My law practice has an interesting ebb and flow. Sometimes, it seems that I have about 10 physician employment agreements going on at the same time, then I may not have one for 2-3 months. Right now, the trend is towards the purchase of medical practices. Here are five things to keep in mind when buying a practice:
- Letters of Intent are not necessary, but they are helpful. Most LOIs are non-binding, meaning that you can agree on a purchase price and other terms, but you do not have to stick with them as you negotiate the final agreement. While that means that LOIs are sometimes not worth the paper they are written on, they can be useful for making sure that the buyer and seller can initially agree on all of the key terms. If not, then there is no point paying attorneys and accountants to perform due diligence and draft the final documents.
- Most agreements regarding the purchase of a medical practice have two stages. The LOI or two-stage contract is signed, then due diligence is performed, and then if everything goes well, the final closing occurs, at which time the building, assets, employees, patients, etc. are formally transferred. Either way, it is necessary to give yourself the time to perform due diligence and the ability to back out without penalty if something concerning arises during the due diligence.
- Asset purchases are better than stock purchases. When the assets are purchased, then the seller keeps the old entity and all of the liabilities (known and unknown) along with it. There are some exceptions, though, for some liabilities that stay with the assets, which is one reason why due diligence is so important. The buyer also gets to deprecate the assets anew, which is another advantage of an asset purchase. In some circumstances, existing contracts (that are not transferable), insurance relationships, etc. require that the stock be purchased instead of its assets. In that case, due diligence on the liabilities becomes even more important.
- Inspect everything. Inspect the property, building, contracts, essential equipment, tax returns and books and records. Meet with the employees and observe the office flow. The last thing you want is to buy what you think is a turn-key, extremely profitable practice and end up with a lemon. Further, even though your contract will make the seller provide dozens of promises (called warranties) regarding the assets, practice, etc., the sellers that breach those warranties or lie about the practice are usually not the type to just voluntarily pay up when they are caught. Instead, you are going to have to sue to enforce those warranties. Due diligence, then, is the best form of protection you can get, as it is much less expensive to solve problems before the contract is signed than after.
- Holdbacks are your best friend. It is rare that both sides are satisfied with the purchase price for the practice. Why not create some incentives that give the seller more money if certain things happen that ultimately also enriches the buyer? In other words, if the buyer thinks the practice is worth $450,000 and the seller says $550,000, an option is to tie some of that $100,000 difference to some performance incentives, such as patient retention over the next 6-18 months, employee retention, cash flow/profitability and the condition of the assets? If all of those things go smoothly, the seller gets some or all of that $100,000, but the buyer has a great practice and is still happy with the deal. If those things go poorly, then the buyer has not overpaid for the practice, is less likely to sue, and the seller likely knows what went wrong and should be happy to be rid of the practice.
I could easily mention another 20 things to consider, but Christy reminds me to keep these short for my ADHD physician readers. Perhaps the most important thing is to have an attorney and accountant involved from the beginning. Medical practices are expensive, but do not be penny wise and pound foolish by not having an attorney and accountant involved from the beginning, as their fees will be a small fraction of the purchase price and can save many times their cost in preventing some situations that could result in litigation.