Why Are Private Equity Firms Buying So Many Medical Spas?

It wasn’t until very recently that private equity firms discovered how profitable well-run medical spas are, and once they did, they made acquiring them a priority. As a result, it’s created somewhat of a feeding frenzy in the market. We’ll get into the numbers and additional factors of why private equity firms buy medical spas, but first, let’s define what private equity firms do.

What Is Private Equity?

Private equity (PE) is an investment partnership that buys and manages companies before selling them, operating investment funds on behalf of institutional and accredited investors. PE firms take one of two approaches when acquiring companies:

• Hold and grow them as a long-term investment.
• Sell or “flip” them in a few years for a sizable profit.
  

The average holding period for a PE acquisition is three to five years.

How Private Equity Firms Make Money

Nearly all businesses are valued on a multiple of their EBITDA (earnings before interest, taxes, depreciation, and amortization), so EBITDA is our starting point.

According to data from Pepperdine University’s Capital Markets Report 2022 (in which the sales of businesses in nine broad industries were analyzed), on average, companies with less than $1 million of EBITDA sold for a 4.7 multiple of EBITDA. When the EBITDA figure increased to between $10 million and $25 million, that multiple jumped to 8.3, nearly a 77% increase.

For context, let’s do some math:

• The average business with $1 million in EBITDA is valued at $4.7 million.
• If a PE firm buys 10 of those businesses, it will pay a total of $47 million, and the combined EBITDA of those ten businesses is $10 million.
• The PE firm can now apply an 8.3 multiple to the combined $10 million EBITDA figure, making the ten businesses it purchased for $47 million now worth $83 million.

And it doesn’t stop there. Add in things like increased purchasing power, operational synergies, and expected cost savings, and the value of the ten businesses the PE firm acquired can easily double.

Plus, if the PE firm continues to acquire businesses and push the EBITDA significantly higher, the EBITDA multiple can increase to a figure well above 8.3, making the overall value of the combined businesses climb even further.

Properly executed acquisition plans can make a PE firm a lot of money. It’s a great example of the adage, “It takes money to make money.”

Why Private Equity Firms Buy Medical Spas

The U.S. medical spa market is valued at around $6 billion and is forecasted to grow by more than 14 percent per year for the next five years. That means it’s expected to double in value by the end of 2028 to $12 billion. How many industries can you name that have that kind of growth potential?

With these numbers, it’s no wonder PE firms are so interested in medical spas. And, as of the end of last year, an estimated 90 percent of medical spas were owned by an independent operator, with only 3 percent held by a PE firm. That means there is a plentiful supply of medical spas that PE firms can acquire, and there likely will be for many years to come.

Additionally, PE firms with previous healthcare acquisition experience know how to set up an MSO (management services organization) to indirectly own medical spas in states with statutes pertaining to the corporate practice of medicine (the statutes prohibit non-licensed individuals and entities from owning them directly). The ability of a PE firm to use an MSO has created a vast buyer pool.

Should You Sell to a PE Firm?

Medical spa owners frequently ask if selling to a PE firm is a viable option for them, and the honest answer is, “It depends.” Here’s what you should consider:

• How long do you intend to continue practicing? Most PE firms want the owner/physician to stay on for at least three years after the sale.
• Does it bother you that the entity the PE firm has set up to manage and operate their medical spa acquisitions will likely sell in the next three to five years? There will be a change in ownership and possibly a change in direction and culture while you’re still working there. Are you comfortable with that? If not, you will want to select a PE firm that pursues a “hold and grow” strategy.
• Do you like the idea of retaining some of the equity in your practice and selling that equity at some point in the future when it’s hopefully worth much more? Many PE firms require this as part of the deal structure.
• What’s the current state of the market? Are you better off selling now or waiting a few more years? This requires an analysis of your medical spa’s current value, expected growth rate, future tax implications, the state of the economy, and numerous other factors.
  

Get Expert Advice

At True North Mergers & Acquisitions, we help business owners identify and prioritize their objectives for their businesses, employees, and families.

If you’re ready to talk about your goals and get insights into how you might achieve them, Randy Krivo, our Senior M&A Advisor specializing in medical spa transactions, would be happy to sit down and talk with you.

Contact Randy today. He can also share some of the details of his recent medical spa transactions so you know what you might expect if you decide to sell.