Technology, Media & Healthcare

How to Underwrite a Physician Practice Acquisition

Underwrite a physician practice by rebuilding EBITDA after the new physician compensation model, then testing provider retention, payer contracts and ancillary revenue compliance. Key metrics are post-close normalized EBITDA, collections per provider and wRVU productivity, payer mix, and the share of income from ancillaries such as imaging, labs or infusion. The compensation reset defines the deal.

What makes physician practice / clinic roll-up underwriting different

Physician practice deals convert income that owners took as compensation into enterprise EBITDA. At closing, physicians accept lower ongoing pay in exchange for purchase price, and the difference becomes the profit buyers pay for. Value comes from patient volume, payer contracts, ancillary services and the ability to recruit and add practices in a specialty. Risk comes from physician departures, compensation models that do not keep doctors engaged, reimbursement changes, and compliance issues around ancillaries, referrals and corporate practice of medicine laws. Roll-ups add integration risk across billing systems, payer contracts and culture.

Lenders underwrite practice roll-ups on pro forma EBITDA after the compensation reset, but they scrutinize add-backs and require evidence that physicians are bound by employment agreements and non-competes. Because the professional entity is often owned by physicians and the platform is an MSO, lenders rely on management agreements and stock transfer restrictions for security. Equity investors underwrite the specialty thesis: demand growth, payer leverage from scale, ancillary expansion and recruitment of younger physicians. They depend on physician rollover equity to align incentives.

Key metrics

Post-close normalized EBITDA

Earnings after the new physician compensation model are the true cash flow buyers acquire.

Collections per provider

Shows productivity and the revenue at risk if a physician leaves.

wRVU productivity

Work relative value units measure clinical output and often drive compensation formulas.

Ancillary revenue share

Imaging, labs, infusion and surgery center income can be profitable but face regulatory and reimbursement risk.

Provider concentration and age

A few senior physicians may generate most revenue and plan to retire within the investment period.

Payer mix

Commercial contracts and government rates determine revenue per visit.

How to underwrite it, step by step

Rebuild historical physician compensation and model the post-close compensation plan.
Analyze collections, visits and wRVUs by provider and location.
Review employment agreements, non-competes, rollover equity and retirement plans for each physician.
Diligence payer contracts, fee schedules and opportunities or risks from consolidation.
Review ancillary services for compliance with Stark, Anti-Kickback and state law.
Confirm the MSO and professional entity structure complies with corporate practice of medicine rules.
Assess billing systems, coding accuracy and revenue cycle performance.
Size debt on post-close EBITDA with conservative add-backs and stress provider departures.

Due diligence checklist

Physician compensation history and proposed compensation plan
Employment agreements, non-competes and rollover equity documents
Collections, visits and wRVUs by provider
Payer contracts and fee schedules
Ancillary service revenue and compliance reviews
Management services agreement and professional entity documents
Coding audits and billing compliance reports
Malpractice insurance and claims history
Credentialing and licensure records
Location leases and expansion plans
Integration plans for acquired practices

Key risks and mitigants

Physician departures after closing

Require employment agreements, non-competes, rollover equity and vesting tied to retention.

Compensation model reduces productivity

Review compensation incentives and test pro forma EBITDA under lower productivity.

Ancillary compliance issues

Obtain legal review of ancillary arrangements and require specific indemnities.

Corporate practice of medicine violations

Use compliant MSO structures and review state law with healthcare counsel.

Integration failure across practices

Assess integration capabilities and avoid crediting synergies until achieved.

Typical financing and deal structure

Physician practice platforms are commonly financed with unitranche or senior term loans sized on pro forma EBITDA after compensation resets, with delayed draw tranches for add-on practices and a revolver. Physicians typically roll a meaningful portion of proceeds into platform equity. In states with corporate practice restrictions, the platform owns an MSO that contracts with physician-owned professional entities, and lenders take security through the MSO, management fees and stock transfer agreements. Smaller single-practice acquisitions use SBA 7(a) or bank loans with seller notes. Earnouts may be tied to collections or provider retention. Covenants include leverage tests and limits on add-backs.

Red flags

Pro forma EBITDA depends on large compensation cuts that physicians have not agreed to
Senior physicians generating most revenue plan to retire soon
Ancillary referrals that may not meet Stark exceptions
Non-competes that are unenforceable in the practice's state
Large add-backs for synergies across practices not yet integrated

Frequently asked questions

How are physician practices valued?

Practices are typically valued on a multiple of post-close EBITDA after physician compensation is reset to the new model. The multiple depends on specialty, size, payer mix, growth, ancillary revenue and provider retention. Platform acquisitions generally command higher multiples than single practices because of scale and infrastructure.

What is an MSO in a physician practice deal?

A management services organization provides non-clinical services such as billing, staffing, IT and facilities to physician practices under a management agreement. In states that prohibit corporate ownership of medical practices, investors own the MSO while physicians own the professional entity. The MSO earns management fees that represent the investment's cash flow.

What is a compensation reset in a practice acquisition?

A compensation reset reduces physician pay after closing so that part of the income they previously took becomes practice profit. In exchange, physicians receive purchase price and often rollover equity. Underwriters test whether the new compensation is sustainable and whether physicians will remain productive. Vesting on rollover equity often supports retention.

Can I use an SBA loan to buy a medical practice?

Yes, SBA 7(a) loans are commonly used to acquire medical practices, particularly by physicians buying from retiring owners. Lenders review collections, payer mix, provider transition and licensure. A seller note and transition period are usually required, and the buyer must be able to maintain patient relationships and payer contracts.

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Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.