Choosing the Best Partner for Growth 

By Andrew Colbert

This coming year is anticipated to be a big year for consolidation in the radiology sector. Utilization is high and expected to continue growing, with U.S. Census data predicting that the over-65 population expected to increase 60 percent by 2030. However, radiology groups are faced with an uncertain environment ahead due to increased complexity of reimbursement, hospital consolidations and increased pressure to measure and demonstrate clinical quality and outcomes.  Many radiology groups currently lack the back-office capabilities, infrastructure and capital to meet these requirements on their own. As such, an increasing number are turning to partnerships to achieve growth. 

In the past year alone, several major deals have closed. In August 2016, Radiology Partners, the largest on-site physician-led radiology practice in the United States, announced its investment in Columbus Radiology, a leading subspecialty radiology group. In November 2016, Riverside Radiology announced its partnership with Excellere Partners, a Denver-based private equity firm. And in January 2017, MEDNAX, a national health solutions partner, announced its acquisition of Radiology Alliance the largest private practice radiology group in Tennessee.  

Radiology practices in the optimal position to consider partnerships are those that have demonstrated historical growth and still see more growth on the horizon. A common mistake many companies make is waiting too long. When it comes to partnerships, future growth potential is much more important than historical results. 

Before determining if a partnership is right for their practice, leaders must first determine their strategic plan and clarify their short- and long-term objectives. 

Strategy and Objectives
Constructing a three year (minimum) strategic plan that outlines financial projections is a critical first step for practices considering a partnership. Taking the time to develop a thoughtful strategic plan will help executives understand the risks and opportunities ahead for the practice in the current environment. 

Included in the strategic plan should be a model laying out all future revenue and expenses, including:

  • Potential revenue changes, including both positive drivers such as new clients or volume expansions and negative drivers such as client attrition, volume declines, bad debt increases or payor rate declines
  • Potential expense changes, including additional hires (both radiologists and management), IT, billing, operational cost increases, investment in new technology or data analytics tools to allow the company to demonstrate quality or required
  • infrastructure costs to transition to value-based reimbursement
  • Planned capital expenditures, including equipment purchases, investment in fixed assets or an outpatient imaging center strategy
  • Ownership changes, including new shareholder additions and associate promotions

    In addition to a strategic plan, shareholder objectives need to be confirmed and outlined in detail before considering any partnerships. Some key questions to help executives determine shareholder objectives include:
  • Does the company have an offensive or defensive strategy?
  • What are the biggest risks of status quo?
  • What is the company’s positioning relative to potential local and national competitive threats?
  • What is the desire for shareholder liquidity and wealth diversification?
  • Is there interest in future upside potential? 
  • How bullish does the company plan to be about continued practice growth?
  • How secure are the relationships with local hospitals?
  • What is the local hospital’s strategy related to outpatient imaging and is there proper alignment?
  • What do shareholders expect to get out of a partnership (i.e., capital, scale, differentiation, unique offering/expertise)?
  • How secure are the payor relationships?
  • Is the practice ready to compete in a risk based reimbursement environment?

Who to Consider
Once executives have created a strategic plan, outlined shareholder objectives and determined that a partnership would be advantageous, it is time to consider various partners. Typically, the decision comes down to a choice between partnering with an investor group or a larger corporation. Both options have unique benefits and disadvantages. 

Investor Group
Partnering with an investor group brings in executives with significant financial resources and business building experience to help a practice scale. A major benefit associated with partnering with an investor group is the increased capital and resources that will accelerate the company’s growth strategy. For instance, capital could be used to invest in new practice acquisitions or new technology to improve efficiency. In addition, investor groups may be able to help identify executives that will be helpful as the practice grows (i.e., CFO, head of sales, etc.).  Members of investor groups are practiced advisors and bring experience in guiding companies, as well as new strategic relationships to the partnership.  

Under the investor model, the practice will typically retain significant equity in the company going forward. This is advantageous for practices who are interested in future upside but obviously will impact the potential cash outlay at closing.  For example, the deal may result in 60 percent liquidity and 40 percent retained ownership in the practice. It is important to confirm alignment of cultural vision to make sure that the practice leadership and the investors are closely in sync going forward (i.e., M&A vs organic growth initiatives). 

Corporation 
Partnering with a larger corporation can be a great alternative option for facilitating growth since the new partner can typically provide support and resources to improve back office capabilities. The partnership would typically come in the form of an acquisition, which may mean more liquidity for existing partners. The tradeoff to this may be less upside in the business growth going forward. However, it may still be possible to negotiate a deal with upside in the form of profit sharing, revenue sharing or equity in the parent company. 

Often the acquiring firm brings significant relationships and experiences across the same or other physician specialties, which may allow for stronger market positioning and leverage from increased scale. 

How to choose the right partner
After determining the right category of partner (i.e., investor vs corporation), the next step is to evaluate which individual partner is best.  

The first, and arguably most important question to ask is: does this partner fit with the current practice culture? The upfront cash payment is important but it can’t be the sole driver in finding your mate.  At some point the initial payment will be forgotten and you need to be happy with your day-to-day job for many years ahead.  Some important questions to consider:

  • What is the company’s experience growing similar practices?
  • What type of relationships does the company have with hospitals, payors and other stakeholders that will help us continue to thrive?
  • Does the Company have investments in technology and operations that will bring more efficiency to our practice?
  • How will the equity be structured? (if investor partner)
  • What are the company’s commitments to clinical quality and patient care?
  • What steps will be taken to preserve physician culture and long-term employment?
  • What are the avenues for continued economic upside, especially if we can continue to grow?
  • Will this partner help us thrive in a risk based reimbursement environment?

Will our future be more secure together vs. as an independent practice?

Another key consideration is how your hospital clients will react to the potential future partner. Consider the types of questions these stakeholders will want answered and try to have all these answered before you choose your partners. Buyers and investors alike will want to speak with all major clients before closing to ensure the deal will not endanger those relationships. 

In addition to cultural fit, financial considerations are critical. For a deal to be right, there must be alignment on both valuation and structure. These are very complex transactions and the ultimate transaction will have hundreds of deal points that much be negotiated.  Some of the major elements, include:

  • What is the mix of cash up front vs. future upside?
  • Will the practice receive the benefit of new contracts and growth that has not been fully realized yet?
  • Will upside come in the form of equity, profit sharing, revenue sharing, etc.?
  • What liabilities will the practice need to cover at the closing?
  • What will shareholder physician compensation and benefits look like moving forward (i.e., term, ability to fire, benefits package, triggers for compensation reduction, etc.)?
  • What will be the definition, terms and geographic radius of non-compete provisions?
  • What will the go-forward structure for employed physicians and support staff be?
  • What will the go-forward structure for billing and support services be (i.e. who is taking the risk on billing issues going forward)?
  • How much autonomy will individual practices have to continue growing in the local market?
  • What is the go-forward governance model?
  • What is the certainty of closure of a transaction? Is there a financing contingency to the transaction? What is the proposed timeline?
  • What is the risk allocation between the buyer and seller for pre-closing liabilities?
  • How long is the expected exclusivity commitment? 

Finally, practice leaders need to consider their company goals to determine if a potential partner can help achieve those goals. Consider what a partner brings to the table beyond money and if these added benefits will assist the company in achieving the goals set forth in the strategic plan.  

Beginning the partnership process 
The first step to evaluating a partnership is engaging with an experienced set of advisors that includes an attorney, investment banker and tax accountant.  It is important to select an attorney and investment banker with deep transaction experience, specifically having closed multiple deals on behalf of radiology group clients. As the company’s partner throughout the process, the investment banker will help practice leaders understand their options, facilitate the preparation of marketing materials, solicit and negotiate indications of interest, and manage the due diligence process.  

The next step is to begin the process of organizing the corporate documents and building the marketing materials.  Key deliverables include a detailed projection model and a thoughtful presentation that coveys the key attributes and differentiators for the practice.  Once marketing materials are in good shape, the process of identifying a partner will begin. Typically, the investment banker will help identify potential partners and solicit proposal. This will be a key time to meet with each of the potential partners to understand their goals and objectives. The investment banker will help create a “competitive” dynamic to drive as much negotiating leverage as possible. As the list of potential partners begins to narrow, executives will work closely with the investment banker to negotiate deal terms and move toward selection of the preferred partner.

The partnership process is one full of complicated decisions and tradeoffs.  Practices will need to be able prioritize which issues are most important to them and recognize that they will need to make compromises in order to gain in other aspects of the transaction. 

Undertaking a partnership can seem like a daunting task, but by taking the process one step at a time and enlisting the help of an experienced investment banker, practices can ensure they are best-positioned for finding the right partner and executing a transaction that is in the best interest of their shareholders.  

About the Author
Andrew Colbert is a managing director and founding member of Ziegler’s Healthcare Investment Banking Practice. Colbert has represented eight radiology groups on innovative transactions; he specializes in advising physician groups on strategic and financing alternatives including merger and acquisitions, capital raising transactions and partnership development. https://www.ziegler.com/radiology