5 Keys to Choosing a Private Equity Group

For health care business owners searching for a sucession plan, including the sale of their business, there’s an alternative financial technique known as a private equity recapitalization (recap), in which health care business owners can sell a portion of their business to private equity group (PEG) partners and still have the opportunity for growth.    

This article will help you better understand how to partner with a PEG. For more on the basics of how recaps work, click here.

Selecting the Right PEG

If your health care business possesses the qualities that PEGs are looking for, you will likely be in a position to consider multiple PEGs as potential partners. How do you help narrow down your choices? Take the following steps:

1. Understand the different kinds of PEGs.

There are a variety of PEG models—from traditional private equity to the fundless sponsor to the search fund to the family office—and one may be a better fit for your business than others. PEGs differ in many ways. One of the most significant concerns is how they approach operating the business.

The traditional PEG, for example, brings committed capital and then expects to work with an operator at the business following the recap. On the other hand, a search fund, which is usually led by someone without extensive experience who is financially backed by several private equity firms, will often expect to run and operate the business after completing the recap.

In addition to taking different approaches to business operations, PEGs also approach hold times differently. Whereas a traditional PEG may hold a company for five to seven years, a family office can hold a company for 20 to 30 years. Understanding the hold times and their dynamics will help you determine the right PEG for your business.

2. Review their history.

Ensure the PEGs you are considering have a good track record of closing deals and completing recaps successfully. You should also try to determine if they have the ability to raise the capital to fund the recap as well as additional capital for future acquisitions.

Also look for health care investment experience. For owners of homecare businesses, it’s worthwhile to dig a little deeper to see if the PEGs have experience investing in the sector. That’s a plus. With that said, it’s best not to rule out any PEGs just because they lack such experience. A PEG with health care experience in an adjacent sector can still deliver benefits.

3. Check their portfolio.

You want to see other health care companies in their portfolio. One of the most significant reasons is to check for crossover opportunities. Oftentimes, you can find synergies between portfolio companies. Consider this: a company that makes peanut butter and a company that makes jelly or chocolate. The companies can succeed on their own, but bring them together and you have businesses with the ability to grow to new levels together.

4. Get to know the company and its leadership.

You want to try to determine what the PEGs would add to your business. How can—and hopefully will—they help you following the recap? This may require some digging, but if you put in the work, you’ll hopefully be able to paint a clearer picture of how your business should change (preferably for the better) after the recap.

Consider that most health care business entrepreneurs are operators, clinicians or both. A skill set they typically lack is knowledge and experience about the financial, accounting and/or systems and processes side (i.e., the back end) of the business. Entrepreneurs are often more interested in and focused on running the business, which means taking care of patients, completing sales or tackling other tasks that are essential to generating revenue. Many of the professionals working for PEGs have strong backgrounds in understanding systems and processes—that is, the boring but essential behind-the-scenes work. That can be incredibly valuable to a health care business for achieving growth, improving performance and streamlining efficiencies.

5. Speak with portfolio companies.

You can also learn a lot by speaking with representatives from one or more of the health care companies in their portfolios. How was the recap process? What has happened since completing the recap? Where are they in the lifecycle as a portfolio company? Asking these and other questions will help better prepare you for what will happen once you complete the recap.

Desirable Qualities

The private equity market is now providing better opportunities for most entrepreneurs. Do you have what PEGs are looking for? Here are a few essential qualities PEGs look for when considering whether to pursue a recap:

• A strong management team in place: PEGs often place as much value on your team’s potential for success as they do on financial performance to date.
• A clear path to success: PEGs may be less knowledgeable about your market dynamics than a strategic buyer, but your ability to project an understandable picture of the future (as shown in your business plan) increases your credibility and ultimately your value.
• Organic scalability: Enhance your options and opportunities to grow even though you may not choose to act aggressively on them for good reasons, such as limited cash flow.
• Opportunities to grow through acquisition: Identify what may be out there for acquisitions, either horizontal (companies with services or products like yours) or vertical (complementary companies). Again, you may not choose to act on these possibilities, but knowing about them is part of presenting a path
• to success.
• The ability to articulate your strengths and weaknesses: Every business has competitive advantages and disadvantages. Being honest about them helps a PEG assess the opportunity. Keep in mind that PEGs often have many resources they can access to compensate for weaknesses.
• A willingness to put money where your mouth is: Keeping a strong equity stake in the new venture not only shows good faith but also demonstrates that you are willing to commit your money to the future earnings of the company.

Many Options

No matter the challenges presented in today’s business climate, there are many options open to you. Every situation is different.

A PEG partner can be a great solution for a business in which the owner is optimistic about the future but still wants to diversify his or her personal net worth.
But going down this road can be as complicated as—if not more complicated than—an outright sale, and comes with its own set of risks. By knowing your options, you can put together the best possible deal when the time comes.