Capital Raising at the MSO Level – Key Strategies for Success

Raising capital for healthcare-specific MSOs allows them to grow, access new technologies and handle regulatory constraints, but there are various challenges to doing so, notably when it comes to regulatory and compliance challenges. Read on to learn more about capital raising at the MSO level and strategies to success.

What is an MSO and Why Capital Structure Matters?

A Management Services Organization, or MSO, specializes in providing administrative and non-clinical services to healthcare providers (i.e., hospitals, clinics, private medical practices, physician practice operations etc.). They specialize in reducing administrative burden, patient scheduling for some physician practices, helping healthcare providers improve efficiency and even assisting in building relationships with healthcare regulators. Other services commonly provided by MSOs may include billing and collection, HR, regulatory compliance and financial management so that healthcare providers can focus on exceptional patient care and patient satisfaction.

The financial structures of management services organizations tend to differ quite a bit from how conventional models are managed. For instance, MSOs charge fees for the services that they provide. They may also use profit-based initiatives to distribute funds, a tactic that can align the MSO and the healthcare providers that it services.

To ensure sustainable growth, MSOs must get their capital structure right. It has a direct impact on accessing funding, managing risk and balancing debt and equity financing.

Key Funding Sources for MSOs

How are MSOs commonly funded? The most typical sources include:

• Debt financing, including bank loans, bonds, lines of credit and more.
• Equity financing, including private equity and venture capital.
• Via strategic partnerships and healthcare-focused investments.
• Convertible debt, which combines debt with equity and is typical in early-stage funding.

Debt vs. Equity Financing – What’s the Right Fit for Your MSO?

Debt and equity financing are two common ways to fund an MSO, but there are key benefits and risks associated with each financing strategy. Here’s a closer look at each:

Debt Financing

While debt financing is an ideal way for MSOs to raise funds without giving up equity, there are some notable risks associated with this strategy. For instance, MSOs must often manage high interest rates and require regular income to ensure sufficient payback on debt payments. There may also be an impact on your MSO’s credit score and the risk of liability if you’re unable to repay debts.

There are some other key benefits worth noting. Debt tends to be tax-friendly, as interest and principal payments are deductible. Repayment teams are also often fairly flexible.

Equity Financing

Though you have to give up equity in your MSO to raise funds, there’s the potential to raise a substantial amount of it via equity financing. In fact, equity financing has the potential to promote rapid growth and significant growth. What’s more is that via equity financing, you won’t add debt or require collateral.

However, there are also some risks that you should consider with equity financing. For instance, you typically have to share profits with investors and may even have to give up some control of the MSO. Additionally, there’s the potential for conflict with investors over the way you’re running the MSO.

Navigating Regulatory Challenges in MSO Fundraising

It’s no secret that there are various compliance and healthcare regulations that anyone in the healthcare field must navigate, including MSOs. Successfully navigating these regulatory challenges can also have a significant impact on fundraising for your MSO.

For example, MSOs with strong compliance programs are generally favored by investors due to the decreased risk of legal consequences and the potential financial losses from such violations. Some key regulatory restrictions you’ll want to familiarize yourself with include The Stark Law and Anti-Kickback Statute. Make sure that any deals are crafted to align with healthcare compliance. This is best done by working with legal teams to structure deals accordingly and ensure compliance throughout the process.

Developing a Compelling Financial Model to Attract Investors

There are a lot of factors that you need to consider when it comes to attracting investors, but one of the most important is developing a compelling financial model. Good financial models help provide quantifiable metrics about your MSO and where it’s headed to give investors a more accurate picture of revenue, costs and cash flow.

Some of the key metrics that you’ll want to be sure to highlight in your financial model include:

• EBITDA – which stands for “earnings before interest, taxes, depreciation and amortization” – is an alternative way to measure profitability up against net income.
• Recurring revenue is a good indicator of an MSO’s overall health outcomes as it helps measure predictable and consistent income.
• Scalability, or an organization’s ability to grow within its current structure

Other metrics you may want to consider include gross profit margin, debt-to-equity ratio, working capital, net profit margin, operating cash flow and revenue growth.

Good financial models can go a long way toward setting investor expectations and communicating the overall financial health of your MSO.

Best Practices for Pitching Your MSO to Investors

Once you have your financial model created, it’s time to work to pitch it to investors. Effectively doing this all starts with knowing your audience and then defining your message to them. Aim to hook potential investors by crafting a compelling story or elevator pitch, and then describing how your MSO can serve as an ideal solution. Presenting your financial model and any other complementary documentation is the next key step. From there, you can work on the terms of the agreement.

Some other general tips for pitching to investors include:

• Showcasing the operational efficiency of your MSO
• Showing the growth potential of your MSO
• Effectively communicate the market opportunity

Once you’ve gained some investors, it’s important to continue to build that relationship. Some tips for building long-term relationships with investors include:

• Communicate regularly and clearly
• Demonstrate value in your relationship
• Build relationships on authenticity and respect
• Ask for feedback

Graphite Financial’s Role in Supporting MSO Capital Raising

At Graphite, we bring a wealth of expertise in MSO fundraising and we help startups craft customized strategies tailored to their unique  needs. In addition to MSO capital raising, Graphite can also offer financial planning and financial strategy services to help MSOs fully optimize their capital structure.

Specialized accounting services can pay big dividends for your MSO, and Graphite’s specialized accounting services can help.

The Future of MSO Fundraising – Trends to Watch

What can you expect from the future of MSO fundraising? A few things:

• There’s growing interest in private equity in healthcare.
• The current trend of healthcare industry consolidation is likely to continue.
• There’s an increasing amount of funding models that are emerging in healthcare.

Prepare Your MSO for Capital Raising Success

If you’re looking to fund your MSO, increase your financial performance, and promote future growth, now’s the time to start planning your fundraising efforts. It’s important to have a strong financial strategy and compliance mindset as you go out to secure funding from investors. Contact Graphite today for help.

Work with Graphite Financial to Secure the Right Capital Structure

As experts in MSO capital raising, we’re ready to help you take your MSO to new heights. Contact Graphite today to schedule a consultation and explore strategies that are specifically tailored for your MSO.

FAQs

What is the best way to raise capital for an MSO?

There are several ways to raise capital for an MSO, including debt financing, equity financing, strategic partnerships and convertible debt. Depending on the status of your MSO and what your future goals are, one or more of these options may be suitable.

How do regulatory requirements impact MSO fundraising?

It’s important to understand regulatory restrictions and structure deals that align with healthcare compliance. Regulatory requirements and compliance also extend to fundraising and must be accounted for throughout the process.

Is debt or equity financing better for healthcare MSOs?

Both debt financing and equity financing have their share of advantages and disadvantages. For instance, with debt financing, you can finance the MSO without giving up any equity. However, high interest rates are common and debt financing requires regular income to ensure sufficient payback on debt payments.

Equity financing is a better way to quickly escalate your MSO. However, you typically have to share profits with investors and may even have to give up some control of the MSO.

What financial metrics are most important to investors?

Some of the most important financial metrics to investors include EBITDA, recurring revenue, scalability, gross profit margin, debt-to-equity ratio, working capital, net profit margin, operating cash flow and revenue growth.

How can MSOs attract healthcare-focused investors?

It’s important to create a compelling financial model to attract investors. Beyond that, you should also be showcasing operational efficiency and growth potential, and tailor your pitches specifically for healthcare-specific investors. It’s also crucial to effectively communicate the market opportunity that you’re presenting.

What role does private equity play in MSO funding?

Private equity can help generate returns on investments in healthcare practices. Private equity firms can help provide non-clinical support, assist with regulations, help with structuring the MSO and help build the MSO overall.