DermatologistsUnderstand the transaction map
Request a plain-language diagram of the current and proposed entities. It should identify the professional practice entity, any management company, property entities, owners, new holding companies and the flow of funds. Ask which entity employs nonclinical staff, owns equipment, contracts with vendors, bills for services and holds payer agreements. The answer may vary by state and structure, so healthcare counsel must assess the design. Do not assume that a diagram in marketing material is a legal organization chart.
The MSO may provide scheduling infrastructure, billing administration, recruiting support, marketing, finance, technology or facilities services. List each service, its service level, the fee basis and the person accountable for delivery. Determine whether the MSO fee is fixed, cost-plus, a percentage of revenue or another formula. Ask how shared costs are allocated among locations and affiliated practices. A percentage fee can rise with revenue even when the service burden does not, while a fixed fee can become expensive if volume falls. The contract should explain scope, reporting, dispute rights, renewal and termination mechanics.
Illustrative example: a practice has $10 million in annual collections and pays an MSO fee equal to 6 percent, or $600,000. If collections rise 8 percent to $10.8 million with no change in the percentage, the fee becomes $648,000. That arithmetic does not show whether the services are worth the cost. The owner should compare the fee with actual services, incremental support, market alternatives and any expenses still retained by the practice. This example is illustrative and not a suggested fee or market benchmark.
Reconcile enterprise value to owner cash
Ask the buyer to define enterprise value, equity value and the assumed debt and cash amounts. Request a funds-flow example for the ownership group. The bridge should identify transaction expenses, debt payoff, working capital, escrow and holdbacks, seller notes, rollover or other consideration. Ensure the ownership percentages and entity-level liabilities are reflected correctly. A practice with multiple owners may have different tax bases, indebtedness or distribution rights that affect each person's outcome.
Illustrative example: a proposal states $20 million enterprise value, with $2 million of debt, $1 million of cash and $800,000 of fees. The preliminary equity value might be $19 million before working capital and other adjustments. If 20 percent of that amount is rolled into buyer equity, the cash component is not simply $19 million less the debt. The funds-flow must show exactly when cash is measured, whether the cash is included in the valuation, and what portion is retained or reinvested. This example is illustrative only; actual definitions control.
Review the quality and timing of each payment. Cash at close is different from an escrow released later, a seller note with credit risk, an earnout subject to operating control or equity that may have no near-term liquidity. For every contingent item, ask who controls the metric, how it is calculated, what information rights exist, whether the buyer can offset claims and how disputes are resolved. Have counsel and tax advisers explain the treatment before using the amount in personal planning.
Evaluate the MSO agreement as an operating contract
The management services agreement may set the practical boundaries of the relationship. Review its term, scope, fees, annual increases, pass-through expenses, service levels, audit rights and indemnities, along with termination rights. Ask who owns work product, business data, phone numbers, domain names, software configurations and vendor relationships. If the practice can terminate only after a lengthy notice period or a large fee, the contract may limit future options. Determine whether the MSO can assign the agreement to a successor or affiliate without practice consent.
Clarify decision rights. Which party approves budgets, hiring, compensation, capital spending, location openings and debt; also marketing and vendor decisions? How are professional and clinical decisions kept with appropriately authorized professionals? The owner should obtain state-specific legal advice about professional entity rules and the boundary between administrative support and professional judgment. A generic assurance that the structure is "compliant" is not a substitute for counsel reviewing the actual documents and operating practices.
Test what happens when service quality falls short. Define response times, reporting frequency, escalation contacts, service credits if applicable, and a process for resolving disputes. If a central billing team changes software or workflows, how does the practice receive training and monitor transition issues? The contract should address continuity if the MSO changes vendors, loses a key service line or undergoes a control transaction. Owners should consider whether the practice has enough information and practical ability to manage its business obligations if the relationship ends.
Read the rollover documents, not just the percentage
Rollover equity is an investment in a new capital structure. Ask what security is being issued, the class of units or shares, the amount invested, the price per unit, and the rights attached to that class. Obtain the governing agreement, subscription documents, capitalization table and any side letter. Understand whether sponsor capital and management equity sit ahead of seller interests, whether preferred returns accrue, and how proceeds are distributed in a future sale. "Twenty percent rollover" could mean 20 percent of an ownership pool, 20 percent of the seller's proceeds, or something else.
Ask for a fully diluted capitalization table immediately after closing and under plausible future scenarios. It should show sponsor ownership, seller rollover, management incentive pool, options, warrants, debt conversion and future capital. Identify the denominator used for every ownership percentage. Ask how new incentive awards or acquisitions may affect the seller's share. The documents should explain whether the owner must contribute more capital, can be diluted for not contributing, or has preemptive rights. Obtain the valuation and tax analysis from independent advisers.
Illustrative example: an owner rolls $2 million into a company with a stated $40 million equity value. The simple fraction is 5 percent only if both figures use the same valuation basis, security class and capitalization before dilution. If a 10 percent incentive pool is created after the calculation, or preferred capital has a priority return, the owner's eventual share of sale proceeds may differ substantially from a simple 5 percent assumption. The example is illustrative and is not a projection of return.
Model outcomes and downside cases
Request a distribution waterfall and run several exit values, including a case with no gain over the sponsor's invested capital. The model should show preferences, accrued returns, debt repayment, transaction costs, incentive pool allocation and the seller's class rights. Ask who selects the valuation at a recapitalization and whether the owner can sell at that time. Understand whether a future buyer can force a sale, whether minority holders must roll again, and what happens if the sponsor does not sell within the expected period.
Illustrative example: a seller's rollover is shown as $2 million at close. A future enterprise value increase does not necessarily double that stake. Suppose the business also has new debt, a preferred return, additional capital and dilution from an incentive pool. The waterfall can leave common holders with less than a simple growth multiple suggests. Request the buyer's model inputs and ask an independent financial adviser to recreate the calculation. Treat sponsor projections as scenarios, not commitments.
Check transfer restrictions, repurchase rights, drag-along and tag-along provisions, rights of first refusal and the consequences of death, disability, retirement or termination. Learn whether an owner who stops working must sell equity, at what price and under what conditions. If the buyer can repurchase at cost or fair market value only in specified cases, understand how "cause," "good leaver" and "bad leaver" are defined. These terms can have a larger practical effect than the initial ownership percentage.
Examine governance and information rights
List the decisions reserved to the board, sponsor, practice entity and local leaders. Ask whether seller representatives have board seats, observer rights or only periodic reporting. Identify veto rights and whether they are individual, class-based or subject to a threshold ownership percentage. A right that disappears after dilution may be less durable than it appears. Review quorum, notice, meeting frequency, conflict rules and the process for related-party transactions.
Information rights should support meaningful monitoring. Determine how often owners receive financial statements, budgets, location reporting, debt covenant status and capitalization updates. Confirm the format and level of detail, who may receive the information and what confidentiality restrictions apply. Ask whether the company may limit access during a dispute or near a sale. If the owner is expected to help grow the platform but cannot see performance against the business plan, the role and reporting expectations may be misaligned.
Governance also includes practical authority over local operations. Who approves a new location, a lease renewal, replacement equipment, a provider recruitment package or a billing system change? What is the budget approval calendar? Are local managers accountable to the practice or the MSO? These questions matter because slow decisions can affect staffing and capacity. Write down examples from the proposed operating plan and request explicit answers instead of relying on broad statements about "partnership."
Review employment and incentives separately
The sale documents and employment agreement serve different purposes. Review base compensation, productivity formula, bonus thresholds, benefits, duties, work schedule, termination rights, notice, restrictive covenants and dispute process. Ask how compensation changes if the MSO reallocates expenses, alters scheduling or changes billing support. Determine whether the owner will have management responsibilities beyond clinical work and how that time is recognized. Have counsel assess enforceability in the relevant jurisdictions.
Management incentive plans may have a separate vesting schedule, hurdle, performance metric, repurchase right and tax treatment. Ask what happens if the sponsor sells, the company refinances, the owner changes roles or the owner is terminated without cause. Obtain the plan documents and model vesting under several timelines. Do not count an unvested award as cash at close or assume an option has value without understanding its exercise price and distribution priority.
Illustrative example: a management award represents 1 percent of a pool after four years, subject to continued service and performance hurdles. If the owner leaves after two years, the unvested portion may lapse. If the company also issues additional awards, the fully diluted share can change. A headline percentage without assumptions for vesting or the hurdle, and without dilution analysis cannot be translated directly into proceeds. The example is illustrative only.
Understand debt, cash controls and future acquisitions
Review existing and new debt, guarantees, liens, cash management, distribution restrictions and covenant reporting. Identify who can borrow, pledge assets or require additional equity. Find out whether owners have personal guarantees or indemnity obligations after closing. Ask how cash is swept, what reserves are retained and who approves distributions. Ensure the accounting definitions in the transaction documents can be reconciled to monthly reporting.
A platform may plan to acquire additional practices. Ask how acquisitions will be funded, whether sellers of future practices receive different securities, and whether existing holders bear integration costs or dilution. Understand how the platform will allocate shared services and brand expenses between locations. A growth plan can create value, but execution requires management capacity and adequate capital, supported by working systems. Ask for examples of the decision process and post-acquisition responsibilities instead of assuming that additional scale automatically benefits every owner.
Compare the offer with alternatives
Compare the proposal with a full sale, a minority investment, an internal succession plan and continued independent ownership. Use the same financial period and assumptions where possible. Include owner time, transition work, capital requirements and taxes, plus risk and control. Some alternatives may be harder to execute but preserve choices; some may provide more cash but impose more restrictive obligations. Document what the owner values and what is still unknown.
Before signing exclusivity or a letter of intent, have independent healthcare transaction counsel, tax counsel and financial advisers review the material terms. Ask for sufficient time to understand the full set of documents. Keep a list of verbal statements that matter and ensure they appear in binding language if the parties intend them to be commitments. Educational material cannot determine whether a particular structure is suitable. Questions or corrections may be sent to Richard@DoctorsInvestorClub.com.
Questions about your own practice? Contact Richard@DoctorsInvestorClub.com.
