Is private equity really for you?

Five “big picture” factors for eye-care groups contemplating the PE route.

Private equity (PE) investments in the medical practice world have been getting a lot of buzz during the past few years, particularly in ophthalmology. In the past several years, the number of PE firms investing in ophthalmology increased from one transaction in 2012 to more than 20 transactions in 2018, according to an article in Becker’s ASC Review last year. Further, Provident Healthcare Partners notes that a PE firm established a new ophthalmology platform during 12 consecutive quarters from the last quarter of 2016 through the third quarter of 2019.

When it comes to evaluating whether a potential PE transaction is right for your group, our experience as health-care transactional counsel representing multiple physician groups (including eye-care groups) across the country in these types of transactions over the past several years has taught us there are five major factors absolutely critical to consider.


Physicians typically strive be very prudent in their personal investments, and most use financial/wealth advisors to manage their investment assets as well as develop a plan to fund both their lifestyles and their eventual retirements. This is part of each person’s wealth-accumulation strategy, as the individual uses his or her very hard-earned income to enjoy life (nice homes, high-end vacations, second homes, boats, cars, etc), save for a child’s college education and to accumulate a nest egg to comfortably enjoy the retirement years.

But, the practice of medicine has vastly changed since the ‘80s and ‘90s. These days, it’s rare for physicians retiring from their medical groups to receive substantial buyouts (which used to be funded by associates coming up through the ranks). Now, it’s more common for retiring physicians to be bought out for a nominal sum, such as their capital account balance and/or 50% of the accounts receivable they leave behind with respect to their personally performed medical services.

As a result, physicians no longer view their ownership interest in their medical group — which they built, or help to build, over the years with their blood, sweat and tears — as a key asset in their financial/investment portfolio. However, a transaction with a PE investor, which has a platform in consolidating eye-care practices, can allow physicians to monetize the real value of their ownership interest in their eye-care practice.

Ophthalmic practices continue to be highly sought after. Dozens of PE investor platforms have the funding for and remain firmly committed to building and growing these practices throughout certain geographic regions and sometimes nationally.

The monetization of the value of your medical practice in connection with a PE transaction generally has two main components:

  1. Up-front cash, usually 70% to 80% of the real value of your practice. This is calculated based on many factors and usually on a multiple of the practice’s free cash flow (also called EBITDA), which financial gurus carefully calculate based on an in-depth assessment of your practice. The multiple is usually a range that can be as low as four to five or as high as nine to 12 and depends on many different factors, such as:
    • The size of the group, based on the number of physicians and clinicians (and the diversity of their ages) as well as the number of office locations
    • Payer mix and reimbursement programs, with a strong preference for in-network groups
    • The extent of ancillary services provided (eg, ambulatory surgery, eyeglasses, etc)
    • The experience and breadth of the practice’s management/executive staff
    Most late-career physicians “sock away” all or most of this upfront cash consideration, while early- to mid-career physicians put some away to get a jump on retirement savings and/or use part of it pay off medical school debt or fund the purchase of a home.
  2. Rollover equity in the PE platform, constituting the balance of the real value of the practice. This is usually 20% to 30% of the valuation (but could be greater or lower). Rollover equity materializes in additional cash consideration as follows:
    • The “second bite” and beyond. PE firms invest their funds in ophthalmic practices (and in many other physician specialties, and in companies in general) to make a healthy return on their investment. The investment time horizon of PE investors varies but generally is in the range of 3 to 7 years (with an average of 5 years). Notably, when the PE investor exits the investment — by selling to a larger PE firm or strategic company — physicians holding rollover equity also benefit financially by being bought out in whole or in part by the larger investor (sometimes referred to as the second bite). Notably, some PE investors in the eye-care sector have exited in the past few years, thereby providing additional cash consideration to physicians who held rollover equity. Moreover, early- or mid-career physicians may experience additional liquidity events beyond a second bite (ie, a third bite and beyond).
    • Fair market value buyout upon retirement (or disability, death, etc.). Most PE transactions are structured so that if you retire from the practice in the normal course (eg, at age 65 or after), the rollover equity that you own at such time is bought out at its fair market value. This provides yet another liquidity event for you to realize the remaining value that you still possess. The same is also true with regard to a buyout of rollover equity you own in the event that you become disabled or die.

Of course, physicians need to make sure the economics work for them and examine the offered compensation packages and anticipated returns. For example, in order for the PE firm to make the initial investment (usually a multiple of the group’s EBITDA), there would likely be a roll-back of the doctors’ compensation (which generates most, but not all, of the requisite EBITDA that the multiple is based on).

This rollback may not be affordable for all of the doctors in a group, especially those physicians whose careers are at the beginning or middle stages, because it comes at the expense of reducing the doctor’s current income for the potential of a long-term gain. Thus, in some cases — and especially if a practice is likely to be more financially successful in the next 5 years (despite the ever-changing health-care environment) — it may be beneficial to delay a PE investment.

In addition, if the practice were to suffer a liquidation event prior to the second bite, it is important for the physicians to know that, generally speaking, the PE firm and any lenders will recoup their funds first, with the physicians only receiving any amounts that may be left over.


Staying the course of a private medical practice involves a number of uncertainties in light of the transformation underway in the health-care industry. How will these changes impact private practicing physicians in the next 5 or 10 years? If “Medicare for all” is adopted in the next several years, how will it impact physicians in private practice? Entering into a PE transaction with an experienced management team (see item 3 below) and a critical mass of hundreds of physicians in the same specialty provides physicians facing a 10- to 20-year work horizon greater certainty with respect to their future.

Also, it increases the likelihood of successfully navigating and operating in this ever-changing environment, regardless of what the future holds. Thus, a PE transaction provides the benefit of hedging future uncertainties in health care.

But, PE transactions also present some degree of uncertainty. When the PE partner selected eventually exits its investment in the eye-care sector, who will be the new investor/partner who takes over, and how will this impact your practice? The answer is not clear, but there is some comfort in knowing that a new investor/partner — who invests even more money than the initial investor — will not want to upset the applecart and will only do so if a substantial majority of the physicians are not opposed to the investor’s involvement. In other words, the new buyer will be wary of making changes to a well-run and managed enterprise because they also hope to optimize their investment and they would not risk making changes that could disrupt this potential.


Another potential advantage of a PE partnership transaction is the benefits to the practice of improvements and efficiencies to the business and non-clinical operations of the practice, which are provided by the PE platform’s experienced professional management team.

This established corporatized infrastructure is able to obtain substantial cost savings from large-group purchasing opportunities (such as supplies, health insurance, malpractice insurance, etc.) and significantly benefit from managed-care contracting expertise, advanced EMR capabilities, sophisticated billing and collection teams, financial management, HR executives and others.

Essentially, the PE platform takes over the business of the practice and allows the physicians to focus entirely on the practice of medicine and their patients. Notably, PE investors do not want to tell physicians how to actually practice medicine. In fact, due to the corporate practice of medicine rules in many states, non-physicians cannot interfere in a physician’s clinical practice of medicine or the independent clinical judgment of physicians in connection with the treatment of patients.

However, PE investors will have decision-making control over the back office/infrastructure functions of the practice as described above, usually through an administrative services agreement. Thus, without running afoul of any prohibition of corporate practice of medicine, the PE investor’s decision-making authority could, for example, pertain to costs and expenditures. This in turn, may impact, for example, the selection of a particular EMR system that a physician may prefer that costs more than another lesser expensive system. In this example, the physicians may have to give up personal decision-making discretion and control.


To be competitive in the transforming health-care marketplace, physician groups need to continue investing in cutting-edge medical equipment and technologies, advanced EMR, data analytics (to succeed in value-based reimbursement programs), new offices and ancillary services. But, each dollar invested in these initiatives is a dollar reduction in physician compensation.

In partnering with a PE platform, however, the PE investor provides capital for these important strategic initiatives, either through its corporate infrastructure already in place or via investing additional funds for such improvements and expansion efforts. However, a partnership with a PE investor means a future environment in which these initiatives will be assessed more critically from the perspective of strategically accreting financial value rather than personal or emotional preferences.


Any decision to proceed in a transaction with a PE platform should be made only after the physician group has done extensive reverse due diligence on its future partner.

We recommend obtaining information on the PE investor and closely examining the following:

  • The PE company’s financial ability to fund and close the transaction with your group
  • Your gut comfort level with the PE representatives and platform executives in terms of experience, truthfulness, culture, vision and fit
  • Whether this is the PE investor’s first foray into physician services, or the investor has extensive experience in this space
  • If the investor has prior experience in physician services platforms, we highly recommend:
    • Carefully assessing the PE company’s financial track record of success, both in connection with other eye-care practices (if applicable) and in connection with other physician specialty services in which it has been active (eg, dermatology, pain, dental, gastroenterology, etc)
    • Meeting (preferably) or speaking directly with multiple physicians who have partnered with the PE investor in the past 2 to 5 years (the longer the better) to find out if the PE firm has lived up to its commitments and is a good partner to work with (culturally and otherwise).

In short, conducting reverse due diligence on a prospective PE investor is critical for the physicians to ensure that they are confident that the PE investor is the right match — culturally, strategically and financially. If the answer is “no” to any of these, the physicians should seriously reconsider whether a partnership with that prospective PE investor will accomplish all their objectives.


Joining forces with PE can be exactly what your practice needs to maximize efficiency now and navigate an uncertain future in years to come. Before you commit, however, be sure to evaluate your prospective partner according to the five criteria we’ve outlined. OM

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