Why would anyone want to buy out a practice? Well, like all things economic, it’s simple: To make money. And that is what private equity companies do. They take over companies so the owners can collect a share of the profits. And who exactly are the private equity owners? These folks are private groups of investors that pool their money together to purchase companies. But, unlike publicly traded companies, the government does not regulate these companies as strictly.
So, why is this important for the typical radiologist to understand? Within the past few years, consolidation has hit the radiology industry. Some of this consolidation has resulted from private equity companies buying out radiology practices throughout the United States. And, who knows? Private equity companies may buy out your current or future practice. So, here is a summary of what you can expect, who wins, and who loses.
What Happens To The Radiologists After A Buyout?
The radiologist’s destiny is the million-dollar question. (Literally and figuratively!) Soon after a buyout, you may notice that the radiology employees lose some of their ability to advocate for patients (1). The private practice partner radiologists no longer hold the purse strings to enact change. So, all radiology employees of the new private equity entity must follow the rules of the new owner/leader.
Next, contract negotiations ensue. Initially, former partners and employees will tend to get good benefits, similar to the old practice. Over time, however, the stakes can change dramatically. In lean times, salary cuts and layoffs can begin rapidly. Since former partners no longer control the salaries, these folks may have just to take what they get. During more flush times, the former partners no longer reap the potential outsized rewards.
Further, in the future, you may notice that capital expenditures decrease to save profits for the private equity owners. That new CT scanner will be challenging to justify in the budget unless it has the potential to bring in new revenues. Private equity-owned practices can no longer buy equipment with the motivation of improving care alone.
The most apparent winners are the older radiologists in the practice who will soon retire anyway. These owners can now collect on a payday that may be as high as 10-12 times their yearly salary. (2) This added benefit, in addition to their savings from years of practice, can allow an early retirement or a more leisurely lifestyle while working fewer days per week.
Depending on the terms of the agreement, the private equity firm can also gain much from buying a practice. The private equity can skim the additional profits previously from its former partners. However, this is all variable and depends on the partnership’s deal.
Occasionally, inefficient practices may also win in these arrangements. For instance, sometimes practices spend too much or cannot take advantage of economies of scale to increase efficiencies. So, it may take an outside entity to improve profitability. Of course, this assumes that the private equity entity knows how to run a practice better than the original employer and delivers some of the added profits to the radiologists. (Many times, that is not true!)
Unfortunately, the biggest losers are the former non-partner stakeholders. These include full-time employees and employees on a partnership track. A buyout can derail the best-laid plans for the future. No longer can partnership track radiologists collect upon the sweat equity they have already committed to their years of practice. Likewise, former employees can no longer count on a similar job structure and contract.
The former younger partners may also lose a bit in the deal. No longer can they rely on many years of good salary ahead. The private equity firm will determine its future. On the other hand, at least these former partners will get a portion of a nest egg to add to their future retirement savings in the buyout.
Unlike those practices that stand to gain from a private equity arrangement, other private equity practices may liquidate the assets of an imaging business to the bare bone and improve profitability on paper so that the private equity firm can eventually resell the company to another entity. These sorts of practices can destroy a radiology imaging center. Good employees leave. Morale declines. And ultimately, the radiology practice can cease to exist. It can certainly happen.
How Much Can You Stand To Gain Or Lose?
So, if you are on the winning side of the equation and make 400,000 dollars per year, you may collect over 4-5 million dollars depending on who formerly owned the equipment and resources. That number, combined with continued employment, may satisfy those winners in the deal.
In the losing lane, non-partners no longer have the chance to build equity in practice. If you think about it, you have already committed three years to a partnership track, and the business has not already made you a partner; you have already lost those dollars of sweat equity. So, if your salary was 300,000 and the practice partners made 500,000, you have lost out on the difference of 200,000 dollars per year for three years or 600,000 dollars. You have also missed out on the ability to collect the 500,000 dollars in perpetuity once you have become a partner. Now, you are subject to the whims of the private equity firm.
The Basics Of Private Equity Buyouts
Describing a private equity buyout is relatively simple. It merely follows the laws of economics. You win if you are on the right side of the equation (the senior and private equity partners). On the other hand, if the equation does not favor you (most employees and some junior partners), you lose. So, if you are fortunate enough to choose among multiple deals, ensure you are doing what is best for your practice. A private equity deal can enhance or destroy your radiologists’ livelihoods!
I would love to hear your comments. What do you think about private equity buyouts in the field of radiology? Any experiences with private equity firms?