Understanding the Business Model for Selling Your Clinical Research Site

As the landscape of clinical research evolves, so too does the business model for clinical research sites. For many site owners, selling their clinic can be a strategic move to capitalize on years of hard work and investment. Personally, I have been exploring the possibility, and have amassed dozens of podcasts on my Youtube channel as well as private conversations with individuals involved in these types of transactions over the past 6 months or so. This article will walk you through the key considerations and steps involved in selling your clinical research site, drawing insights from industry experts in healthcare investment. I have based this article on numerous podcasts from my channel as well as the aforementioned private conversations where the sources wish to remain anonymous. I hope this article can give you a starting point and framework from which you can start doing your own research on the topic.

The Importance of Positioning

When preparing to sell a clinical research site, positioning is paramount. It's crucial to ensure that your site is attractive to potential buyers, which often means having a diversified portfolio of studies and a robust operational framework. Investors are particularly interested in sites that have established a strong reputation, diversified their therapeutic areas, and built a sustainable business model. As one expert noted during a recent discussion of mine, "We started this to sell it one day. Going in, we knew this was not going to be a lifestyle business but a strategic business opportunity." Additionally, not being dependent on any key individuals for the survival of the business is critical!

Market Dynamics and Consolidation Trends

The clinical research market is currently seeing a wave of consolidation, driven by investors looking to capitalize on the growing demand for clinical trials. This demand is fueled by increasing R&D spend, the complexity of clinical trials, and the need for efficient patient recruitment. Investors are particularly attracted to site networks that can aggregate demand across multiple sites and therapeutic areas, thereby increasing their bargaining power with sponsors and CROs.

One notable trend is the increasing interest from private equity firms in acquiring clinical research sites. These firms are looking to build large site networks that can provide comprehensive services across a range of therapeutic areas. For site owners, this trend presents an opportunity to sell at favorable multiples, particularly if their site is well-positioned and profitable.

Additionally, there has been increased activity in large contract research organizations (CROs) acquiring site networks, most likely to differentiate themselves from the competition and to diversify their own revenue streams. This has created some critical liquidity in the market and has catalyzed more venture capital or private equity firms to initiate the consolidation phase. Knowing that liquidity exists in the market has created a layer of safety and boosted multiples from acquiring firms.

The Role of Investment Bankers

Investment bankers play a critical role in the sale process. Unlike brokers who might charge monthly fees, investment bankers typically work on a retainer and success fee basis. They help position your site to maximize its value and create competitive tension by introducing multiple potential buyers. "We don't get paid until a transaction happens," explained one expert, emphasizing the alignment of interests between site owners and investment bankers.

Sites may not need outside assistance from formal bankers, as a marketplace of consultants specializing in these transactions has emerged. In any case, understanding the landscape and networking with other site owners or professionals engaged in these types of deals at events like SOS Save Our Sites may not be a bad starting point.

Financial Metrics and Valuation Multiples

Valuation multiples are a key consideration in any sale. For smaller sites, multiples might range from 5 to 8 times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Larger, more diversified sites can command higher multiples, potentially exceeding 10 times EBITDA as of the date of this article. However, accurate financial reporting is crucial. Buyers will scrutinize expenses, including salaries and any personal expenses run through the business, to ensure the EBITDA figure reflects true operational profitability.

Owner Salaries and EBITDA

One critical factor that influences EBITDA calculations is the owner's salary. In many small businesses, owners may take a lower salary or none at all, opting instead for profit distributions. However, when preparing to sell, it’s essential to adjust this to a market-based salary. Potential buyers will want to see an EBITDA figure that reflects what the business would earn with all positions, including the owner's, paid at competitive market rates. This adjustment helps provide a more accurate picture of the business's operational profitability and ensures the valuation multiple applied to EBITDA is fair and realistic.

As one expert explained, "They’re not going to pay you on expenses or EBITDA before your salary is included, because you’re going to have to make money going forward, and it’s not going to be via a draw. It’s going to be through a W2 most likely."

Deal Structures and Equity Rollovers

Deals can vary significantly depending on the buyer and the size of the site. Common structures include selling a portion of the equity while retaining some to ensure continued alignment and investment in the site's success. For example, you might sell 70% of your business for immediate cash while retaining 30% equity, which can increase in value if the site performs well post-sale, or gets "flipped" again to another acquirer.

Equity rollovers are common, particularly for smaller sites. This ensures that original owners remain invested in the site's success, aligning their interests with the new owners. "They want to make sure there's enough of your wealth tied to the business that you're going to continue running it well," an expert noted. This alignment helps maintain operational continuity and maximizes the potential for future gains.

Growth Considerations and Geographic Factors

When considering the sale of your clinical research site, it’s important to factor in growth potential and geographic location. Sites in diverse and underserved areas may command higher valuations, especially as the FDA places increasing emphasis on diversity in clinical trials. Additionally, sites that can demonstrate a track record of growth and the ability to navigate through therapeutic area "droughts" will be more attractive to investors.

For instance, sites operating in regions with limited competition or those that can easily recruit diverse patient populations are particularly valuable. This is because the ability to consistently recruit patients is a key factor that drives site profitability and attractiveness to sponsors. Additionally, sites with strong referral networks or partnerships with local healthcare providers can further enhance their value.

Preparing for Sale

Before initiating a sale, ensure your financials are in order and your site is operating efficiently. This might involve adjusting salaries to market rates, removing non-business-related expenses from the books, and ensuring that your site is diversified across multiple therapeutic areas. Investment bankers or consultants can assist in this process, ensuring your EBITDA and valuation multiples are accurate and attractive to buyers.

Building Relationships

Even if you're not ready to sell immediately, building relationships with potential buyers can be beneficial. Networking and preliminary conversations can position your site favorably when the time is right. "It's always good to start building relationships," advised one expert, highlighting the importance of strategic networking. Again conferences dedicated to serving research sites and their ecosystems like Save Our Sites Conference are worth looking into. The SOS Save Our Sites founding team consist of site owners and well networked individuals willing to point you in the right direction. Get to know Brad Hightower Monica Cuitiva B.S, B.A ., CRC Judy Galindo Chris Sauber Ashley Margo, BS .

Conclusion

Selling a clinical research site is a complex but potentially rewarding process. By positioning your site correctly, understanding market dynamics, leveraging the expertise of investment bankers, and preparing your financials, you can maximize the value of your site and achieve a successful sale. As the market for clinical research evolves, staying informed and proactive can help you capitalize on opportunities and achieve your business goals.