Five Essential Questions Every Medical Spa Owner Should Ask A Potential Buyer

You’ve been contacted by private equity, and they’ve invited you to join their network of medical spas. They tout their ability to give you the support you need and sell the larger platform for 10x or higher in the future. But who benefits from that sale? Do you get a say in your future?

Before signing that letter of intent – make sure you get answers to the following questions so that you, the med spa owner, can maximize your outcome.

What is an MSO?

An MSO, or Management Services Organization, is a company that provides management and administrative services to medical practices, including med spas. These services can include a wide range of non-clinical functions, such as:

• Accounting and Finance: Handling the financial aspects of the business, including bookkeeping and financial analysis.
• Human Resources: Managing staffing, payroll, benefits, and other HR functions.
• Marketing and Advertising: Promoting the practice to attract new patients and retain existing ones.
• IT and EMR Systems: Providing and maintaining electronic medical record systems and other technology infrastructure.
• Regulatory Compliance: Ensuring that the practice complies with healthcare laws and regulations.
• Facility Management: Overseeing the physical space of the practice, including maintenance and leasing.
• Purchasing and Supply Chain Management: Managing the procurement of medical and office supplies.

In a medical spa context, an MSO allows medical professionals to focus on patient care and clinical services while the MSO handles the business and administrative side of operations. This can lead to more efficient and effective practice management, enabling medical spas to grow and operate smoothly.

How are MSOs connected to private equity?

The connection between MSOs and private equity (PE) in the med spa industry typically involves private equity firms investing in or acquiring MSOs to gain a foothold in the healthcare sector. Here’s how the connection works:

• Consolidation: PE firms often drive consolidation in the med spa industry by acquiring smaller med spas and integrating them into a larger network managed by the MSO. This consolidation can lead to economies of scale and increased bargaining power with suppliers.
• Investment in MSOs: Private equity firms invest in MSOs to capitalize on the growing demand for medical and aesthetic services. By investing in MSOs, PE firms can benefit from the management fees and a share of the profits generated by the med spas that the MSOs manage.
• Scalability and Expansion: PE firms often use MSOs to scale operations efficiently. By providing capital and strategic guidance, they help MSOs expand their services to more med spas, thus increasing their market presence and profitability.
• Streamlined Operations: Private equity-backed MSOs can streamline operations across multiple med spas, implementing standardized practices, technology, and systems. This can lead to cost savings, improved service quality, and higher patient satisfaction.
• Exit Strategy: For private equity firms, investing in MSOs offers a clear exit strategy. Once the MSO has grown and increased its value, the PE firm can sell its stake at a profit.

In summary, private equity firms are attracted to the predictable revenue streams and growth potential in the med spa industry, and MSOs provide an efficient way to manage and expand these investments. So, when you hear about private equity buying med spas, they are doing so through an MSO.

What happens after I join the private equity-backed group?

Private equity says that you will retain autonomy after they acquire your med spa, but, in reality, many decisions will be made by the MSO. For example, some platforms pressure you to maximize revenue, which may mean implementing aggressive sales tactics, prioritizing faster client turnover, or focusing on higher-margin treatments. An MSO may also push you to use their preferred suppliers and make hiring and firing decisions in your medical spa. Are you prepared to give up this control? Or are there alternative transaction/ownership structures where these decisions can be shared?

Some other questions you should consider:

• What kind of culture will the PE firm create?
• Will practice owners have influence in the corporate direction and be able to make decisions independently?
• Are med spa owner contributions treated with respect?
• How many times have they worked with medical practices in the past?

It’s also important to know the firm’s objectives. A growth-oriented firm will focus on growing the number of practices and increasing revenue at existing practices, while other firms may focus less on growth and more on squeezing every nickel out of their existing locations.

I got a 10x EBITDA multiple; that’s great, right?

“Our med spa has over $1mm of EBITDA, and we got a 10x EBITDA offer; that’s great, right?” Not necessarily!

• Are any of your cash proceeds contingent on future performance or paid over time?
• Did you ask what the terms of your stock ownership are?
• How was the share price determined?
• Is your ownership at the same level as the private equity firm, or was your ownership pushed down to only your med spa level?
• Will you hold the same type of equity as the private equity firm, or will you be subordinated to other shareholders?
• Did they include the growth in your rollover in that calculation?
• Do they have the right to purchase your remaining equity at a discount?

As you can see, it’s rarely as simple as an EBITDA multiple. Enigmatic terms and deal structures could cost you hundreds of thousands or more in lost returns.

Private equity keeps talking about a second sale or a “second bite of the apple.” What is the typical deal structure of a med spa acquisition, and what does this mean for me?

In a typical MSO deal, you will sell 100% of your business and reinvest, or “rollover”, 20-30% back into the MSO. The “second bite of the apple” refers to the 20-30% rollover equity that remains invested in your med spa and that you can sell as part of the next transaction, giving you a “second bite” of cash proceeds.

If everything goes as planned, this second bite will occur at a higher multiple and after your med spa’s EBITDA has had several years to grow, increasing the valuation at which you can sell. Only your remaining equity benefits from that growth, however, so that means that the MSO will walk away with 70-80% of the improved valuation while you only get 20-30% of that increase.

At Aviva Aesthetics, we can’t help but ask the question: How is that fair to the med spa owner?

Wouldn’t it be better to find a partner with which you could grow your EBITDA and increase your EBITDA multiple before you sell to a PE-backed group? And own 100% of your business upon that first sale, so you benefit directly from the improvement?

Aviva Aesthetics is an entrepreneur-owned MSO in the medical spa space. We’re committed to maximizing the value of your business before you take your first bite of the apple.

• We help you grow your EBITDA before a sale and sell at a higher multiple than independent practices generally receive
• You retain your autonomy while getting back-office support that makes life easier as we collectively prepare for a sale
• Our med spa owner-run Board of Directors means Aviva members have majority control and make all decisions regarding exit
• You get 90% of proceeds from a future sale, giving you the opportunity to receive 2-3x more in total proceeds than can be expected in a more traditional sale

Don’t let the overflow of emails from private equity promising high exit multiples distort your expectations.

Contact us to schedule a 15-minute intro call and learn more about how we best serve medical spa owners. We also provide free analysis of your financials so you can better understand how you can benefit from our model.

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