Private equity: an “in-game” review

Before choosing a side, understand the truth about these PE myths and misconceptions.

We are now two years into the visible movement of private equity (PE) into ophthalmology, and it’s time to do an “in-game” recap assessment. We are likely in the second inning of this nine-inning consolidation phase.

While the economic value being ascribed to specific practices is something never before seen in the profession, it is far from “easy money.” These increasingly frequent transactions are each the result of months and months — often exceeding a year — of hard work, starting with a practice’s preparation and concluding with an agreement reached among the practice, its acquirer and the myriad attorneys, bankers and other key advisors involved.

The purpose of this article is to help educate physicians on PE reality by dispelling misinformation that exists, in part because there is little information in the public domain. These are by definition “private” transactions. But, through my conversations and interviews across the different stakeholders, a picture has emerged that will help doctors begin (or continue) to develop their own knowledge. The field is evolving rapidly — not so much in the fundamentals of how PE works, but in the understanding of what it means and both the pros and the cons for ophthalmologists who are practice owners.

Please understand that I am not “for” or “against” PE. Each situation is unique; for some doctors, practices and markets, this makes great sense, while for others it does not.

Here are the most common myths and misconceptions plus accurate current information to enhance understanding of the PE market in ophthalmology.


The physician practice management companies (PPMCs) offered a stock-based transaction that promised significant liquidity once a portfolio of practices owned by the PPMC were sold in an initial public offering (IPO).

Today’s transactions are primarily cash along with some stock to create alignment and upside participation for doctors who sell and then become part of a new management entity. All deals are done with fair market compensation post-transaction, so there is a salary pool to adequately recruit, retain and replace a retiring physician or one who leaves the practice. The PE firms buying practices today are experienced health-care investors who are paying for cash flow generated by their acquisitions; they spend a great deal of time and effort to validate the practice’s profitability (EBITDA), which they intend to grow over time.


This transaction is the single most difficult thing most doctors will ever do in business. The process is characterized as having few highs and many lows; this is especially true for those physicians who will represent the practice and interface with the bankers and lawyers. As one surgeon who recently sold said, “it was the hardest year of my life.”

The due diligence required by the buyers will come in two parts. The first part is relatively straightforward, while the second part will be extremely invasive, taking place only after a Letter of Intent (LOI) has been signed by the seller that outlines the key terms of the deal. This second phase of diligence will encompass a much deeper financial review to confirm the quality of the earnings and, equally important, a legal review to make sure the practice is in full compliance around issues of concern to CMS, OIG and DOJ.

The buyer will have higher thresholds and standards than the doctors did as historical owners. Items and issues that you may have let slide will be much more closely scrutinized. This may result in voluntary disclosures to remedy past regulatory violations.

If the diligence uncovers issues that are significant in the buyer’s eyes, this can result in renegotiation of the valuation and/or a change in the transaction structure. If the findings are deemed extremely negative and viewed as “misrepresentation,” this could kill the deal, which is very costly to all parties.

Arnold & Porter attorney Alan Reider advises all practices contemplating a sale to “get in front of the compliance issues just as you would with defining your earnings.” The seller needs to get it right going into the deal, so the buyer has accurate data in valuing the practice and setting proper expectations with investors.

Map gives an overview of PE activity in recent years and may not include all ophthalmic consolidation deals. Location markers indicate presence in a given city but may not represent number of physical locations in that city.


A sale to PE can still be attractive for mid-career or younger doctors. The time value of money by paying long-term capital gains at the close of a deal is mathematically sound, but economics is only part of the answer. Younger physicians have the ability to focus on things they do well: surgery, clinic and expanded services that, based on the compensation model, could earn more money to replace and even exceed foregone compensation. The break-even period, defined as how long in the future it would take to exceed the income paid in a transaction, is 10-14 years in most cases, assuming a status quo in which all things stay the same — which they won’t. Today’s “knowns” can feel more comfortable, but unknowns beyond a doctor’s control may affect long-term viability as an independent provider.

Liquidity events in the future, while never guaranteed, offer multiple opportunities (two to three more “bites at the apple” for a 30-year-old); any additional bites further extend the break-even period. The key is to structure the buy-in so that it makes sense to new and future doctors. They are averse to capital calls and taking on more debt. Options exist, one example being a zero buy-in structure so the new partner benefits from future gain in value (similar to how stock options work for new employees joining a company), allowing a partner to join without financial burden and with the promise of participation based on future value creation. This simultaneously protects the existing partners from dilution of past efforts. PE wants alignment from partnership-track and future doctors and will find mechanisms to make the deal equitable for these stakeholders.

PE glossary

  • Private equity – A firm representing high net worth investors whose funds are used to make investments in established companies that are not publicly traded. Their goal as a PE sponsor is to grow and/or improve financial performance and then sell that company for a profit. PE firms tend to specialize by transaction size or industry.
  • Venture capital – VC firms tend to invest in early stage companies and not medical practices, providing growth capital that is considered much higher risk than typical PE investment. The higher risk can also lead to far higher returns.
  • Investment banks – Firms that represent the seller in negotiations with potential buyers. Banks tend to specialize by either deal size or industry
  • M&A – Mergers and Acquisitions, a term used to describe the activity involved in purchasing of companies and consolidation within an industry sector.
  • EBITDA – Earnings Before Income Taxes, Depreciation and Amortization, a financial metric of the profitability of a practice.
  • Normalized EBITDA – A revised metric that more accurately calculates the free cash flow generated by a practice. One key adjustment is market-rate compensation for each doctor to account for changes in medical personnel that take place in the future.
  • Platform practice – a practice that is sufficiently large in both EBITDA as well as infrastructure and is deemed capable of being a hub for future expansion in a region. A minimum of $3-4 million in normalized EBITDA is typical to qualify as a platform practice.
  • Tuck-in practice – a practice that is attractive but not large enough to serve as a platform.
  • Multiple – the number of years of future profit a buyer is willing to pay to acquire a practice. Larger, well-run practices typically command higher multiples than smaller practices.
  • Valuation – the total value of the practice defined as a multiple of normalized EBITDA.


Control is the single most important topic in the decision to sell or remain independent. In principle, there’s a quid pro quo to the transaction in which the seller gets a huge payday and the buyer gains control. But, not all PE firms are the same in terms of goals and management philosophy. Their strategies range from full centralization (with an emphasis on cost reduction and operating efficiencies) to extreme decentralization (each acquired practice operates independently with payouts at inception and exit based solely on EBITDA). Most are somewhere in between, and the better PE firms have a “focused touch” with practices, bringing the resources that a particular practice needs and wants to thrive without disrupting clinical care. These firms understand that you cannot save your way to value creation; while there likely are some cost savings opportunities, this is all about growth in patient encounters, revenue and profitability.

The bigger challenge is keeping doctors motivated after the first bite; the requirement to take part of the proceeds as rollover equity may not be sufficient incentive to the senior partner(s), while most doctors in a larger practice will have to be fully engaged for 10-20 years.


We are early in the game of PE in ophthalmology; the activity level suggests it is following the same path as other medical specialties but moving at a faster pace.

Multiple sources corroborate that ophthalmology now has more than 20 established platforms that are actively acquiring additional “tuck-in” practices; there were fewer than five such platforms in early 2016. BSM Consulting’s Bruce Maller estimates that more than 800 MDs and 400 ODs are now part of these platforms. He compares this to dermatology, a specialty with approximately 11,000 MDs that saw the number of active PE groups grow from one to 30 between 2011 and 2018. Recapitalization events began to accelerate in 2016, where the sale of a platform to a new buyer provided a second “bite at the apple” for the doctors who had sold their practices. In 2018, there have already been 36 acquisitions. While dermatology activity started much earlier, the buyers who were early into that specialty find eye care similarly attractive — both specialties share common demographics, advances in technology and cash-pay services to complement reimbursed procedures.

An alternative strategy some practices employ is to first grow and build profitability for a sale in the future. They are accessing capital at favorable interest rates and terms from financial boutiques such as MMC Medical and typically have the team in place to acquire smaller practices.

The first-mover advantage is real. The market will be there later, but valuations will likely come down over time based on historical trends. Valuations will also fluctuate based on: 1) interest rates, which affect the cost of borrowing; 2) perceived success in the marketplace to attract both supply of and demand for practices; and 3) demonstrated success with future “bites” for doctors that prove out the PE model. To be certain, there is no crystal ball as to what the M&A activity will look like in one year, let alone four years.


This is generally a very bad idea — there is too much specialized expertise, too much time required and too much risk of getting taken advantage of late in the negotiations. You are selling to buyers who are experts at doing this — while you are a good doctor, you would be wise not to outsmart yourself.

Beyond the valuation economics, there is a tremendous amount of decision making required that will affect “life after the deal.” Bankers and attorneys have the right experience to negotiate the operating and employment agreements to ensure they work for you. While smaller practices with less than $1 million in normalized EBITDA may not warrant a full investment banking process, they should still retain the services of expert advisors and pay for that help. Any resource should provide you value that far exceeds its cost.


Bankers tell me many client practices accept an offer that is not the highest in terms of economic value, but rather the best in terms of fit and mutual respect of the practice culture by the buyer. It’s the partner they can see interacting with daily in the years to come and help the practice execute a growth strategy that the doctor partners may have envisioned but lacked the capital or expertise to conduct on their own.

Doctors are often tempted to believe what they hear on the grapevine about the valuations paid for a certain practice, failing to recognize that it is nearly impossible to independently verify specific terms of a transaction. This can lead to “multiple envy,” where they begin to equate their practice’s value with those they heard have already sold. This is futile, as every completed deal has terms and unique qualities that worked for that buyer and that seller. Multiples will vary based on amount of normalized EBITDA, local market dynamics, existing infrastructure and the composition of doctors and staff for future growth.


Bankers play a significant role and are more than simply “connectors” between buyers and sellers (which is what a broker does). An experienced banker will re-do your financials, develop the “package” to promote you, know the likely buyer pool even before soliciting interest and lead the negotiation with the knowledge of pitfalls to avoid. Most importantly, the banker represents your interests and not those of the buyer.

Choosing the right banker means understanding whether they have done a lot of deals. That deal experience indicates they know the buyers, the valuations, how the PE firms act and react and what you can and cannot get in terms of governance and operations and contracts. Paradoxically, PE firms tend to prefer working with investment bankers rather than directly with clients, as it makes for a smoother process.

Cross Keys Capital’s Bill Britton believes the banker’s role is to educate on options and communicate with all of the partners, not just the managing partner or the loudest partners. “Our role is one of preacher, rabbi and psychiatrist to help facilitate and guide all of the partners through this very arduous process.” I have yet to find a doctor who led the effort in a larger practice in which the deal would have happened without the banker.


Your investment banker and tax attorney are vital to structuring a deal so that it qualifies for long-term capital gains treatment. The complexity increases in practices where ownership is equal but production-related proceeds are not. According to tax expert and business advisor David Glenwinkel of Executive Management Solutions, “Most business owners don’t realize the impact that asset depreciation and AMT can have on the actual tax rate paid following a transaction.” Without question, doctors need top-notch advice to ensure the corporate and tax liabilities are structured properly prior to a transaction taking place; one should never assume that their proposed sale automatically qualifies.


While PE firms typically raise funds and deploy that capital across a portfolio of investments, they don’t simply write a check when they make an acquisition. First, they will likely require the selling doctors to take a percentage of the transaction as rollover equity in the new company to align incentives for future growth. The balance is paid out of a combination of cash and new debt. This debt sits at the “top of the stack” and has first priority to be repaid. Debt is not a dirty word. When properly utilized, the use of debt capital enhances returns and the process for accelerated growth.


Many doctors exploring a sale are surprised to learn that PE firms don’t want to buy the real estate; it’s simply not a good use of their capital. Buyers may require sellers, who often charge themselves below-market rates, to raise their rent to better approximate what is considered a fair market value. This adjustment is part of the normalization of EBITDA and will likely reduce the overall practice valuation. This loss can be offset by a sale to a real estate firm specializing in medical office buildings, which are attractive due to steady and stable growth patterns in health-care services.

In the current market, higher multiples are being given to the real estate than to the practice, according to Collin Hart, CEO and managing director of ERE Healthcare Real Estate Advisors. “Selling the practice changes the dynamic of your real estate investment. Instead of being an owner occupier, you now play the role of third-party landlord to a tenant who will likely have different and more expensive requirements.” Hart’s analyses often show doctors attaining a higher overall transaction value by selling the real estate in a parallel transaction.

The overall transaction value for a practice can be enhanced by selling the real estate in a separate transaction. Image courtesy ERE Healthcare Real Estate Advisors.


The decision to sell one’s practice represents putting a lifetime of work “on the table” for others to examine and explore as part of the consideration process. It is unquestionably the largest financial transaction most MDs will face in their lifetime.

There is a need for general agreement among partner owners to explore options before you start; this will prevent in-fighting down the road, which can drain your time and energy and long-time relationships. Avoid “multiple envy,” where you assume your practice will command the same/higher multiple of earnings as others about which you have heard. Practices trade in a range, and that range will fluctuate. A banker’s role is to make sure you are getting the best deal possible.

This type of transaction is not for every doctor or every practice. For those who want to seriously consider it, be ready to work hard to get a deal done. And, for those who succeed with a transaction, be ready for things to change after the deal closes. Some changes you will like, others you will not. But sell or not, change is inevitable. OM

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