Private Equity Investment in Dermatology and Medical Spa Platforms

Private equity investment in dermatology, medical aesthetics and medical spa businesses continues to accelerate as investors pursue scalable platforms in fragmented healthcare markets. For physician owners and other founders, a private equity transaction can deliver liquidity at an attractive valuation, growth capital and operational resources while preserving meaningful participation in the business's future upside.

These transactions, however, are not conventional purchases of widgets or other assets or equity interests. They operate at the intersection of mergers and acquisitions (M&A) execution and healthcare regulatory compliance – including professional licensure, scope of practice restrictions, fee splitting and corporate practice of medicine (CPOM) rules, in addition to – in certain cases and jurisdictions – the Anti-Kickback Statute and Stark law. The deal elements that appear most compelling at the letter-of-intent stage – rollover equity, earnouts and continued operational involvement – frequently generate material post-closing complexity. Effective transaction structures require a regulatory framework that incentivizes professional performance while aligning the parties around creating value through improved patient outcomes as opposed to purely financial metrics.

Founders evaluating a transaction should focus on several critical considerations from the outset.

Transaction Structure Matters

Healthcare regulatory requirements often dictate transaction structure. Many states restrict the corporate practice of medicine, limiting who may own or control a business in which licensed professionals provide clinical services. Recently, as discussed in previous Holland & Knight alerts, Oregon and California, for example, have increased enforcement in this area.

Accordingly, acquisitions of dermatology and medical spa platforms frequently implement a management services organization (MSO) structure rather than a direct acquisition of the professional entity itself. Depending on applicable state law, the investor-backed MSO acquires the nonclinical assets of the professional entity and provides administrative and management services to a professional entity owned by licensed medical professionals. The professional entity continues to employ the clinicians, who provide medical services within the scope of their practice, and retain authority over clinical care and decision-making.

The delineation between clinical and nonclinical control is fundamental. Management agreements, equity transfer restrictions and governance documents must be structured to give the investor the ability to execute on business strategy and improve the platform's financial performance while preserving the professional entity's independence over clinical decision-making. Accordingly, it becomes important to identify areas of alignment between the business and regulatory perspectives.

For multistate platforms, the regulatory analysis becomes substantially more complex as CPOM restrictions, professional entity requirements and scope of practice and supervision requirements vary materially by jurisdiction. Beyond CPOM, founders should anticipate a range of state-specific regulatory obligations that may affect transaction timing, structure and closing conditions:

• Healthcare Transaction Notice and Approval Requirements. A growing number of states – including California, New York, Oregon, Washington, Massachusetts and Illinois – have enacted laws requiring advance notice to, or approval from, state regulators (typically the attorney general or department of health) before closing certain healthcare transactions. These regimes vary considerably in scope: Some apply only to transactions involving hospitals or health systems, while others extend to physician practices, outpatient facilities and MSO arrangements. Materiality thresholds, filing timelines and required disclosures differ by state, and review periods can range from 30 days to several months. Transactions that trigger these requirements without proper notice risk regulatory challenge, deal delay or unwinding.
• Certificate of Need (CON) Laws. Approximately 35 states and the District of Columbia maintain CON programs that require regulatory approval before certain healthcare facilities can be established, expanded or acquired. Though CON requirements most commonly apply to hospitals, ambulatory surgery centers and certain outpatient facilities, the scope varies by state. In jurisdictions where dermatology or medical aesthetics practices operate licensed facilities or ancillary service lines (such as ambulatory surgery or imaging), a change of ownership may trigger CON review. Founders should confirm early whether any existing licenses or facility designations implicate CON requirements in the relevant states.
• Healthcare Facility Licensure. State licensure requirements for healthcare facilities, including medical clinics and medical spas, may require notification or reapplication upon a change of ownership or control. Even where the professional entity structure remains intact, a change in the MSO's ownership or a restructuring of the management arrangement may be deemed a reportable event. Failure to obtain required approvals or timely notify licensing authorities can jeopardize the facility's ability to operate post-closing.
• State Antitrust and Competition Review. In addition to federal Hart-Scott-Rodino Act review, certain states impose their own premerger notification or substantive antitrust review requirements for healthcare transactions. States such as California, Oregon and Minnesota have expanded their authority to review healthcare consolidation, and state attorneys general have become increasingly active in challenging transactions they view as anti-competitive, even where federal regulators have not intervened. For platforms operating in concentrated markets or pursuing roll-up strategies, state-level antitrust exposure warrants careful evaluation.

For additional insight into state-specific healthcare transaction requirements, see Holland & Knight's Healthcare Transaction Laws Navigator. Founders should evaluate these structural and regulatory considerations before executing a letter of intent, particularly where the platform has expanded across state lines.

Understand the Real Value of an Earnout

Purchase price negotiations tend to focus on headline valuation multiples. Founders should devote equal attention to the composition, timing and conditionality of consideration.

A purchase price comprising cash at closing, rollover equity and contingent consideration is economically distinct from an all-cash transaction at the same headline number. Earnouts warrant particular scrutiny from both a business and regulatory standpoint. Founders should understand the performance metrics, measurement periods and accounting methodology governing the calculation. Earnings Before Interest, Taxes, Depreciation, and Amortization -based earnouts, for example, frequently generate disputes regarding corporate overhead allocations, staffing costs, marketing expenditures, acquisition-related expenses and other post-closing decisions within the buyer's control. Founders may also consider incorporating value-based metrics into earnout structures to complement volume-based measures with quality-of-care indicators. The selection of appropriate metrics will depend on the patient population served and the clinical services offered by the professional entity.

The definitive agreement should address not only the earnout formula, but also the buyer's post-closing operational discretion. Founders should evaluate whether protective covenants are warranted regarding expense allocation methodologies, revenue attribution, changes in accounting practices and other conduct that could affect earnout achievement.

Dispute-resolution mechanics are equally important. The parties should determine whether earnout disagreements will be resolved through an independent accounting firm, binding arbitration or litigation – and which categories of disputes fall within each mechanism.

Rollover Equity Requires its Own Diligence

Private equity sponsors frequently require founders to reinvest a portion of their sale proceeds into equity of the acquiring platform. Rollover equity can generate meaningful additional returns if the platform executes its growth strategy and achieves a subsequent liquidity event at a favorable valuation.

Founders should treat rollover equity as a new investment decision requiring independent evaluation – not merely deferred purchase price.

Among other considerations, founders should understand where their equity sits in the capital structure, whether the sponsor holds preferred securities with a liquidation preference, what anti-dilution protections apply, whether additional capital calls may be required, what restrictions apply to the units and its holder, and what governance and information rights minority investors possess regarding transfers and future transactions.

Founders should also carefully analyze other minority protections, such as tag-along rights, drag-along protections, repurchase provisions (including the valuation of the equity in connection with the same), and the treatment of their equity upon termination of employment, various liquidity transactions or other changes in affiliation with the platform.

Non-Competes Should Be Evaluated Early

Buyers understandably seek to protect the goodwill and going-concern value they acquire. Founders, however, must understand the scope and enforceability of restrictions that will apply if the post-closing relationship does not succeed.

The enforceability of physician and other healthcare provider non-competition and other restrictive covenants varies considerably by jurisdiction and continues to evolve. Certain states such as California, prohibit or substantially restrict non-competes and no-hire restrictions in certain contexts. Also, states distinguish between restrictions arising from employment relationships and those negotiated in connection with a bona fide business sale and those negotiated in exchange for an investment in a business, such as through rollover equity.

This distinction is particularly significant in healthcare services transactions where the founder simultaneously sells an ownership interest and enters into a post-closing employment arrangement.

Founders should carefully evaluate the geographic scope, duration and restricted activities of proposed restrictive covenants in all of the transaction documents, as well as non-solicitation provisions affecting patients, employees and referral relationships. These provisions should be negotiated or at least disclosed at the letter of intent (LOI) stage – not deferred until receipt of the definitive agreements.

Post-Closing Governance Can Matter as Much as Purchase Price

A founder who remains a significant equity holder or operating principal after closing should understand precisely what authority and decision-making rights he or she will retain.

Key considerations include whether the founder receives a board seat or observer right, which material decisions require founder consent, who controls hiring and termination of senior management, how operating budgets are approved and what mechanisms exist if the founder disagrees with the sponsor's strategic direction.

For physician founders, governance arrangements must also respect the boundary between legitimate investor oversight and clinical decision-making reserved to licensed professionals.

The employment agreement, equity documents, management arrangements and purchase agreement should be negotiated as an integrated package. Protections in one document can be undermined by provisions in another.

Planning Before the LOI

Even though an LOI is nonbinding, many of the most important economic and legal terms in a private equity or similar transaction become difficult to renegotiate after the LOI is signed.

Dermatology practice and medical spa founders considering a sale should involve experienced M&A and healthcare regulatory counsel early. Understanding the proposed structure, rollover investment, liquidity options, earnout mechanics, restrictive covenants and post-closing governance before exclusivity begins allows founders to compare offers on the basis of actual economics and risk – not simply the headline purchase price.

With thoughtful planning, founders can structure transactions that deliver near-term liquidity while preserving appropriate protections and meaningful participation in the platform's next stage of growth.

For more information on private equity transactions in the medical spa and dermatology space, contact the authors.