How to buy or sell a group medical practice
By Matt Dickstein
Click on a heading for more articles ⇒
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. If you want to learn a little about preparing your medical practice for sale, read Preparing to sell your solo medical practice.
Finding the Deal
The first step is to find a deal. Talk to people including competing practices. 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.
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.
Structure of Purchase Price
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.
1. Consider who collects the accounts receivable that were booked before the closing date.
2. Managed care contracts are rarely assignable to the buying physician. If the buying physician is not an approved provider within the managed care network, the buyer must discount the managed care patients of the practice when determining the number of transferable patients.
3. Make sure you have an attorney analyze the payment terms for compliance with CA and federal Stark and Kickback laws.
Stock or Asset Sale?
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.
For more on mergers & acquisitions for medical practices, see Merging medical practices.
More Deal Terms
Notice to Patients. It’s best for the selling and buying physician to send a letter to patients that introduces the buying physician. The letter includes the date that the selling physician will no longer be available, and should include a form for the patient to sign and return to authorize the buying physician to continue the patient’s care. The letter helps the buying physician retain the patients, and protects the selling physician from claims of patient abandonment.
Patient Medical Records. The purchasing physician becomes the custodian of the patients’ medical records. The selling physician should require that the buyer retain the records for up to 7 years, and make the records available to the seller on request. There is no general California law requiring a physician to maintain medical records for a fixed period of time. Specific statutes have different retention periods, e.g. 3 years for Medi-Cal patients, 5 years for workers compensation cases, or 7 years for medical clinics. See also my article, Who owns the patient’s medical records?
DEA Controlled Substances. The sale of the medical practice should not include the transfer of controlled substances. The selling physician usually must return the Registration Certificate to the DEA, and dispose of controlled substances in his or her possession per DEA requirements, including by destruction of the controlled substances (and keeping records of the destruction).
Tail Insurance. Sometimes the buyer requires that the selling physician purchase tail insurance. For more information on malpractice tail policies, see Leaving a medical practice / closing a medical practice.
Non-Competition Clause. In most cases, the buying physician 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? and Stealing employees.
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 bind the parties, except for such matters as due diligence procedures and perhaps a lock-up or exclusive period within which the selling practice may not field other offers.
Once the parties agree to the basic deal terms in the letter of intent, 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.
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.