You’ve been contacted by an MSO about acquiring your practice. They are promising you 7x return on your rollover. Too good to be true? Probably. Here’s why.
Creating a 7x return on your capital can only happen one of two ways:
- Buying practices on the very, very cheap (less than 2x EBITDA) — this is not market and is definitely not scalable
- Using a tremendous amount of debt — which multiplies the ability for the equity to be worth something if everything goes perfectly. But when in life do things work out exactly as planned? This strategy will effectively be gambling with your rollover
Does the latter make your head do a 360? We’ll help straighten it out for you.
It is theoretically possible to get a 7x return on your rollover if you have a tremendous amount of debt (10x+) and things go perfectly to plan.
So, what’s the problem with debt?
A prudent amount of debt can be a good thing. It can be used to help a business grow, buy more practices, and open new locations. The lender only needs to get paid back the interest and original principal. So, like borrowing to buy a house, if your home is worth more in 30 years, the loan is repaid to the lender and the homeowner keeps all the profit.
But 10x+ debt is a different story. No lender is going to allow you to have 10x+ debt because they feel it is too risky.
The only way to get that much debt is if the doctors become the lenders. In this case, doctors could be unprotected in the event of bankruptcy because the bank lenders have first rights on the business in bankruptcy, not the doctors.
If it is too risky for a professional lender, why is it not too risky for you?
How does an MSO get to a 7x return on your rollover?
A bank will let you borrow 6x debt. The MSO promising a 7x return on your rollover is then going to ask you to take on an unsecured seller note for the non-cash portion of the purchase price.
What is a seller note?
A seller note is a form of financing used in small company sale transactions whereby a seller (you) agrees to receive a portion of the acquisition (your practice) proceeds in a series of debt payments. Depending on how this is structured, it could mean ongoing payments or no payments for up to five years.
What is an unsecured seller note?
An unsecured seller note is a loan that is not secured by the issuer’s assets. This means that you, the doctor, take on more risk.
The most important takeaway of an unsecured seller note is that there is no guarantee of any payout! (i.e. A conservative person would assume that they will only take home what is paid in cash for their practice.) It’s high risk, which could lead to high reward… but it’s not very likely.
All of this is a little too much financial engineering for our blood.
Why gamble with your practice?
Make private equity work for you, not the other way around. At Allied OMS, we work together to make sure we are helping you grow your practice, manage your practice, and get better economics on the value of your practice — without rolling any dice.
