How to Protect Your Ownership Track: Physician Contracts and Private Equity Buyouts

If you’re considering a physician-owned private practice with the promise of future equity ownership, it’s essential to plan, especially with the rise of private equity buyouts. Too many physicians sign employment contracts without protecting their ownership opportunity, only to watch it disappear in a sale. Here’s how to safeguard your goals through smart contract negotiation.

Ownership Track Contracts Come with a Financial Tradeoff

Many physicians sacrifice significant initial compensation for the potential long-term benefits of practice ownership. For example, the typical hospital-employed compensation plan in your specialty might be $500K yearly. In comparison, a private practice pre-ownership track might only offer $350K per year during your first two years. In this scenario, you could be giving up about $300,000 in earnings with the expectation of future ownership.

If that ownership opportunity disappears because of a private equity acquisition, we believe it’s reasonable that your physician contract provides some legal protection or a clear remedy. After all, the reason you accepted a lower salary was the promise of future equity ownership. Without legal safeguards, you could find yourself locked into a contract that no longer aligns with your original goals.

Fortunately, there are proven contract negotiation strategies that can help physicians protect themselves in these situations. Below, I will outline several important negotiation options to consider when reviewing a physician employment agreement, especially if there is any chance of a private equity sale on the horizon.

Negotiation Options with Private Equity Buyouts in Mind

Most physician employment agreements say that if the practice ownership changes, nothing happens to your contract. The new owners can do whatever they want with no penalty. But we can consider negotiating stronger terms to help protect you.

For example, if there is a change in ownership during your pre-ownership track, we might ask for a clause that says the employer:

1. Cannot terminate you without cause;
2. Must give you an opportunity to buy in as an equal owner; and
3. Must allow you to participate in any sale of the practice.

That’s a nice option to have. It doesn’t mean that you want to do that or must do that – you might not want to continue your career in this position even if it comes with a significant payday. Either way, it’s nice to, at least, have the option to participate.

We can also try to improve your rights if you want to leave the practice around the time of a sale. Some helpful terms to request include:

1. The ability to terminate your contract quickly without cause;
2. Having the employer cover malpractice tail coverage (which is often the physician’s responsibility in pre-ownership deals);
3. A waiver of payback obligations for signing bonuses or negative accrual clauses;
4. Making any restrictive covenants, such as noncompete or nonsolicit clauses, invalid and unenforceable; and/or
5. A financial consideration for the lost opportunity of future ownership.

If you have the option to 1) accelerate into ownership and participate in the sale, and/or 2) get out scot free, then this can be a big advantage and can reduce a primary risk of joining an independent physician-owned private practice.

Not every practice will agree to these terms, but a request is often worth considering. A minority of employers will agree, but having the conversation can sometimes lead to better protections. We don’t do this in every private practice pre-ownership deal we evaluate; it just depends on the situation and physician objectives.

Risks Physicians Face in Post-Buyout Employment Agreements

Most private equity buyouts are structured to force the current owners to stay in the practice for 3-6 years under very penal termination provisions. For example, a post-buyout employment agreement might include a 5-year term with no legal right for the physicians to terminate without cause. Some will have rough physician-side termination damages provisions, including paying back some or all of the purchase price along with consequential damages. These may be even more than the purchase price and include the lost opportunity of building an even more profitable practice. 

There is no ‘free lunch’ here. There are plenty of physicians who reap 7-figure benefits from this transaction and benefit from the services and expertise provided by the MSO. Some regret it and find themselves trapped in a long contract, unhappy practice, without a reasonable opportunity to exit. Walk through these options with your lawyer before agreeing to any private equity buyout!

For insight into employment agreements with private equity-owned practices, check out our blog, Don’t Get Catfished by Private Equity.

Get Help Before Signing Physician Contracts!

PLEASE get a lawyer if you’re negotiating any physician employment agreement, particularly when it’s an independent physician-owned private practice and future ownership is contemplated. There are a lot of tripwires here, and it can be very difficult to DIY this! Schedule a free consult HERE if you would like to explore further.