Whether You Are Buying, Selling Or Launching A Startup Clinical Research Business, You Need To Read This!
A surprising question that I have been getting asked quite a lot lately despite the recent summer slowdown in our industry has been one that revolves around the topic of buying, selling or starting up a clinical research clinic. I had no way of knowing that this would be such a popular topic, but nonetheless, I welcome any opportunity to create more content. When you create roughly one video per day, it is always refreshing to get more ideas!
Last week I received a question from a viewer who was asking if I knew anyone who was interested in buying his research company. After giving him a few companies to reach out to, I decided to create this video.
In the video I discuss different ways to go about finding a suitable buyer for a research clinic. In a nutshell you want to find someone who has a nationwide presence (or at least a regional presence in your area) but does not have any presence in your Site’s geographic location or perhaps they do not conduct the same types of studies that you do and they want to diversify their own capabilities. There are business brokers who, for a fee, will find a suitable candidate for you, but from my experiences of actually having gone through this process, you are better off doing the dirty work yourself, and by dirty work I mean rolling up your sleeves and reaching out to anyone who may be able to lead you in the right direction. This means lots of phone calls, emails, LinkedIn conversations, etc until you find at least 5 potential buyers. One thing to be mindful of during this process is your transparency with your own employees and Principal Investigators. It’s okay to keep it quiet for the time being, but you will find it nearly impossible to do so you might as well bring them in the loop as early as possible.
Once you have found your 5 or so buyers it will be time to get down to business with them each individually. Depending on the size of your company and it’s current structure (i.e. is the PI or any key staff member an owner?) as well as it’s profitability, a typical purchase offer might be 3–4 times earnings. As an example, if your research clinic profits $1 million on average for at least the last year or two, a fair purchase price might be $3–4 million minus any existing liabilities that they will absorb. There are other factors to consider such as how long the owners will stay during the transition period, a typical request is one year. Another factor is getting the PI’s and key employees on board with the new ownership. If there is even a hint that they are not likely to continue with the new owners, the deal would most likely end up dead.
As you can see there are a lot of potential risks that the buyer must consider and most of the time these risks are not worth the potential reward. There are safer, better and cheaper things a buyer can be doing such as:
- purchasing a building in order to conduct their own studies
- starting another clinic of their own in your area
- buying or partnering with a much smaller clinic in your area
- buying a much larger clinic in your area
Because of these reasons above, it is my recommendation for buyers to either look for smaller research clinics to acquire (revenues under 500k/year), start their own clinic and purchase a building that they can operate from, or go all the way to the other extreme (if money is not too much of an issue) and purchase a well established and much larger research clinic (revenues of $10M or more) in that area. These options, in my opinion are much safer plays than purchasing a medium sized research clinic with revenues ranging anywhere from (800k to 4 M per year).
I explained this as well as some additional reasoning in my video below which was in response to a viewer’s question on whether they should start their own clinic or purchase an existing one.
If you purchase a smaller research clinic you will spend a lot less, and as long as you can spot the intrinsic value as well as create additional value through your management skills, you will be better off in the long run. You can even get creative in your aquisition and bring on the existing owner as a partner in your newly formed company (this is in fact what I do). The same can be said about starting your own clinic especially if you can afford to purchase your own property where you can choose to do outpatient studies, inpatient studies and even rent some of the unused space to fund your startup! Finally, purchasing the larger clinics will require some serious soul-searching but in my opinion is still a safer bet than risking millions of dollars on the mid-sized clinics due to the fact that the larger clinics typically have systems in place that allow the business to function without the involvement of the ownership. In fact, I guarantee you that at these larger clinics the owners do not even play an active role in the day to day operations of the company. It is relatively easy to take a clinic from startup phase to $1–3 million dollars in revenue per year, this is not something I would be willing to pay a 3–4 multiple for if I can just do it myself. However, getting a clinic from startup phase to over $10 million dollars in revenue per year is no small feat and cannot be done without systems in place that function independently of any of the owners. There are always exceptions, but I trust my anecdotal evidence on this issue.
In my opinion, if you are currently a research clinic owner looking for an exit strategy you either need to take whatever deal you can get if you are a small to mid-size clinic (although I enjoy the long term cash flow that even small to mid-size clinics are known to generate), or build your clinic to the $10 Million per year revenue level. If you are struggling with this there are several consultants (myself included) in this industry who can certainly help you achieve your goals. If you are an investor looking to get into this industry, I recommend launching your own startup research clinic, use the money you would have used for an acquisition to instead purchase some real estate (even if your company fails you still have a hard asset) and start building your company over time. If you need my help for any of this, you know where to reach me! (949)415–6256 or email@example.com