Blazing a Trail in Healthcare M&A: Unveiling the Strategy Behind Success

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:

[4:17] How transactions serve as a financial solution, not a strategy
[7:48] Steps to prepare for an M&A and practice integration
[8:47] The importance of operational excellence for medium-sized practices
[13:13] How transparent leadership affects practice value during a sale
[16:49] Why younger physician engagement is critical in transactions

In this episode…

What drives success in physician practice transactions? Is it the financial endgame, or do the underlying physician dynamics facilitate a smooth merger or acquisition? In the bustling landscape of healthcare megamarkets, physicians often find themselves at strategic crossroads, so having a clear game plan is pivotal.

Before engaging in a practice transaction, physician entrepreneurs must consider a few crucial factors. Younger physicians can accelerate the value of a practice post-transaction. By deferring to the needs of these future leaders, physician entrepreneurs can engineer a more sustainable and prosperous healthcare business. Additionally, an M&A may appear as a one-size-fits-all solution, but the nuances of strategic growth, culture integrations, and transaction intent can make or break a deal. From recognizing the necessity of physician alignment and transparency to understanding the various pathways a practice can take, organizations can effectively navigate the complexities of healthcare transactions.

In this Transaction Healthcare episode, Zak Eisenberg speaks with his panelists about strategies for physician practice M&As. They discuss the importance of delicate conversations, the art of transparency, and the power of shared goals in the landscape of healthcare transactions.

Resources mentioned in this episode:

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 as a podcast focused on addressing questions and concerns at the intersection of healthcare transactions and business. This is a special episode from a webinar we delivered. It was so interesting that we wanted to share this part with you on the podcast. It’s brought to you by Merritt Healthcare Advisors, were a healthcare focused investment bank. We don’t work on anything else, mostly with provider businesses. And usually we’re working with physician entrepreneurs, helping them to raise capital or sell their business or sometimes helping them also to buy other practices or invest in other types of ancillary service lines. We continue our conversation now with Barry Tanner, CEO of integrated oncology network Bede Broom, Managing Director at assured health care partners, Geoff Cockrell, a partner at McGuireWoods, and co chair of the firm’s private equity group, and John Nantz, founding partner of redwood advisors.

John Nantz 1:18

We’re gonna move on to the next topic, I want to, if you don’t mind, I want to double click on one thing, Barry, you said, because I know in the conversations I have with lots of physicians, this really comes up but I and I always love Franklin Covey talks about this in his book, you know, begin with the end in mind. That is just that is golden advice. And I really think that figuring that out first, particularly, we have more than one person involved. To be it’s point getting alignment around the group, we’ve seen some examples. And actually, I’ve got folks on the line who I’ve personally heard their complaints around this issue of we have doctors in the group and we’re not aligned, some of us really want to grow others, other us want to stay the same, we want to stay independent. So figuring out what you want, what success looks like, and then making sure you’re aligned with your group, if you have that with a people involved, that is going to move mountains for you. And I think to Barry’s point and beats point, simplifying it a bit, you know, your options are you can stay independent, get acquired by a hospital get acquired by a private equity group. And then in that capacity, you can either be acquired with some scale and sort of bolt what they call a bolt on or add on acquisition or you can be a platform. And those are those are the paths that you can go down. And the way that I would say I think the imperatives here are across all three of them, you got to have a quality in the new era we’re moving into there’s more metrics on outcomes is more metrics on cost. I know I’ve been looking at this a lot myself recently. There’s a lot of transparency now about this. So you really want to be focused on clinical outcomes. Regardless, that’s kind of table stakes. If you want to go to you’ll be sold to a hospital or private equity group is an add on or bolt on or integration with them. It’s about scale, fundamentally, like your economics improve as you as you have more scale 15 doctors is going to get a better valuation and five is going to be a better better valuation and to all else equal, it’s sort of a monotonic increase. And so you kind of want to say to Barry’s point, if you just want to be added on to another group, hey, can you get some other groups to pull together to have some some heft in the negotiations? The most complex and what’s interesting is if you want to be a platform, meaning you want someone like an EA to say, hey, we want to enter this specialty area, and we want you to be the kernel of our effort, right? We’re gonna build around you. So if you want to do that, you’re really signing up for something, it’s probably highest risk, highest reward, highest effort, but potentially the most meaningful because really interesting. But to Barry’s point, you need to be thinking in a different level. To do that you need capabilities, you typically need to bring on more staff, you need to have more technical capability. Typically, you have to have that full suite of capabilities so that people can someone like a bead can say, Okay, if we can take you tweak it a bit, make it even better. And then we can scale you and you can kind of become like the leader, one of the leaders in your space. So if you have more questions that you can come, we can talk more but yeah, Zak. Yeah,

Zak Eisenberg 4:17

this is actually something you and I chatted about a few weeks ago. And I think it’s such an important point. You know, the my team always says, and I think it’s really apt. It is that you know, a transaction or a capital provider, like beats firm, private equity or selling to a hospital and monetizing your business is not a strategy. It’s a financial solution. And a financial solution is a way to achieve a strategy, but you can achieve that strategy. In other ways you can raise debt, you can pause and grow organically. Many of Our clients will work with for years who eventually become a platform size. And they do it. They do it independently, but they’re implementing maybe some other type of financial solution that doesn’t include selling today. So it’s one of the first things we always discuss with, with clients. And it’s one of the things I think about because they also said in beads position at one point, why are you selling? The reason for selling is very important. And the reason of going through a transaction or capital event is very important. Do you have a strategy in mind? Or is it a monetization? Is it more like your retirement plan, and, you know, five years from now you’re going to retire. And that’s, that’s all well and good. That’s part of the natural evolution of physician practices. But it’s something important to ask yourself is, you know, I think especially to beats boy, hedge funds, and private equity and venture capital, kind of all get lumped into this private equity bucket. And it’s a real buzzword right now, with physicians, it’s not a strategy. And not all private equity firms are created equal. Not everyone’s going to be like being an MD, PhD, the news about medicine, some of them are just family offices where they made money. And this is not a knock against them. But they made money and you know, hotels or something else, and they’re diversifying their investments. Capital is not created equal. It does depend what you’re using it for, and what kind of partner you’re trying to bring to the table, which I think is, is often even more important than the money that they’re praying. So just keep that in mind, as you’re thinking through strategies, I’d say, one of the options that wasn’t talked about is that if you do want to continue growing, there is the option of waiting and investing in a different way, you can go to your local bank and secure debt, you can grow organically, or John brought up another option of banding together with other local practices and doing the hard work of actually integrating. And that is not easy. That takes years. And it takes work from people like John who can help you navigate that, and people like Jeff, who can help structure that. But that is hard work that takes years to do. Oftentimes, you need some capital to grease the wheels a little bit to make people want to do that, which I think is where folks like BT come in. But you don’t have to, you don’t have to you can you can do it on your own. We’ve certainly seen that with with several clients, and then eventually you can go out and monetize what you’ve built. So just bear that in mind, too. Right? Well,

John Nantz 7:48

that’s a good transition I want maybe we get a few minutes as last topic, I think it’s the most concrete so we can we don’t necessarily speak as much about it. And then I would just say I know people have been raising their hands, etc. The way we have this this setup, if you have a question, if you can type it into the we have a q&a box, and so you should be able to be able to type your questions in. I know, Marty, it looks like wrote in a question there. So if you have anything, because I saw some hands being raised, I’m guessing people have questions, type into the q&a, and then we can direct that to the panelists. So if you have a specific question, or if you want to ask us a personal question, just let us know. And we will direct it to the right person. But let’s transition to topic three. Which is a great segue, Zak, which is basically preparing for m&a and practice integration. As a physician on practice. And Zak, you were literally just commenting on that. I know, Barry has some perspective on this, Zach, if you want to facilitate and I know Barry’s got some thoughts for us.

Zak Eisenberg 8:48

Yeah, I know that as well. I actually wanted to start with you on this one, John, because I know you, your organization has been getting more and more involved with this type of work recently. You know, not not necessarily from a financial perspective, but really from an operational excellence perspective and building out some of that middle management, which is often so, so lacking in smaller and medium size practices. Maybe maybe you can just comment, comment on Yeah,

John Nantz 9:20

sure. Happy to comment on it. What I would just say here is, and we’ve been involved in some situations, we’ve also heard about a lot of situations and I think it’s actually the soft stuff that I think really makes this stuff super challenging. The hard things are more tangible, they’re tractable, right? So like systems, getting everyone on the same billing codes, negotiations, like if let’s assume we’ve got more than one group coming together. Those are solvable problems. They’re hard problems, but they’re solvable. The the simple, but vexing problems are I think the ones you really want to be careful about. So I think the number one thing that we See blow these things up is if you have multiple groups, you have got to have significant alignments about what we were just talking about. If you have a small group of physicians, you’ve worked together for a few years, and you have some misalignment, right, you might be able to figure that out as you go. But if I have five or six doctors here, and six or seven doctors there, and one or two of the doctors there, and we’re all talking about coming together to form a group, and one wants to stay independent forever, and one wants to is like, hey, I want to transaction with a private equity group, and one wants to go to the local hospital. And by the way, we’ve seen situations where people get pretty far along the path. It’s kind of like getting married and not asking if you want kids. Right, you can do it. But I wouldn’t recommend it. Right? So you want to have that conversation before you get married? Right, ideally. So very similarly, we we think that is so critical physician alignment can solve lots and lots of problems. And misalignment can make very easy situations. Terrible, right? So I would really say slow down, when you’re thinking about this go slow down. And because it’s everyone wants to get everyone gets excited, right? It’s like, oh, that’s gonna be really cool, we get to work together, we’re gonna get a better evaluation, etcetera, etcetera, I get the enthusiasm. But I would just say check, you have the same objectives? Do you have the same values, right to people? Are they approaching clinical care, you can even have two groups of different who have good quality care, but they do it different ways, right? One might be slower than a lot of bedside manner. Another might be like, Hey, we’re like an efficiency machine, we were a Medicaid focus group, we got to be super efficient, that’s typically not going to work. So you want to have alignment on objectives, alignment on values, alignment, and you’re kind of philosophy of care. If you have that, then you can really solve a lot of the challenges. And it’s a long list of things to your point, Zak, to actually pull it off, right? And if you actually wanna start going through some of the integration process, and there’s different levels, you can get to you don’t have to fully integrate, right? There’s like accounting and tax integration, there’s brand integration, there’s EMR integration, you don’t actually have to do all of that. It kind of depends on what your objective is. But what I would just say is that stuff actually pretty solvable if you have enough time. But this the soft stuff is really what’s really what’s gonna blow it up. So yeah, that’s what we

Zak Eisenberg 12:23

Yeah. John. John, thank you. Thank you for jumping into that. I, I, I love that you touched on the soft items, because we see we see this all the time as well. And I’m sure a beat and Barry who and Jeff, who are all doing lots of transactions. You gotta see this all the time to just jumping over to Barry on this, you know, aside from alignment, because I imagine that you, you agree with John? And if you don’t, that would be interesting, as well. But what are some of the the other you know, I’d say critical areas for you as you’re you’re really talking to new physician groups that you want to partner with, at integrating technology and how you’ve thought about this throughout your, your career?

Barry Tanner 13:13

Well, I think probably where I spend the most time, there’s two areas that I’ve seen be extremely problematic. One is, I think it’s sort of back to the same thing, it’s why do you want to do this transaction? What do you what do you hope to achieve is, is this simply a matter of monetizing a small portion of your practice value, so that you can have a partner in growth? Or is it one component of an exit strategy. And I think those are very different things. And what I’m looking for is practices that maybe have some combination of younger doctors, older doctors, it’s especially important to me if the older doctors who are close to retirement, but involved in this m&a transaction will actually step up and more or less defer to the younger partners. That’s like, you know, I’m, I’m lucky, I have a shorter timeframe here. You’re going to be around for another 20 years, I want to make sure this works for you. Because you know, the future of the practice is what we’re trying to, is what we’re trying to build on here. The one area that I see more and more and maybe it’s just me being, I don’t know if you see it or not, but I’ve come across a practice of, let’s say, five physicians, with maybe one owner and four employed physicians, and that practice wants to sell and, you know, the one who is the owner, of course, wants to go through the negotiation 90% of the way before coming back and letting the employed physicians know what’s really going on. And of course, So what’s what’s been forgotten here is, first of all the concept of transparency. But second of all, the value of this practice is probably more dependent on the four non owner physicians than it is on the one owner physician. And the value proposition is such that if the one owner physician is extracting all value, the odds are this thing is going to blow up. It’s just a very delicate dance to work with a practice that has that kind of a structure lacks transparency, and maybe even lacks direction and why we’re doing this to begin with. So a lot of the time, I think, when I’m introduced to a practice that wants to do something is really sort of back to what John was saying, trying to understand what’s going on here. Who’s involved with this? Who’s in favor? Who’s not in favor? Is there one leader out of five? Or are there multiple leaders out of five? And is there any reasonably clear shared vision of what we want to accomplish, and if they etablished is an exit, and probably not as interested? If what if it falls into the category of if we only had some rocket fuel, we could literally double or triple the size of this practice, we have a lot to offer, we can, we can extend our reach and offer care to a broader population, we can invest in technology, and really improve the quality and efficiency of care if if you’re hearing that kind of a story. That’s a very easy story for me to get behind. So those that’s kind of what I look for, where I spend probably a lot of my own personal time.

Bede Broome 16:49

Yeah, good barrier. Yeah, I couldn’t be more aligned with you on so many of his points, both the unfortunate stories of sort of a single physician owner and multiple, multiple physician employees. Now, I sort of as a side note, very often in those cases, we need to redo the comp and ownership plan post transaction, so that those employee physician feel like well, not just feel like so that they have some ownership stake to align their incentives with the with the new platform, but completely agree it is these softer elements, that that really are the most complicated part of any transaction, and they can come out in the beginning, they can come out in the middle, they can come out on closing day when one physician decides I’m going to spend, you know, 10 hours reading 200 pages of documents and then it’s like, but I object to this one clause here, you know, without having strong alignment with the group or you know, there can be problems at any stage in the process.

Zak Eisenberg 18:10

So, such important points and I wholly agree it is nearly always the software issues which can can lead to misalignment between buyer and seller in these processes. And that wraps up another episode of Transaction Healthcare. Hit the subscribe button to get notified when we release new conversations. And if you’re someone interested in learning more about these topics, visit us and merrittadvisory.com or send us an email at contactus@merrittadvisory.com

Tags: ASC, Merritt Healthcare Advisors, Transaction Healthcare, Zak Eisenberg