Healthcare I NOVEMBER 12, 2018

Medical Practice Purchase/Sale Considerations

Each individual and entity operating in healthcare (e.g., individual physicians, hospitals/health systems, group practices, etc.) has a unique vision with regard to the strategic purpose of operating and pursuing a medical practice purchase or sale. For instance, and certainly not by way of limitation, physicians may be interested in: selling their practice to a third-party to alleviate administrative burdens (to enable them to focus on patient care), capitalizing on the practice’s growth to take advantage of efficiencies of scale (in light of market pressures), etc. Additionally, physician(s) or medical practices may be interested in purchasing an operational medical practice for the infrastructure in place, to expand the strategic mission of the purchasing entity, to broaden service lines, to acquire a specific practice location, etc. Given all of the variations as to why a medical practice purchase/sale might be contemplated, it is important for the parties (and their respective counsel) to understand the party’s underlying strategy throughout the transaction (as such strategy will impact the overall deal terms that are memorialized and negotiated in the definitive transaction documents). In connection with the parties’ underlying strategy, the transaction documents will be structured to facilitate the sale of all or some of the ownership interests (e.g., stock or membership interests) or all or some of the assets to the new owner(s). It should be noted that while this bulletin generally discusses the purchase/sale of a medical practice, it does not specifically detail the legal considerations that are unique to a physician desiring to obtain equity a medical practice.

This bulletin will provide a high-level overview (and certainly not an exhaustive summary) of some of the considerations that the parties may consider when navigating a purchase or sale of a medical practice. Given the healthcare regulatory environment, and business-related matters associated with the transaction, the parties are well advised to engage healthcare legal counsel early in the process to prepare for an eventual transaction (on both the purchaser’s side and seller’s side) and to navigate the transaction as it progresses from initial discussions through (and following) the closing of the Definitive Agreements. Each party, from the outset, will attempt to maximize their respective position (and interests) during each stage of the transaction.

1. Pre-Discussion Housekeeping. Prior to exploring a potential medical practice transaction, each party should conduct pre-discussion housekeeping to better prepare for an ultimate transaction.

a. Seller Considerations. When physicians are considering a potential sale of a medical practice, the physicians should consider the practice’s overall health by conducting internal due diligence and by exploring potential liabilities prior to such liabilities being discovered during the purchaser’s due diligence or following the closing of the Definitive Agreements (as discoveries at this juncture could jeopardize the potential deal or engender legal risk to the selling practice/selling physicians if certain representations and warranties are made about the practice). For instance, prior to exploring a sale, it is important for physicians to identify potential or actual liabilities and take affirmative actions to correct those issues that can be corrected (e.g., review the practice’s finances (and expenses), identify pending or threatened lawsuits, reviewing billing-related issues, review compliance-related matters (including HIPAA considerations), etc. Moreover, the selling physicians should determine how due diligence will be managed.

b. Purchaser Consideration. Although the purchaser has an underlying strategic goal for the acquisition of a medical practice, the means through which the purchaser accomplishes the acquisition can vary and the purchaser needs to be prepared, prior to discussions with the seller(s), as to how it desires to facilitate the acquisition. For instance, the purchaser should consider: the business advisors that the purchaser will utilize (financial advisor, healthcare attorney, valuation consultant, and potentially payor specialist and financial lender), whether the purchaser will acquire the purchaser’s assets or purchasers’ owner(s)’ ownership interests, any corporate actions that will need to occur (either internally or to structure the entity through which the acquisition will be made), how due diligence will be performed and managed, how management of the target practice will be conducted post-closing, how IT systems will be merged or transferred to purchaser’s systems, the payor credentialing nuances associated with the transaction; how the purchase price will be paid (and whether the purchaser will utilize financing, which takes time to secure), how billing will be conducted post-closing, whether third-party consents must be obtained in connection with the transaction (such as space and equipment leases, etc.), etc.

2. Confidentiality Agreement. Prior to the parties discussing a potential purchase/sale of a medical practice, it is prudent for the parties to enter into a Confidentiality and Non-Use/Non-Disclosure Agreement (to protect each party’s interests) and generally require: 1) that the parties maintain the confidentiality of the discussions and the confidential information being disclosed and/or exchanged; 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.

3. Letter of Intent. Once the parties conceptually agreed to the terms of a potential transaction, the parties may enter into a Letter of Intent/Memorandum of Understanding (which may follow initial discussions or agreed-upon deal terms) that will: i) identify the parties; ii) identify the substance of the contemplated transaction (whether the purchaser is pursuing an acquisition of the selling practice’s assets or selling physician’s ownership interests); iii) detail potential financial deal terms (purchase price, payment structure (at closing and post-closing), expense shifting provisions, detailing how a broker will be paid (if utilized), etc.); iv) detail the due diligence rights, procedures, and timeline; v) detail conditions to closing (such as approvals, valuation opinions, and/or financing conditions); vi) contain confidentiality protections (if a prior Confidentiality and Non-Use/Non-Disclosure Agreement was not executed prior to the entry into a Letter of Intent/Memorandum of Understanding); vii) detail whether the selling physicians (and other individuals) will provide post-closing services to the purchaser/surviving entity (e.g., clinical, administrative, and/or managerial services); viii) whether the selling practice’s employees will transition to employment with the purchaser (if at all); ix) how trailing accounts receivable will be treated; x) how liabilities will be allocated between the parties, etc. The Letter of Intent/Memorandum of Understanding should be specific to those terms that are non-binding (such as anticipated deal and financial terms) and those that are binding (such as confidentiality/non-use requirements, due diligence periods and processes, periods of exclusivity of discussions (if applicable), etc.). As with any legal document (and especially in light of the overall transaction), it is important for each party to engage legal counsel early in the practice purchase/sale discussion to review the overall deal structure, carefully define what information will be considered confidential, etc.

4. Definitive Transaction Agreement(s). At a high-level, the Definitive Agreement(s) will memorialize all agreements, terms, conditions, rights, and obligations between or among the parties in connection with the global transaction. For instance, in addition to the actual Purchase Agreement that facilitates the actual sale/purchase of the ownership interests or assets (as applicable), numerous other agreements may also be utilized—such as Employment Agreements for post-closing services, Management Agreements, Loan Agreements/Promissory Notes, Security Agreements, Non-Compete Agreements, real estate Purchase Agreements/Leases, etc.— between or among the parties in connection with the transaction.

5. Summary. The purchase/sale of a medical practice is a business transaction that is similar to the purchase/sale of a non-healthcare business, except individuals and entities operating in the healthcare space are obligated to comply with healthcare-specific laws, regulations, and requirements (violation of which can carry significant penalties). Although the purchase/sale of the medical practice can be generalized to transitioning the respective assets/ownership interests to the purchaser, the actual transaction can be quite complex and nuanced as the parties attempt to structure the overall transaction, protect their respective interests, structure payment terms, shift liabilities, detail billing and collection rights, transition contracts, secure post-closing employment, securitize payment obligations, etc. Therefore, it is highly recommended that the parties engage experienced healthcare transactional counsel early in the process.

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