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?
