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Lawyer for Physicians, Medical
Corporations and Group Medical Practices
Buying and selling a medical
practice
In this suite of articles, I explain the basic
corporate, business and contract law issues for medical
corporations and group medical practices in California.
I explain things from both sides, that is, the perspectives
of both the individual physician and the group practice.
The articles in this suite are:
This article gives a quick overview of
buying and selling a medical practice.
I discuss the deal from due diligence, through deal
terms, to the definitive deal documents.
Finding the Deal
The first step is to find a deal.
Talk to people in the industry.
Find out if a physician is looking to sell and
retire, or if an up-and-coming associate is looking to buy.
If you have a longer timeline, consider hiring an
associate and grooming him or her to take over (from the
buyer’s side, consider being that associate).
If that doesn’t work, hire a broker who specializes
in medical practices.
Lastly, remember that for most medical practices, only
someone licensed in CA as a physician may buy and own the
practice.
Due Diligence
Both the buyer and the seller should go
about the due diligence process in a business-like manner.
Most buyers of a medical practice have experience in
the profession and understand what to look for, so I won’t
belabor the issue. At
a minimum, (1) check the seller’s medical license for a
history of complaints or litigation, (2) review the
practice’s financial statements and tax returns for the past
three years, (3) analyze whether the seller’s relationship
with referral sources and patients can realistically be
transferred to you (conversely, beware if the relationship
is so intensely personal that it can’t be separated from the
seller), (4) beware of prior employee / contractor
misclassification in the practice, and (5) check for liens,
unpaid back taxes (including sales taxes), unpaid workers
compensation, unpaid trust fund taxes, unpaid vacation
liability, unpaid bills, and current and potential lawsuits.
Deal Terms
The first deal document is a letter of
intent, also called a term sheet.
The parties use a letter of intent to confirm basic
deal terms. The
letter of intent should not be binding on the parties,
except for such matters as due diligence procedures and
perhaps a lock-up or exclusive period within which the
seller may not field other offers.
Purchase price is the primary deal term.
Be sure to take taxes into account, because it’s the
after-tax price that counts.
Payment terms are almost as important as the total
purchase price. For
medical practices, usually you use some combination of cash,
promissory note, and earn-out (which is money that is paid
over time based on the practice’s post-closing performance).
Sellers love cash and buyers love earn-outs.
Also consider who collects the accounts receivable
that were booked before the closing date.
IMPORTANT: Make sure that you have an
attorney analyze the payment terms for compliance with the
CA and federal Stark and Kickback laws.
Another deal term is legal structure –
will it be a stock or asset sale?
As a rule of thumb, buyers want to buy assets and
sellers want to sell stock.
- Stock Sales.
Here the buyer
takes the entire medical corporation, leaving all
contracts, assets and liabilities in place for the
buyer. The buyer gets a carry-over basis, while the
seller pays taxes on the appreciation in their shares
(with no double-tax). This is why sellers love stock
sales.
- Asset Sales.
Here the buyer takes the assets of the practice
but not the liabilities (except those that the buyer
agrees to assume); also the buyer gets a stepped-up
basis in the assets.
This is why buyers love asset sales. The seller
keeps the un-assumed liabilities, and might incur the
dreaded double tax (if the seller uses a C corporation),
that is, the corporation pays taxes on the asset sale,
then the shareholders pay taxes again when the
corporation dividends the remaining purchase price to
them.
Fixing Prior Defective Work
All of us (even lawyers) make
mistakes. When buying
a medical practice, the deal terms should include the fix-up
of the seller’s prior defective work (if this makes sense
given the nature of the practice).
For patients who stay on, usually the buyer will
re-do, for free, defective work done by the seller.
Hence the buyer and seller need to allocate the
responsibility and costs for the re-do work + the time
period for doing the work, for example, for the first year
after closing, the buyer might do the fix-up work then
charge the seller some agreed-to fee for the work.
Also address the purchase of tail
insurance by the seller.
For more information on malpractice tail policies,
see Leaving
a medical practice / closing a medical practice.
Deal Documents
Once the parties agree to the basic deal
terms, they move on to the deal documents including the
purchase agreement.
In the purchase agreement, the seller makes representations
about the practice.
This allows the buyer to recover back some of the purchase
price if any of the representations is materially
misleading, for example, the seller did not disclose certain
liabilities.
Representations are not a substitute for due diligence, but
they do provide additional security to the buyer.
The last important piece is the
non-competition agreement.
In most cases, the buyer should receive a
non-competition agreement from the seller.
Otherwise the buyer is at risk that, after collecting
the purchase price, the seller will set up a competing
practice across the street.
For more information on non-competition clauses, see
May
a physician compete against his or her former practice?
This whirlwind tour is over.
Remember that buying or selling a medical practice is
a complex process.
Legal, tax, accounting, valuation and psychology issues are
all involved. Before
you do anything, get competent legal counsel to help you.
Call me to schedule a
legal consultation: 510-796-9144
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