Private equity (PE) transactions have become of great interest throughout the healthcare industry. While they have their specific characteristics, a PE transaction usually does not include a hospital or health system. Instead, it is between the private practice or related healthcare entity and a PE firm. With much flexibility in the transactional structure, many PE deals consider and, therefore, include a management services entity. Previously called management services organizations (MSOs), now they are known as business services organizations (BSOs). They have the characteristics of the traditional MSO, yet they are more adaptable and versatile in the context of PE transactions.
Typical PE acquisition structural characteristics include the following:
The management and services business value is usually carved-out separately and structured as a distinct management entity. The professional component (the practice) is removed from the management and business services part with its own infrastructure and possesses its own post-transaction value and utilization.
Typically, the BSO is engaged post-transaction by the PE/practice consortium (“NewCo”) through a management services agreement (MSA). The BSO, thus, entails separate valuation and an investment independent of the practice by the PE firm.The separated entity (the BSO) may or may not be purchased, or the practice may not be purchased instead of the BSO being the acquired entity. The BSO is intended to be leveraged with growth and future value through expanded services and the existing infrastructure of technology, management expertise, and the like. The presence of the BSO and potentially the transaction itself usually allows the professional entity (the practice) to stay out of the PE transaction, though not always. The strategy behind the BSO is to build infrastructure and overall enterprise value as a management entity. Building binary values creates future transactional benefits, i.e., the “second bite of the apple.” It also allows the professional component to remain intact and not commingled with the business and management/administrative services.
Overall, the establishment of a BSO results in a dual opportunity to create value and, post-transaction, management/business services. Moreover, it allows flexibility within the overall PE transaction. It promotes the growth and expansion of a robust administrative entity. It often allows for non-professionals (non-physicians) to have ownership interests in the BSO—both before and after the PE transaction. This action promotes the retention of key management talent and enables NewCo to move forward much stronger and more effective for the future. BSOs will continue as a core component of PE transactions. They offer additional value and future growth and economic interest beyond the professional (practice) entity.