What to do if private equity comes calling

Private equity (PE) companies are very interested in healthcare. In my own practice I have worked with both acquiring and selling physician practices to PE. Recently, in Illinois, there have been a lot of PE acquisitions of local practices in ophthalmology, radiology and dermatology, and it seems 2020 will be just as busy.

It makes sense why senior physicians who are close to retirement are interested in selling to PE.  The deal often comes with a significant paycheck, a guaranteed income to take the physician through retirement and a lot less administrative headache. On the other hand, forgotten in many of these PE transactions are the young physicians working in the practice, many of whom were recently hired with the promise of future equity in the practice.

I have recently been in the midst of two physician practice buy-in negotiations when the owners announced they had decided to sell to PE. Such a decision is often devastating to the associate physician, who may feel betrayed by the practice owners and worried about their role in any new practice entity. 

If you work for a practice that is about to be acquired, it’s important to consider all your options:

1. Is the practice one that you desire to remain with even if you do not have the chance to become an owner? If not, it may be time to look at your contract and discover what other opportunities are available. Make sure you are aware of contract terms that apply upon termination and be aware that PE deals are structured to keep the practice entity alive or otherwise to allow for non-compete enforcement.

2. Consider what the private equity buyer might be offering physicians who remain in the  practice. Although it may not be exactly what you had imagined, employment in the acquired practice may still be an attractive possibility. It’s always worth it to consider the terms of the deal, even if it’s just to buy time to find another job. Often a physician can negotiate the new contract with the same, if not better, terms than with the original practice.  Additionally, equity in the management arm of the PE buyer is often a possibility.

 When a PE company values a practice, it looks at the revenue being generated by all physicians in the practice. Any one physician may play a significant role in the value of the practice, which incentivizes the buyer to negotiate a deal to keep the physician on board.  If you choose the leave the practice, depending on the role you play, there may or may not still be a PE deal to be made. Unfortunately, when this happens it is unusual for things to back to the way they were before. My physician clients often leave the practice when there is a failed deal, afraid there will just be another buyer on the horizon.

3. If a physician rejects the PE offered contract, there are a few things than can happen. The physician or practice could provide notice of termination without cause, or the employer may simply assign the physician’s contract to the buyer (if assignable, which most contracts are).  Whatever the outcome, understanding that the manner in which termination occurs can impact enforcement of the non-compete, tail obligations, loan repayment, compensation and other contract provisions is important. Make sure you talk with counsel to best plan your exit strategy.

If you are negotiating a contract with a private practice, you may want to make sure that your contract cannot be assigned without your consent and perhaps discuss the release from any non-compete/tail/loan obligations in the event that the practice is sold. Unfortunately, it is hard to convince employers to include these types of terms in a contract, but it can provide additional peace of mind and protection for a new physician.

Ericka L. Adler, JD, LLM has practiced in the area of regulatory and transactional healthcare law for more than 20 years. She represents physicians and other healthcare providers across the country in their day-to-day legal needs, including contract negotiations, sale transactions, and complex joint ventures. She also works with providers on a wide variety of compliance issues such as Stark Law, Anti-Kickback Statute, and HIPAA. Ericka has been writing for Physicians Practice since 2011.