Introduction

Following a wave of consolidation across various provider-led healthcare specialties, private equity investors recently started targeting the medical aesthetics industry, which includes a convergence of medical spas (“MedSpas”), cosmetic dermatology practices, and plastic surgery practices.

The dermatology sector has experienced significant consolidation over the past decade, with over 30 private equity-backed platforms dedicated to dermatology now operating nationwide. These firms originally focused on services that receive reimbursement from government and commercial insurance providers. Private equity firms have been hesitant to invest in aesthetic only groups, due to concerns about cyclicality and the risks associated with customers covering 100% of service costs out of pocket. 

The tide began to turn as private equity sponsors recognized the significant market fragmentation and attractive macro/micro dynamics existing in the medical aesthetics space.Over the years, there has been a shift in how private equity in the medical aesthetics views skincare, considering it to be somewhat recession-proof.

 In addition, the North American medical aesthetics market boasts a market size of $22.84 billion as of 2023, exhibiting a CAGR of 13.0%, and is expected to reach $67.89 billion by 2032¹. 

Over the past 24 months, there has been a surge of new private equity platform investments established in the medical aesthetics market, including Olympus Cosmetic Group (VSS Capital), Advanced Medaesthetic Partners (Leon Capital Group), Alpha Aesthetics Partners (Thurston Group), Princeton Medspa Partners (Princeton Equity Group), Athenix (Latticework Capital), and Inspire Aesthetics (Hidden Harbor Capital Partners), further illustrating interest in Medical Aesthetic groups and the expanding market for acquisitions.

Given the surge of investment interest and M&A activity, there are a few drivers motivating private equity investors that are investing in the medical aesthetics space.

Medical Aesthetics Consolidation Drivers

Driver 1 – Rising Demand for Aesthetic Services

There is a growing consumer demand for non-invasive cosmetic procedures, such as Botox, dermal fillers, laser treatments, and other skin rejuvenation services. This demand is driven by several factors, including an aging population seeking to maintain a youthful appearance, increased social media influence, and greater societal acceptance of aesthetic treatments overall. As the market expands, private equity firms see opportunities for growth and profitability in acquiring and consolidating medspa businesses.

Driver 2 – Recurring Revenue and High Margins

Medical aesthetic businesses often generate recurring revenue through membership programs, subscription services, and repeat client visits, creating an annuity-like stream of customer stickiness. These businesses typically enjoy high margins due to the premium pricing of their services and products. The combination of steady cash flow and attractive profit margins makes these businesses appealing to private equity investors who seek stable investments with potential for long-term growth.

Driver 3 – Fragmented Market with Consolidation Opportunities

The medical aesthetic sector is highly fragmented, with many small, independently owned businesses. Private equity firms are attracted to this fragmentation as it presents significant opportunities for consolidation. By acquiring multiple medspa businesses, private equity firms can create larger entities that benefit from economies of scale, streamlined operations, enhanced bargaining power with suppliers, and a stronger market presence. This roll-up strategy can lead to increased revenue, cost efficiencies, and improved profitability.

Current Medical Aesthetics Driven Platforms

Why Now?

“Skin Health” – Convergence of MedSpas, Dermatology, and Plastic Surgery

Competition has intensified in the medical aesthetics sector due to private equity involvement. Private equity-backed dermatology groups are increasingly looking to invest significantly in medical aesthetics, alongside private equity-backed plastic surgery groups. Additionally, private equity firms are now aiming to invest directly in medical aesthetics and develop platforms centered around med spas.

This development creates new options for medspa sellers, as opportunities for value creation have become increasingly diversified. The opportunity to combine medspas with medical dermatology and plastic surgery services can provide a comprehensive range of aesthetic offerings, from non-invasive treatments like Botox and chemical peels to more invasive procedures such as facelifts and body contouring, along with traditional medical dermatology services. This integrated approach will establish a one-stop-shop for patients, enhancing the customer experience and increasing the potential for cross-selling and upselling services. Private equity firms view this strategy as a way to attract a wider client base and drive growth through multiple revenue streams, catering to a diverse range of skin health needs.

Improved Valuation Multiples for MedSpa Owners

The medical aesthetics sector is experiencing increased valuations during sales due to heightened competition from private equity firms, which are investing heavily in the sector. For medical aesthetic business owners, the timing has never been better to consider selling the business. As private equity firms increasingly invest in the medspa sector through add-on acquisitions and new platform development, the market is becoming more competitive. This trend benefits medspa business owners by expanding their options for buyers, allowing them to consider not only the financial aspects but also the cultural fit when making a decision.

Key Considerations For MedSpa Owners & Why an Advisor Is Important

When evaluating a potential partner, it is extremely important to find the right fit to ensure a strong go-forward partnership. PGP advises that four critical factors need to be considered when evaluating whether a partner is right for your practice

• Maximize Economics and Achieve Most Favorable Deal Terms
  • Negotiating favorable economic deal terms (equity share price, timing of payment, etc.) 
  • Strike appropriate balance between total EBITDA credit vs the EBITDA multiple
  • Receiving credit for various tangible growth initiatives in the business (new locations, new providers, new service lines, etc.)
• Achieve Clinical Autonomy
  • Ensure there is a strong level of go-forward governance control at the local level
  • The practice maintains directional control at the company, including work schedules, vacation days, work location, and retention of staff
  • Maintained control of provider recruitment and retention
• Ensuring potential partners have the resources to execute against the strategy
  • Access to capital and economies of scale 
  • Adequate level of administrative and operational resources provided (Accounting / Finance, IT, RCM, Marketing, HR & Recruiting, Business Development, Legal, etc.)
• Track Record of Success
  • Partnering with experienced healthcare / PPM ‘Operating Partners’ with a history of adding significant value and operational guidance in the PPM space
  • Proven ability to align with young and newly recruited providers
  • Exceptional key performance metrics (recruitment, attrition, location growth, service line expansion)

Every private equity sponsor views the world through a different lens when it comes to their motivations, growth plan and relevant experience within the space. When seeking a partner, it is imperative for medspa owners to be diligent in ensuring alignment for the future. The partnership is not permanent, but the years following a transaction will need close collaboration from each party for it to be successful. 

Physician Growth Partners (PGP) works on behalf of independent medspa owners to ensure their goals and succession planning needs are met through a transaction. Our process is tailored around maximizing value, while identifying and engaging investors that will be a strong cultural fit with experience in the healthcare space to ensure a successful go-forward partnership.

While many independent groups may initially feel they can navigate a transaction without an advisor, those that have gone through the process with an experienced and reputable firm in their corner will be quick to highlight the significant value add from both economic, partnership and educational perspectives. Ensuring that each shareholder is prepared and fully understands the dynamics within a transaction is crucial for the future success of the business.

Creating Value after the Transaction

One of the biggest questions medspa owners have is what happens after the transaction is consummated? In reality, if you are doing a transaction with a reputable private equity platform, physicians will largely continue to operate “business as usual”. The private equity partner will look to implement certain growth initiatives, but these initiatives will all be items that were discussed at great length in advance of consummating the transaction. On the clinical front, physicians will practice medicine the way they always have. Clinical autonomy is maintained, and an advisory firm like PGP negotiates this on the physician group’s behalf. As for infrastructure capabilities, groups that lack back-office sophistication will typically integrate into the “platform” practices EMR, Accounting and PM systems. Outside of day-to-day operations and clinical delivery, the most notable change is the holding of rollover equity in the new partnership by selling physicians. Due to the fact a substantial liquidity event is experienced, shareholders are required to utilize a percentage of their proceeds in the form of equity in the new enterprise. This is desired by the private equity firms as they want to maintain alignment with the physicians that they have invested in, creating a shared goal of a “second bite of the apple” when the platform ultimately experiences a subsequent sale 3–7 years down the road.

Conclusion      

The consolidation within the medical aesthetics sector continues to accelerate into the fourth quarter of 2024 and PGP expects the heightened pace to continue into 2025. Whether a medspa, dermatology or plastic surgery practice owner outwardly desires private equity partnership, questions the rationale and effectiveness of a PE partner, or downright disagrees with private equity, it is essential to get educated and ensure your practice is positioned for continued success in your market.

For those that choose to go down the path, it is imperative that culture and alignment, not simply economics, is the first goal. The role of an advisor like PGP can be the difference maker not only in knowing who can be trusted and who has a track record of success, but in ensuring an economic outcome that is satisfactory when transferring the ownership of your business.

If interested in pursuing a transaction, learning about private equity, the private equity strategy, transaction dynamics, or activity in your market, please utilize the information below to contact the PGP team and schedule a discussion.

¹Fortune Business Insights – August 19, 2024