Healthcare M&A terms, in plain language

Money and value

Adjusted EBITDA

Earnings before interest, taxes, depreciation, and amortization, after normalizing owner pay and removing one time or personal costs. The base for nearly every price.

Quality of earnings (QoE)

A buyer funded accounting review that re tests your adjusted EBITDA. Most price renegotiations start here.

Enterprise value

The value of the business itself, before subtracting debt and settling working capital.

Working capital peg

The agreed level of receivables less payables you leave in the business. Deliver less and the price is reduced dollar for dollar.

Earnout

Part of the price paid later if agreed targets are met. Tie it to measures you control.

Escrow and holdback

Money withheld at closing to cover breaches of your representations, usually released over 12 to 24 months.

Rollover equity

Proceeds reinvested as ownership in the acquiring platform, giving you a stake in its future sale.

Deal mechanics

Letter of intent (LOI)

A mostly non binding outline of price and structure, with binding exclusivity and confidentiality. Your leverage peaks before you sign it.

Asset versus stock purchase

What is legally transferred. It affects taxes, liability, and whether licenses and contracts move with the business.

Reps and warranties

Statements you make about the business. If wrong, the buyer can claim against escrow or insurance.

Management services organization (MSO)

A non clinical entity that contracts with a clinical entity, used where corporate practice rules limit outside ownership.

Healthcare specifics

Change of ownership (CHOW)

The Medicare filing when a provider changes hands. It determines whether the provider agreement is assigned or re enrolled, and affects timing.

PDGM

The Patient Driven Groupings Model, the Medicare home health payment system based on 30 day periods and patient characteristics rather than therapy volume.

LUPA

A low utilization payment adjustment, where too few visits in a period trigger per visit rather than period payment. High LUPA rates cut margin.

Corporate practice of medicine (CPOM)

State rules restricting non clinician ownership of clinical practices, the reason MSO structures exist.

Certificate of need (CON)

State approval required to open or expand certain providers. In CON states an existing license is worth more.

Accreditation

CARF, Joint Commission, or ACHC status. Buyers treat it as evidence of operating discipline and as a payer contracting requirement.

Exclusion screening

Checking staff against federal exclusion lists. Gaps here are a common and avoidable diligence problem.

Core Financial Terms

Understanding the language of M&A is the first step toward a successful sale. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is the most common measure of profitability in healthcare deals. Adjusted EBITDA goes a step further by removing one-time or personal expenses that wouldn't exist for a new owner. Enterprise Value (EV) is the total value of the business, while Equity Value is what the seller keeps after paying off debt.

Working Capital is the difference between current assets and current liabilities. In healthcare, this mostly consists of accounts receivable (what insurance owes you) and accounts payable (what you owe vendors). A 'Quality of Earnings' (QofE) report is a deep-dive analysis performed by an accountant during due diligence to verify that your reported EBITDA is accurate and sustainable. This is a standard requirement for most institutional buyers.

Healthcare Regulatory Terms

Healthcare M&A is unique because of the heavy regulatory burden. A Change of Ownership (CHOW) is the process of informing regulators that the business has a new owner; failing to do this correctly can stop all insurance payments. The 36-Month Rule is a CMS regulation that prevents home health agencies from selling their Medicare agreement if they haven't owned it for at least three years. This is a critical barrier for new agencies.

PDGM (Patient-Driven Groupings Model) is the payment system for Medicare home health. It uses 30-day payment periods and 432 case-mix groups to determine reimbursement. A LUPA (Low Utilization Payment Adjustment) happens when a patient doesn't receive enough visits during a period, leading to a much lower payment. Buyers will look closely at your LUPA rates as a sign of clinical efficiency and documentation quality.

Deal Structure and Legal Terms

An Asset Sale involves selling the 'stuff' of the business, while a Stock Sale involves selling the legal entity itself. Rollover Equity is when a seller keeps a portion of the business and retains exposure to the combined company. Its percentage, rights, and liquidity depend on the negotiated documents. Escrow is a portion of the purchase price held in a separate account for a year or two to cover any potential problems discovered after the sale, like an insurance clawback.

Representations and Warranties (R&W) are promises the seller makes about the business (e.g., 'we have paid all our taxes'). R&W Insurance is a policy that can protect both sides if one of those promises turns out to be false. Finally, Succession Liability is the risk that a new owner could be held responsible for the old owner's mistakes. Buyers use asset sales and indemnities to protect themselves from this risk. This guide is for educational purposes only.