Management fees in PE diligence and quality of earnings
The management fee decides where a platform's EBITDA sits, so a mispriced fee misprices the deal. How QofE teams test MSO fees, what repricing to the benchmark means at a platform multiple, and the checklist.
Every physician platform deal prices the same number: MSO-level EBITDA. And MSO-level EBITDA is manufactured by one contract term, the management fee, which moves earnings between the professional entity and the MSO the way a dial moves volume. Set the fee high and the MSO looks like a business worth 12x. Set it low and the value hides in the PC where the buyer cannot own it. Which is why the fee stopped being a legal appendix and became a quality of earnings line item.
The regulatory wave sharpened it. A fee that cannot survive the state map is more than a compliance issue; it is an earnings adjustment waiting for a reviewer to apply it.
The four questions a QofE team asks
Is the fee FMV-supportable? Not "is it what comparable platforms charge," since platforms copy each other's mistakes. The test is the two-check build: does the fee equal the cost of the delegated services plus a market markup? The benchmarks exist: median non-clinical cost by specialty, and a median 22.7% markup on cost from 73 outsourced-services comparables.
Does the MSA scope match the costs? Fees priced for full scope while the practice still employs its own billers, or scope stripped by statute (payer contracting in Oregon and California) with the fee never repriced. Scope drift is the most common finding and the easiest to fix before a buyer finds it.
Does the structure survive every state in the platform? A percentage fee is void in Illinois, misconduct in New York, and exposed under the new disclosure regimes. A multi-state platform with one percentage MSA in the wrong state has contingent liability priced into someone's model, and it will not be the seller's.
What happens at the benchmark? The stress test: reprice every MSA to cost plus the market markup and rerun EBITDA.
What repricing means in dollars
Illustrative math, one dermatology practice, $10 million net revenue, full non-clinical scope. A fee set at 80% of collections moves $8.0 million to the MSO. The benchmark build supports about 75.3% of revenue, or $7.53 million. Repricing removes $470,000 of MSO EBITDA from that one practice, and at a 12x platform multiple that is roughly $5.6 million of enterprise value. Multiply across a 40-practice platform and the fee assumption is worth more than most of the diligence budget arguing about it.
It cuts both ways. A platform charging below the supportable fee has EBITDA parked in the PCs, which a seller should surface as upside before pricing, not after.
The seller's version
Everything above lands harder on sellers, because the buyer's QofE team reprices the fee whether or not the seller ever did. A platform heading to market twelve months out should run the benchmark first: reprice drifted MSAs, standardize structures to the strictest state, and build the FMV file, so the QofE confirms the number instead of negotiating it. The fee benchmark is the place to start.
The diligence checklist
Six lines, per MSA: Service scope, listed and current. Fee structure, legal in its state. Cost support, internal or benchmarked by specialty. Markup support, against the comparable set. Refresh history, dated. Regulator exposure, by state, including pending disclosure obligations.
Common questions
How does a management fee affect quality of earnings? The fee sets how much practice economics land in the MSO, so QofE teams test whether it survives repricing to a supportable level. The delta hits EBITDA at the platform multiple.
What is a management fee addback or adjustment? The normalization applied when the charged fee differs from the supportable fee: excess fee income is backed out of MSO EBITDA, or a below-market fee is grossed up, with the FMV build as support.
How do buyers test an MSO fee? Cost of the delegated services, benchmarked by specialty, plus a market markup, median 22.7% on cost. Then structure legality state by state and scope-to-cost consistency.
Does this apply outside private equity? Yes. Lenders, FMV appraisers, and now state regulators with disclosure authority all read the fee the same way.
Sources and method
Benchmark figures are free-tier medians from the MSOs module: cost benchmarks built from public CMS data covering roughly 1.1 million clinicians, markups implied by EBITDA margins of 73 healthcare outsourced-services M&A transactions (2012 to 2026) in the Scope Research Healthcare M&A Valuation Database. The repricing example is illustrative arithmetic on those medians.
This article is a market-data benchmarking resource, not legal, valuation, or investment advice. Fee opinions and earnings adjustments for any specific arrangement remain the professional judgment of qualified advisors.