The Basics of Parent Company Equity and Joint Venture Acquisition Approaches
Like independent practice owners, practice buying groups are constantly evolving and developing new methods to run their businesses better and counter challenges as intelligently and hopefully as systematically as possible.
Three challenges that buyers have had to deal with over recent years are employee retention, employee motivation post sale and relatively higher interest rates.
To counter these challenges, buyers have leveraged two mechanisms (among others) to help, these are, parent company equity and joint ventures:
Parent company equity is a method leveraged by some buyers to align incentives between practice sellers and buyers. In this approach buyers offer sellers part of their purchase consideration in the form of equity in the buyer’s parent company. Parent company equity in turn gives sellers a small stake in all of the hospitals in the buyer’s network, including their own.
In a joint venture, the owner keeps some amount of ownership in their own hospital (typically they’ll continue to own 20 to 45% of their practice) and not the others in the group.
Both of these paths represent opportunities and risks to sellers.
On the plus side, these each offer an opportunity to grow alongside the buyer of your practice, whether that be related to your individual practice (joint venture) or as part of the larger group (parent company equity). On the other hand, if the value of your practice or the group reduces over time that could create a potential downside for you.
Whether the value increases or decreases will depend on a large number of factors including, when you received (parent company equity) or decided to hold your stake (joint venture), the value of your stake when you received (or decided to hold) it, how the entity that you have a stake in was managed and more.
Some things to consider if you’re thinking about working with a company that offers one of these two structures.
Parent company equity:
- How the other hospitals in the parent company’s network have performed over time
- Parent company equity valuation, including how it was calculated
- If there are different classes of equity and any differences between what a seller would receive compared with others
Joint Venture:
- Profit sharing frequency
- Level of data shared and reporting frequency
- Level of autonomy you’ll have post sale
- If there is a management fee and what that would cover
- Put option, if there is no recapitalization event within a period that you’d want to fully exit your stake in the business
Having a strong understanding of these concepts and relationships with the major buyers in the market are important elements, among others, to help navigate the sales process. At VetVet, we’re here to help you. Get in touch if you’d like to learn more about us or have a discussion about the sale of your practice:
Email: Hello@VetVet.co (not .com)
Phone: 510-969-2792
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