Every exit strategy involves tradeoffs. Here is how the economics typically compare:

By Harvey M. Katz | (Connect With Me), CMT Guest Contributor

The Succession Challenge

For physician-owners who spent decades building thriving practices, the question of what comes next — retirement, succession, legacy — looms larger each year.

This issue is becoming more salient by the day because nearly half of U.S. physicians are 55 or older, and about 24% are 65 or above. The challenge is real: How do you extract a lifetime of value from a practice you built, while preserving the clinical culture, patient relationships, and staff loyalty that define it?

For many clinicians, the answer has defaulted to one option: selling to private equity. But the landscape of exit strategies is broader, and more nuanced, than it may appear.

Three Paths Forward

Physician practice owners considering an exit generally face three paths: private equity, traditional sales or Employee Stock Ownership Plans (ESOPs). In this regard, sale to a hospital buyer is generally not a viable option due to the cultural mismatch and legal restrictions limiting practice values to fixed assets under the Stark and anti-kickback requirements.

Private Equity
Acquisition by private equity has dominated headlines in healthcare. PE firms have completed approximately 500 medical practice acquisitions annually since 2020, according to Varnum LLP writing in the National Law Review (natlawreview.com). The appeal is straightforward: PE buyers often offer what appear to be premium prices, sometimes 20-25% above appraised fair market value, because they assume they can generate returns through operational restructuring, billing optimization, and an eventual resale within five to seven years.

Traditional Sales
Selling to a partner, a younger physician or a competitor is theoretically a viable option but one that is viewed as increasingly difficult particularly in the case of younger physicians. Financing can be challenging and finding a buyer willing and able to pay fair value while preserving practice culture is no simple task. Many potential buyers are simply unwilling to incur the debt necessary to fund the purchase of a successful practice.

Employee Stock Ownership Plans
ESOPs represent a third path that has been gaining meaningful traction among professional service firms and, more recently, medical practices. An ESOP allows a business owner to sell some or all of the company to its employees through a tax-advantaged trust structure, providing liquidity to the selling owner while creating employee-owners throughout the organization.

How an ESOP Works

An ESOP is a qualified retirement plan governed by federal law that invests primarily in the stock of the sponsoring employer. Here is how a transaction typically unfolds:

The company establishes an ESOP trust. The trust then purchases shares from the selling owner, either all at once or over time, funded by company contributions, borrowings, or a combination. Employees receive allocations of stock in their ESOP accounts as the debt is repaid. When employees leave or retire, they receive the value of their vested shares.

What distinguishes a well-structured ESOP from a simple stock-purchase arrangement is the use of leverage and financial engineering similar to what PE firms employ — except that the benefits accrue to the selling owner and the employees rather than to outside investors.

Consider a practice valued at $50 million. In a leveraged ESOP structure, the company might redeem a large portion of the owner’s shares in exchange for a seller note. The ESOP then acquires the remaining outstanding equity, making the company 100% employee-owned. The company uses its ongoing profits, enhanced by significant tax savings, to pay down the seller note over five to 10 years. The result: the selling physician receives full value (plus interest) while employees build meaningful retirement wealth.

The Tax Advantages

The tax treatment of ESOPs is not a loophole. It is statutory policy designed to encourage broad-based employee ownership. Two key provisions deserve attention:

First, when an S corporation is 100% owned by an ESOP trust, the entity pays zero federal and state income tax. This is specifically authorized by federal law. Most states follow suit, eliminating state income tax as well. This tax savings alone can boost net income by 30-40%.

Second, the selling shareholder can be offered enhanced participation in the ESOP, and all participants may be offered the opportunity to convert their ESOP accounts to Roth status. This will enable the employees to turn the growth in the value of the practice that occurs through repayment of the transaction debt (to the selling shareholder) free of income tax.

These are not obscure provisions. They reflect decades of bipartisan congressional support for employee ownership and Roth accounts as economic development tools and congressionally mandated tax policy

Comparing the Economics

Every exit strategy involves tradeoffs. Here is how the economics typically compare:

Private equity may offer a higher headline purchase price. But the structure of PE deals often requires that 30% or more of the purchase price take the form of subordinated equity rollover — money that remains at risk in the PE firm’s next fund and may never be fully (or even partially) realized. In addition, most if not all PE firm financial models rely on strict controls on non-owner physician compensation, presenting serious recruitment and retention challenges.

An ESOP transaction may produce a lower initial headline number, but the combination of tax-free corporate earnings (in an S Corp ESOP), interest income on seller notes, capital gains deferral, and the ability to continue participating in the company’s growth can produce after-tax proceeds that rival or even exceed a PE sale. These outcomes can be dramatically enhanced by adding a Roth feature to the ESOP, enabling selling shareholders to realize their ESOP benefit free of federal and state taxes. The math depends on the specific practice, and every situation warrants independent analysis.

PE firms also face their own pressures. Research published in Missouri Medicine found that PE acquisition in healthcare has been associated with increased hospital-acquired adverse events, and over 20% of healthcare bankruptcies in recent years have been linked to PE ownership (pmc.ncbi.nlm.nih.gov/articles/PMC11482842). These outcomes are not inevitable, but they reflect the structural incentives PE firms face to cut costs and maximize short-term returns.

Autonomy, Culture, and Staffing

For many physician-owners, the financial analysis is only part of the equation. Clinical autonomy, staffing decisions, and practice culture matter deeply, and this is where exit paths diverge most sharply.

In a PE-backed practice, new owners typically seek returns through operational changes: substituting lower-cost clinicians for physicians, increasing patient volume targets, standardizing treatment protocols, and reducing support staff. These changes may make financial sense on a spreadsheet, but they can fundamentally alter the character of a practice, ability of the practice to recruit professionals and the patient experience.

In an ESOP structure, the selling physician typically continues managing the practice. The ESOP trustee is a passive shareholder — it does not make operational decisions about clinical care, hiring, compensation, or patient volume. Clinicians retain full autonomy over how they practice medicine. There is no outside investor pressuring physicians to see more patients per hour or substituting nurse practitioners where doctors previously provided care.

For concierge and direct primary care practices, where the physician-patient relationship is the core value proposition, this distinction can be decisive.

What the Research Shows

Employee ownership is not merely a transaction structure. It has measurable effects on organizational performance and employee outcomes.

Research from the National Center for Employee Ownership (NCEO) found that employees at S corporation ESOPs have, on average, more than double the retirement savings of their non-ESOP counterparts, with a median ESOP account balance of $80,500 compared to $30,000. ESOP companies also demonstrated lower involuntary separation rates (2% versus 5%) and were more likely to offer employer-paid healthcare (89% versus 71%) (nceo.org/research/research-findings-on-employee-ownership).

A comprehensive review by economist Douglas Kruse, published by IZA World of Labour in 2022, examined over 100 studies across multiple countries and concluded that employee ownership is generally linked to better productivity, pay, job stability, and firm survival (wol.iza.org).

Research from Rutgers University’s School of Management and Labor Relations found that employment is more stable in employee-owned companies, with lower turnover and increased organizational commitment (smlr.rutgers.edu). With advanced design techniques, the ESOP can be structured to favor physicians and other key revenue generators, creating powerful incentives for the next generation of physicians.

For physician practices, where staff continuity, institutional knowledge, and team culture directly affect patient care, these outcomes are particularly relevant.

Is Your Practice a Good Candidate?

Not every practice is well-suited for an ESOP. The structure works best when certain fundamentals are in place:

• Consistent profitability and strong cash flow (generally $2-3 million or more in annual EBITDA)
• A solid management team capable of growing into the management role without the founding physician’s daily involvement
• At least 15 employees (to enable the plan to meet various IRS requirements limiting concentration of ESOP benefits to a few individuals)
• A physician-owner in their 50s or 60s who is thinking about transition but not rushing to exit immediately or is willing to finance part of the purchase price.
• A workforce the owner values and wants to reward for their contributions to building and maintaining the practice

ESOPs work across healthcare settings: multi-physician practices, specialty groups, ambulatory surgical centers, urgent care networks, and concierge medicine practices with sufficient scale. They are particularly well suited to service-oriented concierge medicine practices because the ESOP provides powerful incentives to the next generation of professionals to grow the practice for their own benefit.

Practical Next Steps

If employee ownership sounds worth exploring, here are practical steps to consider:

1. Get a preliminary valuation from a specialized ESOP valuation advisor. Understanding what your practice is actually worth — independent of any buyer’s premium — is the foundation of any exit strategy analysis.
2. Model the economics. Work with the ESOP valuation advisor and ESOP counsel to model after-tax proceeds under multiple scenarios: PE sale, traditional sale, and ESOP. The results often surprise owners who assumed PE was the clear financial winner.
3. Assess your timeline. ESOPs offer flexibility — you can sell 30%, 51%, or 100% of the practice, and you can do so over time. This is not an all-or-nothing decision.
4. Evaluate your team. A successful ESOP requires capable leadership that can sustain the practice as you transition. If that leadership exists, you have a strong foundation.
5. Consult experienced professionals. ESOP transactions are complex and require specialized legal, tax, valuation, and financial advisory expertise. Work with professionals who have completed multiple transactions.

The exit decision is one of the most consequential a physician-owner will make. It deserves the same rigor and informed analysis that clinicians bring to patient care — examining all the options, weighing the tradeoffs, and choosing the path that best serves the owner, the employees, and the patients who depend on them.

About the Author

Harvey M. Katz is a partner at Fox Rothschild LLP and co-chair of the Employee Benefits & Compensation Department. He has spent four decades advising business owners on ESOP transactions and tax-advantaged exit strategies. He can be reached at 973.403.0552 or hkatz@foxrothschild.com.

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Sources

• Association of American Medical Colleges, U.S. Physician Workforce Data, 2025 Key Findings
• (https://www.aamc.org/data-reports/data/2025-key-findings)
• ESOP Partners, “ESOP Taxation Rules,” (https://www.esoppartners.com/blog/esop-taxation-rules)
• National Center for Employee Ownership, “Research Findings on Employee Ownership,” (nceo.org/research/research-findings-on-employee-ownership)
• Douglas Kruse, Rutgers University, USA, and IZA, Germany, “Does Employee Ownership Improve Performance?” IZA World of Labour, 2022, (https://wol.iza.org/articles/does-employee-ownership-improve-performance/long)
• Rutgers University School of Management and Labor Relations, “Employee Ownership and Employment Stability,” (https://cleo.rutgers.edu/articles/an-empirical-analysis-of-the-relationship-between-employee-ownership-and-employment-stability-in-the-u-s-1999-2011/)
• Varnum LLP, “Private Equity in Healthcare,” National Law Review, natlawreview.com
• Missouri Medicine / PMC, “Private Equity Outcomes in Healthcare,” (https://pmc.ncbi.nlm.nih.gov/articles/PMC11482842/)
• IRC Section 512(e)(3); Small Business Job Protection Act of 1996; Taxpayer Relief Act of 1997

© 2007–2026 Concierge Medicine Today, LLC. All rights reserved. CMT is an independent publication, not owned or controlled by any health system, hospital network, vendor, or membership association — and reports on the full range of practice models and ownership structures in the field. Content is for educational and informational purposes only and does not constitute medical, legal, or financial advice.