Private Equity Wants Your Practice: Essential Steps to Maximize Your Sale Value
The market for medical practice sales to private equity has skyrocketed over the last several years. Annual physician practice transactions have grown by more than 400% since 2015, with deals exceeding 400 in 2023 alone. The numbers make sense – doctors typically get paid double what they’d receive in traditional doctor-to-doctor sales.
Private equity firms love specialty practices that bring in high reimbursements. Dermatology, urology, gastroenterology, and cardiology come off the top of my head. But selling your practice to private equity isn’t as simple as it sounds. These firms look for profit margins above 30% before they show real interest. They might make an exception if they see clear ways to boost profits after buying. The compensation structure usually changes too. A physician making $800,000 yearly might need to accept $600,000, while the difference goes toward practice EBITDA that investors track.
In this piece, we’ll show you everything in maximizing your practice’s value when private equity firms come calling. Our guidance works for both small “tuck-in” practices and larger organizations. You’ll learn what makes these deals tick and how to secure the best outcome for your professional legacy.
Understand What Private Equity Looks For
Medical practices looking to sell must know what private equity firms want. Healthcare private equity investments have grown remarkably. They surpassed $750 billion in the last decade. These investments now target healthcare sectors of all types across the US.
Financial performance and profitability
Private equity investors will get into your practice’s financial health first. They look for practices with strong operating margins—preferably above 7%. Their goal is to find ways to increase profitability after buying the practice.
PE firms review these key financial indicators:
- Net patient revenue per discharge (PE-acquired hospitals saw 7.4% increases)
- Days in Receivable Outstanding (preferably under 35 days)
- Net collection rate (ideal target around 95%)
- Percentage of receivables over 120 days (should be under 10%)
PE firms expect annual returns that exceed 20% on their investments. They prefer buying financially healthy practices rather than struggling ones. Healthy practices can better handle the debt that comes with acquisitions.
Specialty and market consolidation potential
Certain specialties attract PE firms more than others. High reimbursement rates, growing demand from aging populations, and fragmented markets make ideal targets. These investors use a “platform-based” strategy. They make a big original investment in a dominant regional practice. Then they add smaller practices to create multi-state networks.
This “roll-up” strategy helps PE firms achieve “multiple arbitrage.” They combine smaller practices trading at lower valuation multiples into larger platform practices. The larger practices command higher valuations because of their size and market share. PE firms grow their affiliated physician practices by nearly 600% within three years of buying them.
Operational efficiency and scalability
PE firms also review your practice’s operational potential. They search for ways to streamline operations and cut costs. They implement tech improvements that boost efficiency without compromising care quality.
PE investors see physician practices as adaptable roll-up opportunities to streamline back-office work. After buying a practice, they focus on improving revenue cycle management. They enhance tech systems, standardize operations across locations, and negotiate better supply chain and payer contracts through economies of scale.
PE firms buy practices they believe can deliver substantial returns. They plan to improve operations, consolidate market share, and resell within 3-7 years.
Prepare Your Practice for a Private Equity Sale
Your practice’s value will increase with proper preparation before you approach private equity buyers. Understanding what investors want helps you prepare your practice to meet their expectations.
Build internal consensus among partners
Getting all physician partners to agree is a vital pre-sale preparation step. Practices with multiple owners need complete agreement among stakeholders before they start the selling process. Partners should resolve unique ownership arrangements, contractual obligations, and potential conflicts to create a unified approach.
Younger partners who are not close to retirement might resist plans to sell. They should understand the strategic vision and how the deal helps them through better operations, quick cash access, and potential equity growth. The core team should learn about the plans at the right time to balance openness with workplace concerns.
Conduct a practice valuation
A precise valuation sets a fair purchase price and gives you a stronger position to negotiate. Work with valuation experts to assess tangible assets (equipment, real estate), intangible assets (patient relationships, reputation), and practice viability.
Valuation professionals use three approaches:
- Market-based: Comparing to similar practices sold recently
- Income-based: Calculating present value of expected future cash flows
- Asset-based: Tallying tangible and intangible assets
Healthcare transactions must follow state and federal anti-kickback laws that require sales at fair market value without factoring in future referrals.
Address compliance and legal risks
PE funds look for investments that boost profits while reducing risk. A practice with lower profits but strong compliance might draw more interest than a highly profitable one with questionable regulatory practices.
So, hire a third-party coding compliance firm to audit your coding practices. Legal reviews should cover all business relationships, especially sublease arrangements with referral sources and contracts with marketing companies. Look through corporate documents that might need updates – shareholder agreements, bylaws, and employment contracts.
Clean up financial records and reporting
Accrual-basis accounting might work better than cash-basis to show clearer trend analysis. Clean, consistent record-keeping can boost your practice’s selling price substantially. Check financial records from the last 2-3 years to ensure accurate and consistent reporting.
Remove certain discretionary expenses if they won’t repeat. Figure out how recent acquisitions, expansions, or performance improvements will benefit future owners.
Navigate the Sale Process Step-by-Step
The actual transaction process needs careful attention to detail after you prepare your practice for sale. The time from first contact to closing usually takes six months or longer. Several important stages need your focus along the way.
Initial evaluation and outreach
Your practice’s market position and value assessment marks the beginning of the sale process. A healthcare-specific investment banker can help create a competitive auction environment. This approach often leads to higher valuations compared to dealing with just one buyer. Investment bankers add credibility to your practice and can find the most suitable private equity partners that align with your goals.
Protecting confidentiality should be your first priority. Make potential buyers sign non-disclosure agreements before you share any sensitive information. This safeguards your practice if the deal falls through.
Due diligence and documentation
Buyers will inspect every aspect of your practice during due diligence. They look beyond standard financial review to examine:
- Regulatory compliance status
- Payer contracts and reimbursement terms
- Medical record systems and cybersecurity measures
- Staffing models and physician productivity
Your financial statements need normalization by removing non-recurring expenses that affect EBITDA. Note that a mere $1 reduction in EBITDA can lower your practice value by $9-10 if the purchase price uses a 9-10x multiple.
Negotiating deal terms and structure
Private equity firms usually calculate purchase prices using EBITDA multiples, which vary by specialty. The sale agreement should clearly state what’s included – from accounts receivable to real estate – and what you’ll keep. Any deferred payments need appropriate collateral security. Your post-transaction physician compensation formulas should be negotiated carefully, typically ranging between 30-40% of collections.
Understanding equity rollovers and compensation changes
The percentage of equity rollover (ownership kept in the new entity) has grown steadily from 46% in 2020 to 57% in 2023. Lower immediate cash proceeds come with this arrangement, but it offers a chance for a “second bite at the apple” during the PE firm’s exit.
Compensation changes should not surprise you. Physicians making $800,000 yearly might see their salaries adjust to $600,000, with the difference going toward practice EBITDA. PE firms also commonly require practices to maintain specific EBITDA reserves after closing, which affects physician distributions.
Know What to Expect After the Deal Closes
The moment you finalize your private equity deal, you should expect things to change by a lot. PE firms will roll out their strategy to generate returns, which leads to fundamental changes in how physician practices operate.
Changes in physician compensation
The financial reality becomes clear right away. Doctors usually see their pay drop as PE firms work to make practices more profitable. The old pay models give way to systems based on productivity. RVU rates might drop from $42 to $32. Equity stakes and management bonuses help offset these cuts, but doctors still face 15-25% less take-home pay.
PE firms want to redirect money toward the practice’s EBITDA. They need to recover their investment and boost the practice’s value. So doctors end up working harder for less money now, though they might see bigger returns later if the practice sells to another buyer.
Operational and cultural shifts
Doctors lose much of their independence after a sale. Rules exist to keep non-doctors from influencing medical decisions, but violations have happened in many specialties. The new owners focus on efficiency over tradition. They standardize workflows, extend hours, and track productivity more closely.
Culture clashes create real problems, and staff turnover spikes after these deals. Research shows doctor departures jumped by 265% in PE-owned eye care practices. Younger doctors leave at much higher rates – PE practices have to replace them at 2.28 times the rate of regular practices, which only see a 1.08 replacement ratio.
Post-sale responsibilities and growth expectations
PE firms work fast – over half (51.6%) of practices end up selling again within three years of the original investment. During this time, practices grow rapidly. They add nearly 600% more affiliated doctors in just three years.
This quick growth puts constant pressure on practices. They must see more patients, improve billing, and add services. Doctors feel unique stress in this environment. They have less control but more administrative work.
The long-term outlook raises concerns. Almost all PE exits (97.8%) happen through sales to other PE firms. This creates a cycle of short-term profit-seeking instead of building stable practices. Doctors who sell to private equity face ongoing uncertainty as their practices keep changing hands.
Conclusion
Make an Informed Decision About Your Practice’s Future
Physician-owners face both a chance and challenge when it comes to private equity acquisition. This piece shows how PE firms review potential practices, what you need to do before selling, how to handle complex deals, and what comes after the sale.
The financial benefits are big – you’ll typically get double the money compared to selling to another physician. But these benefits come with the most important trade-offs. You’ll need to think about whether you’re okay with less control, possible pay changes, and shifts in practice culture that might affect your goals.
You should ask yourself key questions before jumping into PE partnerships. Will you keep control over clinical decisions? Does your growth vision match what the PE firm wants? Have you really looked into how you’ll get paid after the sale?
Talk to doctors who’ve already sold to private equity groups. Their ground experiences often show what you won’t see during deal talks. Note that PE firms might offer great quick cash, but they rarely stay longer than seven years. Your practice could end up changing hands multiple times.
Your legacy matters just as much as the money. Medical practices mean more than just assets—they represent years of patient trust and community bonds. The right buyer needs to care about these human elements as much as they care about profits.
Private equity acquisition could be your perfect exit plan, or it might go against what you value most. The knowledge from this guide helps you talk to potential buyers with confidence, get the best value for your practice, and ended up making the choice that protects your professional legacy.
