This comprehensive guide explains how to Sell a Medical Practice in 2021. We will review the most important things to consider before you move forward with your decision.
A physician may sell their medical practice for a variety of reasons. For some, a well-deserved retirement is on the horizon, while others may be seeking a better opportunity elsewhere. A sudden illness or relocation are also motives to sell. Our guide is intended to help physicians navigate this complex process.
Related Article: How to Buy a Medical Practice in 2021 [What You Should Know]
Build Your Team
Selling a medical practice involves many legal, financial, and practical considerations. To navigate through these issues, you should recruit a team of professionals to assist you. Having experts to guide and advise you through the process will maximize the value of your practice.
The key is to build your team early in the process. While it may be tempting to jumpstart the sale process by guesstimating your practice’s value and seeking potential buyers, you could get stuck in an unfavorable situation. What may start as an informal negotiation could end up as a legally binding obligation.
At a minimum, your team should consist of an attorney, accountant, and valuation expert.
Healthcare Business Law Attorney
A competent healthcare attorney, experienced in the purchase and sale of medical practices, is invaluable.
An attorney can assist you with the following:
- Compliance with state and federal healthcare laws,
- Due diligence,
- Employee and staff relations,
- Management of patient records,
- Open contracts with third parties, and
- All legal documents related to the sale.
Your attorney will help negotiate the terms of the sale and ensure that you do not have any unexpected obligations after it is complete.
Certified Public Accountant (CPA)
A CPA is integral to determining the accurate value of a medical practice. Having a CPA to create financial statements will provide a clear picture of the business’s financial status. Your CPA will also explain the tax implications of the transaction, which will help determine the type of agreement you enter into and how to structure the sale.
Your medical practice’s value is the core of the entire transaction. The value affects the list price, attracts buyers, and sets the standard for the final purchase price. A health care valuation expert will perform extensive research and analysis on your medical practice to determine its fair market value, considering both tangible and intangible assets.
Valuing Your Medical Practice
The valuation of the medical practice is what drives most of the negotiations toward a final purchase price. The fair market value (FMV) is the standard for valuing a practice. FMV is defined as the result of an arms-length transaction between an informed, willing buyer and an informed, willing seller.
To value a medical practice, an appraiser will consider many factors, including:
- The nature and history of the business,
- Book value and financial condition,
- Economic outlook,
- Earning capacity,
- Fixed assets such as equipment and real estate,
- Goodwill and other intangible assets,
- Post-transaction compensation, and
- Market comparables.
It is important to note that the FMV of the medical practice is not the same as the purchase price. Rather, the FMV is the basis upon which the parties determine the purchase price.
Find Multiple Buyers
Having multiple offers could increase the value of your practice. The best way to locate potential buyers is to contact prospects, such as hospitals, colleagues, and competitors, and let them know you are considering selling your practice.
Many preliminary steps lead up to the final purchase of the medical practice.
To provide security for yourself, there are several preliminary agreements you should consider before investing time and money into the potential sale of your medical practice.
Letter of intent
Once you have a prospective buyer, consider executing a non-binding letter of intent. The parties can preliminarily resolve issues within the letter and outline the tasks to complete before entering into a purchase agreement. The letter of intent serves as a roadmap for the transaction.
Confidentiality and non-solicitation agreement
As part of the due diligence process, the buyer will have access to confidential information of the practice, such as financial statements and employee and patient lists. To protect this information, you may want the buyer to sign a confidentiality and non-solicitation agreement. The terms of the agreement would prohibit the buyer from disclosing the information for purposes other than performing due diligence. The agreement would also bar any solicitation of employees and patients of the practice until after the sale.
Structure of the Sale
You and the buyer must agree on whether the medical practice’s sale will be a stock purchase or asset purchase. A stock purchase is when the buyer purchases the entire business, taking complete ownership and acquiring all assets and liabilities. In an asset purchase, the seller remains the practice’s legal owner and the buyer purchases only specific assets, such as equipment, licenses, inventory, and goodwill.
There are significant legal and tax implications to either type of sale. Your CPA and attorney can guide you on this and advise on which option best suits your needs.
Both the buyer and seller will go through their own due diligence process. The buyer’s due diligence will involve learning the ins and outs of the medical practice to ensure that the business is accurately portrayed.
To accomplish this, the buyer will do the following:
- Examine financial records, including tax returns and financial statements;
- Review all assets and liabilities;
- Ensure compliance with applicable healthcare laws and regulations;
- Understand the billing and coding process of the practice;
- Assess all current working relationships;
- Review all open contracts, such as supply contracts and lease agreements; and
- Analyze any ongoing litigation matters.
The seller’s due diligence is not quite as lengthy as the buyer’s but just as important to the transaction’s success.
Ensure compliance with the corporate practice of medicine
The corporate practice of medicine (CPOM) is a legal doctrine that limits who can practice medicine and provide medical services. For example, Texas’s CPOM prohibits business entities and corporations from practicing medicine and corporations and non-physicians from employing physicians to provide medical services. There are some exceptions. CPOM exists to protect the public from health care decisions being made for financial gain rather than for sound medical reasons.
As a seller, you need to ensure that the buyer is not purchasing your practice as a business entity, corporation, or non-physician that the CPOM prohibits.
Confirm proper licensure
The buyer must have the necessary licensure to practice medicine. A recent medical school graduate looking to start a solo practice is an example of a buyer who may not have the proper license. Further, you should learn if the buyer has any outstanding complaints or disciplinary actions with any state or medical boards that could impact their ability to obtain the licensure. This could cause a severe delay or even fallout of the sale.
Determine financial capability
You want to ensure the buyer has the financial capability to purchase the medical practice. While some buyers will use commercial lenders, others may seek financing from you. If you are eager to secure a deal and agree to finance all or part of the sale, look into why the buyer is not going through a commercial lender. Granted, sometimes commercial lending is too expensive, but other times the buyer is not approved because of poor credit. Make sure to perform a thorough credit check and get adequate security for the loan.
Assignability of third party contracts
Some contracts between the medical practice and third parties may not be assignable. Examples include office space leases and equipment or service contracts. While some agreements allow for assignability or the creation of a new contract, some will not. As a seller, it is your responsibility to know the limitations of the contracts. Failure to discover these restrictions could result in a delay of sale, reduction of purchase price, cancellation of sale, or other issues. If you find that a contract is unassignable, you should exclude it from the final purchase agreement.
Having your team of legal and financial professionals assist in obtaining, compiling, and providing the information will make for an efficient and successful due diligence process.
The Purchase and Sale Agreement
The purchase and sale agreement is built off of the preliminary steps the parties take. While it is common for the transaction to involve multiple legal documents, the main contract is the purchase and sale agreement. Below are commonly found provisions.
The purchase and sale agreement will include some basic provisions that appear in any contract of sale. These provisions must describe what is being sold, what type of purchase (asset versus stock), and the terms of the sale, such as consideration, purchase price, dates, and financing.
There are federal laws and regulations in place that regulate the purchase price of a medical practice. The Stark Law, the Anti-Kickback Statute, and the Private Inurement Statute all apply to the sale of a medical practice between a physician and a larger physician practice, hospital, or healthcare system. A healthcare lawyer will ensure the purchase price complies with the law.
Warranties and Representations
Within the agreement, the buyer and seller will make certain representations and warranties. These are statements of fact that the buyer and seller warrant are true. For example, the seller warrants that the financial records are accurate, while the buyer warrants they have the qualifications to practice medicine.
There should also be indemnification clauses to protect both parties. For instance, the seller should be indemnified from any third-party lawsuits or any other proceedings. The buyer should be indemnified in the event the seller breaches any representation or warranties of the agreement.
List of Assets and Liabilities
The assets and liabilities of the medical practice should be listed on a schedule in the agreement. Any liabilities that the buyer will assume should be identified.
If the selling physician intends to continue practicing in the same geographic region as his former medical practice, the buyer may require that the agreement include a non-compete clause. The duration and geographic scope should be reasonable and not overbroad.
Unfortunately, there are times when a sale will not come to fruition, whether it be a failure to obtain financing or the inability to meet a pre-closing obligation. At a certain point, terminating the transaction and placing the practice back on the market is the best option. Without a clear termination provision, the buyer could hold up the sale indefinitely or try to force the seller to perform.
The termination provision should have a final date when the transaction must close unless the parties otherwise mutually agree in writing. All funds and documents should be returned and both parties released from any further obligations.
Medical Records and Patient Notification
The parties need to agree on how patient medical records will be managed and who will notify the patients of the change in ownership.
Medical records cannot be transferred to another physician without the patient’s consent. Under state and federal law, patients have the right to choose another physician and have a copy of their medical records sent to their physician of choice. The buying and selling physicians must determine how the patient records will be handled—whether they be retained, destroyed, or transferred. If medical records are included in the practice’s sale, the purchasing physician becomes the custodian of the records, not the owner.
The parties’ decision must also be compliant with state medical record retention laws. For example, in Texas, a physician must keep medical records of adult patients for seven years from the date of the physician’s last treatment.
Selling your practice is not only impactful in your life but also in the lives of your patients and staff. To minimize disruption to the practice’s flow and processes, you and the buyer should develop a transition plan.
If you want to learn more about how to sell a medical practice, the healthcare attorneys at Massingill Attorneys & Counselors at Law can help!
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