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Your next partner: private equity?

January 29, 2013
by Dennis Grantham, Editor-in-Chief
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Part 2: What is your business worth to private equity partner?
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In Part 1 of the story, Four reasons to consider private equity, Hunter Peterson, a partner at Trinity Hunt Partners (Dallas, Texas) outlined some of the reasons why a behavioral health entrepreneur might consider selling, or perhaps “recapitalizing” a successful mental health or addiction treatment business with a private equity partner.  Here, in Part 2, Peterson talks about how to move through the sales process, from the pitch, to the negotiation, to the money.  

The pitch

Business owners get a lot of phone calls, including some from would-be investors, says Peterson. He advises that owners first ascertain whether a caller is an actual investor—or someone who hopes to represent actual investors. To protect your interests, determine who the caller is and whom the caller represents. “Unless the caller is an actual buyer, someone backed by a dedicated equity fund or a high net worth,” Hunter suggests that you pass on the call. Many calls, he says, are initiated by would-be middlemen, such as investment bankers or brokers, who promise to recruit buyers in exchange for a fee. But there's a big difference between a real buyer with real capital and the promise of finding one, he warns. “No one can create something [capital] from nothing.”

Another potential negative sign is an early plunge into discussions of valuation. Peterson warns against sharing any significant financial details until a potential investor’s interest is strong enough to warrant a non-disclosure agreement between both parties.

The dance

Figure 1:  Steps in the Dance 

A relationship with a private equity partner typically develops over time, through a sequence of steps:

·         Initial meeting (in person or by phone)

·         Non-disclosure agreement

·         Detailed review of financials

·         Multi-year head count and census

·         Multi-year data - largest payer sources

·         Review IT platform and staff IT capabilities

·         Review organization chart

·         Final onsite visit

·         Complete valuation and private equity offer

·         Offer close, typically within 90 days

If you’ve heard an opening pitch that you like from a credible private equity investor, the next step involves a more detailed visit, by phone or onsite.  Generally such visits are preceeded by a non-disclosure agreement, which allows both sides to discover and disclose material facts and findings about the business without fear of disclosure to those outside the agreement.

Only then do serious financial discussions begin, which always include detailed financial, staff, facility, and operational reviews.  “Be prepared to discuss all of your financials, and to review changes in head count, organizational chart, patient census, and income and expenses for multiple recent years,” Peterson explains. "A buyer will also want to know who your biggest payers are today and how they’ve changed over several years.”

He adds that the topic of systems—notably IT platforms—will also arise, since these—and the skill your administrators and staff have in using them—will say a lot about your organization’s ability to hold its own in an increasingly complex marketplace.  

Any thorough review (see Figure 1) should end with a candid exchange about what you—and your potential investor—feel is working or not working well within the business and what future steps might drive growth.  Whether or not an offer materializes, the exchange of views with a serious potential investor is bound to be of value to any entrepreneur.

The money

Now for the good stuff—the money. Peterson reports that the purchase price you might expect to receive for a healthy business is based on “multiples” of annual operating income. Valuation of your business typically takes place following a detailed, onsite visit and is generally the last step before a private equity investor makes an offer.

The valuation of your business typically depends on the age, health, and assets of your business, but Peterson says there are there are some valuation “rules of thumb” based on the overall size of a behavioral health business as measured in pretax, or "operating" income (see Figure 2):  

Figure 2:  Valuing your business

Operating (pretax) income


Purchase multiple (x times annual pretax income)