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:
- [2:10] How to align the interests of providers and external stakeholders
- [9:13] The average timeline for healthcare practice alignment
- [14:48] A staged approach to selling assets
In this episode…
Selling healthcare real estate and practice operations can create friction between partners, providers, and external stakeholders. This often stems from misaligned interests in value, legacy, and transaction goals. How can involved parties align their needs to facilitate a smooth transaction?
According to healthcare transaction advisors Robert King and Zak Eisenberg, aligning competing interests and resolving associated challenges involves balancing senior partners’ focus on transaction value and legacy with younger members’ priorities, such as autonomy and future earnings. Additionally, real estate negotiations require strategic lease structuring to address valuation and control concerns. Leveraging expert advisors is crucial to streamline these processes, mitigate misalignments, and ensure the transaction delivers optimal outcomes for all parties involved.
In the third segment of the Transaction Healthcare webinar series, Chris Raphaely chats with Zak Eisenberg of Merritt Healthcare Advisors and Robert King of SkyView Advisors about aligning stakeholder interests during healthcare transactions. Together, they discuss recruiting younger providers and physicians, how to sell real estate and practice operations, and the average timeline for stakeholder alignment.
Resources mentioned in this episode:
- Zak Eisenberg on LinkedIn
- Merritt Healthcare Advisors: Website | Email
- Chris Raphaely on LinkedIn
- Cozen O’Connor
- Robert King on LinkedIn
- SkyView Advisors
Quotable Moments:
- “Practices with diverse provider ages trade one type of problem for another during transaction processes.”
- “The politics of large practices are a feature, not a flaw, of diverse provider groups.”
- “Selling both the operations and real estate requires coordination between banks and healthcare real estate specialists.”
- “Misalignment between practice ownership and real estate ownership often manifests in lease negotiations.”
- “The decision to sell practice or real estate first should meet the stakeholders’ needs.”
Action Steps:
- Facilitate open communication among stakeholders: Encouraging transparent and regular communication between younger and older physicians can bridge the gap in their differing priorities and interests. This approach can harmonize future visions, easing alignment issues.
- Develop a succession plan: Establishing a clear recruitment and succession strategy can mitigate investor concerns about an aging workforce within a practice. This ensures sustainability and continued growth potential for the business.
- Conduct market research for recruitment: Understanding the specific challenges and opportunities of regional recruitment can optimize the hiring process, as demonstrated by the differences between urban and rural areas. This action targets the difficulty in attracting talent to less populated areas.
- Align real estate and practice ownership interests: Structuring deals that align real estate and practice ownership interests can resolve potential conflicts in lease negotiations. By doing so, practices can create scenarios where younger stakeholders feel invested while ensuring senior partners reap their deserved benefits.
- Simultaneous planning for asset sales: Engaging in coordinated planning for both the practice and real estate asset sales can streamline the process and maximize value. This strategy addresses the timing and negotiation challenges of dealing with two interconnected yet distinct assets.
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
Zak Eisenberg 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, I want
Chris Raphaely 1:13
to focus on staying on timing, but focusing on an issue that we deal with from time to time. You had mentioned Zak, you know, a more diverse, or more, you know, more diverse set of providers can be viewed, you know, in a better light. But I think with that comes the issue of alignment among all the providers. You know, when you do have that situation, which is not that in my experience, not that infrequent, where you know the partners interests and maybe even some of the non partners interests, you know, who could be key to the business are not aligned in either the real estate side or the practice side, you know. How do you get through those issues? Are there any tips, and does that significantly increase the timeline you were talking about before? Yeah,
Zak Eisenberg 2:10
so it’s certainly a different issue for larger practices or practices with a more diverse array of ages with their physicians, but I the way I think of it, as they’re trading one type of problem for another. Practices that have, say, all more mature physicians later in their career have the opposite issue in a transaction process, which is questions from investors, can you successfully recruit, doesn’t seem like it, and last person you recruit was 10 years ago. These are you know, questions that come up, or also, what is the replacement plan? And this goes to recruitment, but that becomes a risk factor. If your average age is, say, over 55 close to 60, that becomes a real concern for investors for for obvious reasons. So that and that slows up processes as well. We have one process right now where our client has physicians who are later in their career, and this is the exact concern that’s coming up the number of younger doctors is not is not satisfactory to the investors at the table, and they’ve actually had to pause the process to recruit some additional doctors and showcase that they can do that. So
Chris Raphaely 3:36
in time wise, you’re talking about their year, year and a
Zak Eisenberg 3:40
half less well recruiting, I think, is very market dependent. Much easier to recruit someone, to say, the Washington DC area, than it is to rural Kansas, right? So in Washington DC, for example, you can recruit someone in three to six months, right? Other areas are maybe similar, and again, it’s also specialty specific. The more specialized, the more difficult it is to recruit, of course. But back to your question about alignment. This is a feature, not a not a flaw of larger practices. It’s this politics of large practices. And I’d say this is probably true, Chris, even of your practice and law firm, right? You have many partners, some older, some younger, and those the differences and views come to a head in a transaction process, definitively. So it’s it’s always an issue some practices, it’s a bigger issue than for others, and generally it’s that younger physicians are concerned about their future potential earnings number one, and also about future autonomy and management. And older physicians, of course, are more focused on. Of their transaction value and legacy, those are the two big issues for for them, typically, if they’ve built, built the business. So, yeah, unequivocally, it’s always an issue. Comes in different flavors. Each practice and business is different, different cultures, but it’s always an issue
Chris Raphaely 5:20
in Rob following up on that, I assume you see fairly often a situation where the, you know, the partners in the operating entity are not the exact same partners in the real estate entity. And any thoughts on how you kind of smooth that potential misalignment over
Robert King 5:42
you’re absolutely right, Chris. In fact, we virtually never see those two stakehold stakeholder interests align. It also the misalignment issue also arises in just between the stakeholders in the real estate being misaligned as to their various interested when they entered the investment, etc, what we found is the partnership agreements put in place generally don’t give us a road map on these issues. So you know, ultimately, that misalignment between the practice ownership and real estate ownership, it manifests itself in the negotiation of the lease back. The simple core of the issue is the real estate owners want the highest rent possible to maximize the real estate value. The younger practice stakeholders often feel like they’re being left holding the bag with these long term leases while the senior doctors plan to retire and and have effectively cashed out. And it’s large numbers at stake. To give you, to illustrate the point, a $3 per square foot swing in rent on a 40,000 square foot facility, that’s $2 million of value. So we’re talking about real money here. The other thing is, the junior and newer partners, they have fear of losing control over the facility if it’s sold, that’s that’s a major issue we deal with all the time. However, a well structured lease can certainly resolve those, those concerns. Ultimately, no silver bullet at all. I’ve seen formulas applied, but they’re always forward looking in the sense that, well, you’re only going to continue to practice for X years, therefore you only get this much. The problem with that formula, in my opinion, is it completely ignores the risk profile of the original doctors who went out and developed or bought the facility, took, took the risk. There’s a very different risk profile to buy into a piece of real estate that’s occupied by a very successful large practice, as opposed to saying, I’m going to build a building and how’s my business in there? So you do have misalignment there. The sale lease back does give you an opportunity to realign interest. We see a lot of and I have a lot of buyer clients who really like this model, where you you don’t sell the entire it’s a partial sale, where, in the practice, the younger stakeholders keep a partial interest in the real estate, the investors love it because it creates what we call a sticky tenant, and it gives those younger and newer physicians a chance to enjoy the appreciation on the real estate over time, which they haven’t achieved is yet because of how new they Are to the practice. My last comment would be, it’s really important to have people like Merritt and, again, self serving, but ourselves to assist with the process, because those alignment issues, I mean, you have a lot of competing interests at the table. My experience is, if you have somebody who’s been through the process many times, it can really cut down on the time it takes to work out solutions that are good for all the stakeholders,
Zak Eisenberg 5:56
just Just to add, you know, one thing on just timing, as I agree With what Rob said between the real estate owners and the practice owners. I think it’s it’s more rare, but when there is more or less universal ownership alignment, those become somewhat easy calculations for us. We just recommend that the real estate entity take as much rent as possible, because the valuation on real estate is generally higher from a multiple perspective. But you were talking about timeline, I thought of two examples, two very similarly, similar orthopedic practices in the same area of the country. One of them had a more uniform COVID. Sure about where they saw health care going and the challenges of health care, the challenges of the practice, and there was still disagreement between young and old, but to get through that, I’d say disagreement process took them three months, because they were overall, fairly aligned already on vision and that they needed to do this, but it was more about how it would get done and what the practice would look like moving forward. Another practice also aligned on long term vision, but I think the culture not as aligned generally, and that same decision making process took them nine months. So it, it really, it really depends on the group. And I’m sure, I’m sure you’ve dealt with many, many, a 20 person board meeting where, yes, where physicians are. You know, getting getting heated. Owners are getting heated. And there are very differing views. So you
Chris Raphaely 11:05
were one fairly recent. One comes to mind that I think both of us were on, but I’ll leave it at that. But Rob had mentioned something that, that I wanted to, that I wanted to kind of, kind of come back to, and that is when you’re when you’ve got, you’ve got some, some misaligned interests, or on aligned interests. And it’s something I see you had mentioned that you know, it’s quite a bit different, that when, when you know the you’re investing in something that’s basically not even a hole in the ground yet, as opposed to, you know, an existing building with a successful practice in it. But one thing I find is sometimes that’s a function of, you know, that issue of trying to recapture that risk. That’s because the deal that when the when the person who came in, when it was already operating, the way that deal was cut to bring them in, it wasn’t real. It was kind of, they got a, you know, it wasn’t really negotiated that way. They kind of brought them in because they were part of the practice. So they kind of let them jump in without recognizing the risk. So now you’re really trying to recut a deal that might have done five years ago in connection with a bigger transaction when the payout is now manifesting itself. So a lot of times, I’ve seen that as really a function of not very, maybe fully thought through negotiations that happened, you know, five years before, when that more junior person came in. Because, hey, we want to just get them in the practice. So we’re not going to sell the real estate soon. We’ll just, you will give them basically real estate, which is, you know, has more value than they’re really, you know, is enhanced value, kind of when they come in. That’s the way I kind of analyze it. Do you? Do you see it differently? No,
Robert King 13:04
we see that very frequently. Yeah, you know, very rarely do we see that the real estate is marked to market when recruits come in. I mean, there’s a lot of different competing interests going on there. There’s a new great doctor on board. And so there’s a the real estate piece isn’t the only concern, obviously, but, yeah, we see, we see that time and time again. But
Chris Raphaely 13:30
of course, that makes it a much tougher negotiation now that you’re on the press P of A of an event like we’re talking about, and now, now the rubber meets the road, so certainly, certainly see that. So let’s talk about, let’s not, let’s go from kind of overall timing to, you know, when you sell which asset you know is there first of all, just generally, can you talk to the pros and cons about selling one asset first and then the other asset later. So let’s just start there. We’ll tell you kind of in in bite size. Is there? You know, pros and cons of a stage approach or doing it together?
Zak Eisenberg 14:14
You want to take that Rob?
Robert King 14:14
Yeah, sure. You know this, this is I’m hard pressed to find a deal where this doesn’t arise, where you have interest in selling both the operations and the real estate. Each case is obviously different. Different practices have different goals, different stakeholders. Then the practices have different goals, etc, but generally selling the practice first, whether it be to private equity health system, whatever kind of investing entity it is, the argument is that’s a good idea to improves the tenant credit the. The practice may get a more favorable valuation due to the professional management such such an investor can bring into the practice. Most PE firms have a plan to scale the practice that’s always attractive to the buyer the real estate that they’re going to grow the practice and improve the credit of the tenant. A lot of that comes down though to choosing the right investment partner. That’s where Merritt comes in. They excel at finding a good fit for practices. So given the right circumstances, selling the practice first creating a long term lease in that sale can be very beneficial on the real estate side. Contrarian view is to sell the real estate first, excuse me. The basis of that view is that there is a definite cohort of investors, including institutional grade investors, who want to see the physicians on the lease they’re concerned about. You know, the private equity firm who’s buying the practice not having deep experience in the healthcare sector. Maybe they’re carrying too much debt. Again, choosing the right partner to move forward with is obviously key. The other, the other aspect of that is, if you sell the you sell the real estate, first you get to do the sale lease back on your terms, so to speak. And so when you when the investor comes in to buy the practice, the lease terms are set, and you just have the opportunity to put in more favorable lease terms. Again, there’s no right or wrong way. My opinion, after many, many transactions, is to which is the essence of our session tonight. You need to run at least the planning portion simultaneously. You need it’s two sides of the same coin. You need to look at at, you know, if you pull on one, you’re pushing on the other kind of thing. There needs to be coordination between investment banks and healthcare real estate specialists. It’ll improve the alignment on the deal points and ultimately maximize value. If the practice decides, no, let’s go with this first and then that, that’s great, but let’s, let’s establish what the road map looks like, and why would you do one before the other, and and does it meet the stakeholders needs? You know, the client’s goal is always top of mind for us, the most important thing,
Chris Raphaely 17:35
how about selling together?
Robert King 17:38
Selling together? What’s that difficult from a timing perspective? But
Zak Eisenberg 17:44
yeah, I just also jump in there, Rob, I I think you’ll also be hard pressed, Chris, to find the same buyer that wants
Chris Raphaely 17:57
that was my next question. But you got Yeah? It’s
Zak Eisenberg 17:59
yeah, it’s very, very rare that you’ll have the same one, maybe some health systems, for example,
Robert King 18:07
picking up the as well. Yeah, yeah.
Zak Eisenberg 18:10
But even in that case, the health systems need to be pushed into a position where they’re going to pay top dollar for both assets. Yeah, usually the the best buyer for real estate and Rob would know better than me. I think are publicly traded REITs and other real estate institutional investors, right? But as far as selling them together, we’ve not with Rob’s firm, but with another firm. Many, many times we’ve conducted with that same firm, simultaneous health care transactions with the real estate and the and the operating business. So I think if you are thinking about selling them both at the same time, I think it’s extremely important to have a both an investment banking team as well as a real estate health care advisory team that are working hand in hand in conjunction. It’s very, very important if you’re selling them at the same time. Well, for us, whenever we’re talking about this with our with with clients or potential clients, it’s always a it’s always a possibility. I think there are pros from a valuation perspective, but not necessary. Many of our clients, especially on the operating side, it doesn’t affect the operating transaction, really at all it. I think for many of our clients, they see the the real estate as a bit of an annuity. After they’ve they’ve transacted their practice, and they hold on to it. I think usually the operating business is a much more personal issue, in my experience, Robin and yours, but usually selling of a practice or a physician. And operating business in let’s say it’s an AC is a much more emotional and personal decision than selling a piece of real estate that they have think Rob stole right that on the real estate side, it comes down more to timing and making sure you have the right times of types of terms in place so that it doesn’t impact any potential operational sale down the road, if you do decide to sell it first, but it’s very, very rare that you have on the flip side, the operating business being sold first is going to impact the real estate. If anything, I agree with Rob, you might have some groups to Rob’s point. Again, you’ll you know better than me that might not like having a private equity firm in there. Maybe they’re tough tenants in some levels, etc. Yeah, yeah. I think you know, by and large, let’s say we look at a more mature industry, like ambulatory surgery centers or cervical hospitals. If those get purchased by, say, SCA, which is owned by Optum or uspi, which is owned by tenant, without a doubt, the the real estate purchasers, the institutions, are going to see those investors as much more credible and significant upgrading credit, right? They’ll, they’ll be very happy to have them in there. So, yeah. Generally we the lease. The main thing we focus on, if the real estate is not being sold, is making sure lease terms are market and favorable, so that if the physicians want to turn at some point down the road, they don’t have to go and renegotiate the whole lease and, you know, beg their new partner to give them some better terms.
Zak Eisenberg 21:44
And 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 at merrittadvisory.com or send us an email at contactus@merrittadvisory.com.