FAQ Great Oaks PCC

Welcome to the FAQ page of Great Oaks PCC!

The most common questions

As experienced consultants in medical clinic consolidation, we understand you may have many questions about the process and its impact on your practice. Medical rollups involve consolidating multiple clinics into a larger, centralized entity, providing numerous benefits such as enhanced operational efficiency, access to advanced technology, improved financial performance, and greater bargaining power.

Here, we address the most common questions our clients and newly interested doctors, attorneys, accountants and bankers have about medical rollups. Whether you’re curious about how consolidation can streamline your clinic’s operations, improve patient care, or impact your autonomy as a physician, you’ll find detailed answers and insights to guide you through this transformative process.

Explore the FAQs below to learn more about the value and intricacies of medical clinic consolidation.

Why is a group of Core Clinics needed to form the nucleus for a medical clinic platform?



A group of 5-6 founding doctors is needed to meet the typical criteria for flexible commercial bank funding and establishing a Medical Services Organization (MSO). Having a group of doctors gives the lender a lower risk profile and allows the borrower to have more flexible and favorable terms.

Bank funding is the critical feature of the PCC algorithm. Commercial bank credit is the lowest cost capital, and it eliminates the role for private equity to become the controlling owner of the platform. The MSO is the only way to consolidate clinic operations under a single manager to capture the efficiencies and SCALE that a competitive medical clinic needs to succeed in the healthcare marketplace.

What role does financing play in operating a medical practice?



A source for external financing is necessary to operate a medical practice on a sufficient scale and deal with all the administrative and logistical complexities that arise.   Managing cash flow, capital outlays for equipment and IT, adding professional staff members, expanding a clinic – these are all fundamental operational elements supported by financing.

At a minimum, the fundamental banking relationship for a medical practice involves a line of credit from a commercial bank for intermittent working capital, cash management support and occasional loans for capital improvements and equipment.

Once the practice is well established, a typical doctor will obtain a personal credit line from his primary banking relationship which meets needs for his personal and family cash management. Normally, the commercial credit facilities available to a doctor, or a small group of doctors, are relatively limited and not sufficient for all the needs of an expanding medical practice.

While financing with bank debt as described above will serve the immediate needs of the clinic, it may have limitations in facilitating accelerated growth of a clinic as opportunities are encountered.  And it does not always provide a channel for doctors to extract equity value from the business which has been built up already.  In those situations where bank financing is not sufficient, the platform can easily issue preferred shares to increase liquidity.   Doctors must participate in a larger clinic group in order to enjoy the financial and professional benefits of scale, including payment for equity in the business.

Generally, what are the forms of financing accessible to doctors for their medical practice operations?



The most frequent avenue of financing accessible to independent doctors is a local bank, or local branch of a National Bank. Banks generally are conservative in lending to a single practitioner or small group of doctors because their risk relies on the success of the individual doctor’s services – and a lot can go wrong with a small-scale practice from a lender’s perspective. To a lender the risk factors include, for example, the death or disability of a key doctor, the legal fall-out of a messy divorce, a dispute among the doctors, or some adverse litigation.

For doctors wanting to execute a more expansive business plan while maintaining reasonable autonomy, there are two primary paths to follow: (a) secure additional investment funds from an outside partner to supplement bank borrowing and/or (b) join with other medical practitioners to form a larger and more creditworthy business platform. The most common conventional solution involves a combination of both – secure investment funds and merge practices to form stronger, consolidated operating entity. For doctors preferring to sell their practice, larger regional platforms and private-equity financed platforms are common solutions.

How can a doctor monetize his equity value in the practice? Can this be done without effectively selling the practice or losing control of its management?



The easiest way for a doctor to leverage equity value in his medical practice is to borrow more money from the bank for his own personal expenditures, using the value of his medical practice as collateral for this loan.  The bank will not interfere with management, except to the extent of requiring certain cash payment to be made as scheduled.

For an individual practitioner, the availability of such a loan may be limited, and in any case this source of funds will normally require a plan to repay the amount borrowed with interest over a 5–7-year period.   This behaves very much like a home equity loan secured by a house; but in this example, it would be equity in a medical clinic.  In this regard, it is important to remember that only medical practitioners are allowed to own medical practices (which are ‘regulated assets’), so the bank’s recourse is limited.

The most common way to extract equity cash from ownership of a medical practice, especially for doctors needing a large cash amount or planning to retire, is to sell the entire practice, or a majority interest in the practice, to one of the ‘rollup’ funds active in his specialty.   Even if he is not retiring, this route normally requires the doctor to relinquish operating control of the practice pursuant to an employment agreement.   If the doctor retains a minority interest in the practice, those shares are called ‘rollover’ shares which entitle the doctor to a subordinated participation in the larger rollup platform.

It often proves difficult to monetize ‘rollover’ shared downstream. Great Oaks PCC is the only template which allows doctors to extract equity value from the platform while maintaining professional autonomy and assures a retiring doctor that his practice equity will be acquired at market value by the platform when he chooses to retire.

What are different styles of medical ‘consolidations?



There are several forms of consolidation in the medical field, and here are a few:

• Funded and Majority Owned by Private Equity – This is probably the most common style of ‘consolidation’ and represents most of the transactions in the past 10-15 years.   Capital needed to acquire the member practices is provided by private investors whose sole purpose is to obtain exceptional investment returns.  For doctors retiring, this is often an attractive option.  In this environment, professional managers control all clinic operations outside of the regulated direct medical service to patients.  Doctors work under terms of an employment contract.  For doctors not retiring, industrial metrics applied to clinic operations often  impinge on the doctor’s autonomy.   Constant pressure to cut costs while maximizing revenue may compromise both the doctor’s professional satisfaction and patients’ clinic experience.

• Merger without Private Equity for Benefits of Scale – This approach is less common and growing in popularity, although it does not generally serve the goals of a retiring doctor.   It is essentially a collaborative effort to merge practices to obtain the core benefits of consolidation: economies of scale in purchasing supplies, more access to credit for expanding the clinics, and centralized professional management of day-to day clinic operations, which frees up doctors to concentrate on medical service to patients.  This form of partnership often relies upon contract services with a third-party Management Services Organization.  Here again, industrial metrics applied to clinic operations will impinge on the doctor’s autonomy and may compromise patients’ clinic satisfaction.

• Partnership with Core Capital (PCC) – This recent innovation relies mostly on low-cost bank financing and preserves maximum autonomy for doctors.   This format is designed for doctors who plan to practice at least five more years.  Doctors always maintain control of the platform.    Bank financing primarily is used, and when third party investment is needed, passive preferred equity shares are issued.  Most important financially, the low-leverage and high dividends paid to members preserve the value of the doctors’  equity shares, delivering higher cash distributions in the short term and creating much higher share values in the long term.

How can a Partnership with Core Clinics (PCC) serve the objectives of a practicing physician?



PCC reverses ‘financial polarity’ so the partnership structure serves long-term interests of the participating doctors rather than short-term financial goals of private equity investors.  Private equity focused on competitive financial returns is agnostic about medical services except as a path to profits.   It is not surprising that many rollups controlled by private equity generate internal tension between the financial managers and the medical professionals.

For a doctor who plans to practice at least five more years, the PCC template can make the doctor’s professional and personal life more fulfilling on many levels:

• Appropriate low-leverage financing enables clinic operations to perform at an optimal level and enhances cash flow distributions for personal use.

• Professional management of all non-medical aspects, including negotiations with insurers, creates more space for the doctor/patient relationship and the doctor’s professional development.

• While prudent business  policies govern day-to-day clinic  management,  the PCC platform’s patient-centered operating policies are guided by directors selected from the participating physicians – preserving more autonomy for the medical staff.

• The PCC financial template is a sustainable platform designed to deliver cash flow in the short-term and long-term value growth for doctors’ equity.   This means the platform will not face a transactional imperative for the doctors to sell the whole partnership in 5-6 years or be forced to accept a merger with a different platform.  Doctors can redeem shares in the PCC platform over time to fit their own financial objectives.

What are the most common business risks to a doctor relying on external investment funds to support the business side of a medical practice?



If an independent doctor is using conventional bank financing, the business risks are typically very clear: if you don't pay the principal and interest due to the bank, the bank has the right to sue the doctor personally and probably has the right to remove any portable fixtures or equipment that might be in the clinic.

When the doctor is in partnership with others, and is no longer the sole owner of the practice, the business risks become much more complex.   Even if the partnership owning the practice has only one bank loan, the issue of the partners’ joint and several liability for repaying the loan comes into play.  There is always the potential of a dissident partner suing the partnership, not to mention ongoing day-to-day issues regarding management policies.   Collective ownership does not always result in effective management.  As a result of unintended consequences, the results can be detrimental to all parties.  Operationally, a well-run MSO can usually serve all the members satisfactorily.

When a doctor has obtained cash by selling his majority interest in the practice to a large ‘rollup’ entity, his ownership becomes passive, and his remaining equity interest is entirely dependent upon the management decisions made by those who control the MSO. While a large cash payment up front often mitigates the doctors’ concerns about downstream results, private equity interests often do not have fiduciary concerns.  The controlling interest may conduct the partnership’s business to their own advantage.   By contrast, a doctor-controlled PCC platform will always maximize the doctors’ downstream financial results.

Is sustainability an important factor in assessing a doctor's financing alternatives?



Great Oaks believes a doctor’s equity in his established medical practice is a legacy asset that should be managed with professional fiduciary guidance.    To use any financing arrangement that is not sustainable is to compromise the security and value of this key asset.

Many of the conventional private equity rollup funds do not have a sustainable structure.  Their expected financial returns are too high for a long-term horizon.  This is why a large cash payment up front to the doctors (often about 70% of the practice value) is the key element for doctors in most private equity deals– leaving the ‘rollover’ shares retained by doctors typically with a dubious downstream value.

The Partnership with Core Clinics (PCC) meets the medical partnership’s financial and management needs, while achieving long term stability by relying primarily upon conservative low-cost commercial bank financing.    The result is a sustainable business platform designed for doctors practicing five years or more. There is a substantial equity payment to each doctor at the outset, substantial cash dividends, and the opportunity for future share redemptions, in addition to the doctors’ contract compensation.  The doctors’ shares in a PCC platform are, in fact, legacy assets.

How is a Partnership with Core Clinics (PCC) formed initially? And what happens next?



Doctors comprising the founding cohort of a Partnership with Core Clinics must represent total aggregate annual earnings before tax (technically called EBITDA) of $3-$5 million. This could represent one practice with several doctors or a consortium of practices. With this ‘critical mass’ of clinic operations, Great Oaks will work with the doctors to form the PCC business platform, in cooperation with a commercial bank which will provide the credit facility for the new platform.

Doctors in the ‘founding cohort’ of a PCC platform gain significant financial benefits from being founders. Great Oaks will work with doctors who want to pursue a PCC platform, but initially represent less than aggregate EBITDA earnings, to expand the consortium until sufficient aggregate earnings are assembled to form an MSO and launch the platform. Clinics in the PCC initially should be in the same regional market area, but do not need to be in the same metropolitan market.

Once the PCC platform has been established, it has total flexibility to add new member practices of any size at any time.

How is new technology integrated at clinics without causing disruption, friction and anxiety?



Medical Technology platforms are evolving rapidly and many offer new functionality that could improve diagnosis and/or practice operations. Practice integration will:
1) start with an assessment of current systems and data
2) identify opportunities for operations improvements and develop a business case for changes
3) centralize management of the platform where possible while minimizing negative impacts to both patients and staff
4) constantly evaluate new technologies and procedures that could benefit patients directly and/or improve the effectiveness of the medical staff.

Frequently asked questions