Three Years Out: The Succession Runway That Starts in August
August is succession planning season. Not because of a deadline that falls in August, but because the work that protects your practice valuation three years from now has to start being visible in your financials two years from now — and that requires starting the operational changes today.
Most orthopedic surgeons think about practice transitions in one of two ways. The first: they plan to sell eventually, and they will figure out the details when the time comes. The second: they get approached by a private equity firm, find themselves interested, and begin a process they were not prepared for.
Neither path produces the best financial outcome.
The surgeons who exit on their own terms — with the highest multiples, the most favorable earnout structures, and the cleanest tax treatment — are the ones who started the runway three to five years out. They treated the transition the way they treat a complex surgical case: with a staged protocol, clear milestones, and enough lead time to prepare before the intervention.
What Changed This Year
There is a new urgency to starting this process, and it comes from the data in last week's episode.
Hospital and system-employed orthopedic surgeons now outperform independent practices on median work RVU output. This is a reversal of a long-standing pattern — and it matters for practice valuation.
When a buyer evaluates your practice, they normalize your EBITDA against a replacement surgeon scenario. That normalization often uses hospital productivity benchmarks as one of its reference points. If a buyer's analyst models that a replacing surgeon — without your specific referral relationships and without your personal clinical reputation driving volume — will generate 10 to 15% fewer RVUs than the hospital-employed peer benchmark, your forward revenue assumptions take a haircut before a single term is negotiated.
The practical implication: a practice that depends heavily on a single surgeon's personal productivity and referral relationships is more exposed to this valuation discount than a practice that has been systematized. The three-year runway is about building that systematization — not as a box to check, but as a genuine structural shift that shows up in the financials a buyer eventually reviews.
The Year 3 Work (Starting Now)
The most important year in a three-year runway is the first one — the year you are in right now, if you are planning to exit in 2029.
The Year 3 work has three components.
The first is practice systemization. The goal is reducing the percentage of the practice's EBITDA that is directly attributable to the selling surgeon's personal productivity, relationships, and presence. This means formalizing scheduling systems so that OR time is protected by infrastructure rather than by the surgeon's personal relationships with the hospital. It means building case coordination capacity that does not require the surgeon's direct oversight. And it means documenting clinical protocols in a way that makes the practice genuinely transferable.
A practice that goes from 95% surgeon-dependent to 70% surgeon-dependent over three years is a fundamentally more valuable asset at exit. Buyers pay more for predictable post-close cash flow.
The second is personal goodwill documentation. Personal goodwill — the value attributable to the surgeon's individual reputation, skills, and referral relationships — can potentially receive long-term capital gain treatment if the facts support that this goodwill is owned personally and if the sale is structured and documented accordingly. Depending on income level and the Net Investment Income Tax rules, the combined federal rate on such gains may be as high as 23.8% (20% capital gains + 3.8% NIIT) for some high-income taxpayers, but actual rates vary. Enterprise goodwill may be taxed differently and can result in higher effective tax rates depending on the practice’s entity type and transaction structure.
For a surgeon planning to exit in three years, the personal goodwill documentation process starts now. This involves working with a valuation professional to separate and quantify the personal component: non-compete analysis, referral source attribution, patient loyalty metrics, and the surgeon's own assessment of which elements of the practice's value leave when she does.
The third is revenue source evaluation. A practice whose revenue is entirely dependent on direct surgical volume — no ASC ownership stake, no consulting income, no teaching or research relationships — is more vulnerable to the RVU productivity argument above. A surgeon who holds a 20% ASC ownership stake has a revenue source that will continue regardless of post-close surgical volume. A surgeon with an established teaching relationship at an academic center has professional goodwill that is documented and credible. Neither of these is difficult to establish in three years. Both of them add to enterprise value.
The Year 2 Work
The Year 2 work is about building the infrastructure that makes the practice transferable on paper, not just in principle.
This is typically when the associate hire happens — or when the process begins. Finding, recruiting, and integrating an orthopedic associate takes 12 to 18 months from initial search to the point where the associate is generating meaningful independent revenue. If the associate search starts in Year 2, the practice has 12 months of associate-generated revenue history by the time buyers begin due diligence in Year 1.
This is also when referral network documentation becomes important. A buyer wants to know where the practice's volume comes from and whether it will continue after the seller's departure. Referral source attribution — by primary care, by geographic catchment area, by subspecialty referral relationship — makes the revenue story much more defensible in the due diligence process.
The Year 1 Work
Year 1 is execution. The practice is systematized. Personal goodwill is documented. An associate is generating revenue. The referral network is mapped.
Now the work shifts to buyer engagement, deal structure, and tax planning for the transaction itself. For a surgeon planning a PE deal, the rollover equity negotiation and compensation structure analysis happen here. For a surgeon planning an independent sale, the buyer pool is identified and the competitive process is structured.
The installment sale analysis and personal goodwill allocation happen in Year 1 as well — but they are only credible if the groundwork from Years 2 and 3 exists.
What a Three-Year Runway Produces
The following scenario uses simplified assumptions for illustration only. Actual valuation multiples, tax rates, and transaction outcomes will depend on your specific practice, deal terms, and tax situation.
Consider a surgeon who starts this process today at 55, planning to exit at 58. Practice currently generating $900,000 in EBITDA with a current valuation of approximately $2.7 million at a 3x multiple, before any personal goodwill allocation.
After three years of systematic runway work: the practice is 65% transferable (reduced surgeon-dependence), a multi-year associate track record adds $200,000 in annual EBITDA from non-surgeon-dependent revenue, normalized EBITDA grows to $1.1 million, and personal goodwill is documented at 45% of the total transaction value.
Exit outcome: $1.1 million EBITDA at a 4x multiple (supported by systematized infrastructure) equals $4.4 million in enterprise value. For a high-income surgeon, assume for illustration that the personal goodwill allocation of $1.98 million (45%) is taxed at an effective federal rate of 23.8% (20% long-term capital gains plus 3.8% NIIT), producing approximately $471,000 in tax. Assume the remaining enterprise goodwill of $2.42 million is taxed at a blended effective rate of approximately 30%, producing about $726,000 in tax. Total tax in this simplified example: about $1.197 million. Net: roughly $3.2 million.
Without the runway — a distressed 18-month sale at the same $900,000 EBITDA but without systematization, without an associate track record, and without personal goodwill documentation: $900,000 EBITDA at 3x equals $2.7 million. Assume, for illustration, that most of the proceeds are taxed at a 37% marginal ordinary income rate for a surgeon in the top federal bracket, producing approximately $999,000 in tax. Net: about $1.7 million.
In this simplified comparison, the difference is roughly $1.5 million. The runway is three years of work that began in August.
The August Diagnostic
If you are between 50 and 57 and you have not started the succession planning conversation, August is the right month to begin.
Not because the exit is imminent. Because the work that makes the exit on your terms requires years of lead time, and August is the season when that conversation naturally starts — when summer creates a brief window of strategic bandwidth, and when the coming fall presents the first meeting opportunities with the advisors who will shape the process.
The question to ask this August: if you had to sell your practice in 18 months, would it be ready?
If the honest answer is no — if you are the practice, in the sense that most of its value walks out the door when you do — the runway starts now.
This material is for informational and educational purposes only and is not intended as individualized tax, legal, or investment advice. Tax and transaction outcomes depend on your specific circumstances, entity structure, and deal terms. Orthopedic surgeons should consult their own tax advisor, legal counsel, and valuation professional before implementing any succession or sale strategy.
Capably Yours,
Jared
DISCLAIMER
This article is for informational and educational purposes only and does not constitute investment, tax, or legal advice. It does not take into account the specific objectives, financial situation, or needs of any particular person. You should consult your own tax, legal, and investment professionals before acting on any information contained herein. Capable Wealth, a New York registered investment adviser, provides advisory services only where properly licensed or exempt from licensing.