How do PE firms value medical practices?
Private equity firms value medical practices primarily on a multiple of trailing twelve-month adjusted EBITDA, typically 5x to 12x, with the multiple driven by scale, growth, payer mix, and provider retention.
Definition
Private equity (PE) is investment capital from funds that buy controlling stakes in companies, hold them 3 to 7 years, and sell to the next buyer at a higher value.
The detail
PE valuation of a medical practice happens in three steps. First, normalize EBITDA by adding back owner above-market compensation, personal expenses, one-time items, and pro forma adjustments for new providers and locations. Second, apply a multiple based on practice size: under $1M EBITDA trades at 4x to 6x, $1M to $3M EBITDA trades at 6x to 9x, $3M to $10M trades at 8x to 12x, and platform-scale assets ($10M+) trade at 10x to 16x. Third, structure consideration: typical PE deals pay 60 to 80 percent in cash at close, 10 to 20 percent in rollover equity, and 5 to 20 percent in earnouts contingent on retained EBITDA over 12 to 36 months. Rollover equity is the most important provision to negotiate because it determines your second bite at the next exit, which is typically 2 to 4x the value of the first.
Pitchbook Healthcare Services Reports document PE deal volume and multiples by subsector.
Source: Pitchbook
Bain Healthcare PE Report tracks median EBITDA multiples and deal structure trends annually.
Rollover equity typically represents 10 to 30 percent of total consideration in physician practice transactions.
Source: AHLA Healthcare M&A resources
What this means for clinic owners
From Sorso
The first PE offer you receive is rarely the best one. Multiples vary by 30 to 50 percent across competing buyers for the same practice. If you take an unsolicited offer without running a process, you almost certainly leave money on the table.
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What is the average EBITDA multiple for dental practices?
Dental practices sell for 5x to 8x EBITDA for single-location and add-on acquisitions, 9x to 11x for multi-location regional groups, and up to 12x for $5M+ EBITDA platform deals. The single biggest driver is scale: scale tier matters more than specialty.
What is the average EBITDA multiple for PT clinics?
Physical therapy clinics typically sell for 5x to 7x EBITDA for single-location and add-on acquisitions, and 7x to 9x EBITDA for multi-location platforms with $1M+ in EBITDA.
What is a dermatology practice worth?
Dermatology practices typically sell for 7x to 10x EBITDA for single-location and add-on acquisitions, and 12x to 15x EBITDA for multi-location platforms, with cosmetic-heavy practices commanding the highest multiples.
What is a med spa worth?
A medspa or med spa typically sells for 4x to 7x EBITDA for single-location and add-on deals, and 6x to 9x EBITDA for multi-location platforms. Valuations weight heavily toward recurring membership revenue, provider tenure, and injectable mix. Below $500K EBITDA, expect an SDE-based valuation closer to 2x–3x instead.
What is the difference between platform and add-on multiples?
Platform acquisitions trade at 8x to 14x EBITDA — the buyer pays for scale, infrastructure, and management. Add-on acquisitions trade at 4x to 7x EBITDA because they bolt onto an existing platform. The same practice can be worth 2× more depending on which the buyer needs.
How much will a DSO pay for my dental practice?
DSOs typically pay 5x to 8x EBITDA for single-location dental practices, and 8x to 11x for multi-location platforms with $1M+ EBITDA. Consideration is split: 60–75% cash at close, 15–30% rollover equity, the rest in earnouts tied to retained EBITDA over 12–36 months.
What are EBITDA add-backs in practice valuation?
EBITDA add-backs are non-recurring or owner-related expenses added back to reported EBITDA to show normalized earnings, typically increasing reported EBITDA by 10 to 30 percent in owner-operated practices.
Should I sell my practice to private equity?
Selling to private equity makes sense if you want partial liquidity, want to grow with capital and infrastructure, and are willing to operate as a partner rather than sole owner; it is wrong if you want full retirement or full operational autonomy.
How do I evaluate a PE offer?
Evaluate a PE offer on six dimensions: enterprise value multiple, cash at close percentage, rollover equity terms, post-close compensation structure, earnout conditions, and platform exit timing assumptions.
What is a quality of earnings report?
A quality of earnings (QoE) report is a buyer-commissioned financial due diligence analysis that normalizes EBITDA, tests the reliability of revenue and expenses, and identifies risks that affect purchase price, typically costing $50K to $150K for a healthcare practice.
What is an LOI in healthcare M&A?
A letter of intent (LOI) in healthcare M&A is a non-binding agreement that sets the proposed purchase price, structure, exclusivity period, and diligence timeline before a buyer commits the resources to close a deal.
What is rollover equity in a practice sale?
Rollover equity is the portion of sale proceeds that the selling owner retains as equity in the buyer's platform, typically 15 to 30 percent of total consideration, creating a second liquidity event when the platform is later sold.
What is a working capital peg in an M&A deal?
A working capital peg is the target level of net working capital the buyer expects at close; delivery above or below the peg results in a dollar-for-dollar purchase price adjustment, typically reducing a headline price by 3 to 8 percent at close.
How long does it take to sell a medical practice?
Selling a medical practice to a PE buyer typically takes 6 to 12 months from engagement to close, with 2 to 3 months of prep, 1 to 2 months of marketing, 2 to 3 months of diligence and negotiation, and 1 to 2 months for definitive documents and closing.
What is an earnout in a healthcare M&A deal?
An earnout is a portion of the purchase price paid only if the practice hits post-closing financial targets, typically 5 to 20 percent of total consideration over 12 to 36 months, tied to retained EBITDA or revenue thresholds.
What is a platform investment thesis in healthcare PE?
A platform investment thesis is the PE firm's plan for how a first acquired practice will grow into a multi-location roll-up through add-on acquisitions, usually targeting 3x to 5x EBITDA growth over a 4 to 7 year hold.
What is a MEIP in a healthcare PE deal?
A management equity incentive plan (MEIP) is a pool of equity, typically 8 to 15 percent of the post-close cap table, reserved for executives and key providers who stay with the platform, paying out at the next liquidity event.
What is a data room in healthcare M&A?
A data room is the secure online repository where a seller uploads financial, legal, clinical, and operational documents for buyer diligence, typically containing 500 to 2,000 files organized across 15 to 25 top-level categories.
What is an IOI in healthcare M&A?
An indication of interest (IOI) is a non-binding preliminary bid, usually providing a price range rather than a specific number, submitted after a buyer reviews the confidential information memorandum but before full diligence or LOI.
What is reps and warranties insurance in M&A?
Reps and warranties insurance (RWI) is a buyer-side policy that covers financial losses from breaches of seller representations in the purchase agreement, typically priced at 2.5 to 4 percent of coverage amount for healthcare deals.
What is a non-compete in a healthcare practice sale?
A non-compete in a healthcare practice sale restricts the selling physician from opening or joining a competing practice within a defined geography and time period, typically 15 to 50 miles and 3 to 5 years, though state law enforceability varies widely.
What is pro forma EBITDA in a practice valuation?
Pro forma EBITDA adjusts historical earnings for known future changes like new providers hired mid-year, fee schedule increases in effect, or a recently-opened location running below capacity, typically reflecting a full year of annualized performance.
How should I structure LLCs for multi-location healthcare practices?
Most multi-location healthcare practices use a holding-company structure: a parent LLC (often an S-corp for tax) owns separate per-location operating LLCs and a separate real estate LLC for any owned buildings. This isolates liability between sites, simplifies partner buy-ins at the location level, and keeps real estate out of the operating risk pool, but it must be designed around your state's corporate practice of medicine rules.
Founder of Sorso. 19 years in corporate finance. Managed a $450M loan portfolio before building a fractional CFO firm exclusively for healthcare clinics.
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