Path to fast profit

How private equity deals typically work
Note: Values are in millions

Start with physician group valuation


EBITDA*$2
EBITDA multiple**x 10
Enterprise value= $20
Equity value$20

* Earnings before interest, taxes, depreciation and amortization (EBITDA) is a way to measure a company's performance.
** Assuming an EBITDA multiple of 10x. As an example, $2 million equals $20 in million enterprise value.

   

Private equity invests


PE investment$8
Borrowing+ $6
Total cash to physician group= $14
Physician investment or
rollover equity*
+ $6
Purchase price:= $20

*Physicians buy in to new company through reduced compensation.

   

New company capital structure


Debt$6
New equity value$14

Ownership is divided based on percentage of investment ($14):

  • 57.1% PE firm equity ($8)
  • 42.9% Physician equity ($6)

   

Planned value creation

  • Expansion of locations
  • Increase services offered
  • Decrease costs through consolidating management functions

   

Five years later: New investors


New EBITDA$6
EBITDA multiplex 10
Enterprise value= $60
Less remaining debt- $3
Equity value= $57

Proceeds after sale to new investors


To physicians with equity at 42.9%$24.4
To PE firm with equity at 57.1%$32.6

Total proceeds to physician group

First sale$14
Second sale+ $24.4
Total= $38.4

Source: Epstein Becker & Green; American Medical Association: “Trends in Private Equity Acquisition of Dermatology Practices in the United States”

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