Selling to Private Equity or a Hospital — What the Agreement Must Say

A hospital system offered to acquire a two-physician rural practice, and the practice never answered. One owner wanted to sell; the other did not; the agreement said only that decisions required mutual consent. Fourteen months later, the offer had lapsed unanswered, collections had fallen 9 percent, and the partners were dividing what remained through counsel. The offer was real. The practice’s inability to respond to it was structural, and it was written into nine pages signed years earlier by people who never imagined a buyer.

Private equity and hospital acquisitions of physician practices are now ordinary. Most partnership agreements in force were drafted before that was true, and a practice that receives a letter of intent without transaction machinery in its agreement has three bad options: renegotiate its own governance under a deadline set by a buyer, accept terms it would not otherwise accept, or watch the offer expire while the partners argue. Five provisions prevent all three, and they only work together.

First, define the trigger broadly enough to catch what a transaction actually looks like. A clause that governs “the sale of the practice” invites an argument about whether this is a sale. Draft it to cover asset purchases, equity purchases, mergers, reorganizations, and any affiliation or management arrangement that transfers effective control—whatever the cover letter calls it. Buyers structure around definitions for good reasons of their own, and the partnership’s protections should not depend on which structure a buyer’s tax counsel prefers this year.

Second, set the vote. A sale sits at the head of the reserved-matters catalog and takes a supermajority, two-thirds to 75 percent. Not unanimity, which hands every partner a permanent veto over the other owners’ retirements and will eventually be used that way. Not simple majority, which lets a bare group sell the minority’s careers. The supermajority is the setting that requires broad agreement without requiring universal agreement, and it should be paired with a notice period and full written disclosure of the transaction documents to every partner before the vote.

Third, draft the drag-along. Where the required supermajority approves a transaction, the drag-along requires every partner to sell on identical terms, because buyers do not close around holdouts and a single dissenting owner can otherwise price a transaction to zero. That is real power, so its fairness constraints are what make it legitimate: the same price per unit, the same terms, and no non-economic obligation—no covenant, no employment condition, no indemnity—worse than what the approving partners accepted themselves. A drag-along that lets a majority impose a five-year non-compete on a dissenter while accepting two years for themselves is not a governance provision. It is a trap.

Fourth, draft the tag-along, which is the mirror and protects the other direction. If a founder or a controlling group sells a control block, every other partner may join on the same terms. Without it, a majority can sell control at a premium and leave the junior partners as minority owners of a practice now run by someone they never chose, holding illiquid equity with exactly one possible buyer. Alongside both, the year-round transfer restrictions do the quiet work: no transfer of equity without partner approval, a right of first refusal on any proposed transfer, a prohibition on equity passing to an estate or a spouse, and a repurchase right if a partner’s equity is reached by creditors. Together they keep a financial catastrophe in one household from seating a stranger at the partners’ table.

Fifth, and most often skipped, define how proceeds split before anyone is contemplating a transaction. Pro rata by ownership is the intuitive default and it is frequently the wrong answer, for a reason that surprises partners who have never had it explained. Healthy practices deliberately price the internal buy-in below what an outside buyer would pay, because the incoming partner is purchasing a minority seat in an illiquid asset rather than control, scale, and the right to reprice the practice’s future. That discount is correct, and it has a corollary: a straight pro rata split at exit hands the newest partner an outside-market windfall on equity she bought at the internal price. So the agreement may fairly tier sale participation—by tenure, by capital actually contributed, or on a stated vesting schedule. The strongest form deserves its name in the document: the delta-recapture provision, under which new partners buy in at the internal valuation and the founding owners receive the difference between internal and external value if a third-party sale ever occurs. Whatever the design, it is drafted at admission, when it is a pricing conversation. Raised at the letter of intent, it is a betrayal.

Two more terms belong in the transaction section, and both concern what the partners are selling beyond the practice.

Clinical autonomy and patient continuity are negotiable at the letter of intent and unrecoverable afterward. The agreement cannot bind a buyer, but it can bind the partners’ own approval: require that any approved transaction include stated protections—clinical protocol authority, referral freedom, minimum staffing and visit-length parameters, panel-size limits, and continuity commitments for the practice’s existing patients—or that the partners expressly vote to waive them. Physicians who sell without those terms and expect them anyway are relying on a relationship with an entity that will be sold again.

Restrictive covenants are the second. A private equity or hospital transaction routinely requires covenants far broader in radius, duration, and scope than anything the partnership agreement contemplated, and a partner can discover that the deal is conditioned on a restriction she never agreed to. Set the outer bound in the agreement: no sale may impose a covenant exceeding stated limits on any partner without that partner’s own consent. That single sentence converts an ambush into a negotiation.

One arithmetic point deserves a place on the readiness checklist. Every offer should be modeled as price plus five years of post-close compensation, computed for each available path including remaining independent, because the headline check and the paycheck it reduces are the same money. A transaction that looks generous at signing and repriced at renegotiation is the most common disappointment in this market.

The companion textbook, Pediatric Practice Management: The Fundamentals, works the valuation methods, the normalization adjustments, and the offer decomposition in full.

Red flags. No defined vote threshold for a sale, so any partner can veto indefinitely. A proceeds-split methodology created under pressure during a live transaction. No clinical autonomy or patient continuity protections required of any approved deal. No drag-along, so one holdout can end a transaction the rest of the group needs. And existing covenants incompatible with what a buyer will require, discovered during diligence.

Put a transaction-readiness review on the annual governance calendar and the practice stops being surprised. A private equity offer without a private-equity-ready partnership agreement is an offer the partners cannot accept.