Selling to Private Equity? Know What Happens to Your Equity If You Leave

Intuitively, we know that patients trust their doctors. Fully 92% of surveyed patients said continuity with their primary care physician was important or very important, according to a JAMA-published survey.

But doctors are human, and at some point many want to rethink how they work or prepare for retirement. How can they best manage this desire while fulfilling their professional and legal obligations to patients?

As more practices look to sell to private equity, a study identified a trouble spot. Private equity firms generally seek to eventually exit their investments by selling the practices they acquire. The study found that two years after PE resold the practice, only 43.5% of doctors remained at the practice, compared with 60% in the comparison group.

The physicians who walked away kept practicing and went to work for another organization.

One potential explanation is that after a rollover is supposed to pay off, the new owner often asks the doctors to roll equity again under fresh vesting terms. That’s when they decide they’ve had enough of the arrangement. While the study has limitations, it appears to be the most direct published evidence on the topic.

This raises a question that rarely gets asked during diligence. What happens to unvested equity when a physician leaves voluntarily?

The answer is in the equity documents, separate from the employment agreement, and it often works against doctors. These physicians often forfeit unvested units outright. The platform can sometimes repurchase vested units at original cost, or book value instead of fair market value, and sometimes on its own timing.

A departure classified as “for cause” or as a “bad leaver” event under the operating agreement carries even worse terms, and the definitions reach further than most physicians assume when they skim them at the time of signing.

None of that means that doctors should not sell. Plenty of these transactions work, and for a practice with a real capital need and a buyer with a credible plan, a sale is often the right call.

The new owner is asking doctors to accept deferred compensation that depends on them staying, in a setting where the best available evidence says many professionals in that situation do not stay.

There are four questions doctors should get answers to before they sign an agreement:

• How are unvested units treated on voluntary resignation, and what specifically counts as resignation for good reason?

• If the platform repurchases the vested equity, at what price is the purchase made, and on whose timing? Fair market value, original cost, or something else?

• If the sponsor extends its hold past the vesting date, does the vesting continue, accelerate, or stall?

• Is the non-compete enforceable in the state if the doctor leaves? Oregon now voids most non-competes for medical licensees, California bars them except when tied to the sale of a business, and the federal rule that would have applied nationally was set aside in court. So the answer turns on where they practice and on whether the covenant attaches to the sale or to the employment.

The stakes reach well beyond the deal in an overburdened healthcare system. Patients like going to the same doctor, and data shows the benefits: Consistency leads to lower mortality rates, fewer hospitalizations, fewer emergency department visits, and better preventive care. When doctors move to a new practice, they too often lose patients in the process.

Many doctors want to keep caring for their patients, and patients trust them to do so. The surest way to protect that relationship is to read the equity documents closely before signing, while doctors still have leverage.

Douglas McCormack is founder and chief executive of Acumen Partners, a health care advisory firm in Washington, D.C. Disclosure: Acumen Partners advises physician-practice owners on sales to private equity sponsors and planned acquirers and is compensated for that work. This article is general information and does not constitute legal advice.