When a private equity group acquires an ophthalmology practice, the purchase price almost never arrives as a single payment. A portion is paid at closing. The rest is structured as an earnout tied to performance metrics over the next 2 to 5 years, sometimes longer. The physician is told this is how every deal works. The earnout protects both sides by ensuring the practice continues to perform through the transition.
What the physician learns over the following years is that the earnout protects one side significantly more than the other.
The 6-Month Notice Penalty
One ophthalmologist sold his practice to a PE backed group after more than 20 years of ownership. The earnout period extended well past the point where he expected to have full control over his next move. When he raised concerns about operational changes degrading the practice, the response wasn't a conversation about how to fix things. It was a reminder about his contractual obligations. When he explored what it would take to leave, he was told he'd need to provide months of advance notice. The notice requirement was a lever designed to ensure that any departure would be costly enough to discourage it.
Moving the Target
The earnout metrics themselves create a second layer of control. The targets are typically set using the practice's historical performance as a baseline, adjusted for growth expectations that the PE group considers reasonable. The physician agrees to those targets at signing because they appear achievable based on how the practice has always operated.
The problem is that the PE group begins making operational changes almost immediately after closing. Staffing levels shift and the payer mix changes as the group renegotiates contracts across the platform. Overhead allocations appear on the practice's financials that didn't exist under independent ownership such as charges for corporate services, regional management, technology platforms, and administrative support that the physician never requested and can't opt out of. Each of these changes affects the numbers that determine whether the earnout gets paid, and none of them are within the physician's control.
The physician is accountable for hitting a target that the group can move.
According to SRS Acquiom's analysis of more than 850 private target acquisitions, earnouts pay an average of just $0.21 on the dollar across all deals, and 41% pay nothing at all. In physician practice transactions specifically, earnouts carry additional regulatory risk under the Anti-Kickback Statute, which makes revenue based compensation to selling physicians who continue referring patients legally problematic.
The Equity Box Nobody Can Open
The equity component adds another dimension. Most PE acquisitions of physician practices include an equity rollover, typically 15 to 25% of the purchase price retained as shares in the acquiring platform. The physician is told this equity will appreciate as the platform grows and eventually exits to a larger buyer.
Years after one such acquisition, the equity remains illiquid, unvalued, and untradeable. The platform hasn't found its next buyer and the shares have no posted value on any exchange. The physician can't sell, value or plan around them. The equity that was presented as upside at signing has become an unresolvable line item on his personal balance sheet.
The Formula the Physician Should Demand
For physicians evaluating PE acquisition offers, the earnout and the equity rollover should be analyzed as a single economic unit, not as two separate components. The earnout formula should be examined in detail before signing, with specific attention to which inputs the PE group can change during the earnout period. If the group has the authority to modify the payer mix, add overhead allocations, reassign patients to new locations, change the scheduling template, or restructure the staffing model, then every one of those levers can be used to move the target in a direction that reduces the physician's payout.
Clean Asset Purchase
A practice transition structured as a clean asset purchase with no earnout and no equity rollover eliminates both of these problems. The purchase price is agreed upon, paid, and complete. The physician either stays on during a transition period with clear terms or steps away. There's no multi year period where every clinical decision, every day off, every conversation with management gets filtered through the question of whether it affects the payout. And there's no illiquid equity sitting in a box that nobody can open.
The ophthalmologists who signed these deals were presented with a structure that appeared standard and was described as mutually protective. The problem is that the structure isn't mutual. The PE group controls the inputs, timelines, and exit. The physician controls clinical work. When the clinical work is excellent and the payout still falls short, the structure is working exactly as it was designed. It just wasn't designed for the physician.
This article is for general educational purposes and is not legal or financial advice.
Verdira is a healthcare acquisition platform focused on ophthalmology practices. Physician ownership. Transparent structure. No volume quotas. If you are evaluating the ophthalmology market and want to understand how different practice models affect transition planning, we are open to thoughtful conversations.
Contact info@verdira.com | 307-381-3734 | verdira.com
