Urgent message: Urgent care’s success in delivering a retail healthcare experience has attracted the attention of private equity and hospital investors; understanding the deal timeline is an essential first step for an urgent care operator interested in buying or selling a business.
Alan A. Ayers, MBA, MAcc is Vice President of Strategic Initiatives for Practice Velocity, LLC and Practice Management Editor of The Journal of Urgent Care Medicine.
Urgent care centers are popular among investors because they provide consumers with on-demand, extended hours medical care with neighborhood convenience and a retail experience. In fact, this investment trend has been noticed by Wall Street for several years.1
Earlier this year, publicly traded Hospital Corporation of America (HCA) announced plans for a giant expansion of urgent care centers in an effort to build out patient access points in its 14 major markets.2 The company’s president said it will use a portion of its record $2.9 billion capital budget in 2017 to increase urgent care locations from 72 today to 120 by year-end.3 The company is the nation’s largest investor-owned hospital company. It owns nearly 170 hospitals, and its 2016 revenue was roughly $41.5 billion.
HCA is not alone: since 2008, private equity investors have put $2.3 billion into urgent care clinics.4 A private equity firm is an investment management company that provides financial support for a business. This definitely includes urgent care facilities.5
This article examines private equity’s impact on the urgent care industry, details how private equity firms operate, and outlines the steps involved with purchasing or investing in an urgent care center.
The Private Equity Business Model
The business model for a private equity urgent care business is simple: treat as many patients as quickly as possible—it’s a low-margin, high-volume proposition. Wall Street sees an opportunity here, and it’s that money that’s driving the growth. Experts say that continued urgent care acquisitions show that this growth is steady with predictable margins. Private investment groups from all sectors—private equity, angel investors, health insurers, and health systems are looking to invest.6
“We borrow a lot from the restaurant industry,” said Zach Wooldridge of Elm Creek Partners, a Dallas-based equity firm which in 2011 purchased a majority stake in Millennium Healthcare Management, an urgent care chain with locations in Louisiana and Mississippi. “We have to be good, fast and kind to be successful.”7
Private equity sponsors (also referred to as financial sponsors) want to acquire urgent care facilities that they can grow or improve (or both), with an end game of selling their investment or making a public offering. A common growth strategy for private equity sponsors is to acquire a platform company8 in a specific industry like urgent care and then add more companies to the platform through acquisition. The added companies can be competitors of the original platform company or other businesses connected to that service or product. However, these businesses are added with the intention of increasing the overall revenues and earnings of the platform investment.
The next critical component for a private equity target is EBITDA—earnings before interest, taxes, depreciation, and amortization. In general, private equity companies will acquire new companies through leveraged buyouts,9 which distinguishes financial sponsors from strategic buyers engaged in more traditional merger and acquisition transactions.10
Private equity investors seek target companies that can generate enough cash to service the debt that’s incurred to acquire them.11 In contrast, because strategic buyers frequently fund their acquisitions from cash on hand, they don’t need to incur debt and can complete transactions in a quicker timeframe. Further, unlike private equity investors, strategic buyers will look at businesses with negative EBITDA because they’re less concerned about debt service. As such, the prospects for acquisition targets is broader for strategic buyers.
PEGs Target a Specific Seller Type
Private equity investors seek a particular type of seller. Since they won’t run the target company’s day-to-day operations after closing, they look for sellers who are willing to continue to run the urgent care center. They prefer the target to have a founder or principal who will remain with the business and partner with the private equity sponsor to implement its strategy for growth and eventual exit.
The actual life cycle of a private equity fund can vary from one deal to the next, as different phases of the timeline may last longer than others. That said, let’s look at a general timeline for a private equity transaction which will be helpful to urgent care owners who are considering this option.12
There are actually two distinct timelines for private equity funds. First is the fundraising and closing timeline. This addresses securing the investors. The second is the fund term timeline, concerning investments.13
Due Diligence and Fundraising
Assuming that a target urgent care company has been selected, the first phase of a private equity purchase is due diligence, along with raising capital. The PEG will market the fund to potential investors to raise money for the acquisition. Depending on numerous factors, such as whether it’s an established private equity house and a strong economy, this phase can be completed rather quickly. Typically, this can take from 6 months to over a year. As part of this marketing, a PEG may do all of the following:
- Create and deliver a concept paper for approval and a detailed business plan
- Hire external consultants, such as accountants, attorneys, and industry insiders
- Establish a fund management company and hire an operations team
- Establish the investment vehicle
- Finalize the fee structure and other documentation
Once there is sufficient investor interest, the PEG will hold an initial closing for the fund. It will start its operations, with initial investors being admitted as partners in the fund.14
Another part of this initial fundraising is term negotiation, as investors will want to negotiate the fund documents. They will seek to modify partnership agreement. It’s not uncommon for an investor to demand a side letter stipulating specific terms.14
In the next year, additional investors may be sought and subsequent closings will occur. The fundraising period ends at final closing.
Making and Managing Investments
The fund will structure and make new investments over the next 4–6 years, which will include acquiring more urgent care centers. This may include growing a platform business in the urgent care industry and looking at investing into ancillary services. The fund manager is tasked with managing the progress of the investments. Liquidations and distributions may be made at this point from income-producing investments. Also, there can be additional calls on investor commitments.
Exiting Investments, Dissolution and Liquidation
This period also lasts about 4–6 years. At this point, the fund will exit investments by selling off the urgent care centers and distributing profits among the investors. Liquidation occurs through a series of transactions liquidations over the next several years, rather than a massive, one-time sale.
New investments are usually prohibited at this point, pursuant to the terms of the fund’s limited partnership agreement. Hence, the fund manager isn’t allowed to invest the fund into new companies.14
However, a limited partnership agreement may provide that the fund manager could extend the term of the fund for a limited period.14 These extensions may be an effort by the fund manager to obtain the best return on the fund’s investments. As a result, the process of divesting interests in private companies can take a long time. As you can see, there can be significant overlap in the phases of a private equity fund.
The fantastic growth of the urgent care model means that private equity firms are increasingly interested in urgent care centers as investments.5
This review of the private equity process will give you the background you need in the event that you are approached—or approach—a private equity fund to invest in your urgent care center.
- Barkholz D. Private equity firm Warburg Pincus buys majority of urgent-care chain CityMD. Modern Healthcare. April 18, 2017. Available at: http://www.modernhealthcare.com/article/20170418/NEWS/170419866.
- Barkholz D. HCA charging ahead with urgent-care centers and free-standing ER openings. Modern Healthcare. January 31, 2017. Available at: http://www.modernhealthcare.com/article/20170131/NEWS/170139986.
- Private equity stake in urgent care grows with CityMD acquisition. J Urgent Care Med. April 20, 2017. Available at: https://jucm.com/private-equity-stake-urgent-care-grows-citymd-acquisition/.
- Creswell J. Race is on to profit from rise of urgent care. New York Times. July 9, 2014. Available at: https://Www.Nytimes.Com/2014/07/10/Business/Race-Is-On-To-Profit-From-Rise-Of-Urgent-Care.Html.
- Dura C. All you need to know about private equity owned urgent care. Ortho Now. Available at: https://www.orthonowcare.com/private-equity-owned-urgent-care/.
- Japsen B. Investors taking note of urgent care center boom. Forbes. July 22, 2017. Available at: https://www.forbes.com/sites/brucejapsen/2015/07/22/urgent-care-centers-grow-with-unitedhealth-blue-cross-stakes/#6c0203194f8d.
- Private equity eyes returns in doc-in-the-box boom. Reuters. March 21, 2013. Available at: https://www.cnbc.com/id/100577293.
- Platform company. Divestopedia. Available at: https://www.divestopedia.com/definition/856/platform-company.
- A leverage buyout is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. Leveraged Buyout – LBO, Investopedia. Available at: http://www.investopedia.com/terms/l/leveragedbuyout.asp#ixzz4px8aQ6vb.
- 4 key differences between financial and strategic buyers. The National Center for the Middle Market. September 5, 2014. Available at: http://www.middlemarketcenter.org/expert-perspectives/4-key-differences-between-financial-and-strategic-buyers.
- Blomberg JA. Private equity transactions. Business Law Today. Available at: http://apps.americanbar.org/buslaw/blt/2008-01-02/blomberg.shtml.
- 4 Stages in the life of a private equity fund. The Private Equiteer. November 12, 2009. November 12, 2009. Available at: https://seekingalpha.com/article/172992-4-stages-in-the-life-of-a-private-equity-fund.
- Barber F, Goold M. The strategic secret of private equity. Harvard Business Review. September 2007. Available at: https://hbr.org/2007/09/the-strategic-secret-of-private-equity.
- Davie AJ. The life cycle of a private equity or venture capital fund. Strictly Business. June 29, 2017. Available at: https://www.strictlybusinesslawblog.com/2017/06/29/the-life-cycle-of-a-private-equity-or-venture-capital-fund/.