Mergers and Acquisitions in Indian Ophthalmology- A Happy Marriage or a Painful Divorce?
A 70-Year-old Ophthalmologist who was practicing for 40 years,
did not think of any exit options, he developed cancer and passed away within 6
months. He did not have Children who were Ophthalmologists or nor planned his
exit before or valued his practice. So,
after his passing away, what the family could get out of a
thriving practice is just value of depreciated equipment’s which they sold after
much difficulty. We should understand that we are all mortal and our time in
the earth is limited, so its important to plan our exit and understand what
value our practice will get once we hit 60 + Years of Age.
Though consolidation in healthcare practices have been very
common in developed economies. In India the concept of Mergers and Acquisitions
is relatively new. Heavily Private Equity Funded Corporate Eye Care chains aim
to acquire more and more practices to grow.
In Indian Scenario a very small number of Practices got
acquired – but unfortunately in the last decade most of them have not been
Happy Marriages and resulted in a Painful Divorce.
Solo Private Practitioners feel the pressure today due to
increased competition from the Corporate Eye Hospitals, Charitable
Organizations and Government Hospitals. Also running a Private Practice is
becoming more and more complicated with regulatory, manpower issues and
increasing patient demands. Many times, solo practitioners wonder why they have
started a practice at all.
The idea of merging with a corporate player comes to our mind
occasionally. Let us discuss regarding the pros and cons of Merging or Getting
acquired by a Larger Practice and what are the steps to be taken during this
process. Please note that the following discussions are based on my opinion and
interactions with finance professionals and Hospital owners. There may be differences
in the assumptions.
Which Practice is
ideal to get Acquired?
Size Matters:
Out of around 6000+ Private Ophthalmology Practices in
India, only a very small percentage reach a good revenue scale. A larger
corporate always wants to acquire a practice which has a decent revenue scale
for them to justify the time spent in the deal. So, in terms of revenue a
practice which has more than 3 Crores Annual Revenue been considered optimal
for an Acquisition.
Profit is paramount:
Profit making practices are sought after for acquisition.
Earnings before Interest, Depreciation, Taxes and Amortization is an important
metric that is calculated on arriving at a valuation for acquisition. Most
private practices in India are bootstrapped and have good EBIDTA margins. 40%-50%
EBIDTA is very common in solo practitioner Eye Hospitals. The company which
acquires a practice wants to earn back the money invested in the acquisition in
4-5 years, hence profits is one of the most important parameters for a
successful acquisition.
Team Size:
A good team is valued more. A good team of Ophthalmologists
and support staff will fetch more value than a single practitioner alone with
very small team. Corporates like a good
team since they want to save the time spent on team building. Moreover, the
same team can be used for expansion purposes.
Regulatory Compliances and Accounting Practices:
Its Important to have all regulatory compliances in place
and follow good accounting practices. If you want to get good valuation, make
sure that there are no Compliance issues and maintain clean books of accounts,
Fixed Asset Details etc. Most practices don’t get acquired since the revenue
they quote is not justified by their records (Income Tax Filings etc.)
Private Limited Companies are easier to acquire – than Partnerships
etc.
Loans and Litigations:
If the practice has large Loans are having involved in
Litigations, medico legal cases, etc.- the valuation will decrease based on
that.
Patient Data Maintenance and Others:
Remember- Data is everything. Practices which have accurate
data of patients including total number of patients seen since inception, the
contact details – and accessibility of the data through digital mode (Good EMR)
etc. are valued more. Even having a Logo and good website matters to the
acquirer.
The Keyman:
The owner of the practice is the face of the organization
and his capability and potential fetches the value. Since the practice is build
based on the reputation of the owner, his commitment after the acquisition and
for how long he will stay with the organization, also makes a lot of impact in
the acquisition process and in the valuation.
When should you
not think of getting Acquired?
Children are Ophthalmologists:
The most common exit Option for Ophthalmology Practices in
India is Children taking over the practice. Hence if your children are
Ophthalmologists and willing to take care of your practice, then that will be a
best option for you. But I have been observing two common trends these days 1) Children
of Doctors, not interested to take up Medicine as a career 2) Even of Children
become Doctors, they do not want to take up Ophthalmology or settle in smaller
towns. Hence these two factors play a major role in deciding your exit option.
Personality of the Practice Owner:
If you have a personality of not being able to work with a
corporate or a larger organization, then it would be a difficult exercise to
consider an acquisition. Since once you get acquired, the acquirer will want you
to stay with them at least for 3-5 years to transition the practice. Many acquisition
deals failed due to this.
The M and A Process:
Please note the M and A process is going to be grueling and
time consuming and will involve multiple people and you must be prepared for
this.
1)
The process starts with Discussions between both
parties and Internal discussions within both organizations if they would like
to get into the process.
2)
Hiring of advisors, auditors, and legal experts
by both organizations.
3)
Signing of NDA.
4)
Due Diligence and Practice Valuations.
5)
Agreement on pricing and signing of a Letter of
Intent.
6)
Share Purchase agreements are drafted, and
agreements are signed.
7)
Financial Transactions are completed.
8)
The Deal is closed.
Valuation:
There is no thumb rule for the valuation, they say valuation
is what the Buyer wishes to buy and what the seller wishes to sell for, there
is no fixed amount.
·
Generally, Eye Hospitals get a EBIDTA Multiple
of 5-15 times for Good Will and Business.
·
Keyman Ophthalmologist gets a market salary for
the committed period the buyer wants him to work for.
·
If building is owned- a market rental shall be
worked on.
·
Equipment’s get a depreciated value.
The payment of the arrived valuation may be done in a
staggered manner- 50% Upfront and balance in 3 Installments provided revenue milestones
are reached and so on. There can be other models of payment also 100 % Upfront,
75% Upfront and so on. This purely depends on the buyer and seller.
Seller will have to sign a Non-Compete Agreement for X Number
of Years
Pros of Merging with a Larger Practice
·
Smaller practice gets an exit option and do not
have to close once the owner becomes old or does not have someone to take care
of practice after him, besides having a good financial incentive on merging.
·
The Ophthalmologist can focus more on clinical
care while the managerial aspects are taken care by the Acquirer.
·
Access to wider variety of specialists provides
enhanced clinical care with a small practice merge with a larger organization.
·
The smaller practice has access to a wider
variety of advanced technologies available in a larger organization (Example
Femto Lasik, Femto Cataract etc.)
·
Economies of Scale- Smaller Practice gets access
to Purchase, Manpower etc. provided by the acquirer.
·
Branding of the Larger organization and
marketing support shall provide larger number of patient base.
·
Increased Compliances and Less Regulatory
Headaches.
Cons of Merging with a Larger Practice
·
Clash of Culture and Core Values- Many
Smaller practices feel there is a culture clash and clash on core values
between the two organizations.
·
Sometimes a Merger may create negative effect on
patients, and patients feel that they have lost the personal touch which was
earlier available with a smaller practice.
·
The future of the smaller practice depends on
the future of the larger practice – so both are tied up if larger entity does
well- the smaller one also and can happen vice versa also.
Are there any Alternatives?
Yes, there are other alternatives for smaller practices to
grow- A common Management platform is something which would work well while
smaller practices also retain their freedom. Ophthall Practice Development is
one such platform wherein smaller practices can join as members and then access
support of the platform to
·
Engage common Marketing Agencies and share costs
of Marketing.
·
Engage Manpower in each geography for Insurance Empanelment
and Approvals.
·
Start Common Diagnostic Centers in each
geography.
·
Create Common Knowledge database to patients in
terms of websites etc.
·
Create Common Standard Operating Protocols,
·
Share Existing Resources among Members (OT, Equipment’s
etc.)
·
Purchase Equipment’s/ Consumables in bulk and
reduce costs of purchases.
·
Create a common fund which can inturn fund
smaller practices.
·
Create a Larger fund to Acquire Practices which
want to exit. Acquisition by Doctors shall be better when compared to acquisition
by a business entity
As a first step request you to become a Life member of
Ophthall Practice Development Club , you will also get a free registration to
the Ophthall Conference in Chennai in July and – we can meet network and discuss
more on these ideas
Link to Register https://www.ophthall.in/ophthall-practice-development
Please also share your opinions and feedback to me in my
personal whats app +919840324333
