Mastering the private equity deal: a framework for medical practices

Bert Orlov (Courtesy: EisnerAmper)

Since 2015, annual reported physician practice transactions have grown by more than 400%—exceeding 400 in 2023. During this period private equity (PE) firms have also been increasing their acquisition of physician practices, from 75 deals in 2012 to 484 deals in 2023.

Clearly, increasing numbers of physicians are considering transactional options with PE partners. But why all the fuss? Simple: Physicians have a new, more lucrative way to monetize the value they’ve created in their practices. But is a PE acquisition a good idea?

To answer that you need to examine the pros and cons for your own practice. The pros: substantial financial return, reduction in the burden of running a practice, and support to run/grow the practice. The cons: loss of autonomy, less financial attractiveness for younger doctors, and uncertainty about how PE will play out in the future. Regardless, any physician in private practice should give serious consideration to the option of a deal or at least think about how PE might impact the market.

PE-driven industry changes would flow from the consolidation of smaller practices into larger, better-capitalized groups. These entities can invest in performance improvements in revenue cycle, patient management/engagement, IT/AI, additional physicians and leadership/staff, marketing, and more. Collectively, these results will enable PE-backed groups to compete more strongly.

In addition, AI and patient engagement will evolve materially. Delivering on value-based care—tracking patients, engaging staff for care management, and measuring performance—will also improve. In addition, market relationships—patient engagement, managed care contracting, and hospital relationships—would likely favor larger players.

Based on our experience with dozens of such transactions, representing both buyers and sellers, here’s a three-step framework for evaluating and then conducting a PE transaction. Following a clear process is crucial to practice success in crafting a deal with a PE firm (or hospital network or other MD groups). Broadly speaking, the framework can help prevent a deal from unravelling late in the process.

Prepare: Ensure internal consensus based on a realistic understanding of the practices’ value and market dynamics, plus identify a means to increase market value.

Negotiate: Identify potential partners and select the best choice. Then, advance deal-making (including legal, financial, and tax review as well as proper due diligence on both sides), and plan for the detailed components of negotiations.

Implement:Facilitate the transition, detailing essential seller and buyer responsibilities, transaction mechanics, and successfully navigating the often-convoluted closing process.

Let’s do a deeper dive on each of the three steps:

Step I: Preparation

The goal is to develop internal consensus, establish a realistic sense of practice value, and determine strategies to strengthen value and thus purchase price. (Even for those not contemplating a PE deal, learning how the market will view practices and identifying strategies to strengthen independent practice warrants understanding; thus, all practices could benefit from taking these actions.)

• Discuss short- and long-term goals. An independent, third-party facilitator can add objectivity and help prevent (or at least manage) internal conflict while making sure each stakeholder is heard. This discussion forms the basis for deciding whether and how to move forward.
• Every practice needs to understand its strengths and weaknesses. A broad analysis should include financials, productivity, referral sources, operating expenses, and patient throughput as well as market relationships.
• Understand what strategies can drive performance improvement to increase the practice’s earnings before interest, taxes, depreciation and amortization (EBITDA), a standard measurement of market value. Examples include productivity growth, revenue cycle management, coding, and efficiencies in staffing. For larger groups, valuable levers can include ancillary services utilization/development, avoiding over-investment in those that don’t show a positive return, and leakage reduction across specialties and ancillaries.

These tasks will enable the practice to articulate goals and delve into deal details. Typically, key elements of a deal include purchase in cash versus equity shares, physician compensation and restrictive covenants, operational autonomy, planned investments by PE, and service-level agreements from the buyer following the sale.

Step 2: Negotiations

• Identify potential partners and contact those with relevant interests in your specialty, region, or organization type.
• Develop a “pitch book” and circulate to potential partners to help set the tone for the discussions and demonstrate to PE firms that you understand the market. The pitch book should include a full scope quality of earnings (QoE) report and other analyses to demonstrate value around productivity, cost effectiveness, market strength, and so forth.
• Secure and evaluate PE proposals. Develop a clear matrix to evaluate proposals based on a set of key factors that can be “graded” to yield the top two or three candidates. Based on that narrowing of potential partners, conduct due diligence on the finalists and select your preferred partner.
• After signing a letter of intent, expect a “stand-still” period in which you can only negotiate with that one partner. Use that time to gain a deeper understanding of the financial, strategic, operational, and organizational character of your potential partner. You can also work out the deal terms, including financial, legal, and tax issues.

Step 3: Implementation

• Develop an overall plan for transition containing the timeline and roles and responsibilities for both the buyer and seller. This plan supports mutual accountability and a smoother transition. Typically, the buyer bears responsibility for system conversions (e.g., EHRs and IT), onboarding of staff/MDs, and marketing, while the seller is responsible for A/R run-down, MD/staff productivity, and community outreach. A joint committee for oversight of the process is recommended, especially for overlapping areas such as marketing to patients and the community.
• Joint development of growth plans should begin so that the practice and its PE partners/owners are ready to immediately generate value for both the PE firm and the partners/physicians (assuming they hold some equity).
• Monitor progress against the timeline and adjust as needed, recognizing that small delays are common, and it is generally better to nail down all the details than to rush into the final signing.
• Close the deal and transition operational management according to the ground rules established above.

Naturally, there are many details underlying each step described above. But following a structured process will strengthen both the deal terms and the internal cohesion of the group throughout the process. Even for those not envisioning a PE acquisition in the near future, understanding PE expectations is critical for strengthening a practice’s finances and maintaining its competitive position. 

Bert Orlov, MBA, is a managing director in the health care consulting group of EisnerAmper, a tax, accounting, and advisory firm.