The letter of intent usually arrives before the practice is ready for it. A dermatology group gets a call from a platform backed by private equity, the headline number is larger than anyone expected, and within a week the partners are excited. Sixty days and one quality of earnings review later, the offer has dropped 20 percent — not because the practice got worse, but because the buyer’s accountants found things its own books never made visible.
Private equity has been consolidating physician-owned practices for a decade, and in 2026 the activity has broadened well past dermatology and ophthalmology into cardiology, orthopedics, GI, primary care, and dental. The difference between a strong exit and a disappointing one is rarely the medicine. It is whether your practice financials can support the number you are being offered.
The Number That Actually Gets Priced
Buyers do not pay a multiple of collections. They pay a multiple of adjusted EBITDA — earnings before interest, taxes, depreciation, and amortization, restated to show what the practice will earn after the sale, under the new ownership structure. Two practices with identical revenue can receive offers that differ by millions because their adjusted EBITDA differs.
Why Your Tax Return Understates Your Practice
Most physician-owned practices are run to minimize taxable income. Owners take large salaries, run legitimate personal-adjacent expenses through the business, prepay costs in December, and expense equipment aggressively under Section 179. Every one of those choices is smart tax planning and every one of them makes the practice look less profitable than it is.
Normalization reverses those choices on paper. The goal is a clean, defensible earnings figure that a buyer’s diligence team will accept — and the operative word is defensible. Add-backs you cannot document with a general ledger entry, an invoice, and a one-line explanation will be struck, and every struck add-back gets multiplied by seven to twelve times when it hits your price.
The Add-Backs Buyers Expect to See
| Adjustment | What It Is | What You Need to Prove It |
|---|---|---|
| Owner compensation | Physician salary and distributions above what the buyer will pay you as an employed clinician post-close | Current W-2s and K-1s, plus the proposed post-sale comp model |
| Discretionary expenses | Vehicles, family payroll, travel, club dues, personal insurance run through the practice | Ledger detail by vendor; a memo per item |
| Non-recurring items | Litigation, a one-time EHR conversion, storm damage, a retired partner’s buyout | Invoices and proof the cost will not repeat |
| Related-party rent | Rent paid to a physician-owned building above or below market | Third-party appraisal or comparable leases |
| Pro forma changes | A new provider hired mid-year, a location closed, a payer contract renegotiated | Signed contracts and run-rate analysis |
The single largest adjustment is nearly always physician compensation, and it cuts both ways. If you currently pay yourself $900,000 and the buyer’s model pays you $550,000 plus a productivity bonus, the $350,000 difference becomes EBITDA — and you are, in effect, selling a share of your own future income at a multiple. Understanding that trade is the heart of the decision, and it is why the reasonable compensation question you have been answering for the IRS suddenly matters to a buyer too.
Every dollar of add-back you cannot document is not a dollar lost. At an eight-times multiple, it is eight dollars lost.
Where Quality of Earnings Reviews Find Problems
The buyer will commission a QoE report from an outside accounting firm. It is not an audit; it is a hunt for reasons the EBITDA you presented is too high. In medical practices, the same issues surface repeatedly:
Cash-Basis Books Hiding Accrual Reality
Most practices report on a cash basis, which is fine for taxes and misleading for valuation. Collections in January that relate to December visits, unpaid claims sitting in accounts receivable, and refunds owed to payers all distort any single period. Buyers convert to accrual, and if your bookkeeping has never tracked revenue by date of service, that conversion is done by their team using their assumptions.
Revenue Cycle Leakage
A high denial rate, aging A/R over 90 days, and inconsistent write-off policies are not just operational problems — they get read as evidence that reported collections are unreliable. A practice with disciplined revenue cycle management defends its top line; one without it watches the buyer apply a haircut.
Compliance Exposure
Missing supervision documentation, unpaid overtime, misclassified contractors, and stale HIPAA risk assessments all become escrow holdbacks or price reductions. Clean payroll and compliance records are worth real money at closing.
Structuring the Deal: What Physicians Should Model
Most PE transactions use a management services organization structure: the buyer acquires the non-clinical assets and enters a long-term services agreement with a physician-owned professional entity, so state corporate practice of medicine rules are respected. Within that framework, three economic levers deserve careful modeling before you sign anything:
- Cash at close versus rollover equity. Buyers typically require sellers to roll 20 to 40 percent of proceeds into the platform. That equity is illiquid, subordinate to the platform’s debt, and only pays out on a future sale. Model it as an option, not as cash.
- Post-close compensation. The lower your employed salary, the higher the EBITDA and price — but you live with that salary for the length of your employment agreement, usually five years. Run the math on both scenarios across the full term.
- Earn-outs and clawbacks. Any portion of price tied to future EBITDA targets is contingent. Understand what you control after the sale and what the platform controls.
Tax structure runs alongside all of this. Asset sales versus equity sales, purchase price allocation, installment treatment, and whether rollover equity qualifies for tax deferral each move the after-tax number materially. Our tax strategy team models these before a letter of intent is signed, because after signing, leverage disappears.
Getting Deal-Ready: The 12-Month Plan
The practices that command top-of-range multiples did not clean up in the two weeks after the LOI. They ran the practice as if a buyer were watching for a year beforehand:
- Move to monthly accrual close. Track revenue by date of service and produce a real balance sheet. This is the foundation of everything else.
- Build a rolling adjusted EBITDA schedule updated quarterly, with every add-back tied to a ledger reference and a supporting document.
- Document related-party arrangements — real estate, equipment leases, family employment — at market terms with signed agreements.
- Produce management-grade reporting: provider productivity, payer mix, A/R aging, and denial trends, monthly. Buyers pay more for practices that already report like platforms, which is exactly what our financial reporting engagements build.
- Commission a sell-side QoE. Finding your own problems first costs a fraction of what a buyer’s discovery costs you at the negotiating table.
The Bottom Line
Running your practice on adjusted EBITDA discipline makes it a better business whether or not you sell. And if the call does come, you will be negotiating from a number you can defend rather than reacting to one the buyer constructed for you.
If you have received an inbound inquiry, or simply want to know what your practice would be worth to a strategic buyer today, schedule a free consultation. Our CFO advisory team will build your normalized EBITDA schedule, pressure-test it the way a QoE firm would, and show you what to fix before anyone else is looking.
