Private equity buyers often present higher valuations compared to traditional doctor buyers. However, the structure of these deals can be quite different. In many private equity transactions, less than 100% of the offering price is paid in cash at closing. Instead, sellers might encounter holdbacks contingent on the practice meeting specific financial goals and a significant portion of the payment in the form of “equity” in the purchasing entity. This equity has the potential for significant upside, but it comes with numerous restrictions on its sale, and its ultimate value is not guaranteed.

The higher valuations from private equity are driven by their target returns, typically around 15% to 20%. Conversely, private doctor buyers need a much higher return, often exceeding 40%, to support both the practice and their personal livelihoods. This necessity is why banks are cautious about loaning money to private buyers if the practice price is too high, potentially jeopardizing the buyer’s ability to service the loan while maintaining a reasonable standard of living. Therefore, while private equity offers may initially seem more attractive, they come with complexities that need careful consideration.

Tip: While private equity buyers might offer higher valuations, these offers often include future uncertainties like equity stakes and contingent payments. Carefully analyze the terms and compare them with the more straightforward valuation from a private doctor buyer to ensure you understand the potential risks and rewards.

Tip: Ensure that any potential buyer, especially a private doctor buyer, has solid financing. Ask detailed questions about their financing plans and debt management to confirm they can sustain the practice's profitability while managing loan repayments.