Healthcare I MAY 1, 2017

Interested in Buying/Selling a Medical Practice?

Over the course of a physician’s career, a physician may explore opportunities to either purchase or sell a medical practice. Such transactions could arise based on a variety different motivating factors, but the fundamental goal is the same: facilitate the transfer of the historical medical practice (via a sale of ownership interests (e.g., stock or membership interests) or assets) to the new owner. However, such transactions are more complicated than they may initially appear, especially as the parties try to protect their respective interests beginning with the initial (and potentially, informal) discussions through (and following) the closing of the Definitive Agreements. Additionally, in connection with the transaction, the parties need to comply with the applicable corporate and regulatory requirements.

Although there are many different nuances that are related to the purchase and sale of a medical practice, this bulletin will focus on some considerations (although certainly not exhaustive) that could be applicable in connection with the process:

1. Confidentiality Agreement. A medical practice is a business with assets and proprietary information that its owners must safeguard. Similar to non-medical businesses, a medical practice must protect its internal confidential and proprietary information prior to discussing a potential sale with another third-party (and, of course, a medical practice and physicians must safeguard protected health information in accordance with HIPAA, which is beyond the scope of this bulletin). For instance, from the selling physician’s perspective, the physician owner(s) of a medical practice have likely implemented policies and procedures, developed relationships with other physicians, entered into various contractual agreements with other third-parties (including, but not limited to, vendors, hospitals, suppliers, or other providers), developed a strong core of trustworthy employees, may have pending liabilities, etc. Conversely, a potential purchaser of a medical practice may also have sensitive information that the purchaser may desire to protect during pending discussions, such as: the purchaser’s financial ability enter into and fund the transaction, information related to the purchaser’s current medical practice (if any), information related to potential liabilities, etc.

Given that each party to a potential medical practice transaction has confidential/sensitive information that should be protected during the exploration of a potential transaction, it is prudent for the parties to consider entering into a mutual Confidentiality and Non-Use/Non-Disclosure Agreement early in the process to require: 1) that the parties maintain the confidentiality of the confidential information being disclosed; and 2) the return of such confidential information to the disclosing party (or destroy the information if authorized by the disclosing party (with an attestation to such destruction)), if the parties decide not to proceed with the transaction, or at the disclosing party’s request. Failure to enter into a Confidentiality and Non-Use/Non-Disclosure Agreement (or similar document) could result in confidential information being disclosed to the detriment of the disclosing party. As with any legal document, it is important for the parties to carefully define what information will be considered confidential.

2. Letter of Intent. After the parties explore the initial deal points, it is often helpful for the parties to memorialize their understanding of the essential deal terms in a non-binding (which should be expressly stated) Letter of Intent. Although a Letter of Intent is not required, and is not utilized in all transactions, it may be a helpful document as it enables the parties to highlight, at a high-level, some of the key terms of the transaction. For instance, a Letter of Intent may detail: 1) whether the purchaser is acquiring certain assets (and if so, the specific assets being acquired) or whether the purchaser is acquiring ownership interests; 2) the purchase price (and how such purchase price will be distributed at or following Closing); 3) whether the selling physician(s) will continue clinical employment with the continuing practice (either under its historical corporate existence or through the acquiring entity); 4) expense-shifting provisions; 5) whether the selling physician(s) will provide transition services; 6) whether historical employees will be retained for a certain period of time following the Closing; 7) whether the purchaser requires financing to pay the purchase price (in which case, securing such financing may be a contingency to closing); 8) how trailing accounts receivable will be allocated; 9) allocation of liabilities; 10) whether a broker was utilized by either party, and which party is responsible for satisfying such brokerage fees, etc.

Practically speaking, although a Letter of Intent is not a formal transactional document—as it does not bind the parties or complete the transaction—it can be useful as it requires the parties to focus on the key issues/business terms. For instance, the parties may understand generally how they would like to structure a transaction, but haven’t thought through the specifics. Going through the process of preparing the Letter of Intent is a more efficient exercise than working through such terms in the Definitive Agreement phase of the transaction. To be sure, there may still be disagreement about the terms that are incorporated into the Definitive Agreement(s) (even though they were included in the Letter of Intent), but the Letter of Intent helps the parties move the key terms forward at an early juncture so they are relatively on the same page as the transaction takes shape.

It is also possible for the parties to include confidentiality requirements in the Letter of Intent, rather than executing a separate Confidentiality and Non-Use/Non-Disclosure Agreement. Depending on how the initial discussions progress, the parties may have a general understanding of the transaction at the beginning, and may wish to move directly into the Letter of Intent phase, in which case, the Letter of Intent should include confidentiality and non-use/non-disclosure. If the parties desire to incorporate such confidentiality provisions into the Non-Binding Letter of Intent, they must expressly state that the confidentiality provisions are binding, irrespective of the otherwise non-binding nature of the Letter of Intent. Thus, following the execution of the Letter of Intent, the parties will then be in a position to exchange information during the due diligence phase.

3. Due Diligence. In connection with the potential sale of a medical practice, the purchasing physician(s) will likely want to obtain information related to the historical practice to understand the nature of the practice, revenue, liabilities, expenses, etc. and the seller(s) will likely want to understand the purchasing physician’s ability to pay the purchase price, manage the practice, maintain employees, etc. Once the parties execute the Confidentiality and Non-Use/Non-Disclosure Agreement (or following the execution of the Letter of Intent, provided that it includes proper confidentiality and non-use restrictions), the parties will be in a position to exchange information to determine if they are going to proceed and complete the transaction.

4. Definitive Transaction Agreement(s). As mentioned above, the purchase and sale of a medical practice can be structured as either an asset deal or an ownership interest deal—each having its advantages and disadvantages. The parties will ultimately identify whether they are proceeding based on an asset or ownership interest structure based on a variety of factors, such as: the intended goals of the transaction, the allocation of liabilities, pre-closing date accounts receivable, tax implications of the sale and purchase price payment(s), regulatory considerations, etc. At a high level, the two (2) potential structures could be as follows:

a. Ownership Interest Deal. In an ownership interest deal, the selling physician(s) ownership interests (e.g., stock or membership interests) in the medical practice will cease, and the purchasing physician(s) will own the ownership interests in the medical practice following the Closing Date. For example, Physician A owns 100% of ABC Medical Practice, P.C. and Physician A sells 100% of such ownership interests to Physician B. Following the Closing of the ownership interest transaction, Physician B owns 100% of ABC Medical Practice, P.C. and Physician A will not own any ownership interests in ABC Medical Practice, P.C.

b. Asset Deal. In an asset deal, the owner of the medical practice causes the entity to sell certain assets to the purchaser, while the historical entity continues to be owned by the historical owner and the purchaser only acquires the specified assets. For example, Physician A owns 100% of ABC Medical Practice, P.C. Physician A causes ABC Medical Practice, P.C. to sell the agreed upon ABC Medical Practice, P.C. assets to an entity formed by Physician B. Following the Closing of the asset transaction, Physician A continues to own 100% of ABC Medical Practice, P.C., although ABC Medical Practice, P.C. will not own many (if any) assets, and Physician B’s entity owns all of the identified assets that were acquired from ABC Medical Practice, P.C.

As mentioned above, both structures have benefits and drawbacks, but each may be viable depending on the specific nature of the transaction.

The Definitive Agreement(s) can be constructed in various ways, but essentially, the Definitive Agreement(s) are the ultimate transaction documents that will facilitate the actual sale/purchase of the ownership interests or assets (as well as detail other aspects and terms of the transaction). The parties must also confirm that the transaction complies with applicable fraud and abuse statutes and rules, which are beyond the scope of this bulletin.

5. Post-Closing Employment and Transition Services. Some physicians, in connection with a potential practice sale, are interested in continuing to perform clinical services as an employed physician for a certain period of time post-Closing. For instance, a physician may be interested in selling his/her medical practice, and desire to focus solely on performing clinical services, perhaps on a reduced schedule, or on certain days. Moreover, as the historical physician owner(s) cease ownership of the historical entity, the purchaser(s) may desire to engage such historical physician owner(s) to perform identified transition services (i.e., having the historical owner(s) available to teach the new owner(s) how to access historical accounts or programs, advise the new owner(s) as to who the new owner(s) should contact in the event of operational issues, etc.), all of which are designed to assist with the transition of practice operations to the new owner(s). 

6. Summary. Although this bulletin only provides a high-level overview of some of the considerations that the parties may consider when contemplating a potential purchase or sale of a medical practice, the actual progression of discussions, preparation of the contractual agreements (ranging from negotiated points in the initial Confidentiality and Non-Use/Non-Disclosure Agreement, Letter of Intent, Definitive Agreements, and/or post-closing Employment/Transition Services Agreements, etc.), potential regulatory and corporate filings, identification of assets, real estate issues, technological transition issues, etc. can be quite complicated. Therefore, it is highly recommended that physician(s) considering a potential sale or purchase of a medical practice engage experienced healthcare transactional counsel early in the process.

This bulletin is for general informational purposes only, and does not constitute legal advice.