it's as a shareholder, the seller or we're talking about as a new employee of the organization or as a new shareholder.
00;22;28;03 - 00;22;28;25
Rajesh U Kothari: Managing Director - Cascade Partners
Shareholder. Right.
00;22;29;07 - 00;22;54;15
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
So, in all of those cases, it sort of is, OK, well, what is the purpose of this and what is it going to mean long term to that individual? So, we do try to be thoughtful. And when we've got different folks that are sort of in different categories, but certainly when we're talking about the shareholders of the sellers, I'm you know, it's a conversation about what is most important.
00;22;54;22 - 00;23;12;27
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
I think I think that's where we really operate from. So when we're talking about getting the getting the deal done right, what are the most important components to them? What do they see as sort of their future seat? What is their expertise for post transaction and what does that really mean to them? And then try to work from there.
00;23;13;05 - 00;23;33;23
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
And the other thing to consider there is, is when you have a group that is selling, and the expectations might be different among the group members. And so, trying to reconcile that and make sure that everybody sort of on the same page feels comfortable, feels protected or advocated for, I think is a large part of that.
00;23;33;24 - 00;23;53;20
Rajesh U Kothari: Managing Director - Cascade Partners
Fine. It's a balancing act, right? So, we're trying to manage all of the expectations of the shareholders and our clients. But at the same time, you know, the, the partner and the buyer has an expectation of perfection, right? Because they're looking for that that's the ability to generate that cash flow. And they know they don't want to make it easy for the back nine because they just paid them a whole bunch of money.
00;23;53;20 - 00;24;22;20
Rajesh U Kothari: Managing Director - Cascade Partners
And that's and we recognize that that's fair. And balanced. And, you know, we're often seeing kind of, you know, selling shareholder, you know, a five year or nine subject estates. Right. But typically, like a five year non-compete and kind of two years, one- or two-years post-employment, one or two years post new shareholder, meaning that they have a non-compete for one or two years after they're done being a shareholder in the new the new company, the holding.
00;24;22;20 - 00;24;25;20
Rajesh U Kothari: Managing Director - Cascade Partners
Again, those are the same metrics that you're seeing in the marketplace.
00;24;25;23 - 00;25;00;20
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
I think those are pretty consistent. Yeah. That is also what we are seeing. And I think you're right. I mean, one of the things that you pointed out was that when you I mean, I think for our client’s rate to look at these and say, what does this mean for me? Right? That's always where we're working from. But if you think about the buyer's perspective, I mean, so much of the value of the business is related to the physicians and potentially also the leadership of some of the folks that are involved in leadership and so the protection I mean, what is the investment?
00;25;00;20 - 00;25;21;06
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
What are they purchasing? If folks can just walk across the street or walk out the door walk across the street and set up shop. So, it is a balancing act. And I think you're right. I think those metrics really are consistent with sort of what we're seeing in the marketplace. OK, so we've talked a lot about the shareholders and many of the things that come up in the transaction with respect to the shareholders.
00;25;22;03 - 00;25;43;03
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
But one of the other things that is involved in this, of course, are the other physicians, right? Some of the non and the non-owners of the younger physicians that are in a practice and oftentimes they are looking at this and feeling like a transaction or really any type of transaction, any sale, regardless of the type of buyer, might not be in their best interest.
00;25;43;10 - 00;26;03;28
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
So how do you how do you perceive that or what advice would you give to physicians that are not necessarily in that shareholder camp or maybe are young shareholders and are just looking at it and saying, what does this mean for me? Because I'm not sort of at the end of my day, at the end of my career and this transaction is happening yeah.
00;26;04;05 - 00;26;30;19
Rajesh U Kothari: Managing Director - Cascade Partners
There's a there's an interesting dynamic. Someone must be running around all the residency programs around the country saying PE is horrible because that's the common feedback we hear. And usually, it's because of lack of information. They just don't know or someone telling them, I don't know who is selling this, but you know, I remind people, look at just as there are bad private equity partnerships out there, they're private bad private practices.
00;26;30;26 - 00;26;46;26
Rajesh U Kothari: Managing Director - Cascade Partners
Sure. And, you know, there is good and bad. You got to find the right partner. And so, when we're working with younger folks, so it starts out with shareholder physicians because this conversation is really happening at a shareholder level. And the older doctor like was a great you know, I can get realize the value in my practice a way I never could.
00;26;46;26 - 00;27;25;20
Rajesh U Kothari: Managing Director - Cascade Partners
And the young doctor will hold it. I'm giving up 20 years of cash flow and we've helped groups go through and understand is this is actually better for younger physicians. And the reason is it's a shift in mindset. It's a shift from cash flow, which is how they were trained and what they've been experiencing and moving them towards thinking about equity because you know, every group is going to want those physician shareholders to roll equity, meaning they're going to put part of their proceeds into owning equity in the holding company that's been created that the private equity groups are creating to consolidate all these.
00;27;26;05 - 00;27;53;29
Rajesh U Kothari: Managing Director - Cascade Partners
So that shift from cash flow to equity, right? Is that role. Well, the private equity group has got to grow that, right? They only make a return if they can grow the value of the equity. And they're targeting two, three, five X what they've invested. Right. So, think about if I sold my practice for $100 and I took $30 and I rolled into the new and they generated a three X return, so now I've got $90.
00;27;54;25 - 00;28;06;05
Rajesh U Kothari: Managing Director - Cascade Partners
Well, if I take $60 and put it in my pocket and roll another $30 to do it again right now, I'm really accelerating my equity value and my value creation.
00;28;06;14 - 00;28;06;23
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Right.
00;28;07;09 - 00;28;30;01
Rajesh U Kothari: Managing Director - Cascade Partners
And that's very different than cash flow and I'm doing it all at a capital gains rate. So, I'm saving 20% right off the bat in most places right there. And so, there's a tremendous amount of value creation and younger docs can do that flip multiple times. An older physician is typically doing it maybe once, and then they're approaching retirement age, they're not practicing anymore.
00;28;30;07 - 00;28;58;02
Rajesh U Kothari: Managing Director - Cascade Partners
So, they'll lose that opportunity. If you look at some of them, very successful private equity provider Role Labs started with single practices and gone through multiple private equity, you know, a couple of the largest. Right. And emergency Madison went public, right? So, physicians row that whole way up and then what they said those TAB team, those same two public companies, then one private eye to the largest private equity groups in the country.
00;28;58;10 - 00;29;27;00
Rajesh U Kothari: Managing Director - Cascade Partners
But all that way physicians got to ride that wealth creation. So, when we've helped younger physicians understand this dynamic, they've been then there's been much more appreciation. We have one practice where, you know, a young associate, doc became a shareholder as part of the transaction without having to buy in. Well, because the value now of your practice ten years ago, 15 years ago, they tossed out equity in practices because it didn't really have a lot of value.
00;29;27;09 - 00;29;33;22
Rajesh U Kothari: Managing Director - Cascade Partners
And as I was a partner, we advise all our classmates stop using the term partners and start using the term shareholder.
00;29;34;05 - 00;29;34;11
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Right?
00;29;34;26 - 00;30;00;17
Rajesh U Kothari: Managing Director - Cascade Partners
Because now they're a shareholder and that's the dynamic that's changing. And that's in this particular case. And that person has gone on to now lead the group and is actually representing the group as part of its board representation. So, it can be a great opportunity and very long term create a lot of value creation far and above kind of the current income stream that they think they're forgoing.
00;30;00;26 - 00;30;22;16
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Right. And I think there's a couple other things. You know, oftentimes I feel like, you know, in my role, it's probably more about some of the concerns about work life balance or what is it going to look like, how is it going to impact clinical day to day and those sorts of things. And I think you made a really good point, which is, you know, find the right partner, right?
00;30;22;16 - 00;30;47;25
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
So in the right situation with the right private equity group, not only is all of this available, but you've also potentially got economies of scale with the type of, you know, whether it's infrastructure, compliance, support, you know, billing, all of the things that a practice has to do on its own and that folks would need to support on their own.
00;30;48;02 - 00;31;03;09
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
That's all going to be sort of taken to a higher level. It's going to be taken off of folks’ desks. There's also leadership opportunities, as you are describing. So, there's a lot of things that can be really great if the right organization is identified.
00;31;03;27 - 00;31;24;24
Rajesh U Kothari: Managing Director - Cascade Partners
And people focus on the value, and they think, Oh, you're an investment banker, all you care about some money. It's like, no, that's the end. We advise our clients, right? The money doesn't matter. At the end, the money will all be roughly the same. But if you pick a really bad partner, right? It doesn't matter how much money you got, you're going to be miserable, you're going to be cranky.
00;31;25;03 - 00;31;42;21
Rajesh U Kothari: Managing Director - Cascade Partners
Right? You're going to be unhappy with the whole concept. And but if you do it right, you get a partner that understands how to manage physicians and how to grow and build a business. Right? Private equity guys, they don't know anything about practicing medicine, right? They leave that to the clinicians. Clinicians are always worried, Oh, they're going to tell me how to practice.
00;31;42;21 - 00;32;02;17
Rajesh U Kothari: Managing Director - Cascade Partners
No, they're not going to tell you how to practice medicine. Right. Every good group out there knows high quality care is the most important things, not saving a nickel or a dime or $10 by doing something different. But they know that if we build a really good organization, there's tons of value that can be created through just efficiencies, synergies, as you described.
00;32;03;18 - 00;32;09;13
Rajesh U Kothari: Managing Director - Cascade Partners
But they have built tens, dozens, hundreds of companies before.
00;32;09;19 - 00;32;09;28
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Right.
00;32;10;10 - 00;32;25;00
Rajesh U Kothari: Managing Director - Cascade Partners
And that's what they're experts and that's what they're going to do with your practice. And they're going to let you continue to be a good clinician. I describe to physicians all the time, you know, being a great clinician is a full-time job. Being a great CEO is a full-time job. You can't do both.
00;32;25;09 - 00;32;40;08
Elizabeth Sullivan: Healthcare Practice Chair - McDonald Hopkins
Yeah, absolutely. I think that's a great point. And I think it does it offers a really incredible perspective for younger, younger shareholders that may be a little bit hesitant and concerned about a transaction.
00;32;40;08 - 00;33;00;11
Rajesh U Kothari: Managing Director - Cascade Partners
Absolutely. Well, Liz, thank you very much for seeing great insights today. And I think a lot of elements to help physicians and other health care entrepreneurs think about what they might do in a transaction again, I'm Raj Kothari with Cascade Partners with Liz Sullivan from McDonald Hopkins. Thanks for joining us for Cascade Conversation.