For some medical aesthetics practice owners, the Mergers & Acquisitions (M&A) process might be an entirely new concept. After all, much of the momentum in the medspa market has been generated in very recent years. If you’re an owner who closely watches trends in the industry, you’re probably sensing the rising tide of M&A transactions between independent owners and private equity groups or other investors.
If you’re new to M&A, the process can look complicated. Is a sale something you’re interested in pursuing? Is your medspa ready for a deal? And what can you expect in the process? We answer those questions and define some key terms in this post.
Understanding Investor Interest in Medspas
Private equity groups are investing in aesthetics practices for many reasons. First, the industry itself, and therefore independent practices, is seeing huge growth. From consumer interest to technology to new demographics of people seeking treatments, medical aesthetics is an exciting place to invest.
In contrast to other medical fields–like dental, for example–the aesthetics space is still relatively unconsolidated. Independent owners are scaling their businesses on their own, and investors see an opportunity to partner with successful practices.
So, what makes a successful practice in an investor’s eyes? If you’re considering selling your practice, it’s crucial to know what buyers are looking for:
Medspa Services and Pricing Strategy: Do you offer a service mix that’s profitable year-round? Are you leveraging new technology? Do customers (or members) have a reason to come back for various treatments throughout their lifetime? Investors look for a sustainable long term strategy.
Operations: Buyers will take a close look at how efficiently you operate, from your systems and processes to your team to your finances.
Cash Flow and EBITDA: EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a way to understand your practice’s free cash flow, and an important part of the M&A process.
Preparing Your Medspa for an M&A Transaction
Once you understand what buyers are looking for, you can start preparing your practice to hit the market. The length of this phase will vary depending on your business, but chances are you’ll need to spend some time streamlining your operations, building value, and potentially scaling to multiple locations. Regardless of the size or nature of your practice, here are some key steps in this preparation phase:
Get your financial house in order
If you haven’t already, assemble a powerful team to start putting together financial reports. You’ll likely need a CPA, an attorney, and a financial advisor to help you understand the value of your practice (and how to increase it for a potential sale.) The right team will be able to help you identify opportunities (like hiring a provider or adding a service) that will better position you for a deal.
Assess value and formulate a sale strategy
Once you understand your business’s value, you can think about what a successful exit looks like to you. What are you looking for in a buyer? Your team can start putting together an investor or buyer list and thinking about how to present your practice.
Gut check: Are you really ready to sell?
It’s easy to get caught up in the excitement of a potential transaction. However, sellers sometimes forget what giving up control of their business actually means. Walk out on Friday, you’re the boss. Walk in on Monday, you’re an employee. Are you prepared for what it truly means to sell?
Keeping this in mind, it’s also important to pay attention to what’s happening in the market. If you want to maximize your financial return, the timing of your exit plays a role. That’s why it’s important to start preparing for a deal… yesterday. That way, when the timing is right, you’ll have a transition plan and strategy in place.
Hitting the Market
Now it’s time to market your practice and connect with potential buyers. As an independent practice, it will be crucial to rely on an experienced team of advisors to help provide you visibility and help you connect to the right buyers.
You’ll create marketing materials and put them out to your network of carefully selected potential investors. During this phase, your legal team will also need to help you facilitate terms, confidentiality, and Indication of Interest (IOI) documents.
Letters of Intent (LOI)
A potential buyer will send a seller a Letter of Intent (LOI) detailing their interest in the practice and their initial offer. An LOI will outline the structure of the deal. Sellers need to carefully vet offers and consider not just the “big number” at the top, but a few key components:
Components of an Offer
Cash at Close: This is the guaranteed money a seller receives on the day of purchase.
Earnout: Very likely, the practice will have to perform at a certain level to hit predetermined benchmarks, and in turn, earn the remaining portion of the purchase price. The earnout component details the terms of how the seller can obtain that additional investment, based on the performance of the business.
Equity: What kind of equity does the buyer offer the seller in the go-forward business (oftentimes a Management Services Organization or MSO)? This is an important component of the offer to consider, and it’s crucial the seller hires a legal team who knows how to protect their long term best interest.
Employment Agreements
In many transactions, the previous owner of the company will stay on as an employee. An employment agreement will outline the terms, including:
How long will the owner stay on as an employee?
How will they be compensated? (This might include the terms of equity as well.)
What contractual obligations will they have?
Again, it’s imperative to have the right legal team in place to help a seller outline employment terms aligned to their idea of a successful exit and their vision of the future.
Due Diligence
Due diligence is taking place in the background of the entire process. The buyer’s and seller’s legal teams are reviewing purchase agreements, representations and warranties (promises each side makes to each other) and conducting a lien and litigation search (on behalf of the buyer). Similarly, the parties' respective financial advisors are keeping eyes on the numbers to ensure there are no marked changes in financial performance throughout the process.
A lawyer’s job in this process is to make sure their client is as protected as possible, often negotiating the nuances of the deal and putting the right protections in place to minimize the client’s exposure to risk.
Negotiation and Closing
Congratulations! You’ve made it to the final steps of the M&A process. Once both parties have negotiated the terms of purchase, they can finalize and sign the Purchase Agreement. Now it’s time to celebrate and move into the next phase of business (and life) for the seller.
Marti Law Group Specializes in Medical Aesthetic M&A
In order to ensure the best possible outcome in a transaction, you need a legal team with first-hand experience in the M&A process. Even better, you need a team who specializes in medspas. Marti Law Group is one of the only firms in the country who specializes in aesthetic medicine and remains hyper-focused on staying at the forefront of the rapidly evolving industry. Contact us to learn more.