The private equity deal glossary for physicians

The words you use and the words they use

Physicians and deal professionals often describe the same thing with different words. When a banker or a buyer says something you do not recognize, it is usually one of these. The right-hand column is what you will hear in meetings and see in documents.

The rest of this page defines 36 terms in the order you are likely to meet them: who the players are, how the price is set, what the paperwork says, what happens to your money after closing, what the shares you receive actually are, and how you eventually get out.

The players and the structure

Private equity (PE)

Private equity firms are investment companies that buy businesses using a mix of their investors' money and borrowed money, then try to sell those businesses for more in about 5 to 7 years. The firm that buys your practice is called the sponsor, and the money it invests belongs mostly to pension funds, endowments, and wealthy families. Why it matters to you: the sponsor's timeline, not yours, sets when the company will be sold and when your rollover shares can turn into cash. Start with should I sell my practice to private equity.

Platform

A platform is the first and largest practice a private equity firm buys in a specialty or region. It becomes the base that other practices are attached to, and its leadership often becomes the leadership of the whole company. Why it matters to you: platforms are paid a higher multiple than practices bought later, because the buyer is paying for the foundation and not just the profit. If you are the platform, you have more room to negotiate on price and terms.

Add-on (tuck-in)

An add-on, also called a tuck-in, is a smaller practice bought after the platform and folded into it. The buyer already has the management team and systems in place, so the add-on is valued mostly for its profit. Why it matters to you: add-ons usually receive a lower multiple than the platform did, sometimes several turns lower, and have less negotiating power over the employment terms and rollover structure that the platform already set.

Recap (recapitalization)

A recapitalization is the technical name for what happens when you sell a majority of your practice while keeping a slice. The buyer changes who owns the company, typically adds debt to the balance sheet, and leaves you with a minority stake. Why it matters to you: when a buyer describes the deal as a "partnership" or a "recap" rather than a sale, the mechanics are still a sale of control. You will no longer make the final decisions.

MSO (management services organization)

The MSO is the company the private equity firm actually owns. It provides the business services a practice needs, including billing, human resources, information technology, leases, payer contracting, and marketing, and it charges the medical practice a fee for those services. Why it matters to you: your rollover equity is usually in the MSO or a holding company above it, and your employment agreement is usually with the MSO or with a professional entity it controls. The MSO page shows how the pieces connect.

Friendly PC

A friendly PC, or friendly professional corporation, is the medical entity that still legally owns the practice and employs the physicians, held by a licensed physician who has agreed to follow the MSO's direction. The arrangement exists because state law often says only physicians can own a medical practice. Why it matters to you: the physician who owns the friendly PC typically has signed agreements that let the MSO replace them, so control in fact sits with the MSO even though the PC looks independent on paper.

Management fee

The management fee is what the MSO charges the practice for running its business side. It is paid from the practice's revenue before physicians are paid, and it is how the practice's profit moves to the company the sponsor owns. Why it matters to you: the size and structure of the fee determine how much profit reaches the MSO, and therefore how much value your rollover shares represent. Ask how it is calculated and whether it can change.

CPOM (corporate practice of medicine)

Corporate practice of medicine laws are state rules that say only licensed physicians, or entities they own, may own a medical practice or employ physicians to practice medicine. States enforce them with different strictness; California and New York are strict, and Florida has no such doctrine. Why it matters to you: CPOM is the reason the MSO and friendly PC structure exists at all, and it shapes what the buyer can and cannot control in your clinical work. See the state pages for how your state treats it.

The price

EBITDA

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is the practice's yearly profit before those four items are subtracted, and it is the number the buyer multiplies to arrive at your price. Why it matters to you: nearly every dollar of price is a multiple of EBITDA, so at a multiple of 8x, a change of $100,000 in EBITDA changes the price by $800,000. The buyer's version of your EBITDA, after the scrape and after the quality of earnings review, is the one that counts.

Multiple

The multiple is how many times EBITDA the buyer pays. An offer of 8x on $2 million of EBITDA is a $16 million enterprise value. Why it matters to you: the multiple is the headline number everyone quotes, but a high multiple on a low EBITDA can be worth less than a modest multiple on an honest one. Ask what EBITDA the multiple is applied to before you compare offers.

EBITDA adjustments (add-backs)

Add-backs are changes the buyer or your banker makes to your reported profit to remove one-time costs or owner perks that a new owner would not pay. A one-time legal bill, an above-market lease to a physician-owned building, or a family member on payroll are common examples. Why it matters to you: add-backs raise EBITDA and therefore price, so your banker will look for them, but the buyer's accountants will challenge every one. Adjustments can also go the other way and lower your number.

Scrape

The scrape is the portion of your current income the buyer takes out of your future pay to create the profit it is buying. A physician practice often has little profit after the owners are paid, so the buyer lowers owner compensation to market rates and the difference becomes EBITDA. It is often 20 to 30 percent of prior pay. Why it matters to you: you are, in effect, selling your own future income for a multiple of it today. The math of whether that trade is good for you is on the scrape and income repair page.

Income repair

Income repair means getting your pay back toward what it was before the scrape, through productivity bonuses, growth in the practice, new ancillary services, or a share of the profit above a target. Why it matters to you: buyers describe income repair as the answer to the scrape, but it depends on future performance that you do not fully control, and it can take years or not arrive at all. Get the formula in writing and model what happens if volume stays flat.

QoE (quality of earnings)

A quality of earnings review is a study of your financial statements by an outside accounting firm the buyer hires. It tests whether your profit is accurate, whether it is likely to repeat, and whether your add-backs hold up. Why it matters to you: the QoE almost always produces a lower EBITDA than the number in your letter of intent, and the buyer will use it to lower the price or change the terms. Some sellers commission their own QoE before going to market so there are no surprises.

The paperwork

LOI (letter of intent)

The letter of intent is the first written offer. It lays out the price, the split between cash and rollover, the basic employment terms, and the timeline. Most of it is non-binding, but it almost always includes a binding exclusivity clause. Why it matters to you: the LOI is the moment of greatest negotiating power you will have. Almost everything that decides your after-tax outcome, from the purchase price allocation to the non-compete, is easier to change before you sign it than after. Our list of mistakes starts here.

Exclusivity

Exclusivity is the period after the letter of intent, usually a few months, during which you agree not to talk to any other buyer. It gives the buyer time to do diligence without competition. Why it matters to you: once exclusivity starts, your competing offers are gone and the buyer knows it. Price reductions after the quality of earnings review are common during this window, and your only real alternative is to walk away and start over.

Non-compete / non-solicit

A non-compete is a promise not to practice within a set distance for a set period after you leave. A non-solicit is a promise not to recruit the practice's staff or patients. In a sale, these covenants can be attached to the sale of the business and to your employment agreement separately. Why it matters to you: the payment allocated to a non-compete is taxed as ordinary income rather than capital gain, and the restriction can keep you from working in your own town if the arrangement fails. Some states limit these terms; see the state pages.

Tail coverage

Tail coverage is malpractice insurance that covers claims filed after your existing claims-made policy ends, for care you gave while it was in force. It is typically bought as a one-time premium of roughly 200 percent of the annual premium, within a 30 to 60 day window. Why it matters to you: who pays for it is a contract term, not a given. The buyer often provides prior-acts coverage for physicians who stay, but retiring or departing physicians may face a large bill. The W-2 planning page covers this.

Your money after closing

Hold-back (escrow)

A hold-back, or escrow, is part of the sale price set aside with a third party for a year or two in case problems turn up after closing, such as a billing dispute, a tax issue, or a claim that a statement you made in the contract was wrong. Why it matters to you: the money is yours only if nothing goes wrong. Understand what can be claimed against it, who decides, and when the balance is released.

Earnout

An earnout is extra sale money paid later only if the practice hits agreed targets, such as a revenue or EBITDA level in the year or two after closing. Why it matters to you: the buyer now controls the decisions that determine whether the target is met, and an earnout tied to your continued employment can be taxed as compensation rather than capital gain. The earnouts page explains the tax treatment.

Clawback

A clawback is a contract right that requires you to pay money back if you leave before a set date, breach the agreement, or miss a target. It can apply to a signing bonus, part of the purchase price, or your rollover equity. Why it matters to you: a clawback turns a payment you thought you had received into a loan you may have to repay. Read for the triggers and for how "cause" is defined.

Asset sale vs stock sale

In an asset sale the practice entity sells its things (goodwill, equipment, receivables) to the buyer. In a stock sale you sell the entity itself. Buyers prefer asset treatment because they can deduct the price over time; sellers often prefer stock treatment because it is taxed once at capital gain rates. Why it matters to you: the structure decides your tax bill, and most private equity deals use an F-reorganization to give the buyer asset treatment while preserving your capital gain and rollover deferral. See asset sale, stock sale, or F-reorganization.

Personal goodwill

Personal goodwill is the value of the practice that is tied to you as a person rather than to the business: your reputation, your referral relationships, your patients' loyalty to you. It can be sold by you directly, separate from the practice. Why it matters to you: personal goodwill is taxed as capital gain to you and, in a C corporation practice, avoids the second layer of corporate tax. It only works if you have not already signed an employment agreement and non-compete with your own practice. The personal goodwill page covers the cases.

Depreciation recapture

Depreciation recapture is tax at ordinary income rates on the gain from selling equipment you had already written off through depreciation. If you expensed a $200,000 laser and the buyer pays $150,000 for it, that $150,000 is ordinary income, not capital gain. Why it matters to you: it is recognized in the year of sale even if the rest of the price is paid over time, and for equipment-heavy specialties it can be a meaningful part of the tax bill. The tax pillar page covers it.

Installment sale

An installment sale is a sale where you are paid over several years and, by default, pay tax on each payment as it arrives rather than all at once. Seller notes and many earnouts are taxed this way. Why it matters to you: spreading the tax can help, but the deferred payments carry imputed interest that is ordinary income, you bear the buyer's credit risk, and if more than $5 million of installment obligations are outstanding at year end, Section 453A charges interest on the deferred tax. See the earnouts and 453A page.

Your equity

Rollover equity

Rollover equity is the part of your sale price that you take as ownership in the buyer's company, usually the MSO or a holding company above it, instead of cash. Most deals require 20 to 40 percent of your price to be rolled. Why it matters to you: it is a minority stake with no public market, it sits behind lenders and preferred investors, and its value is whatever the next sale produces, which can be zero. The tax on it is deferred, not forgiven. The rollover equity page is the place to start.

Section 721 / 351 exchange

Sections 721 and 351 are the tax code provisions that let you receive rollover shares without paying tax on that part of the price at closing. Section 721 applies when the holding company is a partnership or LLC; Section 351 applies when it is a corporation and the contributing group ends up with 80 percent control. Why it matters to you: your basis carries over, so when the shares are eventually sold the full gain is taxed then. If the rollover does not qualify, for example because part of it is tied to vesting, you may owe tax at closing on shares you cannot sell.

Waterfall

The waterfall is the order in which money from a sale of the company is paid out. Lenders are repaid first. Then investors holding preferred equity receive their money back plus any preferred return. Then common equity holders, which usually includes physicians with rollover shares, split what is left. Why it matters to you: if the company sells for less than hoped, the layers above you can absorb the entire price. Ask where your shares sit and what has to be paid ahead of you.

Preferred return

A preferred return is a set annual return, often expressed as a percentage, that the sponsor's investors must receive on their preferred equity before common shareholders get anything. It accrues whether or not the company pays it in cash. Why it matters to you: a preferred return grows the amount that must be paid ahead of you every year the platform is held. The longer the hold, the more of the sale price it consumes before your rollover shares are reached.

PIK (payment-in-kind)

PIK, or payment-in-kind, is interest or preferred return that is added to the balance owed instead of being paid in cash. A PIK preferred instrument compounds, so the amount ahead of you in the waterfall grows each year. Why it matters to you: PIK is invisible in the day-to-day business but very visible at exit, when a preferred balance that started at a certain size has grown for 5 to 7 years. Ask whether any layer above you accrues PIK.

Dividend recap

A dividend recap is when the company borrows money and pays the proceeds out to its owners as a dividend. It lets the sponsor return cash to its investors before selling the company. Why it matters to you: whether any of that cash reaches common shareholders depends on the waterfall, and often most or all of it goes to the preferred layer. Meanwhile the added debt sits ahead of you and increases the risk to your shares.

Your exit

Second bite of the apple

The second bite is cashing in your rollover shares when the sponsor sells the whole company to the next buyer, usually 5 to 7 years after your deal. It is the reason buyers ask you to roll a large share of your price. Why it matters to you: the second bite can be large when the platform grows and sells well, and it can be small or nothing when it does not, or when the exit is delayed. A Commonwealth Fund analysis published in April 2026 found that about half of private equity owned practices are resold within 3 years, which says as much about the churn as about the payoff. The second bite page looks at the evidence.

Continuation fund

A continuation fund is a new fund set up by the same private equity firm to buy the company from its older fund. The sponsor stays in control, its original investors get cash, and the company is not sold to an outside buyer. Why it matters to you: instead of a second bite in cash, you may be asked to roll your shares into the continuation vehicle, pushing your liquidity out several more years. Ask what your rights are if the sponsor chooses this route.

Re-roll

A re-roll is being asked, or required, to exchange your shares for shares in the next buyer's company at the time of sale rather than receiving cash. It can happen in a sale to another sponsor or in a continuation fund. Why it matters to you: a re-roll means another 5 to 7 year wait for liquidity, another waterfall, and another set of leaver rules. Find out before you sign whether you can insist on cash at the exit and for how much of your position.

Drag-along

A drag-along is a contract right that lets the majority owner force minority owners to sell their shares on the same terms when the majority sells. Why it matters to you: when the sponsor decides to sell, you will sell too, at that time and on those terms, whether or not you think the price is fair. The related tag-along right, which lets you join a sale the sponsor makes, is worth asking for.

Good leaver / bad leaver

Good leaver and bad leaver rules set what happens to your shares if you leave before the company is sold. A good leaver (retirement at an agreed age, death, disability) typically keeps their shares or is paid fair value. A bad leaver (quitting early, termination for cause, breaching the non-compete) can be forced to sell at a discount, at cost, or in some cases forfeit unvested shares entirely. Why it matters to you: the definitions of "cause" and "retirement age" decide which category you fall into, and they are negotiable before closing. This is one of the ten items on our mistakes page.

When a glossary is not enough

Knowing the words helps you follow the meeting. It does not tell you whether the deal in front of you is a good one. If the offer is a small add-on from a single buyer, the terms above may be fixed and the only decision is whether to sell at all. If you have already signed the letter of intent and exclusivity has started, the tax structure and most of the equity terms are largely set, and your remaining levers are timing and the employment agreement. If you have already closed, the already sold page is more useful than this one.

What to do next

1. Read the letter of intent with this page open

   Circle every term you find here and write down what the LOI says about it. Where the LOI is silent, that is a question for the buyer before you sign.

2. Ask the six questions that decide your outcome

   What is the scrape and the income repair formula? What EBITDA is the multiple applied to? Where do my rollover shares sit in the waterfall and what accrues ahead of me? What are the leaver definitions? Who pays for tail coverage? What is the purchase price allocation?

3. Model the after-tax number

   Use the after-tax proceeds calculator to turn the headline price into cash in hand after rollover, hold-back, fees, and federal and state tax. Then read how a practice sale is taxed for what drives the difference.