Navigating Private Equity Buyouts: A Guide for Plastic Surgeons at All Career Stages

Abstract

Background:

Recently, private equity (PE) investments in plastic surgery have increased as senior surgeons retire and transfer their legacy practices to corporate ownership in exchange for substantial payouts. During this transition, clinicians and practitioners at acquired practices often feel skeptical about the organization’s goals and future. If left unaligned, the relationship between these groups deteriorates, and consequently, so does the quality of clinical care. Although the medical literature on this topic highlights the risks of PE, it often fails to address strategies for fostering a healthy working relationship among these groups.

Methods:

A comprehensive review of the medical business management literature was conducted to identify potential solutions applicable to clinical settings.

Results:

PE acquisitions typically give rise to 5 core concerns: future uncertainty, salary cuts or job losses, increased workloads, loss of clinical autonomy, and unclear organizational and career prospects. This article identifies recommendations tailored to both clinicians and PE leaders to improve integration, alignment, and productive partnerships. These recommendations address the unique concerns and aspirations of physicians at various stages of their careers within the PE landscape, with the overarching goal of enhancing practice valuation and achieving career success without compromising patient care.

Conclusions:

Drawing insights from business management, this article proposes actionable steps to improve the integration of PE firms into plastic surgery practices. A collaborative partnership can benefit all stakeholders—physicians, practices, PE investors, and patients—while safeguarding the quality of patient care.

Takeaways

Question: How can we prepare plastic surgeons for the growing influence of private equity (PE) investments and buyouts of their practices?

Findings: PE investments are growing rapidly. Most clinicians are unaware of how PE works and what their goals are. A clinician-friendly explanation of the financial principles behind PE and a simple plan to navigate the changes after a PE buyout could help plastic surgeons navigate the change.

Meaning: Understanding and navigating the growing role PE plays in plastic surgery is important to all plastic surgeons at all stages of their careers.

INTRODUCTION

Private equity (PE) investments in health care have reached more than $750 billion within the last decade.¹ With the number of PE buyouts of physician practices reaching record numbers, more than 30% of for-profit hospitals in the United States are now owned by PE firms as of January 2024.^2,3 Plastic surgery has not been an exception to this trend; $3.1 billion in PE investments were made in the aesthetic practice and clinical spa space between 2016 and 2021.⁴ Although initial acquisitions focused solely on cosmetic practices due to their attractive cash-pay models and scalability, reconstructive practices have recently become targets as well.

Although the capital infusion from PE acquisitions is broadly welcomed, the integration of PE management with clinical teams is often met with resistance. Typically, the transitions in leadership and the resulting changes to practice operations that come with PE acquisitions cause divisions within practices: senior partners are seen as the primary beneficiaries, mid-career partners feel limited in their opportunities for advancement, and recent hires—eager to rise to partnership—often find themselves functioning as PE employees, constrained in their ability to establish their own sense of medical practice. Simultaneously, staff members and support teams experience a sense of abandonment, perceiving their practice, once driven by a mission to help others, as replaced by a corporate, profit-driven machine.

Although PE acquisitions are often portrayed negatively, they do offer benefits. By adopting a business-focused perspective, PE firms frequently identify and eliminate inefficiencies in medical practices, cutting unnecessary costs that could erode profitability over time. Balancing these benefits against the challenges reveals the reality that PE investments in health care have both significant advantages and drawbacks. The current literature reflects this mixed sentiment, with some articles praising PE investment, whereas others highlight its associated risks and adverse effects, such as negative patient outcomes and perceived threats to clinical autonomy.^5–12

Despite this polarized discourse, few articles offer solutions for effectively integrating PE into the field of plastic surgery. This article seeks to shift the focus by providing concrete recommendations for improving relationships and collaboration between PE leaders and clinicians. Drawing on the well-established record of accomplishment of PE in non–health care sectors and insights from business management literature, we outline actionable strategies for both corporate leaders and the diverse clinical workforce they now lead.

PE: RELEVANT FACTS

To properly integrate PE into health care—and plastic surgery specifically—it is crucial to understand what PE entails and how its financial mechanisms directly impact practices, their physicians, staff, and patients (Fig. 1). With an abundance of literature available on the intricate workings of PE,^6,13–15 our focus will be only on the key points. To help with further discussion, a glossary of business terms (listed as they appear) is provided in Supplemental Digital Content 1 for those not familiar with business terminology. (See figure, Supplemental Digital Content 1, which displays the business glossary, http://links.lww.com/PRSGO/E10.) Additionally, although the presence of PE in the heart care sector is not unique to the United States, each country has its own nuanced proceedings. Similar to global variations in plastic surgical research outputs,^16,17 the integration of plastic surgeons in the PE sector varies by country based on their approach to clinical advancement, productivity, and workforce dynamics. These variations impact practice integration, with each country and culture requiring its own tailored guidelines for integration.

Fig. 1.

The function of PE. (A) Purchase: the PE firm buys the practice for $100 million, composed of $20 million of their own funds and $80 million of borrowed money. (B) Profitability: in the first 80–100 days, the PE firm engages in multiple rounds of cost and job cuts, increases in patient volumes, workloads, prices, and revenues, and sells unnecessary assets. (C) Internal growth: the PE firm works to realign the staff and practice’s goals, improve efficiency, and grow productivity in its most profitable sectors. (D) Expansion: the PE firm adds value to its initial purchase through mergers and acquisitions of similar practices, repeating steps A–D at each new practice. (E) Exit: the PE firm sells the practice bundle for $150M. With only $10M in debt remaining at this point, the PE firm retains $140M, achieving a 7× return on their initial equity investment. M, dollars in millions.

Furthermore, although the PE sector has recently recognized massive growth, a current place of protection from PE acquisition in the United States has been academic practices, partly due to the PE requirement of full ownership of an acquired practice. With most academic practices having overarching governance from a parent organization, PE firms are not able to obtain unilateral control of these practices and view them as unfit investment options. However, if these academic centers fully privatize their academic practices or hybridize the teaching faculty (“privedemics” as it is colloquially termed), PE investments could increase.

PE firms are typically highly leveraged (see Appendix A, Supplemental Digital Content 1, http://links.lww.com/PRSGO/E10) entities, meaning that they use minimal amounts of their own assets to purchase a practice and rely heavily on borrowed funds to make acquisitions. In essence, firms utilize the money of others to make their initial purchase and then unitize the cash within the acquired practice to pay off the borrowed money. This method of acquisition can be known as a “leveraged buy-out.” Target companies are selected based on the firm’s belief that the acquired entity can generate sufficient cash flow to repay debts and yield profit (A, Fig. 1). This approach drives an aggressive business strategy in which, during the first 80–100 days postacquisition, the firm must drastically reduce costs and maximize profits (B, Fig. 1). The goal of the PE firm is to continually refine operations (C, Fig. 1) so that the profits generated from the first acquired practice can be used to replicate the process with another acquisition, creating a domino effect of purchasing practices (D, Fig. 1). Over time, the firm expands through this model of acquiring new practices with the profits of already acquired practices. This cycle continues until the initial debt is repaid, typically within 5–8 years, at which point the PE firm exits the practice to a secondary buyer at a multiple of the original purchase price (E, Fig. 1). Three important facts to recognize about PE investments are that they are illiquid, meaning exiting these investments early can be difficult and can take years; firms use carried interest to pay their PE managers, reducing the practice’s earnings; if the practice is mismanaged and cash flows drop, the practice runs the risk of debt default, shutdown, or emergency buyout by another firm, typically at an overall loss for the original acquirer.

To achieve such profitable practices able to maintain this business model, significant incentives are often provided to managers of the practice to maximize profit and reduce waste. Although good for the economics of the organization, this can create a sense of division within the organization. The staff could perceive a sense of “profit chasing” rather than delivering patient-centered care.¹⁸ With this model, PE-owned practices must operate in a space that balances quality patient care, low costs, and high profit margins—ideally, the foundation of any successful practice.

In contrast, when PE acquisitions are poorly managed, several problems can occur: the quality of patient care may decline; adverse events may increase; waiting times increase; patient access is hampered; care costs may increase; and, in-hospital acquisitions, the incidence of adverse effects and patient mortality has been shown to rise.^19,20 All of this can culminate to the point that the clinical staff becomes disenchanted with the practice, whereas debt obligations may remain unmet.^21,22 Consequently, workers face uncertainty, salary cuts or job losses, increased workloads, loss of clinical autonomy, and unclear organizational and career prospects.²³ Despite the criticisms, these financial investments continue to be an attractive option for retirees in various medical practices, allowing them to prevail.^24,25 Therefore, to ensure the longevity of the practice, the goals of the PE firm and practice employees must be harmonized, with the surgeon being the leader in this effort.

ROLES OF THE RETAINED PRACTICE PHYSICIANS AND THEIR TEAM

The clinical team must help the PE firm transition into its new role if they wish to maintain a voice in practice decision-making. Their willingness to do so is key to building rapport and respect that can be later used when aligning goals. The clinical team must recognize the aim of the PE firm and decide from 3 options—fully integrate with the new business model and become a part of the change team, stay as an employee and continue patient care without any active involvement in the business, or leave the practice.

We must recognize that some potential conflicts are bound to arise, especially between the longtime practice employees and their new PE leaders. Staying alert to conflicts and mitigating misunderstandings early will build a stronger partnership. The degree of involvement and steps each clinician must take depends upon their career level.

Senior Partners

Senior partners in a practice undergoing a PE buyout are in a unique position to benefit significantly. Senior partners are typically given the option to retire and reap immediate monetary benefit from the buyout or transition to part-time employment with the PE firm and enjoy greater flexibility in their schedule. However, these options can create feelings of unfairness among other less-senior members of the practice, leading to perceptions of their leaders “selling out” and leaving staff unattended. To address these challenges, senior partners must adopt an inclusive leadership approach to the PE deal that accounts for the wishes and goals of the more junior members and the practice as a whole. This includes studying the deal comprehensively, meeting with staff to openly discuss the deal, bringing in other professionals (consultants, lawyers, etc.) to fill in knowledge gaps, evaluating the PE firm’s record of accomplishment, ensuring fair valuation of the practice, developing a solidified plan, and seeking independent financial counsel (Fig. 2).²⁶ It is also essential to remain ready to engage in months-long negotiations or to turn down a PE firm’s offer if their intentions focus on profits, or compromise patient care, team welfare, or the practice’s legacy.

Fig. 2.

Steps senior-career surgeons can take to be successful in PE acquisitions.

Furthermore, senior partners should negotiate strategically on behalf of the entire team—including mid-career professionals, new recruits, nurses, and staff—who have contributed years of effort to building the practice. This can significantly enhance team morale in the transition, ensuring that employees feel recognized and rewarded while encouraging long-term dedication. A team that has already adopted the idea of being acquired by a PE firm can be leveraged as more profitable in negotiations, providing benefits to the senior partners looking to sell their portions of the practice. Senior partners should also offer their services to the PE firm to act as a link in communication to the clinical team, as most PE firms do not fully understand the needs of a plastic surgery practice. Senior members offer a great chance to acquire change champions, as most already recognize them as the practice’s leaders.

Mid-career Partners

A PE buyout significantly impacts mid-career plastic surgeons, who have typically invested 5–10 years of challenging work into a practice and may have accumulated some equity, but not enough to comfortably cash out. For these surgeons, the transition to being employees of a corporation can feel like a regression, leading to disappointment and disengagement. Mid-career surgeons have many factors to consider (Fig. 3).

Fig. 3.

Steps mid-career surgeons can take to be successful in PE acquisitions.

First, mid-career surgeons should decide whether to stay with the practice or leave. If they choose to stay, it is crucial to become deeply involved in the PE firm’s mission to ensure job security and a voice in the practice’s management. This can include negotiating a financial stake in the firm and securing a position of decision-making to influence the direction of the practice. Mid-career surgeons bring significant value to the PE firm due to their practical experience, efficiency, independence, energy, and consistent delivery of quality results. With 10–20 years still ahead in their careers, these surgeons offer long-term continuity for the practice, which is essential both before and after the second sale. Mid-career partners should actively engage with the PE firm, share their growth and profitability ideas, and be placed in leadership roles so they can grow with the organization. In doing so, they not only increase their own value but also contribute to the practice’s valuation at the time of the exit.

Second, regarding salary, mid-career surgeons should anticipate an initial reduction in their yearly base pay but seek to have this cut converted into equity within the practice, leading to a potential lifetime value increase if the firm does well. This deferred income could yield significant returns when the PE firm eventually exits. Because most medical professionals lack an in-depth understanding of business, mid-career surgeons should seek outside professional guidance and education on the lifetime value of their different payment options to best find success. Finally, mid-career surgeons should focus on mentoring junior partners who may face even greater uncertainty and hesitancy about their jobs and financial futures due to the buyout. By providing mentorship, mid-career surgeons can help junior partners see a clear growth path and a more stable future within the practice.

Junior Partners and New Recruits

For this group, a PE buyout typically changes their salary, increases their workloads, and sometimes reduces the support staff they were promised. New recruits can benefit greatly from proper investigation into a potential place of work before signing a contract (Fig. 4). Open conversations with a practice about their 5- and 10-year plans are encouraged. The junior/mid-career demographic is often at a complex point in their lives, balancing career development with personal commitments, such as starting a family, placing children in schools, or managing newly established home mortgages. This group is typically highly motivated to stay geographically close, and this can be leveraged during negotiations.

Fig. 4.

Steps junior partners and new recruits can take to be successful in PE acquisitions.

Both the junior physicians and the PE firm must come together, with negotiations brokered by the mid- or senior-level partners, to renegotiate a fair contract. This contract should include short-term advancement options that mature annually until the exit; long-term stock vested to carry beyond the second sale; deferred income that guarantees a cash payout at the time of the PE exit; and a partnership offer for the junior physicians to buy into assets (such as the surgery center or spa). This approach will energize the juniors to work even harder, at little immediate cost to the PE firm.

Nurses and Staff

Long-time staff members are critical for a smooth transition. The staff are intricately connected with their plastic surgery patients and understand the inner workings of the practice. Ensuring they are allies instead of skeptics is essential. New initiatives, including a graded performance-based bonus structure at the start of the buyout (immediate reward); involvement in practice operations management; new responsibilities and titles; and skill-training opportunities (eg, laser education and cosmetic training) will benefit the practice and gain their confidence.

BENEFITS FROM THE SECONDARY SALE

When the PE investors plan a secondary sale, the profits are substantial. To ensure that the surgeons within the practice get their fair share, they must have preemptive negotiations with PE investors to secure their returns. Because this is greatly dependent on contracts, partners must consult legal experts for tailored guidance during both the initial acquisition and second sale.

MUST-DOS FOR PE LEADERS

Led by business-savvy management professionals, who typically lack an understanding of medical practice, PE firms can inadvertently make decisions that hinder patient care and increase costs to patients.²⁷ Better collaboration between PE leaders and the practice team could help both teams succeed. Addressing the 5 main “dissatisfiers” of PE is a key strategy to achieving this goal (Fig. 5).

Fig. 5.

Key pitfalls in PE management to avoid and strategies to overcome them.

The Dissatisfiers of PE and Their Mitigation

Uncertainty

Retained employees commonly feel uninformed and alienated from their practice, generating uncertainty about their future. PE leaders should acknowledge this sentiment and work to mitigate it via open-forum town hall meetings. This form of transparent communication and enhanced employee engagement has been shown to consistently outperform their unengaged industry peers.²⁸

Salary Cuts, Job Losses

As a first step to increase profits, most cost-conscious PE managements introduce cuts. Navigating these changes fairly and sensitively is critical and commonly includes transparent communication, fair severance payouts, and offering help in finding new employment for those not staying with the practice. For physicians, it is crucial to understand the financial dynamics at play: any up-front loss in salary during a PE buyout impacts subsequent compensation. Any yearly reduction in salary should be met with a fair trade in ownership of the practice or a distribution at the secondary sale.

Increased Workloads

Reduction in staff typically amounts to more work with no increase in resources. Managing this change is difficult and may need new incentives, new perks, career advancements, and even additional delayed vacation time. Employees, particularly administrators, need clear and concise communication about the mission, the practice’s revenue streams, and how these contribute to growth.

Loss of Clinical Autonomy

A major concern among physicians and nurses is that clinical decisions will be overruled by business managers. Addressing this fear head-on is essential. PE leaders must openly acknowledge their lack of clinical expertise and assure staff that clinical decisions will remain under the purview of health care professionals. Business decisions should only be made after consulting clinical leaders to assess their impact on patient care. This habit will produce the best results for everyone.⁵ Setting clear boundaries and maintaining open communication fosters mutual trust and respect between PE leaders and the clinical team.

Prospects

Once the immediate fears are addressed, PE leaders must establish their commitment to the team. They should clearly articulate their expectations and seek alignment with the team. This dialog is a terrific opportunity to align the management culture of the PE firm and the existing practice culture so that friction is reduced and the future is clear.

Understanding how decisions have been traditionally made, what the practice styles are, and how these culture-driven behaviors need to integrate with the new business-oriented PE leadership is important. A one-size-fits-all approach to practice integration and management is ineffective. A slower, proactive stepwise change that is conscious of these variations is more effective.

CONCLUSIONS

PE investment in plastic surgery is complex and needs careful navigation by physicians and PE investors. For this collaboration to yield rewards, an early alignment between both teams, an unrelenting focus on high-quality patient care, and a collaborative partnership are essential. Managed properly, PE acquisitions can unlock great value for all.

DISCLOSURE

The authors have no financial interest to declare in relation to the content of this article.