What to Expect When Selling a Physician Practice

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For various reasons, a medical group may decide that it is time to sell their practice. This could be due to reduced reimbursements, increased operational complexities or the desire to “cash out” and retire. When considering a sale, practice leadership should take the following steps to ensure maximum benefit to the physicians in the practice.

Phase 1: Sale Preparations

In this phase, the practice must determine at what price it is willing to entertain purchase offers. This step usually occurs because a potential purchaser, such as the hospital system or competing large practice, has approached practice leadership about interest in a sale.

Practice leadership needs to engage an accounting firm and legal counsel to help with this important step. Legal counsel can provide confidential internal advice as practice leadership evaluates its options. The accounting firm will be a key resource in preparing financial information, considering forthcoming financial offers and determining whether the purchaser’s proposed compensation models are viable.

Practice leadership should identify a negotiating team and assess the interest level of each physician owner in agreeing to a sale. Each physician’s bottom line issues also should be taken into account. There may be physicians in the practice that are unlikely to agree to a sale or who would object to working for a potential purchaser. In these cases, practice leadership may decide to “shed” a physician from the practice prior to sale. A plan to deal with this issue early on is important in avoiding a late roadblock in the transaction.

Phase 2: Negotiations with Proposed Buyer

In this phase, initial discussions with the potential purchaser take place. The parties should sign a Non-Disclosure Agreement (NDA) at the outset to ensure that the discussions themselves and the information exchanged are kept confidential. They will exchange financial information and key documents. They will also discuss the purchase price and the general terms of both the purchase agreement and the physician employment contracts. This step, if successful, usually ends up in a nonbinding Letter of Intent (LOI) between the practice and the potential buyer, with an outline of the key terms of the acquisition.

During this process, the practice’s legal counsel will review, revise and even negotiate the NDA and the LOI. To identify potential hiccups, legal counsel should also do an initial compliance review of key contracts. They may find non-compliant Stark arrangements, key contracts that come with restrictions or sales notice requirements that require attention.

Legal counsel should also retain a valuation consultant who can advise the practice on its fair market value range for both the purchase and employment agreement terms. This information is necessary before discussions on price and employment compensation commence.

Phase 3: Hammering Out the Details

Following the LOI, the third stage usually occurs in two concurrent tracks. In the first track, the parties negotiate the terms of the sale documents. This includes the purchase agreement, the employment agreements and the ancillary agreements, such as assignment and assumption agreements, consents and possibly a new space lease agreement, as well as the disclosure schedules. These disclosure schedules can shift risks associated with representations and warranties that the practice is making to the purchaser away from the practice. The practice’s legal counsel will also need to ensure that the new employment agreements sufficiently protect the interests of the practice’s physicians over the long run.

In the second concurrent track, the potential purchaser will conduct a deep due diligence review of the practice. They will require that the practice disclose numerous documents and information to the purchaser before finalizing the sale. This could include copies of all contracts held by the practice, including employment agreements, management agreements, vendor agreements, payor contracts and agreements with coverage and medical director agreements. Financial documents going back several years will also need to be disclosed. Litigation history and threats of litigation are also included in the due diligence requests.

In order to present the practice in the best light possible, it is helpful for it to know in advance what documents will be requested as part of the due diligence process. The practice can ensure its key contracts are in place and determine if they can be transferred as part of a sale.

Additionally, the purchaser will want to determine if the practice owns or leases its medical office space. If the practice owns its space, the purchaser will likely want to perform due diligence review, including physical inspection of the real property as well as title review. The purchase and sale of the medical office building may occur concurrently with the sale of the practice, or the conveyance of the medical office building may occur after the sale of the practice. If the purchaser is a hospital system, the hospital system may require that the physicians remain employees of the hospital system for a period of time following the transaction (typically, one year). In that case, the medical office building is typically transferred to the purchaser, and the parties simultaneously enter into a lease agreement with the purchaser as landlord and the physician(s) as tenant. The new lease will need to comply with the applicable Stark Act provisions. The parties may wish to attach the grant deed as an exhibit to the purchase agreement, and, if applicable, may also wish to attach the form of the new lease as an exhibit as well.

Please note that the direct acquisition of a medical group by hospital, hospital system or other non-physician owned entity is generally not permissible in “corporate practice” states (including California and Texas).

If the practice leases its medical office space, it will need to assign, and the purchaser will need to assume, the medical office lease. The purchaser will likely request a copy of the lease and all amendments as a part of its due diligence review. Any assignment of the lease will need to comply with the terms and conditions in the lease applicable to such assignment, such as a requirement that the buyer obtain the landlord’s prior written consent to the assignment.

Phase 4: Closing the Deal

With these steps in place, the parties will be ready to close the transaction. At this point, the parties will have finalized the terms of all agreements and the disclosure schedules. The purchase price will be transferred. Key staff and physicians will become employees of the purchaser, and, after credentialing, they will commence work for the new employer.

By understanding what to expect, what to ask for in negotiations and how to identify potential issues, a win-win will hopefully be achieved for all parties.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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