You are going to get the call
If you own a clinic doing $3M or more in revenue, you have probably already gotten it. A broker, a PE-backed platform, or a "strategic acquirer" reaching out to discuss your "options."
Private equity firms have been rolling up healthcare practices for a decade. Dental was first (the ADA Health Policy Institute tracks DSO affiliation, and in our experience the share of dentists affiliated with a DSO has been growing steadily). Physical therapy followed. Dermatology, urgent care, ophthalmology, veterinary, and mental health are all in play.
The pitches sound great. "We will handle the business side. You focus on patients. Here is a check for 6x your EBITDA."
Some of those deals work out well. Many do not. And the difference usually comes down to whether you understood the financial details before you signed.
How PE offers work
A typical PE acquisition of a healthcare practice looks something like this:
Valuation. They value your practice as a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). For most outpatient clinics, multiples range from 5x to 8x depending on size, growth rate, specialty, and payer mix. A practice with $800K in EBITDA at a 6x multiple would receive an offer around $4.8M.
Deal structure. You rarely get 100% cash at closing. A typical structure might be 60-70% cash at close, 20-30% in an earnout tied to performance over 2-3 years, and sometimes a small equity rollover where you keep 5-10% ownership in the new entity.
Earnout. The earnout is tied to hitting revenue or EBITDA targets post-acquisition. If the practice hits the targets, you get the remaining payout. If it does not, you get less. PE firms know that practices often dip in performance after the founder steps back. The earnout shifts that risk to you.
Management agreement. Most deals include a management services agreement (MSA) where you stay on as a provider or clinical director for 2-5 years. Your compensation is set in the agreement, and it is almost always lower than what you were earning as an owner.
Non-compete. You sign a non-compete. Typically 2-5 years, within a certain radius. If the deal goes badly, you cannot open a competing practice across the street.
Your EBITDA is probably wrong
Here is the thing most owners do not realize until they are deep in due diligence: the EBITDA that PE uses to value your practice is not the number on your P&L.
PE firms calculate "adjusted EBITDA." They start with your reported earnings and then adjust for items that do not reflect the ongoing earning power of the practice.
Some adjustments work in your favor:
- Owner compensation above market rate gets added back
- One-time expenses (lawsuit settlement, equipment replacement, office move) get added back
- Personal expenses run through the business get added back
Some adjustments work against you:
- Below-market rent on a lease you own gets adjusted to market rate
- Provider compensation that is below market gets adjusted up
- Revenue from providers who are leaving gets removed
- Unsustainable growth rates get normalized
The problem is that most clinic owners have never calculated their own adjusted EBITDA. They see revenue minus expenses and call that profit. When a PE firm shows up and says "we will pay 6x EBITDA," the owner does rough math in their head using the wrong number.
I have seen owners (anonymized Sorso clients across multiple specialties) who thought their EBITDA was $600K discover it was $420K after proper adjustments. That is the difference between a $3.6M offer and a $2.5M offer. And it usually happens in the middle of negotiations, when you have already mentally spent the money.
What most owners get wrong about valuation
Messy books reduce your multiple. PE firms do rigorous financial due diligence. If your books are disorganized, if your accountant cannot produce clean financials going back three years, if your revenue and expenses are not properly categorized, the buyer perceives risk. Risk reduces multiples. A practice that might command 7x with clean financials might get offered 5.5x with messy ones. On $600K EBITDA, that is a $900K difference.
EBITDA trends matter more than a single year. Buyers want to see three years of growing or stable EBITDA. If your best year was two years ago and you have been declining since, they will use the trailing average or the lower recent number. If you are growing, they give you credit for the trajectory. This is why timing matters and why you should not call a broker the quarter after your best provider leaves.
Payer mix affects valuation. A practice with 60% commercial insurance is worth more than the same practice with 40% commercial and 35% Medicaid. Commercial reimbursement rates are higher and more negotiable. Medicaid rates are set by the state and at risk of being cut. Buyers assign higher multiples to practices with strong commercial payer mixes.
Provider concentration is a risk factor. If one provider generates 50% or more of total revenue, the buyer sees key-person risk. What happens if that provider leaves? The valuation will reflect that risk, either through a lower multiple or a larger earnout tied to that provider staying.
Getting your books ready (even if you do not want to sell)
Whether or not you plan to sell, having PE-ready financials makes your practice more valuable and better managed. Here is what "ready" looks like:
Three years of clean, GAAP-compliant financial statements. Not just tax returns. Accrual-basis P&L and balance sheet, reviewed or compiled by a CPA. Monthly, not just annual.
Normalized owner compensation. Know what your total compensation package is (salary, distributions, personal expenses, retirement contributions, health insurance) and what a market-rate replacement would cost. The difference is an add-back to your EBITDA.
Location-level P&Ls. If you have multiple locations, buyers want to see each one broken out. They are buying the enterprise, but they want to know which locations carry the weight. I wrote about this in detail in my previous post on location-level P&Ls.
Revenue by provider. Buyers want to see provider-level production data going back at least two years. They want to know if revenue is diversified or concentrated in one or two providers.
Payer mix breakdown. Commercial, Medicare, Medicaid, self-pay, workers comp. By location if you have multiple. Trends over time.
Accounts receivable aging. Clean AR with minimal balances over 90 days. If you have $300K sitting in 120+ day AR, a buyer will either discount it or exclude it from the deal entirely.
The golden handcuffs problem
The part of the deal nobody warns you about is what happens after you sell.
You sign a management agreement. You show up to the same clinic. You see the same patients. But you no longer make the decisions.
Staffing changes go through corporate. Equipment purchases need approval. Your schedule gets optimized by someone in an office you have never visited. The new billing company does things differently. Your favorite office manager gets laid off because corporate has a centralized admin team.
Some owners handle this fine. They genuinely wanted to stop dealing with the business side and just practice medicine. The check clears, they see patients, they go home.
Other owners are miserable. They built the practice from scratch. They handpicked the team. They made decisions based on patient care. Now decisions are made based on margin targets set by investors who have never treated a patient.
I have worked with owners on both sides. The difference is almost always about control. If you are the kind of person who started a practice because you wanted to run things your way, a PE buyout will be a difficult adjustment regardless of the dollar amount.
And here is the financial reality: if you stay for the 3-year management agreement at a salary of $350K and your previous owner compensation was $550K, you are giving back $600K of the purchase price just through reduced compensation during the earnout period.
When independence makes more financial sense
The math on staying independent often works better than people think.
Take a practice doing $5M in revenue with $700K in EBITDA. A PE firm offers 6x, or $4.2M. After the earnout structure, you get maybe $2.8M at close and the rest over three years (if you hit targets).
If you stay independent and your practice grows EBITDA by 10% per year (which is modest for a well-managed clinic), your cumulative EBITDA over the next five years is $4.3M. You keep 100% of it. You keep control. You keep your team. And you still own an asset that is growing in value.
The sell decision makes financial sense when:
- You are burned out and the management burden is affecting clinical care or your health.
- Your practice depends heavily on you personally and has key-person risk that will only get worse.
- You are within 3-5 years of retirement and want certainty over optimization.
- You have been offered a premium multiple (8x or higher) that compensates for the earnout risk.
- You have a specific use for the capital (another business, real estate, etc.) that will generate returns above what the practice produces.
The stay decision makes financial sense when:
- Your practice is growing and you enjoy running it.
- You have a young team and no key-person concentration.
- Your EBITDA margin has room to improve (and it usually does with better financial management).
- You have not yet optimized your revenue cycle, payer contracts, or cost structure. Fixing these things increases your value if you sell later and increases your income if you do not.
Before you take the call
If a PE firm or broker contacts you, do not start the conversation until you know three numbers:
- Your actual adjusted EBITDA (not the number on your tax return).
- Your total owner compensation package (salary, distributions, benefits, personal expenses through the business).
- The cumulative income you would earn over the next five years if you stay independent.
If you do not know these numbers, you are negotiating blind. And the other side of the table is not.
Schedule a free assessment and we will calculate these numbers for you. No obligation to sell. No obligation to hire us. Just clarity on what your practice is actually worth and what your options look like financially.
