What's the end game on white collar and medical rollups?
Recently looked at DD to help my fund look at potentially launching a platform in one of the popular white collar services roll-ups (think accounting, wealth management, consultancy). These are great businesses. There are theoretical multiple arbitrage and operating leverage opportunities. But I can't get over the fact that there is no real exit strategy that makes sense.
Most of these businesses generate revenue through the senior practitioners' relationships. Instead of the $0.5-5M a year they bank from LLC distributions, you are trying to sell them on a equity story with multiple expansion. Get a slice of our big pie vs. eat your whole small pie. BUT I don't think these operators really have a path to a full liquidity until they retire.
Even if all the growth and multiple expansion are realized, the next buyer needs these people incentivized and working, not off to a beach after $10-20M+ liquidity event. So you can't really cash these people out in a meaningful way other than a small slice that they would have made anyways by just being a partner in the original small practice.
So, I went around to my contacts in healthcare PE space and asked how they model these exits for medical roll-ups. I really could not get a straight answer out of all the smart people I talked to. These docs who were practice owners have turned into salaried employees with phantom equity. A lot of the times there is friction and motivation issues. Nobody seems to know where the big platforms owned by UMM/MF are going to exit, once the hot potato recap games come all the way downstream.
What am I missing? Has there ever been a great exit in a professional services or medical practice roll-up where the original sellers found a way to get paid out and transition the business to the next buyer?
Based on the most helpful WSO content, here are some insights on the end game for white collar and medical rollups:
Key Challenges:
Revenue Dependency on Senior Practitioners:
Exit Strategy Concerns:
Motivation and Friction Issues:
Insights from Healthcare Rollups:
Platform and Bolt-On Strategy:
Operator Involvement:
Financing and Leverage:
Potential Solutions:
Incentive Structures:
Succession Planning:
Clear Exit Strategy:
Conclusion:
The end game for white collar and medical rollups involves addressing the challenges of revenue dependency on senior practitioners, motivation issues, and defining a clear exit strategy. Successful rollups often rely on a platform and bolt-on strategy, operator involvement, and careful financing. Developing incentive structures, succession planning, and a clear exit strategy can help overcome these challenges and create a sustainable and attractive business model for future buyers.
Sources: Healthcare Rollup Strategy, Doctor thinking of exit opportunities, No PE in my PA, Exit Ops - The End of The Show II, https://www.wallstreetoasis.com/forum/corporate/the-forgotten-cousin-of-finance-commercial-insurance?customgpt=1
As someone at a MFO as our private markets person the roll-up play in WM is going to end horribly, IMO. Like everything PE touches it made sense at first to have some aggregation for a myriad of reasons (tech, better breadth of investment capabilities, ability to hire specialists in niche areas like estate planning, etc.). But it's gone so far that there's what feels like hundreds of these trash WM roll-ups that have no path to exit at all other than selling to a larger fund which I think is a bad practice in general. I came from a wire house and people at these RIAs are there because they hated the big banks bull shit, but when you start ramming 100 RIAs together it starts to smell just like a wire. Same can be said for medical roll-ups, it's just a cash out for the docs but many of them realize it's a disaster on the other side for the next gen. Issue in medical is insurance and whatnot make it a rigged game for aggregators to win over the single practice docs, which ultimately hurts everyone, namely patients.
Greater fool theory.
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