Evaluating a private equity offer and rollover

Selling an OB-GYN practice to a private equity backed platform can combine a sale of business assets with continued employment and an investment in the buyer's future. Each piece has its own rights and risks; payment timing differs too. A headline valuation alone cannot tell an owner what cash will arrive at closing, what obligations will remain, or what a rollover may eventually be worth. Evaluate the legal structure, proceeds, continuing role, and exit mechanics as one transaction, while modeling each separately. The goal is to understand the documents well enough to compare a certain amount today with contingent value and obligations later.

Understand the corporate structure

Healthcare investment transactions may separate the clinical practice from administrative services. A physician-owned professional corporation (PC) provides professional services. A management services organization (MSO) may own or provide non-clinical assets and services such as staff, space, billing systems and software, plus management services. In a friendly-PC arrangement, licensed physicians retain legal ownership of the clinical entity while a long-term management services agreement (MSA) governs the relationship with the MSO. Structure varies by jurisdiction, and healthcare counsel should assess whether the documents and actual operations fit applicable rules.

Ask the buyer for a visual organization chart that identifies every entity, its owners, each contract, and the flow of money. Trace which entity employs physicians and staff, bills payers, owns equipment, leases real estate, carries debt, and receives management fees. An owner should be able to follow the path from collections to the PC, from PC payments to the MSO, and from platform earnings to investors. If the chart relies on unexplained labels or omits a material affiliate, request a revised version before evaluating the offer.

The PC's ownership and succession rules deserve particular attention. Review who selects its physician owner, what qualifications that person must maintain, and what happens if the person retires, becomes unavailable, or leaves the platform. Read the PC bylaws, stock transfer documents alongside the MSA and employment agreement agreements together. A corporate chart may show formal physician ownership while contractual provisions give the MSO significant practical power; counsel should explain how decision rights work in ordinary operation and in a dispute.

Translate the headline into cash and risk

An offer commonly combines cash at closing, rollover equity, and employment. Enterprise value describes the value of the operating business before subtracting debt and adding or subtracting other adjustments; it is not necessarily the amount distributed to owners. The purchase agreement may deduct debt-like items, transaction expenses, unpaid taxes, or a working-capital shortfall. It may hold back cash in escrow for indemnity claims and defer some amount as an earnout or seller note. Ask the buyer to define each deduction and show the proposed calculation in a sources-and-uses schedule.

Illustrative example: Assume an offer states an enterprise value of $20 million. The parties estimate $1.5 million of debt-like items and $500,000 of transaction expenses, leaving $18 million before other adjustments. If owners roll 25 percent of that amount, the rollover investment is $4.5 million and cash before tax is $13.5 million. If $1 million is also withheld from cash proceeds in escrow, immediately available cash falls to $12.5 million. These figures are illustrative arithmetic only. Actual documents may apply deductions, rollover percentages, tax allocations, and escrow differently, and the working-capital adjustment could increase or reduce the final payment.

A rollover is a reinvestment in the continuing platform, not cash in reserve. It may be illiquid for years, rank behind debt or preferred equity, be diluted by later issuances, and produce little or no proceeds if the platform's value does not exceed priority claims. Request the security's governing documents, a fully diluted capitalization table at closing, and an example showing ownership after planned acquisitions, incentive grants, and new capital. Confirm whether the rollover buys the same class and has the same rights as sponsor equity. If additional contributions can be required, ask whether an owner may decline, what dilution follows, and whether nonpayment can trigger a forced sale.

Evaluate earnouts and incentive equity

An earnout pays additional purchase consideration if a defined target is met after closing. It may be based on EBITDA, collections, provider retention, or another metric over a stated period. Obtain the exact formula, accounting policies, measurement dates, access to supporting records, and a process for challenging calculations. Clarify how changes in staffing, payer contracts, central overhead allocations, billing practices, or integration plans affect the metric. If the buyer controls those inputs and the seller has no approval or reporting rights, the earnout may depend more on buyer decisions than on the practice's underlying performance.

Ask whether the earnout is calculated at the practice level or across the whole platform, and whether losses elsewhere can offset the practice's results. Define what happens if the buyer sells, restructures, closes a location, or changes accounting methods during the measurement period. A workable agreement identifies the responsible decision makers, bars inconsistent accounting changes, provides regular reports, and establishes an independent accountant or other neutral process for disputes. Treat contingent payments as uncertain until the formula and operational control are clear.

Some buyers call management incentive equity "scrip." The label has no standard economic meaning. It may be options, profits interests, phantom units, or another instrument with a hurdle, vesting schedule, and restrictions. Request the actual grant and plan documents; a presentation does not establish the award terms. Model the instrument in a distribution waterfall at several sale values. Understand vesting, exercise cost, good-leaver and bad-leaver definitions, termination effects, transfer limits, tax treatment, and what happens in a recapitalization or sale. Do not add incentive equity to guaranteed purchase price when comparing bids.

Model the second bite carefully

A second-bite recapitalization or sale may let rollover holders realize value if the platform grows and a later buyer pays more. It may also never occur, arrive much later than anticipated, or return less than expected after debt and preferred claims. Ask the sponsor for its operating plan, expected acquisition pace, integration spending, debt repayment assumptions, and likely funding needs. Determine whether growth depends on adding practices, increasing earnings at existing locations, or both, and who pays for integration costs and central services.

Test the distribution waterfall instead of relying on a projected enterprise value. Start with an assumed future sale price, subtract debt and transaction costs, apply any preferred return or liquidation preference, account for management incentive pools and dilution, then calculate the portion allocated to the rollover class. Specify whether the rollover percentage applies to the fully diluted company, a particular subsidiary, or common equity after senior claims. A percentage of "equity value" has little meaning until the documents define the denominator, distribution priority, and payment timing.

Illustrative example: Assume a later sale produces $60 million in equity proceeds after debt and sale costs, and preferred investors are entitled to receive $20 million before common holders. If a management incentive pool then receives $4 million, $36 million remains for common equity. A seller who owns 10 percent of that common equity would receive $3.6 million before taxes and any additional adjustments. This is illustrative only: a different preference, ownership denominator, dilution, or fee treatment changes the result. Request a low exit case and a central case. Include a higher case and one with no later transaction.

Have an independent financial adviser model the security and a tax adviser review the structure before signing. Compare sponsor projections with a downside case that assumes slower growth, lower margins, additional debt, or no sale. Request written assumptions for the expected holding period and exit valuation method. Confirm the fees and future capital requirements as well. Past sponsor returns do not establish what this particular investment will produce, especially when the platform, borrowing, market, or security terms differ.

Review compensation and governance after closing

The employment agreement can materially change an owner's economics. Compare current total compensation with proposed salary, productivity formula, benefits, retirement contributions, malpractice coverage, call pay, and bonus eligibility. Ask whether productivity credit follows individual work, shared work, or group services, and how the formula treats administrative duties, leave, schedule changes, or collections received after termination. Review the agreement's term, renewal, termination notice, cause definitions, and any repayment or offset rights.

Keep employment risk distinct from investment risk. An owner may lose employment while retaining illiquid equity, or may be required to sell equity after leaving. Read leaver provisions alongside the employment agreement and MSA. Clarify how the company values equity at departure, when payment is due, whether the company can offset alleged damages, and how a valuation dispute is resolved. Check for provisions that cause unvested awards to lapse or vested interests to be repurchased at a discount after termination.

The MSA may give the MSO authority over budgets, non-clinical hiring, vendor selection, billing operations and marketing, as well as locations. Review service standards, fee calculation, audit rights, change mechanisms, term, renewal, termination rights, and dispute resolution. Identify matters reserved to licensed professionals and the process for addressing disagreements. Ask which decisions require PC or owner approval, who can replace the MSO, and what practical transition rights exist if the relationship ends. The documents should state the transition process, required resources, and who pays each cost before signing.

Diligence the buyer as well as the practice

Request references from physicians and administrators at acquired groups. Ask about integration timing, turnover, compensation changes, billing centralization, technology transitions, local decision making, and access to financial statements. Speak with people whose practices have operated under the buyer long enough to see how initial promises translated into routine operations. Ask who leads the platform, who controls budgets, and how local leaders raise concerns. Confirm whether the buyer can provide the investment and support described in its proposal.

Review the buyer's financing structure, existing debt, equity commitments, and any conditions on funding. Ask for evidence of committed capital and a clear timetable for financing and diligence, along with the approvals required to close. Determine whether the buyer plans to syndicate, assign, or transfer the transaction to another entity, and what protections apply if control changes. A buyer with an attractive stated price may present more execution risk if its financing, regulatory approvals, or required consents are uncertain.

Have counsel review restrictive covenants, indemnity caps, representations, escrow, closing conditions and assignment rights, plus termination rights. Review payer and hospital consents, real estate documents, lender releases, and state regulatory filings that may apply. Clarify whether the seller must provide transition services, the expected hours and duration, and compensation and expense reimbursement. A letter of intent may leave price nonbinding while making confidentiality, exclusivity, expense reimbursement, or governing law binding, so understand those commitments before signing.

Read the term sheet with a proceeds model

Before agreeing to exclusivity, translate the letter of intent into a sources-and-uses schedule. Show enterprise value, estimated cash to owners, debt payoff, transaction fees, working capital, escrow, rollover, seller notes, and taxes. Use ranges for unresolved items and label assumptions clearly. Separate amounts paid at closing from amounts contingent on performance, held back for claims, or invested in a new security. The model should show both total stated consideration and the amount each owner expects to receive after ownership percentages and entity-level obligations are applied.

Create a side-by-side comparison of offers that includes price, financing certainty, closing conditions, required consents, employment terms, rollover security and indemnity, along with governance. Consider the likelihood and timing of cash payment alongside potential upside. A lower stated price may offer more certainty if it has fewer contingencies, a cleaner financing plan, or less restrictive post-close terms. Ask for a clear transaction timetable and identify which party is responsible for each consent and deliverable.

Negotiate exclusivity as a defined period with a realistic diligence timetable and clear expiration. Identify which terms are binding, whether the buyer can extend exclusivity unilaterally, and what happens if it changes economics after diligence. Consider the opportunity cost of pausing other discussions during a no-shop period. Keep a written log of assumptions and proposed changes so that the final purchase agreement can be checked against the economic understanding in the term sheet.

Check transaction protections

The purchase agreement allocates pre-close liabilities, including billing audits, refunds, employment claims, and tax exposures. Review the survival period for representations, the indemnity cap and basket and exclusions; also confirm whether escrow is the exclusive remedy. A broad indemnity can convert a nominally high price into a contingent obligation for former owners. Match each representation to records the seller can verify, disclose exceptions through the agreed schedules, and ensure that obligations are allocated among owners in a way that reflects the negotiated deal.

Confirm every closing condition and the party responsible for obtaining each consent. Payer enrollment, hospital relationships, landlord approval, and lender release can affect timing. Set a long-stop date and understand termination rights if a required consent is delayed or denied. Agree how the business will operate between signing and closing, including distributions, hiring, capital spending, and unusual contracts. Interim covenants should allow ordinary operations while identifying actions that require notice or consent.

Review the rollover subscription documents against the negotiated term sheet before signing. The definitive instrument controls rights and restrictions, plus tax treatment obligations, including future liquidity mechanics. Check definitions, distribution priority, transfer restrictions, information rights, voting rights, tax distributions, drag-along provisions, and treatment in a recapitalization or sale. A rollover holder may be required to join a future sale on terms set by a majority, so understand whether the holder receives the same form and timing of consideration as the sponsor.

Review tax timing with an adviser before deciding how much to roll. A rollover can defer some tax in certain structures, but treatment depends on the instrument and transaction details. Determine whether tax distributions are available and whether an owner might owe tax on allocated income without receiving cash. Ask how tax withholding, state filings, and basis are handled. Tax treatment should be modeled alongside liquidity needs, because a theoretical deferral may not compensate for an unsuitable security or insufficient cash at closing.

Owner action checklist

Before signing exclusivity or definitive documents, each owner should be able to explain the cash calculation and ongoing obligations. They should also know the rollover's place in the waterfall and when it could be worth nothing. Transaction counsel, a tax adviser, and healthcare counsel should review the relevant agreements. A financial adviser should verify proceeds and waterfall calculations. Compare the term sheet with the employment agreement and MSA. Check the rollover instrument separately, then resolve any conflicts before signing.

• What is the net cash at close after debt, expenses, working capital and escrow, with taxes modeled separately?
• Which employment or transition obligations continue after closing?
• What security class, ownership denominator, and waterfall apply to rollover and incentive equity?
• What can dilute value, delay liquidity, or require additional capital?
• Who controls each operating decision, and how are PC and MSO responsibilities documented?
• How are earnouts measured, audited, disputed, or affected by buyer decisions?
• What does the downside look like if growth slows or the platform has no later transaction?
• What are the indemnity limits, closing conditions and consents, plus termination rights rights?
• Have independent transaction and tax counsel, plus healthcare counsel counsel reviewed all definitive terms?

Questions about your own practice? Contact richard@doctorsinvestorclub.com.