Don’t Let One MSO Offer Set The Terms Of Your Dermatology Practice Sale

As MSOs and private equity continue to invest in the dermatology industry, practice owners are going to receive more unsolicited offers than ever. These offers are attractive and are built to flatter the practice owner. The goal of the MSO is that you see the total enterprise value of your business on paper, oftentimes for several million dollars, and sign on the dotted line without any questions and without knowing what other buyers would’ve bid. What they do not want you to do is look heavily into the financial and qualitative terms of the offer that are really going to determine whether this is a good deal for you.

Before I joined TUSK Practice Sales, I was on the other side of the table from practice owners. As buyers, the goal was to purchase practices at the lowest possible price so that when it came time for our group to recap, we would make a bigger return on our investment. It’s the name of the game for many of these platforms. MSOs want to be the only buyers at the table. Here’s how the sale of your dermatology practice will be impacted if you accept the offer. 

Why the Offer Is Structured the Way It Is

Most MSOs are backed by private equity, which operates on a hold period. The sponsor buys a platform, adds dermatology practices for three to seven years, then sells the group. That sale is the recap.

The platform, the MSO, almost always sells at a higher multiple than it paid for any single practice inside it, so every practice acquired below that multiple adds value the day it closes. 

What Should You Look For Beyond the Purchase Price?

Let’s focus on the financial terms inside of dermatology offers.

• How much is cash at close, and how much is equity? When you sell your dermatology practice, you will likely not receive the entirety of the value in cash. You’re going to receive some cash at close, oftentimes anywhere between 60% and 85% of the deal, with the remaining attributed in the form of equity. At TUSK, we work alongside the CPAs, accountants, and wealth advisors that also work alongside the dermatologist to ensure the cash at close will satisfy any needs such as retirement or debt coverage.
• Which type of equity, and where does it sit? These are not interchangeable. Holdco equity is a stake in the parent company that owns the whole group, so its value moves with the platform and it typically converts to cash at the recap. Joint venture equity is a direct stake in your own location alongside the MSO, so it tracks your practice rather than the group and often pays distributions sooner. Understanding the timeline of when you will be able to cash-in on your equity and how much risk you’d like to take on, will be crucial to deciding whether this deal works for your needs.
• Is there an earnout, and is it tied to something you still control? An earnout pays you only if the practice hits agreed targets after closing. If those targets depend on decisions the buyer makes, or are not realistic, you will likely not receive any funds associated with these deal terms.
• What is held in escrow, and what releases it? Escrow is money set aside to cover problems found after closing, and the release conditions matter as much as the amount. While not common in many deals, this is an item that can arise as the deal marches to closing.

Those are just the financial terms.

The Terms That Decide Your Next Role in Your Dermatology Practice

If you contribute a significant amount to production, the buyer is going to want you to stay in the practice after the sale for a period of time. Three to five years is standard, and the reason is continuity of care and ensuring a smooth transition with your staff. 

The post-close employment agreement is where you and the MSO determine your compensation, employment duration post-close, non-competes, and any terms related to an early exit. All of it is negotiable, and most of it goes unnegotiated when there is one buyer at the table and nobody advocating for the seller.

What Changes When You Run a Represented Process

On average, TUSK clients who come to us holding an unsolicited offer see that offer increase by forty percent net of our fees. Much of the improvement is seen in the deal structure, because a represented process puts the practice in front of multiple buyers at once, and competition puts every term back on the table.

An advisor with a deep buyer network can put your practice in front of groups you would never have heard from on your own, and that is what creates real leverage on both the price and the terms. An experienced advisor in dermatology practice sales, like TUSK Practice Sales, knows which levers to push and pull on because of the extensive knowledge in negotiating with buyers daily. 

That is a better outcome for the buyer too, because the buyer and advisor’s relationship will allow for a smoother and quicker process. If you have an offer in front of you, you need to know if the deal is fair and if the group behind the offer for your practice will be additive to your organization as well. Consulting with a dedicated dermatology broker will be the quickest way to reach your answers. At TUSK, we’ve consulted and conducted valuation analysis for practice owners months and years at a time before they decide it’s time to sell because we believe you should be making an informed and confident decision when it comes to your life’s work.