Decoding the Deal: A Glossary of Healthcare PE Transaction Terminology

When selling your medical practice, you enter a world filled with financial and legal jargon. This glossary defines the key terms you will encounter in any private equity healthcare transaction, giving you the vocabulary to understand your deal, ask the right questions, and protect your interests.

Foundational Financial & Valuation Terms

These terms form the basis of your practice’s valuation. Understanding them is the first step to knowing what your business is worth in the eyes of a buyer.

• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
  This is the primary measure of your practice’s operating profitability. A private equity buyer will look at your EBITDA as the starting point for almost every valuation discussion. It shows the cash flow your practice generates from its core operations before accounting for financing decisions or non-cash expenses. For a deeper look, see our guide on EBITDA Explained for Physicians.

• Adjusted EBITDA
  For a physician-owned practice, this is arguably more important than standard EBITDA. It “normalizes” your earnings by adding back personal expenses run through the business (like a car lease), one-time costs (like a new EMR implementation), and adjustments to the owner’s compensation to reflect a fair market rate. A buyer uses this figure to see the practice’s true, sustainable earning power. Proper normalization is critical for maximizing your valuation. You can learn more in our EBITDA Normalization Guide.

• Valuation Multiple
  A buyer will offer to purchase your practice for a “multiple” of your Adjusted EBITDA. For example, a $1 million EBITDA practice valued at a 6x multiple has an Enterprise Value of $6 million. This multiple is not arbitrary; it changes based on your specialty, practice size, provider dependency, and growth potential. Highly desirable specialties like dermatology or gastroenterology often command higher multiples. See typical Valuation Multiples by Medical Specialty.

• Enterprise Value (EV)
  This is the total, headline valuation of your practice, calculated as Adjusted EBITDA multiplied by the valuation multiple. It represents the value of the entire business, including both debt and equity. From this number, you will subtract any debt and transaction-related fees to determine your net proceeds.

• Goodwill
  This is the value a buyer pays above the fair market price of your tangible assets (like equipment and real estate). Goodwill reflects the intangible value you’ve built over years—your practice’s reputation, brand name, referral network, and loyal patient base. For established local practices, goodwill often makes up a significant portion of the total purchase price. Learn more about Valuing Intangible Assets in Healthcare.

Key Documents in the Transaction Process

A healthcare M&A deal progresses through a series of critical documents. Each one serves a specific purpose and carries different legal weight.

• Non-Disclosure Agreement (NDA)
  Also called a Confidentiality Agreement, this is the first legal document you’ll sign. It legally prevents a potential buyer from sharing the sensitive financial and operational information you provide them. It’s a standard but essential protection before any serious discussions begin.

• Letter of Intent (LOI)
  After initial review, an interested buyer will present you with an LOI. This document outlines the proposed key terms of the deal, including the valuation, deal structure, and timeline. Think of it as a formal handshake. While the price is usually non-binding, other terms like the exclusivity period (preventing you from talking to other buyers) are legally enforceable. For a full breakdown, review our guide to Understanding the Letter of Intent (LOI).

• Asset Purchase vs. Share Purchase Agreement
  These are two different ways to structure the legal sale of your practice. The structure has significant implications for taxes and liability. Buyers typically prefer an asset sale.

• Definitive Purchase Agreement (DPA)
  This is the final, legally binding contract that solidifies every detail of the transaction. It is drafted after due diligence is complete and incorporates all negotiated points from the LOI, including representations, warranties, covenants, and closing conditions. Once signed, the deal is set.

Deal Protections & Structure Components

The headline valuation is just one piece of the puzzle. These terms describe how buyers protect themselves and structure the deal to manage risk.

• Due Diligence
  This is the buyer’s formal investigation into every aspect of your practice—financial, legal, clinical, and operational. They will scrutinize your financial statements, billing compliance, payer contracts, and employee records. A thorough and organized PE Due Diligence Checklist for Practices is essential for a smooth process.

• Representations & Warranties (“Reps & Warms”)
  These are legally binding statements of fact you make in the DPA about the condition of your practice (e.g., “all tax returns are accurate,” “the practice is in full compliance with HIPAA”). If a representation is later found to be false, the buyer can make a financial claim against you.

• Escrow
  An escrow is a portion of the purchase price (typically 10-15%) that is held by a neutral third party for a set period after the closing (e.g., 12-24 months). This money acts as a security deposit to cover any claims the buyer might make against you for breaches of your reps and warranties.

• Earn-Out
  An earn-out is a form of deferred payment that is contingent on the practice achieving specific performance targets (like revenue or EBITDA goals) after the sale. If the practice hits its targets, you get the additional payment. If it falls short, you don’t. Earn-outs can bridge valuation gaps but shift future performance risk onto you, the seller.

• Covenants
  These are promises you make in the sales agreement to either do something or refrain from doing something. The most common example is a non-compete covenant, which prevents you from starting a competing practice within a certain geographic area for a specified period after the sale.

Healthcare-Specific Terminology

Healthcare transactions have unique regulatory and operational layers. Familiarity with these concepts is crucial.

• Management Services Organization (MSO)
  In states with Corporate Practice of Medicine (CPOM) laws that prohibit non-physicians from owning a medical practice, PE firms use an MSO structure. The PE firm owns the MSO, which buys all the non-clinical assets of your practice and provides management services (like billing, HR, and marketing) in exchange for a fee. The physicians retain ownership of the clinical entity, or “friendly PC.” You can explore this further in our MSO Structure Explained article.

• Successor Liability
  This is a legal principle where a buyer can be held responsible for the past actions and liabilities of the business they acquire. Both buyers and sellers work with legal counsel to structure the deal (often as an asset sale) to minimize the buyer’s exposure to your practice’s historical risks.

• Run-Off Insurance (Tail Coverage)
  When you sell your practice, your standard “claims-made” malpractice insurance policy often expires. Run-off or “tail” coverage is a separate policy you must purchase to cover you for any claims that are filed after the sale but relate to incidents that occurred before the sale. This is a critical closing cost for any physician.

• Stark Law & Anti-Kickback Statute
  These are federal laws governing physician self-referrals and prohibiting payments made to induce patient referrals. During due diligence, buyers will heavily scrutinize your practice’s compliance with these regulations to avoid inheriting legal risk. Learn more about Navigating Stark Law & Anti-Kickback.

From Terminology to Transaction

Becoming fluent in the language of PE and M&A is one of the most effective ways to prepare for a sale. It allows you to participate in conversations confidently and evaluate offers with a clear understanding of the risks and rewards.

This glossary gives you the foundation, but every deal is unique. If you’re ready to see how these terms apply to your practice’s specific situation, our team can help you navigate the process.