By Jamaal R. Jones, Esquire and Matt Lester
Physicians may be determined that it is in their best interest to sell their medical practice for various personal and business reasons.
A few of the reasons may chose to sell are because:
(1) they are retiring;
(2) relocating to another city/state;
(3) maintaining the practice is too much of a burden/stress;
(4) they are physically unable to meet the demands;
(5) lower reimbursement rates; or
(6) someone simply made them an offer that they couldn’t refuse.
Regardless of the reason why a physician may choose to sell their practice, there are certain business and legal considerations that they should factor into the decision process.
Who is Buying Physician Practices?
Florida is one of the few states that allow for a non-physician to own a medical practice, excluding optometry, dentistry or chiropractic practices. Large corporations, private equity firms, hospitals, health systems and ambitious physicians looking to expand their practices are all common buyers in today’s market. Due to healthcare reform, the value of physician practices is diminishing in many markets.
What is the Value of my Physician Practice?
Many business owners, including physicians, have an idea in their head of what they THINK their business is worth. Often there is an emotional component that is factored into what the physician perceives their practice to be worth. I encourage my physician clients to be realistic with their expectations.
Let’s face it, there’s no guarantee that patients will remain with a practice once their beloved physician departs and purchasers are aware that while there is some benefit to buying an existing practice there is also significant risk. For this reason, many purchasers choose to pay the purchase price over several months after closing and hire the prior owner as an independent contractor during the transition. I advise my clients to meet with a healthcare consultant and bankers who work primarily in the medical and dental industry so that they can determine what the fair market value (“FMV”) of their practice is. A FMV is partly based on the tangible assets of a practice and consists of all furniture, fixtures and equipment owned by the practice such as examination tables, desks, chairs, and medical equipment.
There are numerous methods and factors to be considered in determining the value of the physician’s practice when preparing to sell. The value of a physician practice fluctuates based on: (a) payer mix; (b) referral sources; and (c) the presence of ancillary services. If a practice has one or more ancillary services that it provides that can dramatically increase the value and eventual purchase price of your practice due to the increased profit margins.
The process includes requirements or rules that must be followed in order to legally sell a practice. All legal and business considerations should be addressed to ensure the selling physician receives the best possible price for the sale of their practice. The selling physician must be careful to avoid any actions that can reduce the value of the practice during the sale.
Sellers must be careful not to misrepresent terms and conditions of the physician practice because it is highly likely everything will be discovered during the purchaser’s exclusive due diligence period. The selling process ends with a negotiated agreement with attorneys covering the asset purchase agreement, revised partnership agreement (if applicable) and employment agreements to name a few. During the closing process all agreements will be signed and executed.
How do I Structure the Sale of my Physician Practice?
The sale of physician practices can be structured in various ways depending on the facts and circumstances specific to that particular practice (i.e. debts, obligations, leases, etc.) A physician has to choose between selling stock in their practice, assets, or in some cases a combination of both.
A physician that sells stock in their practice will pay fewer taxes on the purchase price. However, purchasers are wary of purchasing stock because they assume responsibility for the practice’s liabilities. The trade-off with a stock purchase is that the purchaser retains the physician’s payer contracts, tax ID number resulting in a much smoother and faster transaction.
In an asset purchase agreement, the physician has to be very specific about what is included in the sale (i.e. art and certain furniture isn’t included). In this strategy, the physician-seller positions the sale as an alternative to a startup practice. The value is not as high, but a small amount of intangible value can be justified for:
- Speed when compared to that of than a startup;
- Less losses than a startup;
- a trained workforce already in place, telephone number, website, and historical marketing already in place;
- Medical Equipment and furniture are present;
- Stronger Patient base and reputation.
A transaction involving the value of intangible assets of a practice could trigger violations of various state and federal healthcare laws, including, but, not limited to, the Florida and Federal Anti-kickback Statutes and Stark law. Tangible and intangible assets can all be included in the sale of a physician practice however to avoid anti-kickback issues, the final price must not overwhelmingly exceed the FMV of the practice. If the purchase price exceeds the FMV of the physician practice it will be a red flag for regulators. Regulators might interpret the sale to be disguised as an impermissible payment for patient referrals also known as Patient-Brokering in Florida. You should always consult with a healthcare attorney to conduct an analysis of Stark Law and Anti-Kickback Statutes before proceeding with the sale.
The sale of a physician practice may include a “competitive auction process”. Smaller physician practices don’t usually go through this auction process, but it is not uncommon for a larger practice with several offices and expensive medical equipment to go up for auction with a minimum reserve that must be met. All parties involved must agree to the terms and a price. A competitive auction includes an invitation of greater than 20 buyers to bid. Buyers in competitive auctions typically have a six-week deadline to submit a letter of intent to purchase at a tentative price pending exclusive due diligence performed by the buyer for 60-120 days.
Protecting your Practice
Physicians spend a significant amount of money and devote countless hours to building their practice. It’s not always easy to part ways with your practice, but prior to completing the sale you want to make sure that you and your practice are adequately protected. No matter the size of your practice, when you are entertaining offers from potential purchasers a well-crafted Non-Disclosure Agreement (“NDA”) should be drafted by a healthcare attorney and signed by those potential purchasers. The NDA ensures that any documents or information that they receive during the negotiation process will be returned, destroyed, and kept confidential or else there will be a lawsuit for resulting damages. Also, the information gathered during the negotiation practice, such as trade secrets can’t then be used to directly compete with you. Once signed the potential purchasers are given access to secure online data rooms, which include financial statements, confidential information memorandum (CIM or pitchbook), and operational statistics.
What if you own the practice and real property?
Physicians that also own the practice facility need to prepare for the sale of both their practice and the practice facility. Alternatively, if the physician is interested in keeping the practice facility, he or she can lease the space to the buyer of the practice. In the leasing agreement, the physician may give the buyer and option to purchase the facility in the amount of time specified. If the selling physician wishes to remain employed by the purchasing party, remaining a landlord represents a conflict of interest that needs to be addressed. Therefore, the selling physician should contract for the sale of the practice facility with the buying party or an independent property management business.
The following is a list of Legal Considerations for sale of physician practice:
- Beware of Fee Splitting and Kickbacks
- Structure the Transaction in a legally permissible manner, such that it doesn’t violate any applicable healthcare or business laws.
- Purchasers must conduct Due Diligence
- Physicians must protect patient protected health Information (“PHI”)
- Account for and protect against any Data/Information Breach
- Resolve any existing contract disputes
- Determine whether you can assign third party contracts
- Negotiate the noncompetition clause
- Negotiate an agreeable indemnification clause
- Adhere to any termination Provisions
- Consult a CPA to determine the tax risks
- Transition the non-physician employees appropriately
In addition to these considerations, there are many other factors to consider before deciding to purchase or sell your practice. The sale of a practice can’t be completed overnight and could take several months. The purchaser may have to obtain a Healthcare Clinic License and ensure that the transaction doesn’t violate Stark or meets one its exceptions. It’s up to you to determine whether the time is right to sell your practice. No matter the size of your practice you should always consult with an experienced healthcare attorney.
This post was authored by Jamaal R. Jones, Esquire and Matt Lester of Jones Health Law, P.A. for more information contact us at (305) 877-5054; email us at [email protected], or visit our website at www.JonesHealthLaw.com.
It should be noted that I am not your lawyer (unless you have presently retained my services through a retainer agreement). This post is not intended as legal advice, it is purely educational and informational, and no attorney-client relationship shall result after reading it. Please consult your own attorney for legal advice. If you do not have one and would like to retain my legal services please contact me using the information listed above.
All of the information and references made to laws, regulations, and advisory opinions were accurate based on the law as it existed at this time, but laws are constantly evolving. Please contact me to be sure that the law which will govern your business is current. Thank you.