Medspa Market Interest Creates Opportunities for Owners and Investors

With building interest in wellness and cost-effective, nonsurgical aesthetic treatment among the American public, the medspa industry has seen increasing growth over the past decade. As a result, the medspa market is heating up, with investors interested in getting in on the ground floor of a newly consolidating industry.

The driving forces for investor interest

Chief among the factors driving investor interest in the medspa industry is the industry’s demonstrated capacity for growth.

The American population is aging quickly, and, as a result, anti-aging treatments are increasingly popular. Demand for medspa services is also expanding among young people, both for “preventive” aesthetic care, and in response to shifting aesthetic trends. Many medspas have also recognized that men are a relatively untapped area of potential demand and have responded by creating services marketed specifically to that group.

Investors are also attracted to opportunities that demonstrate resilience amid economic downturn or other major events. While the medspa industry took a hit during COVID-19, recovery has been strong and swift, with patients interested in returning to their pre-pandemic routines.

The cash-based nature of the medspa business makes it an attractive target for investors. Medspa revenue is essentially all out of pocket, with the potential for recurring revenue from a single customer as they become more comfortable with and interested in medspa procedures. Medspas also offer multiple, high-margin revenue streams — both from procedures and retail sales of products and at-home tools.

Finally, we are still on the front end of the wave of mergers and acquisitions activity in the medspa industry. While investors are increasingly interested in medspa opportunities, there is still ample room for additional activity — and the chance for investors to create dominant market positions. The froth in the medspa market can be a win for owners, with finalized deals routinely bringing valuations of between six and eight times EBITDA.

The value of management service organizations

An increasingly popular method of consolidation within the medspa industry is the management service organization (MSO). MSOs are entities created to help with business functions such as accounting, marketing, scheduling, office management, and human resources. MSOs generally function by entering into management service agreements with physician-owned corporations and charging a management fee for the services provided.

MSOs can be a powerful vehicle for improving operational efficiency, as they can generally hire more specialized staff than an individual medspa. Sharing resources in non-medical areas allows physicians and health professionals to focus on providing care to patients, rather than splitting time between the clinical and business aspects of maintaining a practice.

MSOs also increase the opportunity for non-physicians to invest in medspas while maintaining compliance with state laws regarding the corporate practice of medicine (CPOM). CPOM requires that physicians own medical practices and dictates that only physicians can receive payment for medical services. MSOs create a vehicle to extract value from medspas for non-physicians who have an interest in the industry but lack the clinical qualifications to open their own office.

Keys to a successful transition

Whether you are actively seeking investment in your practice, or you simply want to keep your options open and focus on improving operations, several key items can help smooth the process of a potential future transaction.

Communicate your “why”

Knowing your goals and understanding the story of your business is key in assessing whether an opportunity might be a good fit for your organization. When entering into an agreement like an MSO — which by its nature removes aspects of control from the existing owners of a practice — trust and understanding between current owners and potential investment partners is paramount to a successful relationship both during and after a deal.

Build a strong team

In many cases, your position when entering a transaction is only as good as the team you bring to the table. Making sure that internal and external advisors understand your business and objectives, as well as the market landscape and deal structures, can increase value during a transaction. Quality advisors with experience in the medspa industry can help you avoid common pitfalls.

Professionalize the business side of your practice

Financial information is fundamental to a successful transaction — it drives valuations and helps quantify the story you tell about your business. Medspa owners often place greater emphasis on the elements of the practice that are patient-facing, while neglecting basic business functions that are an investor’s key indicators of the health of the practice.

Even if a transaction is not on the horizon, organized and accurate financials can help you understand areas for improvement, set goals, and create a plan for the future.

Understand your market

Knowing how you stack up against others in the medspa industry can provide clarity, help you advocate for the value within your practice, and reveal areas of opportunity for improvement. To make your organization a more attractive candidate for investment, find advisors with deep industry knowledge who can help you make sense of the current market, set expectations, and provide advice.

How we can help

CLA’s team of health care professionals can help you understand key areas of opportunity within the medspa industry. With a wide range of experience, we routinely assist with accounting support, CFO consulting, cash basis to GAAP financial conversions, and support throughout the process of a transaction. Reach out today to learn how CLA can help you elevate your business and achieve your goals.