I get more than my fair share of calls from doctors expressing buyer’s remorse.
They sold their practice to private equity (PE). They may have received a large check, with the expectation of more money down the road, if they can stay the course. Or they may have received a small check and lots of shares of stock in the roll-up company that one day will go public.
Since I am receiving calls from doctors who are venting, my recency bias suggests most of these types of deals do not deliver as promised for doctors. I conclude that healthcare and private equity don’t mix. That may not be fair. If you’ve had a positive experience selling your practice to private equity, please write in.
Let’s start at the beginning. Why would someone sell their practice to private equity?
Well, they’ve worked for years building their reputation and their brand. And likely they have a successful business. They reasonably want an exit strategy. The universe of options for monetizing that exit is not infinite. You can bring in partners and sell your shares to them. You can merge with other similarly situated groups. You can sell to the local hospital or healthcare organization. Or you can just walk away – perhaps you’ve made enough, and enough is enough.
So, why private equity?
The initial reason is money.
Immediate payout: The sale often offers a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), giving the physician a large upfront sum. That’s a check you can take to your bank today.
Future upside: Many deals include “rollover equity,” meaning the physician retains a minority stake in the new company that could appreciate if the PE firm sells later. Who doesn’t want to play with house money and receive a second, even bigger check in the future?
Next, there are business and operational reasons.
Less management burden: PE firms usually centralize billing, HR, compliance, marketing, and IT through a management services organization (MSO). You likely hated your administrative tasks. Good. Now you can outsource those tasks to others. You can stay in the OR all day.
Professional management: This allows physicians to focus more on clinical work and patient care rather than running the business. You likely didn’t have an MBA. Now you get an MBA to run things. Isn’t that a good thing?
Economies of scale: Larger entities can negotiate better payer rates with carriers, supply contracts, and technology deals. When you purchased professional liability insurance, software licenses, and paper clips, you were paying full retail. Now you can buy at wholesale.
Next category… is cash for growth.
Capital for expansion: PE funding can enable new clinics, acquisition of competitors, or investments in new technologies and service lines. This is not for everyone. Perhaps you just wanted to retire. But your brand could live on.
Brand leverage: Joining a platform often provides marketing, referral, and recruiting advantages.
Negotiating power: Larger, consolidated practices have greater leverage with insurers and vendors. We hit this advantage earlier. But it bears repeating. Because this likely is one of the main advantages.
Finally, it’s a formula that’s been used by your colleagues on their way out the door.
Retirement pathway: A PE sale can help older physicians monetize their practice value and transition out gradually.
Recruitment appeal: Younger physicians may prefer joining a professionally managed, financially stable practice.
Structured buyout: The PE group often provides predictable mechanisms for ownership transition versus informal internal buy-ins.
OK, so what’s the other side of that coin? What are the downsides?
The main one: Loss of autonomy. You were previously captain of the ship. Now you’re a widget with minimal control. Before, if you didn’t care for an admin or scrub tech, you could fire them. Now, you have to suck it up, buttercup. You’re no longer the captain. You don’t give orders. You take orders.
Next, the sword of Damocles will hang over your head. You will be held accountable for revenue. Really accountable. Work RVUs are how you’ll be measured. Time per patient. Number of patients you saw. Need more time with that one patient? Tough. You can do it, of course, but then you’ll have to make it up. You thought you were retiring? Now you’re working evenings and weekends. Even more evenings and weekends than before.
Cultural misalignment. You’re a doctor. You liked working around doctors. They were part of your tribe. They get you. You get them. Now, there are business types who speak a different language. You’ll have to adapt.
Finally, short investment horizon. PE wants its investment to yield profitability soon. They do not want to wait too long. You did 4 years of medical school. 7 years of residency and fellowship. You’re used to a long time horizon. PE is not.
And one more thing, if you didn’t receive a large check up front, but mostly equity in the future roll-up, there are no guarantees that investment in paper will pay off later.
OK, let’s say you did get a big check upfront. Now, you can get another check merely by showing up and coming to work for the next, say, three years. Surely, you can suck it up. How bad could it be? Couldn’t you be a metaphorical prisoner for three years, and then count the cash when you receive your freedom?
Well, hard to say.
When you’re about to retire, you assume your health will be the same three years later. Is that accurate? For many, yes. For all, absolutely not.
Then, what if you truly are miserable driving to work each day over the next three years? That misery makes you more difficult than before. That bleeds into your interpersonal relationships. Your marriage may have been struggling before. Now it’s over. And your spouse will collect half of that giant new check. Was it worth it?
Well, like most things in business, who you do business with matters as much as the type of business you are doing. If you want to consider private equity as an option, learn more about the organization you’ll be working for. Get references. See how well it worked out for your peers. Not all PE organizations are the same.
Be cautious about trading a certain stream of revenue today for an uncertain one in the future. Many physicians have been burnt, having to work far longer than they intended.
Finally, don’t be too greedy. You’ll never be able to spend it all in your lifetime. It makes no sense becoming a prisoner at work at the end of your career.
OK, if PE worked well for you, please let us know.
What do you think?
I do have an MBA and this is just bad business.
1) One good aspect not mentioned, the new entity takes control of medical records and is responsible for maintaining them.
2) Why anyone would stick around after a purchase like this, or any business, for more than a brief time is ludicrous. The new entity will not run things the way that you did. They may not even be as profitable as you were because your business operations were optimized for your area, and your patients.
3) The small piece of equity is just a carrot that is dangled but is meaningless, because you do not know if the purchasing company is a good business operation or not. You don’t really care since you are not sticking around. The only reason for doing a deeper dive into their business is if you are taking a buy out over time (bad idea). Get your money, and get out.
It is a large chuck of money, invest it conservatively and wisely and it will provide income for you the rest of your life. For many physicians, there was never any planning about what to do in retirement. Therefore sticking around is thought to be a useful transition. It isn’t.
Cut the cord, and move on. That is scary for those physicians that have never changed careers. But there is life after practice.
4) Make sure that you have a good business attorney familiar with these agreements, look over the exit financial documents. You would want to be indemnified against anything that the business entity may do to your former practice, patients, staff etc. You do not want to get dragged back in to anything once they take over (another reason for a clean break).
5) I saw one buy out decades ago, where the buy out took place over several years because the purchasing physicians did not want to take out a loan. They should have. Instead the selling physician paid them, not on the valuation of the practice when he departed, but on a percentage of future revenue as the new owning physicians grew the practice. They wound up paying far more than the practice was worth at the time of sale. Had they taken out a loan, and paid one set price up front, they would have had the bank load paid off faster than they paid off the selling physician, and for far less money.
6)Physicians that I have encountered for the most part over the past 50 years are terrible business people, make terrible business decisions, and have no understanding of contracts, the present value of money, or anything else business related. I’ve seen mistake after mistake made because of the arrogance of thinking that since they could master medicine, they could master business, with no training and no experience.
7) If one wants to see what corporate medicine is like look no further than the physicians working for hospitals. It is not any better on that side of the street.
8)Bear in mind, that the practice that you built has economic value. Don’t just close the doors and walk away. That is not sound business. Do get a certified check at close. Then walk away. You will get a large payday for all of the equity you built over time. Physicians and even many small business people are not trained to think this way. Also, the search for an entity to sell to should not start a month before you are planning to retire. It should start a year in advance. You must get a lot of documents together to have a proper valuation done, so you know the worth of your business.
Only once you know the value of your business are you in a position to negotiate a price for your practice. Physicians just shutting the doors are throwing away money.
One other issue that is not discussed, falsely inflated accounts receivable. If you bill Medicare at your usual and customary rate, and medicare allows their rate of reimbursement, of which they pay 80%, then you will have significant write offs. Bill the correct amount.
I tried to explain to a physician and his wife decades ago, that the amount that they billed above the medicare allowed rate, was never going to be collectible. They thought that they were owed tens of thousands of dollars that they would never collect.
Bad debt decreases the value of the practice leading up to a sale.
Retired has it correct. Not discussed is the issue of being required to face malpractice claims if you continue to work for the buying entity/persons. Even if they pay your liability insurance, you yourself will still have to help the insurance company “resolve” the claim.
This is especially relevant if you are a surgeon. Surgery practice is very “personal.” You are held to a very personal standard of care.
Then there is the issue of downsizing after your retirement. There is no compelling reason to maintain a large home with a pool to “attract” your grandchildren. First, you may not end up with any. Second, when your grandchildren become teens, they will have their own lives and will never visit you.
Only you can decide if you want to continue to live in a Blue state that depends on your taxes to pay for their socialism. That socialism did not help you or prevent you from being required to take out and repay your student loans.
Michael M. Rosenblatt, DPM
Great blog, Jeff.
Another point left out in discussions about selling to private equity is that you have no control over what happens to the private equity company. With the PE entity, at least you have some hope of equity in the business going forward (of course, that’s why a lot of these doctors spend so much time on the phone trying to recruit more doctors to join to feed the beast).
But now we are seeing PEs, many struggling with debt, selling out to larger corporations who are paying cash and acquiring many medical practices en masse.
So the physician has gone from partner in a practice to minority stakeholder in a private equity entity to a small cog in a ‘corporate strategic’, not just a captive doctor, but also a captive customer, likely forced to make all of their purchases from the mother company.
And does the corporate strategy have to honor the doctors’ original contracts? The jury is still out on that.