Zak Eisenberg is the Vice President of Merritt Healthcare Advisors, which provides investment banking services to healthcare services organizations. In his role, he manages the strategic development and execution of ASC, surgical hospital, and physician practice transactions. Zak specializes in sourcing and analyzing transactions and capital and negotiating and structuring investments. Previously, he was a Biofund Venture Analyst at New Orleans Bioinnovation Center, a biotech and life science-focused venture capital firm, and led the analysis team at a renewable energy-focused private equity firm.
Here’s a glimpse of what you’ll learn:
- [1:49] How to address the shortage of healthcare providers and nurses
- [4:40] The role of multiuse earnouts to increase practice value
- [10:13] Physician partnership models in real estate transactions
- [15:15] Considerations for consulting a law firm during transactions
In this episode…
Healthcare systems face an increasing shortage of providers and nurses, creating an imbalance between supply and demand. How can practice advisors address this gap to ensure a sustainable future for the healthcare sector?
The shortage of physicians and nurses is driven by systemic barriers like expensive, prolonged training for doctors and demographic shifts affecting nursing. Healthcare transaction advisor Zak Eisenberg notes that market corrections and expanded educational programs could address these issues over time. Additionally, young physicians often face financial and cultural barriers to equity participation in transactions, so Zak suggests leveraging multiyear earnouts to bridge valuation gaps.
In the final installment of the Transaction Healthcare webinar series, Chris Raphaely speaks with Zak Eisenberg of Merritt Healthcare Advisors and Robert King of SkyView Advisors about the barriers to healthcare practice transactions. Together, they explore strategies to address workforce shortages, optimize transaction structures, and navigate regulatory and compliance concerns.
Resources mentioned in this episode:
- Zak Eisenberg on LinkedIn
- Merritt Healthcare Advisors
- Merritt Healthcare Advisors email: contactus@merrittadvisory.com
- Chris Raphaely on LinkedIn
- Cozen O’Connor
- Robert King on LinkedIn
- SkyView Advisors
Quotable Moments:
- “In the US, it takes far longer and is more expensive to become a physician than in other countries.”
- “When there’s a supply imbalance, nurses get paid a lot and will continue to until that imbalance is resolved.”
- “Earnouts can be a good tool if buyer and seller are not seeing eye to eye on value.”
- “Having a good team of advisors is absolutely critical when selling a practice people have spent their lives building.”
- “Transaction law is a very particular practice area because it covers everything in the business, especially in healthcare.”
Action Steps:
- Advocate for expanding medical and nursing education opportunities: Encourage institutions to increase the number of medical and nursing school slots to address the shortage of healthcare providers. This approach targets the core issue of supply imbalance, aiming to produce more qualified professionals in a timely manner.
- Explore alternative compensation models like earnouts carefully: Understand the benefits and risks of earnouts and other compensation structures in healthcare transactions. This knowledge can help balance buyer and seller interests, reducing disputes and ensuring smoother transitions post-transaction.
- Support partnership models in medical practices: Implement pathways for new physicians to achieve partnership status within a practice, possibly through structured financing or bonus systems. This model promotes investment in the practice’s success and addresses the challenge of integrating young physicians into ownership roles.
- Recognize the importance of specialized legal and advisory support: Acquire experienced legal and advisory teams familiar with healthcare transactions to navigate complex regulatory environments effectively. This ensures that critical compliance issues are handled proficiently, minimizing risks during the transaction process.
- Foster collaboration between senior and junior physicians in real estate investments: Encourage senior physicians to create opportunities for junior ones to invest in practice-related real estate. By addressing the financial barriers young doctors face, you can support long-term commitment and growth within healthcare practices.
Sponsor for this episode…
This episode is brought to you by Merritt Healthcare Advisors.
Merritt Healthcare Advisors is an investment bank with a unique focus on healthcare providers and their businesses.
Merritt leverages the healthcare industry expertise of its owner-operators, clinicians, investors, and advisors to develop surgical facilities that perform safe, efficient, and cost-effective procedures.
To learn more, visit https://merritthealthcare.com/.
Episode Transcript
Intro 0:04
Hello and welcome to Transaction Healthcare. I’m Zak Eisenberg, Vice President at Merritt Healthcare Advisors. Merritt Healthcare Advisors is an investment bank with a unique focus on healthcare providers and their businesses. Transaction Healthcare is a podcast focused on addressing questions and concerns at the intersection of healthcare transactions and business.
Zak Eisenberg 0:26
Zak Eisenberg here, this is a special episode from a webinar we delivered. It was so interesting that we wanted to share this part of it with you on the podcast. It’s brought to you by Merritt Healthcare Advisors. We’re a healthcare focused investment bank. We don’t work on anything else, mostly with provider businesses. Usually, we’re working with physician entrepreneurs, helping them to raise capital or sell their business, or sometimes helping them to buy other practices or invest in other types of ancillary service lines. Now we’re happy to share this part of a webinar featuring Robert King, the director of healthcare real estate at SkyView Advisors, our moderator, Chris Raphaely, who is the co chair of Cozen O’Connor’s healthcare and life sciences department, and myself, well, this
Chris Raphaely 1:14
is great. I could, we could go on forever, and I’ve got a million questions, but I want to be respectful of people’s time, and we also do have some questions from the audience that I promised we would have time for, and we have a couple of minutes, so I will, I’ll just run down the list. I think we have four or five questions and and we’ll try to get to all of them. The first one is, Zak, you spoke about the dearth of providers and nurses. Any thoughts on how this shortage might be alleviated?
Zak Eisenberg 1:49
It’s a great question. I think here in the States, we have a unique issue with let’s talk about doctors first. Doctors, I think, are potentially artificially held down by the number of new licenses that are granted, and also by the sizing of MD departments. And there are reasons that this occurs with the you know, ama, etc. So I think there are some issues there. The other part that’s unique to American health care is that it takes far longer in the US, and it’s far more expensive to become a physician than in other countries, which also pushes people into, say, other careers, especially as the average income for specialized physicians has come down, and even for primary care physicians has come down over the last several decades. It’s less attractive as compared to other say professions like say the the legal profession, Chris the for nurses. I think, I think over I think it’s really just a demographic issue. Is my view of it, nurses and mid-levels are becoming much more prominent, and the number, the absolute number, has gone up over the last several decades. It’s well over 3 million nurses now in the US, and that’s grown a lot. But the issue is we still have a dearth of supply, as this question said, because we have so much more need, because our population has gotten much older. So I’m not quite sure how to how to solve that, but when there’s a supply imbalance, and we’ve seen this in the market, nurses get paid a lot of money, and they’re going to keep being able to get paid a lot until that supply and balance comes to a head. And look, a lot of schools and universities are taking advantage of this. Their nursing programs are expanding. They’re much less expensive than physician programs. PA programs have exploded. So I’m less concerned over that, over the next 20 years, 10 to 20 years, I think the market will correct for that. It’s just we’re talking about people. It takes a long time to train people, and people have career paths if they want to, you know, retrain and go in a different direction. So I think that’s something that gets worked out, not in, you know, two to five year time frame, but in a 10 to 20 year time frame,
Chris Raphaely 4:25
the use can you comment? I guess this is on the practice side as well. Zak, there’s a question here about the use of multi year earn apps to increase value. What do you see there? And do they increase value?
Zak Eisenberg 4:40
Oh, interesting. And Rob, I’d be curious if this has come up in real estate deals too. But on the operational deals, we always push for transactions to be less risky for clients. So what? What’s the least risky facet of a transaction? Cap? Cash, yeah, number one. Number two would be equity in the business rollover in the business post transaction. The third would be, I’d say, delayed forms of consideration, like a seller note, for example, or delayed cash. Let’s say they just pay you. Instead of paying you 5 million today, they’re paying you 5,000,012 months from now, no strings attached. The most risky form that you know lots of investors like is an earn out, which is based on performance metrics. Now there are a bunch of problems with earn outs from a seller’s perspective. The reason why buyers like it is because it is a way to risk adjust the price of the asset that they’re buying. And in some ways, that can be good for sellers too, because, you know, maybe you think the market has come back to you and told you, in today’s dollars, you’re only worth 10, but people are willing to pay you 13 if you hit certain threshold. And so to us, it always comes down to, what are the alternatives and what, what are the offers that someone’s looking at? If everyone has an earn out, you’re probably going to need to structure some type of earn out. That being said, we always will push for other forms of structures. Because not only and Chris, you know this, we’ve structured quite a few very complicated or announced your firm, they also have some real compliance concerns, especially when you’re talking about physician practice. They generally, you can base them on profit, but it’s very difficult. You generally want to base them on something like volume or revenue, if anything. And again, Chris, you could, you could talk more about the reasons why, better than, than I could, but yeah, I’d say, I’d say, again, burnouts can be a good tool if buyer and seller are not seeing eye to eye on value, but I’ll just give you a quick alternative, when you just structured this in another transaction instead, which was suggested that by the buyer, we went back with an option structure which is achieving a very similar goal but has less risk because it’s not performance based necessarily. It’s it really is just about giving the buyer the option, in this case, the option to buy more shares in the future for today’s price, at the strike price today, which creates an ability for them to essentially say they were, you know, instead of buying 60% today, they went down to buying 51% and then they had the option to buy another 9% two years from now. What that gave them is the ability to say, Well, if the business isn’t going as well, I won’t buy that. And so I’ve adjusted my price. So anyway, there are many, many issues with it.
Chris Raphaely 8:05
I’ll only add, you know, I like you know, especially you know, either side. But obviously, you know, the two sides have different views, buying, selling, but I like to use, you know that I think, I think of it is, you know, earn outs can be used as gap closures. You know what I mean, maybe, you know, maybe that major drivers in the transaction. But when you’ve got a disconnect of a little bit, you know, you can use the earn out to kind of close maybe a gap in the way the parties are looking at the the asset. I will say, though, to be honest with you. And you know, no matter how you draft them and all that, they’re very often subject to some level of dispute, if not almost every time you see it a lot, and again, it’s sometimes it’s, it’s, you know, just a matter of level. Sometimes it’s a matter of where you hit it or not. But you know, they can be tough to structure, and then they can be tough to monitor and tough to, you know, solve if there’s a dispute. So I would agree, from certainly a seller side, they’d be fourth on my list. Is, is the avenue of of compensation, but,
Zak Eisenberg 9:17
yeah, I think one deal that we worked on together in particular, the earn out was a very small portion of the actual transaction value, but it took more than half of the negotiation time, which isn’t really great for for anyone, right? So, yeah, I think generally there are better options that are simpler, that don’t create as much dispute between buyer and seller, because also in a lot of these situations, you know, buyer and seller need to be partners after the transaction closes, and that can create a lot of tension having that type of negotiation.
Chris Raphaely 9:50
So two more questions, and bringing on new providers, if you guys have a sense what percentage of practices you. Bring them on as equity provider, as equity holders in the practice. We’re talking about brand new hires, I guess
Zak Eisenberg 10:08
you want to take that Rob maybe talk
Robert King 10:13
that’s a dwindling concept. To say the least, most young physicians being recruited do not simply don’t have the financial resources to buy into the real estate that’s due to student debt to a great extent, but also the increased values of the real estate we’ve seen over the over the last few years, not just few years, but decades. Literally, it’s not so easy to buy into, even a 20,000 foot facility, that’s a big number to buy in, five, seven, 10% of that facility. Pretty young physician who’s just left school. So we see it less and less all the time, used as a recruiting tool. Or see it actually happen. And and this, I know, because when when the practice comes to the table, it’s almost invariably just the senior docs who own the real estate, and the juniors aren’t involved in the transaction at all.
Chris Raphaely 11:13
How about Zak?
Zak Eisenberg 11:16
Yeah, I’d say on the practice side again, it really comes down to the specific practice. Some of them, and I’d say this is the majority, probably two thirds, maybe more, of practices we see have some type of partnership model ingrained in the business, and it’s either structural or it is just what they do. That is the culture of the business where there is a pathway to partnership over, let’s say, a two to three year period for new physicians, or they have the ability to buy in, either through financing from the business, low low dollar financing from the business, or through basically paying through it, through their their bonuses. The other the other cohort, are really businesses that are owned by the physicians that founded the business, and then any physicians coming on generally have an eat what you kill model, and that’s their upside, as opposed to sharing in the business as a whole. I’d say that’s a far smaller portion of those practices, and they tend to be, on average, slightly smaller. But you know, of course, there are always exceptions. There are some very large practices that have been built that way. It. It doesn’t generally work as well in higher acuity specialties, usually say interventional specialties or surgical specialties physicians want to in in the practice, generally, even the young doctors, we see that much more in lower acuity or primary care type businesses where physicians are more okay being employed and having a productivity model that makes a lot of sense. Generally, on the on the side, where physicians can buy in, we’ll see varying structures of how and Chris, actually, you bring this up earlier, about not totally thinking out how the physician partnership will impact the part of the partners at the time of a sale. Many practices are what we think of as a flat equity structure, meaning it is uniform. So if you have 25 positions, each one of them only owns 4% right? Absolutely. And as the number of physicians grows in the practice, that number pro radically just goes down. So it’s just flat across the whole organization. This obviously creates issues when there’s a transaction, because you have some physicians who are working much harder generally, than others. That’s just the nature of life. Some people work a lot harder than others, and that’s that’s fine, and you have some physicians who generate a lot more business, a lot more revenue for the business because of that. And this creates a lot of alignment issues. We’re talking about alignment. Actually, the bigger alignment issue we usually see is around this as opposed to old versus young. It’s more big providers versus small providers, and you need both for practice to thrive, because people refer to each other. And you know, surgeons make a lot more revenue than non surgeons, but non surgeons are in many ways just as important to a practice as surgeons, because they’re creating the referrals, they’re seeing the patients in the clinic. So yeah, it’s quite it’s quite variable,
Chris Raphaely 14:57
okay, and the last question we’ll get to when I switch. This is not a question I planted. This came naturally from from our audience. How do buyers handle the situation where the practice seller employs an inexperienced lawyer?
Zak Eisenberg 15:12
I see the question it if it’s a banked process, we handle that situation very delicately, because usually our clients have a good relationship with that lawyer. Might be their local attorney who helped them set something up, but I don’t have to tell either of you. Transaction law, in and of itself and transactions, is a very particular practice area of law because it covers everything in the business. And then health care, in and of itself, is a whole different ball game, because there’s a very complex regulatory and compliance concerns and health care that just don’t exist in other areas, with maybe the exception of finance. So you know, again, we always joke in Merritt , we made a terrible choice in profession, not only a very regulated space ourselves, but our clients are even more regulated. But I would say when, when that situation comes up, we we give that lawyer some rope, and oftentimes, before throwing them under the bus, if they’re not able to handle it, we’ll recommend bringing in another firm to support them as a first step. And if that doesn’t work, if they are really creating some some real issues for our client. We develop relationships with our clients where we tell them the truth, and if that’s as we see, it right, and if that’s, if that’s our perspective, we’re going to tell them. And you know, it’s a no personal, personal issues, but if it’s a it’s a small law firm with just one or two lawyers, it’s very difficult to manage a process like this and manage other clients at the same time. These are very complex processes with hundreds of pages of documents that you need, yeah? So it’s just very challenging.
Chris Raphaely 17:16
Yeah, that’s a great point. I mean, I’ve seen that situation play out a lot of ways, but it’s not unusual where, you know, maybe it takes to the point where the documents come in and it’s real, and things are getting hot and heavy, you know. And we’re talking about, as you said, a lot of documents, and it’s staring them in the face, and we’re talking short time frames, because this is, you know, doing deals is all about getting it done quickly, once you’ve decided to do it hidden and do it, if things drag out, it’s a problem on a number of different levels. So, you know, it’s not unusual that, you know, that lawyer will recognize that, you know, maybe, maybe I do need some help at the very least, or maybe I need to turn it over to somebody who’s, you know, it’s not a matter of one lawyer being a better lawyer. It’s a platform and who’s set up to do what you know, there’s things that a larger law firm is not going to do as well as a smaller law firm, or certainly not as efficiently, but these type of fundamental, you know, organizational level transactions, you know, you do need somewhat of a team, and you certainly need experience. I mean, like any advisor, obviously. So you know, while I’ve seen situations where there’s conflicts, I’ve also seen many situations where you know that that first lawyer will realize at some point in the process that somebody, they’re going to at least need some other support from somebody who does this type of work regularly.
Zak Eisenberg 18:39
And Chris, I would just add, I think it’s very much the same way in any advisor situation. From our standpoint, we’ll speak with early on if the if our client has a lawyer, an accountant or, let’s say, a real estate person locally that they like and trust, and someone who sold their personal home or whatever, we’ll have a conversation with them first. And if you know, really they’re not up to snuff, well, we’ll tell our client that that’s our perspective, and that they should either recommend that that person needs support, or they should, you know, potentially step aside, but yeah, I think it’s just as important, not only for legal but also accountants and other other advisors in these processes, that people who understand what, what this, what a transaction process looks like, particularly in health care, it can create a lot of value for you as the seller, to have the right, right team in place. I would
Robert King 19:45
echo Zak’s comments thoroughly, obviously, a very delicate situation, but ultimately, our duty is to advise our client to get their result that they want, and that’s the path that we always follow. What’s. Tact, of course, sure, sure. And, you know, I
Chris Raphaely 20:04
think, just, I think we’ve run to the end of our questions there, and we’ve run to a little bit over maybe the time that we have allotted, but it was a fantastic discussion. And I’ll, I’ll leave the group with as we close out just, you know, as you can see, you know, from the issues, we’ve just really started to crack scratch the surface on this, you know, when we’re talking about selling a practice that people have spent their lives working to build and real estate that they’ve spent, you know, investing significant dollars in, and is a big part into that. You know, practice can be a big part of the practice. You know, there’s so many issues that arise. Having a good team of advisors is absolutely critical. Yes, there’s a cost to it, but you know, what I found is in almost every situation, and certainly anytime I’ve worked with with our two panelist firms, it’s happened exponentially. Whatever cost there is to bringing that advisor on, a good advisor will return to the their customer many times over. And that’s definitely the case with the with the folks at Merritt as well as SkyView. I’ve worked with them both. And with that, I’m going to be quiet and I’ll just if there’s anything Zak or Bob want to say and close, I’ll turn it over to them, and then I’ll thank our audience, as well as Josie Zak and Bob, for a really interesting and insightful discussion.
Zak Eisenberg 21:44
I just echo those comments, Chris. Really appreciate the time tonight, guys, Bob and Chris, and appreciate all the attendees coming tonight. It was a great, great conversation. And I hope everyone has a great, great evening.
Robert King 21:58
Yes, thank you to everybody for attending. Chris, thank you so much for moderating. Very much appreciated. And
Chris Raphaely 22:05
good evening, everybody. Okay, good night, everybody. And
Outro 22:10
that wraps up another episode of Transaction Healthcare. Hit the subscribe button to get notified when we release new conversations. And if you are someone interested in learning more about these topics. Visit us@merrittadvisory.com or send us an email at contact us@merrittadvisory.com.