How To Avoid Being Rug Pulled By Private Equity

The term rug pull became popular again with crypto. It is a phrase that describes when the owners of shares suddenly sell a majority stake. They do so without the other individuals knowledge who are invested in that asset. This has been happening more often than you might think in medicine with groups selling to PE (Private Equity).

How are doctors being rug pulled by PE right now? Well, by hiring on new doctors or APPs and then selling to private equity (PE) before those individuals have partnership. Effectively pulling the rug out from underneath them and leaving them financially no better off or even worse off afterwards.

How To Spot A Potential Group Ripe For PE Takeover

There are some key factors to tell if a group is most likely open to PE (private equity) takeover.

  1. Independently owned and small-medium size (1-10 locations usually).
  2. Owner is > 50 years old
  3. PE buying up other groups in your location
  4. Last remaining independent practice in your city

How To Avoid Being Rug Pulled By PE (Private Equity)

  1. Do your due diligence. Before making an investment (your time by agreeing to work for them), research the group and its leadership.
  2. Understand the terms of your employment agreement. Make sure you fully understand the terms of the contract, including the length of the waiting period until you can buy into the practice, the potential exit strategy, and the rights and responsibilities of all parties involved.
  3. Look for transparency. A group that is transparent about its activities and performance is more likely to be trustworthy. Look for medical practices that quickly answer your questions when seeking employment in a direct way. The more vague the response, the more hesitant you should be.
  4. Understand the risks. If you have no guarantee of buying shares in the practice in writing (often called right of refusal), then you have nothing promised. They can change the deal at any time.
  5. Hire an attorney or group to review your medical employment contract.

It’s also important to note that not all groups will fit into this risk pool. Not all private equity firms are exactly the same. However, it is always better to be informed and prepared for worst case scenarios.

How I Got Rug Pulled

I love the doctors that I worked with for the first job I took right out of residency. I was a hospitalist and in my contract there was the following statement.

“After 24 months of full-time employment, [the doctor] is eligible for consideration by the board to be allowed to buy shares in [the medical group] at then current valuation and subject to approval by the current board members.”

Did you read between the lines there.

  1. I have to be approved at that time to buy in depending on what the board wants or agrees to
  2. I have to buy at whatever valuation they put to the company. This is done at that point in time when the time comes for buy in.

The Terms Changed

When time came for me to buy in, the valuation that I was verbally told about changed. Initially it was $30k for the buy in. Suddenly the buy in went to 75k for the same number of shares in the company.

Since I was hired, several other doctors were hired too. All of a sudden, the valuation of the company was higher. A valuation that I helped the company achieve.

Instead of being rewarded for my sweat equity, I was told that I would have to now pay more than twice my initial quote for buy in.

If It Is Not Explicitly Stated In Your Contract, It Is Not A Promise

I can not stress this enough.

If you do not have in writing something in your contract, then the terms at buy in can drastically change.

Ask For First Right Of Refusal

To avoid being rug pulled by the owner of a medical group selling to PE before giving you shares, ask for first right of refusal.

The owner will probably say no to this blanket ask. However, you might have a chance to negotiate if you ask:

“If at the 2 year buy in, and if I bring in 2.2x my salary in income, I want the first right of refusal to buy shares in the practice with a clause that activates within 6 months of my buy in date to protect me from you selling to PE or anyone else right before I’m set to become a partner.”

As a business owner, I would sign that contract since it would only activate if they produced a fair amount of income for the practice and over a well defined period of time.

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One thought on “How To Avoid Being Rug Pulled By Private Equity

  • January 30, 2023 at 10:28 AM
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    Great post!

    Reply

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