This episode was originally published on May 23, 2018.
M&A activity has been heating up in the last few years… and 2019 is no exception. At the same time there has been a lot of movement in the healthcare sector, but due to its unique nature, special care has to be taken when dealing with acquisitions in this industry.
Patrick Krause, a director at investment bank MHT Partners focused on healthcare, has shepherded a lot of deals in this sector. He shares how he helps turn M&A transactions into win-win-win deals, where both Buyers and Sellers are happy – and patients benefit, too.
Tune in to find out…
Mentioned in This Episode: mhtpartners.com
Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters, where I speak with the top experts in mergers and acquisitions, and we’re all about one thing here, that’s a clean exit for owners and founders. This week, I’m joined by Patrick Krause. Patrick is a director of MHT Partners and also the co-head of their healthcare services. MHT Partners is an investment banking firm with offices in San Francisco, Dallas, and Boston. Patrick has advised on numerous transactions during his career, including sell-side and buy-side advisory work, as well as various strategic advisory assignments. Again, this is all exclusively within the healthcare sector. Patrick, welcome aboard today.
Patrick Krause: Well, thank you, Patrick. It’s a pleasure to sit down and chat with you a little bit here today. Hopefully, we can make it fun and informative for our listeners.
Patrick Stroth: I don’t think that’s going to be a problem. Tell me now, how did you get started in investment banking in general, but then also specifically where you focused on one sector as an expertise, which is healthcare? Walk us through how you got there.
Patrick Krause: Happy to. So, I’ve spent the bulk of my career working at the confluence of healthcare, finance, and technology. Upon graduating from the University of Michigan, which seems like a million years ago, I came out to the Bay Area and really cut my teeth as a consultant working for Deloitte. I worked across a number of their different groups, but almost exclusively serving their large global healthcare clients, ranging from integrated models like Kaiser to large biotech companies like Gentech, Roche, and really everywhere in between on the healthcare value chain, hospitals, provider groups. It really gave me an opportunity to deepen my skillset there. The range of my assignments varied from technology implementations, to the development of financial controls, to audit work, so between the operational exposure and the ability to build a deep skillset, and then move to investment banking was a straight forward one.
I worked at a number of post-merger acquisition deals, diligence deals for private equity businesses, all related to healthcare, knew that I’d been bitten by the deal bug. At the time there was not an opportunity to do more transaction oriented work at Deloitte, so I went back to business school and got my MBA with the intent of getting more hands-on deal experience, either at a bank or as a corporate development officer at a business, and have been fortunate to have the opportunity to do both. Prior to joining MHT Partners, I had a quick stop at Novartis’ Molecular Diagnostics Group doing some business development, corporate development work. Then, linked up with the founders of MHT Partners, as they were leaving their respective prior firms, to come onboard and help build-out our healthcare practice, which is what I do today. I lead our practice, and again, focus on serving founders, owners, entrepreneurs, private equity groups, as they seek to craft and execute healthcare strategies designed to maximize outcomes for the party.
Patrick Stroth: Well, I like how you went and characterized it, you got bit by the deal bug. I think that’s something that’s kind of common in this industry right now. As an investment banker, now your expertise is, not on the diagnostic side, but it’s helping owners and founders sell their businesses faster, and for a greater return, and making it overall smoother. Now, healthcare is very, very different from other sectors like tech or consumer products, okay? Both based on their ownership structure and then also operationally, there’s a lot less outsourcing that can be in done in healthcare. Why don’t you describe the differences between the healthcare sector versus pretty much any other sector out there?
Patrick Krause: Yeah. It’s certainly an interesting place to play as a banker. I think the realization that folks need to come to is, first and foremost it is, it’s a people driven business, whether they’re relying on providers to deliver great care or taking great care of your patients, it’s really driven by the interactions between different folks. Being able to speak the language of medicine and business helps bridge the gap. It helps to be more effective when you’re crafting the deal. Investing and healthcare is obviously a process which requires some thoughtfulness, just to ensure that you’re compliant with the rules and regulations that are in place in our country, generally speaking, with good reason. That is such that business concerns don’t necessarily drive medical decisions or outcomes.
We talked a little about this in prior conversations, to buy a healthcare company that actually is responsible for delivering care, a couple extra steps are involved. It’s not like, you know, a sales force going out and acquiring Realsoft, which just happened, or you negotiate a deal and you’re done, you can directly buy the company. Physicians and physician practices in this country are required to be owned by physicians, to be compliant with corporate practice of medicine. I’m not a lawyer, I’ll say that. I just play one on TV. A good transaction attorney can help you through all this, as well. But, in order for someone to directly invest in a private practice, there’s typically an interim step, whereby, we create a management service organization, or anther legal entity that that private equity group can invest in, that group does the administrative work and kind of back office work that physicians tend to loath, while the physician retains ownership of their business, and then signs an agreement to share revenue with the MSO, enabling the private equity group or other non-physician to invest in the brackets.
It’s a little more convoluted than a traditional sale. But, we found over the years, that it’s an effective way to get these deals done, appropriately align incentives, and really capitalize on the value proposition that we all believe in on these deals, which is, you free doctors up to focus on the delivery of high quality patient care, you hand-off some of the administrative tasks, and as you become a bigger organization, not only can you see more patients, make healthcare more accessible, hopefully, you make it more efficient and more cost effective for folks.
Patrick Stroth: Yeah. That’s something that, you know, you can only outsource so much of the admin work and the file keeping, and so forth. It’s the actually delivery of care, it’s impossible to outsource, but as you get larger groups, if groups come together, and organizations get bigger, there’s a lot more sharing, and it improves, like you said, the accessibility. That’s a real key point that is a big differentiator. The other thing we could get into a little later on, that you mentioned, is the regulatory burden is unavoidable in this sector. Now, my experience in the healthcare sector in the last 20 years is largely on the insurance side, doing the directors and the officers, and the regulatory, and cyber coverage, things like that. When I first got into the sector, I thought of two things. There were doctors and there were hospitals. That’s what every person sees on the street and everything. I didn’t realize that there’s this entire universe of other businesses like the MSOs that are established just to support, and facilitate, and supply the delivery of care.
Now, when we’ve spoken before, you have a real neat, clean way of dissecting that huge diverse universe into really simple to understand, I would say, buckets, for lack of a better word. Tell me about these buckets. What’s the differentiation between each, and then how are they exposed or not exposed or what are their big concerns facing an M&A transaction?
Patrick Krause: Yeah. I don’t think there’s a lot of original thought in this. This is how we at MHT have elected to kind of segment the healthcare universe.
Patrick Stroth: Oh, no. You take credit for it. You made a very user friendly way. So, go ahead and take credit for it.
Patrick Krause: Well, we have a fairly broad mandate in terms of where we like to play. That translates into four industries, sub-vertical. I’ll start with the first. It’s really been the cornerstone of our healthcare practice, and that’s specialty physician groups, whether it’s hospital-based specialties like anesthesiology, radiology, cardiology, or it’s more consumer-facing medical fields like dermatology, ophthalmology, dental, and physical therapy. We’ve seen a lot of activity in the space. I’ve done a number of deals in this space.
Key challenges there are, obviously, making sure that all the partners incentives are appropriately aligned, risk and compliance is appropriately addressed, and then making sure that you’re delivering high quality care. At the end of the day, as a physician, you’re only product is a satisfied customer, meaning, is a well patient or is a better patient, and really having that high touch, and focusing on people is important, and that drives the culture and the business. Making sure you get a group of physicians aligned with the same mindset is a big part of the battle.
But, certainly, an important part of healthcare system in this country, it’s the folks that are on the battle lines every day, taking good care of people. Gosh, it’s been a pretty exciting place to be an investor the last five or six years. I cannot think of a more active period of investment in that space in a long time.
The second industry vertical that we spend a lot of time on is post-acute care. It’s kind of a catchall for us. But what that means is, the treatment of folks outside of a hospital or clinical setting. It could be home health, it could be hospice, it could be behavioral health.
Patrick Stroth: Physical therapy too?
Patrick Krause: That’s more reliant on providers.
Patrick Stroth: Okay.
Patrick Krause: We tend to keep that in the first group, but point well taken. I suppose it could be in that bucket, as well. But, the element here, the interesting thing for investors has been a lot of the dynamic that we see in our country. For better or worse, we are a graying nation. Folks are getting older. Folks are needing to consume more healthcare services. A hospital is not always the best setting for that. It’s not your home. It’s expensive. It could be a risk of infection, just by being around people that are sick. Taking care of people in their home is a compassionate, cost effective way to deliver care. We see that as a pretty exciting area of growth in the coming years. It’s not without its challenges, as well. Reimbursements have stabilized over the past several years. But, a business that has yet to find a model where you can scale over larger regions, just because it’s so focused on the provision of care by a local population and skilled nurses, or physicians assistants to take care of people.
As you’re thinking about how to allocate risk, whether on a deal or after a deal has been identified, and you’re thinking about how to translate that allocation of risk into your purchase agreement, you need to make sure you’ve got a good handle on providers, credentialing, their past record, make sure that incentives are appropriately aligned, so that those providers stick around. Turn can be kind of a scary component in this industry.
Again, it all comes down to taking good care of the patients. I think culture is an important thing to look at when you’re evaluating any opportunity to doing a deal in this space, as well, it’s a good thing to take a look at. And, throwing a bone to Patrick, it’s one where insurance is your friend, and you have to make sure you have the right product in place, and risk appropriately identified, allocated, mitigated.
Patrick Stroth: Gotcha.
Patrick Krause: Last big bucket for us is technology driven products and services. That could be true healthcare IT point solutions or products geared towards serving commercial payers like revenue cycle management, billing, coding, scribing, things like that. Or, you could have a different risk profile. It’s more product driven and technology driven, so you want to make sure that there’s no infringement of IP, there’s kind of a uniqueness or a dependability to that technology. And, you want to make sure that you’ve got an exciting, addressable market to go after.
Last bucket, a smaller one, but one that’s important to us, as well, is other healthcare services. You’re familiar working in that space too. That could be pharma services, like CROs. It could be the delivery of goods and products to a hospital or a clinic, it could be some of those products themselves. It’s another area that we like. Again, just different risk profile in that it is not driven by people or providers per se, but by products and services. There a more traditional business risk profile exists around customer concentration, products, cost of acquiring or creating products, cost of selling products, all those good things.
But, it’s a broad mandate for us. It’s a great big world out there from a healthcare perspective. It continues to be an exciting place to play from and M&A perspective, from a strategy perspective. Gosh, we have a ways to go, but if we can take some of the other business principles from other industries and apply them to healthcare, hopefully, we can get better outcomes, make it more affordable, more accessible for everybody.
Patrick Stroth: Well, I think great item that you pointed out there, that a lot of people overlook, it’s more of a millennium-type of term is called culture. And, particularly in a post-acute care, where we’ve got nursing homes or assisted living facilities, and everybody can recall those terrible news stories about elder abuse and everything, and these disconnections within the system that doesn’t bring the care that should have been brought, a lot of that is cultural, and it’s just having that culture of wanting to deliver the best care, the best services, and stand behind it. You see the physicians are pressing that because it’s literally their name on the door or their name on the practice. As you get to these other things, I can’t tell you how you can possibly understate the importance in culture with the post-acute care because that’s where you’ve got behavioral health, you’ve got a lot of these other things that are the softer-type, longer term issues that you’ve got to keep that great sense of excellence. That’s great that you pointed that out with these.
As you look, because you’re dealing with the founders and owners, many of them are physicians, some of them aren’t, they’re in the medical tech area, what’s the difference, where some founders, they succeed in getting what they want out of their deal? They get it set up, they get what they want, and then their peers will struggle. Maybe you can differentiate it between a physician owned practices or physician owned companies and non-physician owned companies, but where’s the drop-off, where some struggle and others seem to get right to go, right to where they need to be?
Patrick Krause: Well, being ready, it’s kind of the biggest thing that you can do to be success in a transaction. I mean that in multiple ways. One, obviously, it’s important to have your house in order, to make sure that you’ve got processes documented, that you’ve got your financials cleaned up and on an accrual basis, if possible. But, I also mean, you need to be ready emotionally. In some instances, seek control of a business that you’ve built for 30 years. Be able to bring on a partner that is going to have thoughts on how you run your business, and be ready to let go on something that you’ve spent a career building. Some folks are ready to do that, others are less so. But, being able to really understand why you want to do a transaction, why it’s the right time, and being able to let go, so to speak, can help a lot.
A good advisor will be able to talk you through that. At the risk of seeming shamelessly self-serving, it’s very important to pick the right advisors to guide you through this process, accounting, financial, deal related. They’ll be a sounding board. They can help depersonalize a lot of the issues that come up on a transaction. Just like a good lawyer would not choose to represent themselves in a deal, a good advisor can kind of take you out of some of the more contentious conversations.
Patrick Stroth: I don’t want to interrupt you too much there, but I do want to really highlight this because I think it’s a real big point, of having somebody as a third party, intermediary there that can be diplomatic, can listen to the various players, and give honest feedback without being emotionally tied or defensive with the other sides, I think that’s a great role that experts like you play in this. This is a very emotional time, you may have different objectives on the seller’s side, and being able to negotiate within that selling team before going off to the buyer, I think is critical with what you do.
Patrick Krause: I couldn’t agree more. Just depersonalizing it, and knowing that somebody there’s to be your arms and legs will make all the difference in a transaction. There’s no secret to it. It’s hard work. Maybe that is the secret. It’s just like anything else, stay organized, be fair in your puts and your takes, and you’ll get through it. A lot of folks, it ends up being a great experience. It’s a chance for folks to realize some liquidity. It’s a chance for folks to effect a generational shift in their business, such that it survives beyond the first generation of the founders, or to find a partner to help grow and achieve the growth that you see for the business.
Patrick Stroth: I think another real big benefit of having someone like you involved is, for a lot of these, especially physicians, but a lot of these owner and founders, with some exceptions, this is their one deal. This is their one time. You’ve been involved in hundreds of these deals. I think, not only have you seen these processes work, you know who the real good buyers are, as opposed to the other buyers that may not have the best intentions in the world, and may make a perspective seller spin their wheels only to grind them down, where you’ve got others that they may not offer the best price outright, but they’re going to be a lot easier to deal with, and you know their buying habits.
Patrick Krause: That’s right. You make a great point there, Patrick. A good advisor, particularly one that focused on an industry, will have been down the road a few times with a few of the buyers that you’d be reaching out to in that process, give you insights into how to negotiate, what’s important to them. That in turn allows you to position a seller’s business to get the most of what’s important to you, the seller. A good banker or advisor will be able to help you do just that.
Another key consideration is whether you want to sell all of it, all your business, so to speak, or if you want to find a partner and continue to work with them to grow it. That can certainly influence your buyer choice, as well, whether you sell out entirely or you identify a partner to move forward with, can give you unique opportunities, different in several regards. But, I think the key point is a process, well-designed, will create options for you, such that you can evaluate buyers, you can match price points to roles going forward, such that you can get most of what you want. It might not be everything, but if you have a couple options to pick from, you can usually get what’s more important to you.
Patrick Stroth: Is there a particular size practice or metric for people that are listening that want to get ahold of you? What size practice or maybe value is an area that you fall in with your clients?
Patrick Krause: That’s a good question. I think there’s a degree or flexibility on our end in terms of the mandates that we take on, but I think if you were looking at averages for MHT Partners as a firm, we typically represent companies with around five million dollars in EBT, earnings before income, tax, and depreciation. That’s not to say that we wouldn’t work with bigger companies or smaller companies, just on average that’s where we tend to shake out. That’s more of a function of the lifecycle that the companies that we represent are in, right? They tend to be a little bit older and more established. The owners might be looking for an exit or a liquidity event and it just happens to be where they are. But, no hard and fast rules. The only real criteria for us is to work with great companies, niche market leaders in their states, and usually uniquely differentiated from their peers.
Patrick Stroth: The best way then for listeners then to decide whether MHT would be a fit for them is, they need to reach out to you directly. How can our listeners find you?
Patrick Krause: They can certainly find us on the internet, mhtpartners.com. You could always reach out to me directly. I’d welcome the conversation. You can call me in the office, that’s 415-446-9511 or email me at firstname.lastname@example.org. Would love to be helpful however I can be.
Patrick Stroth: Well, fantastic. Well, this is diverse, very technical, very specific type of area to get into. I’m sure a lot of people listening are going to have further questions for you. And so, I encourage everybody to reach out the Patrick. He’s going to be absolutely responsive and maybe there’s a fit, maybe not, but the thing is having a conversation with these experts, really enhances your chance of having a clean exit. I want to thank Patrick for helping us and sharing his knowledge with a very, very highly regulated technical industry that is enormous. We wish you all the best of luck, Patrick. Thanks again for joining us.
Patrick Krause: My pleasure.