Navigating Medical Practice Transitions – Buying, Selling & Merging
General Disclaimer:
The contents of this presentation are not legal advice and are being provided for informational purposes only, to be used by medical practices as deemed most appropriate to the individual business.
Medical practices should make these decisions in consideration of what is best for their individual needs. This presentation is provided for informational purposes based upon the information available, which is continuously changing. Nothing stated herein shall be considered legal advice or intended to create an attorney-client relationship
Price Valuations (Anti-Kickback)
The value of a medical practice for a sale must be for fair market value to avoid violating the anti-kickback statute. To ensure compliance with these laws, the fair market value of a medical practice should be determined without considering the volume or value of referrals or other business generated between parties. The valuation should be based on objective factors such as the practice's tangible and intangible assets, financial performance, market conditions, and other relevant factors.
Engaging a qualified healthcare appraiser or valuation expert with expertise in healthcare transactions is essential to accurately assess the fair market value of a medical practice while adhering to anti-kickback and Stark Law requirements. This helps maintain compliance and ensures a fair assessment of the practice's value in a sale.
There are several common methods of valuing a medical practice, and they can be used in combination that will consider factors like financial performance, assets, patient base, location, and market conditions. Often, the best approach is to use a combination of these methods to arrive at a more accurate valuation for fair market value.
1. Asset-based valuation
2. Income-based valuation
3. Market-based valuation
Preparing for the Sale
Having the right team in place from experienced professionals such as healthcare attorneys, accountants, financial planners, and business brokers specializing in medical practice sale is critical to provide valuable advice to assist with legal, financial, and operational aspects of the transaction.
Ensuring Financial and Operational Readiness (Seller-Side)
Sellers must ensure their medical practice is ready for the transaction. This includes addressing any financial or operational issues that could deter potential buyers or decrease the value of the practice.
1. Financial Documentation
2. Patient and Operational Records
3. Contracts and Agreements
4. Regulatory Compliance
Ideal Timeline
1. Conducting a Search
2. NDA (1 Week)
3. Soft Due Diligence (2 Weeks)
4. Letter of Intent (1 Week)
5. Due Diligence (2-3 Weeks)
6. Purchase Agreement (1-2 Weeks) - Earnest money deposit made upon execution.
7. Satisfaction of Closing Conditions (4-6 Weeks)
8. Closing - Remainder of sale price paid.
Non-Disclosure Agreement
A non-disclosure agreement (NDA), also known as a confidentiality agreement, is a legally binding contract in which a party agrees not to disclose certain information that is shared with them by another party. The information is typically sensitive, confidential, or proprietary and is disclosed to the other party for a specific purpose, such as the discussion of a potential business deal or employment.
Conducting Due Diligence (Buyer-Side)
Due diligence is a comprehensive appraisal of the medical practice done by the buyer to confirm all material facts regarding the sale. This often includes a thorough review of financial statements, contracts, operational procedures, and compliance with laws and regulations. Due diligence is crucial to the buyer to identify any potential risks or liabilities before proceeding with the transaction.
Sample Due Diligence Checklist
Letter of Intent
A Letter of Intent (LOI) regarding the sale of a medical practice is a non-binding agreement that outlines the basic terms and conditions of the sale. It typically precedes the drafting of the formal asset purchase agreement, and may contain the following elements:
1. Identification of Parties
2. Description of the Transaction
3. Purchase Price and Payment Terms
4. Due Diligence
5. Confidentiality
6. Exclusivity (“No-Shop”) Clause
7. Proposed Timeline
8. Conditions to Closing
9. Termination
Asset Purchase Agreements
Asset Purchase Agreements (APAs) are commonly used in the sale of medical practices because they allow buyers to specify the assets they wish to purchase and the liabilities they want to assume. They provide a greater degree of flexibility and customization than stock purchase agreements. And they do not take on the liability of the selling entity.
Common elements found in APAs:
- Purchase Price
- Financing
- Identification of assets to be transferred
- Purchase Price Allocation
- Tax implications
- Reported to the IRS
- Closing Date
- Organizational Structure and Authority
- Ownership and Condition of Assets
- Accuracy of Financial Statements
- Compliance with Laws and Regulations
- Patients and Records
- Contracts and Agreements
- Liabilities
- Taxes
- Employees and Benefits
APAs (Indemnification Clauses)
Indemnification clauses are crucial elements in an Asset Purchase Agreement (APA) as they provide protection to the buyer and seller against future liabilities arising from the sale.
- Breach of Representations and Warranties
- Pre-Closing Liabilities
- Post-Closing Liabilities
- Third-Party Claims
- Breach of Covenants
- Tax Indemnification
- Indemnification Procedures
APAs (Closing Conditions/Contingencies)
Closing conditions or contingencies in APAs refer to a series of requirements that need to be satisfied before the final completion or "closing" of the deal. These conditions may encompass a broad range of criteria. Failure to meet these conditions can provide the buying party with the right to terminate the agreement with the return of any deposits made. Therefore, closing conditions serve as protective measures ensuring that the transaction meets the expectations and requirements of all parties involved.
Examples include:
- Financing
- Assignment of Contracts
- Leases
- Employee Retention
- Material Adverse Change
- Completion of Due Diligence
APAs (Governing Law, Dispute Resolution)
- Specify governing law and jurisdiction that will govern the interpretation and enforcement of the agreement.
- Have a dispute resolution procedure that will keep disputes in arbitration so that it is not filed in state court to keep matters private.
- Consider requiring mediation prior to arbitration.
Stock Purchase Agreements
A SPA is an agreement where a buyer acquires the ownership (stock) of an incorporated business, rather than just its assets as in an Asset Purchase Agreement (APA).
- Less common way practices are acquired.
- Takes on all liability of the selling entity.
- Similar to an APA, it will have representations and warranties, indemnification clauses, and conditions to closing/contingencies.
Mergers
The merger of medical practices refers to the combining of two or more medical practices into a single entity. This can occur for various reasons, such as improving efficiency, expanding services, or enhancing the quality of patient care. The merged practices typically integrate their resources, personnel, and patient base to form a unified healthcare organization. By joining forces, medical practices can leverage economies of scale, share costs, and collaborate on medical advancements, ultimately benefiting both the healthcare providers and patients.
Merger Agreement
A merger agreement for medical practices is a legally binding document that outlines the terms and conditions under which two or more medical practices will merge to form a single entity. This agreement typically covers various aspects, including:
- Parties Involved
- Purpose and Objectives
- Assets and Liabilities
- Financial Considerations
- Governance and Management
- Employment & Staffing
- Regulatory & Legal Compliance
- Confidentiality
- Dispute Resolution
Handling of Patient Records
- Adhere to HIPAA regulations and maintain patient confidentiality throughout the process. This includes not disclosing any patient information during the negotiation and due diligence stages without proper precautions.
- California law does not permit the sale of patient medical records. They are transferred under the custodianship of the buyer, who assumes the responsibility of maintaining and protecting them. Patient records must be transferred to the buyer in a secure manner.
The key provisions under the HIPAA governing the privacy and security of health records are found in Title II of the Act. Specifically, the Privacy Rule (45 CFR Part 160 and Subparts A and E of Part 164) governs the use and disclosure of Protected Health Information (PHI), while the Security Rule (45 CFR Part 160 and Subparts A and C of Part 164) governs the safeguards required for electronic PHI. Additionally, the California Confidentiality of Medical Information Act (CMIA) under Civil Code §§56, prohibits the selling of medical records.
Consulting Agreements for Physicians
Consulting agreements are commonly used in the sale of a medical practice to facilitate the transition of the practice from the selling physician to the buying party. They outline the terms under which the selling physician will provide services after the sale, often in a consultative role rather than a direct patient care role.
- Transition Assistance
- Retaining Institutional Knowledge
- Maintaining Patient Relationships
Employment of Selling Physician
In the sale of a medical practice, the selling physician sometimes remain employed by the buyer, serving a crucial role in the transition of the practice and continuity of patient care. Generally, has the following elements:
1. Term
2. Compensation
3. Benefits
4. Termination Provisions - For “Cause” or “Without Cause”
5. Restrictive Covenants: Non-Disparagement, Non-Solicitation, Non-Interference
Non-Competes
- Enforceability
- Reasonable Scope
- Duration
- Geographic Restrictions
- Potential Exceptions
Transitioning the Medical Practice
Transitioning a medical practice post-sale is a complex process that involves a variety of steps. It’s crucial to maintain quality of patient care and staff morale during this time.
- Communication Strategy
- Operational Integration
- Cultural Integration
- Continuity of Care
- Retention of Key Staff
- Rebranding
