Dermatologists who own practices are sitting in the drivers’ seat. Dermatologist buyers and sellers will be happy to know the specialty is among the more attractive in healthcare investing. But to reap the benefits, dermatologists need to know what they want and be ready to act, according to Thomas Ferkovic, R.Ph., M.S., managing director of the national practice management consulting firm Medic Management Group, based on Akron, Ohio.
Ferkovic, who was part of the panel discussion “Dermatology Business Trends and Practice Opportunities,” during the March 2017 American Academy of Dermatology (AAD) Annual Meeting in Orlando, Fla., says dermatology is enticing for many reasons. Some of the top draws are that demand is high and supply isn’t; it’s a fragmented market with a lot of small practices; and dermatology practices can provide retail cosmetic and medical services.
“So there’s growth opportunity for an acquirer,” Ferkovic says. “You can add a Mohs component. You can add cosmetic. You can add retail. You can do some pathology. There’s a lot you can build on if you bring practices together. And there are a lot of ancillary revenue streams, depending on what you’re starting with.”
Investors, including national companies and individual dermatologists, alike, are “rolling up practices,” meaning they’re taking a number of practices and putting them together to make bigger practices. There are also dermatologists who are thinking about selling.
The question dermatologists are asking in each scenario, according to Ferkovic, is what’s in it for me? To answer that question, dermatologists need to know what they want and how they want a deal, whether they’re buying or selling, to look.
“I use a house as an [analogy]. When we put our houses up for sale, we have an idea of what we want. We want to stay in the house for two more months. We want a certain price. We will fix certain things and we won’t fix certain things…,” he says. “A lot of times physicians who sell practices don’t necessarily know what they want.”
They might hear about a price, but that’s only the beginning of a complex buy or sell.
“If they know what they want, they’ll know when the right deal comes along,” Ferkovic says.
The issue for most dermatologists isn’t whether they can do the deals—they’re certainly smart enough, according to Ferkovic. It’s more a question of whether they have enough time and the infrastructure needed to pull off a merger or acquisition. The goal should be to be able to prepare for and analyze deals based on what you want, and that takes preparation. Dermatologists who see a deal on their desk but no time or infrastructure to analyze it are at risk for making big mistakes, he says.
Dermatologists who are thinking about joining a bigger practice needs to do due diligence on the buyer.
“It’s obvious that the buyer is going to do due diligence on the practice. But you need to know who you’re going to be joining. Do they fit culturally with you? Do they see patients the same way? What are their expectations?” Ferkovic says.
Tips for effectively doing due diligence, include calling other practices in the network, including practices that didn’t do the deal, he says. Call around for references. Call medical societies in the area and ask what they’ve heard about the buyer. Call other private equity companies in the business and ask what they know about the company. Call leadership peers that are connected and find out what they’ve heard.
“Specifically, call some of the doctors that are actually working there. Ask the right [open-ended] questions, like what do you like? What would you do differently? Has anything disappointed you in the process? Then, be quiet and listen,” Ferkovic says.
Dermatologists interested in acquiring other practices should be secret shoppers, calling those offices, to see how long it takes me to make an appointment.
“You also want to look at all the financial statements for the last three to five years, depending on what they have. You want to pour through to see how solid they were. You want to see policies and procedures. When appropriate, you want to talk to some of the key staff and key partner physicians, to find out what they’re doing to see if culturally they fit,” he says.
Prepare whether you’re buying, selling or holding
It’s never too early for dermatologists to prepare their practices to be acquired.
It’s similar to staging a house, Ferkovic says. Real estate agents tell home sellers to stage their homes with the smell of warm cookies cooking in the oven, or, if it’s an empty house, to furnish it and make it look like home.
Staging the practice means preparing its financial statements, making sure that expenses are within benchmarks and having ancillary services. It’s important that policies and procedures are in place, all a practice’s compliance is planned and executed, there’s a good succession plan, as well as strong marketing and employee training programs in place.
“Whether you sell it or not, [the process] will help your practice,” he says. “If you’re the person buying or selling, having those kinds of things in place will add value to your practice.”
Make sure the timing is right
A dermatologist wants to make sure his or her practice is on an upswing before entertaining deals.
“When you look back at the last three-years of financial statements, you don’t want to see them trending down. You want to maybe take a year or two and kick it into gear, fix what you need to fix and have them start to trend up for the right reasons and repeatable results,” he says.
Make the move for the right reasons
There are right and wrong reasons for entering into a deal. On the acquisition side, for example, dermatologists should acquire not for size but rather to increase the net value or decrease the overhead (which increases the net earnings).
“You never go into these acquisitions unless you’re going to gain from it,” he says.
Have your A-team in place
Whether buying or selling, dermatology practices should have a strong advisory team in place. Each of these advisors need to be experienced in healthcare mergers and acquisitions. Going into a deal without that experience could be costly, according to Ferkovic.
That team should include a good healthcare consultant who can prepare the practice, do due diligence and more; an accountant who is well versed in tax and mergers and acquisitions; and a healthcare attorney.
“Having the A-team doesn’t cost you anything because they don’t typically charge you unless they’re doing work for you. But if they know you and understand your practice and what you want, when the opportunity comes, they’re ready to roll,” he says.
Disclosure: Thomas Ferkovic, R.Ph., M.S., is managing director of the national practice management consulting firm Medic Management Group.