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Buy or Sell a Medical Practice

How to Buy or Sell a Medical Practice

This article gives a quick overview of buying and selling a medical practice. I discuss the deal from due diligence, through deal terms, to the definitive deal documents. If you want to learn a little about preparing your medical practice for sale, read Preparing to sell your solo medical practice. FINDING THE DEAL The first step is to find a deal. Talk to people including competing practices. Find out if a physician is looking to sell and retire, or if an up-and-coming associate is looking to buy. If you have a longer timeline, consider hiring an associate and grooming him or her to take over (from the buyer’s side, consider being that associate). If that doesn’t work, hire a broker who specializes in medical practices. Lastly, remember that for most medical practices, only someone licensed in CA as a physician may buy and own the practice. DUE DILIGENCE Both the buyer and the seller should go about the due diligence process in a business-like manner. Most buyers of a medical practice have experience in the profession and understand what to look for, so I won’t belabor the issue. At a minimum, (1) check the seller’s medical license for a history of complaints or litigation, (2) review the practice’s financial statements and tax returns for the past three years, (3) analyze whether the seller’s relationship with referral sources and patients can realistically be transferred to you (conversely, beware if the relationship is so intensely personal that it can’t be separated from the seller), (4) beware of prior employee / contractor misclassification in the practice, and (5) check for liens, unpaid back taxes (including sales taxes), unpaid workers compensation, unpaid trust fund taxes, unpaid vacation liability, unpaid bills, and current and potential lawsuits. Read my article, Avoid successor liability when buying a medical practice, including provider numbers and taxes. STRUCTURE OF PURCHASE PRICE Purchase price is the primary deal term. Be sure to take taxes into account, because it’s the after-tax price that counts. Payment terms are almost as important as the total purchase price. For medical practices, usually you use some combination of cash, promissory note, and earn-out (which is money that is paid over time based on the practice’s post-closing performance). Sellers love cash and buyers love earn-outs. NOTES: 1. Consider who collects the accounts receivable that were booked before the closing date. 2. Managed care contracts are rarely assignable to the buying physician. If the buying physician is not an approved provider within the managed care network, the buyer must discount the managed care patients of the practice when determining the number of transferable patients. 3. Make sure you have an attorney analyze the payment terms for compliance with CA and federal Stark and Kickback laws. STOCK OR ASSET SALE? Another deal term is legal structure – will it be a stock or asset sale? As a rule of thumb, buyers want to buy assets and sellers want to sell stock. Stock Sales Here the buyer takes the entire medical corporation, leaving all contracts, assets and liabilities in place for the buyer. The buyer gets a carry-over basis, while the seller pays taxes on the appreciation in their shares (with no double-tax). This is why sellers love stock sales. Asset Sales Here the buyer takes the assets of the practice but not the liabilities (except those that the buyer agrees to assume); also the buyer gets a stepped-up basis in the assets. This is why buyers love asset sales. The seller keeps the un-assumed liabilities, and might incur the dreaded double tax (if the seller uses a C corporation), that is, the corporation pays taxes on the asset sale, then the shareholders pay taxes again when the corporation dividends the remaining purchase price to them. For more on mergers & acquisitions for medical practices, see Merging medical practices. MORE DEAL TERMS Notice to Patients It’s best for the selling and buying physician to send a letter to patients that introduces the buying physician. The letter includes the date that the selling physician will no longer be available, and should include a form for the patient to sign and return to authorize the buying physician to continue the patient’s care. The letter helps the buying physician retain the patients, and protects the selling physician from claims of patient abandonment. Patient Medical Records The purchasing physician becomes the custodian of the patients’ medical records. The selling physician should require that the buyer retain the records for up to 7 years, and make the records available to the seller on request. There is no general California law requiring a physician to maintain medical records for a fixed period of time. Specific statutes have different retention periods, e.g. 3 years for Medi-Cal patients, 5 years for workers compensation cases, or 7 years for medical clinics. See also my article, Who owns the patient’s medical records? DEA Controlled Substances The sale of the medical practice should not include the transfer of controlled substances. The selling physician usually must return the Registration Certificate to the DEA, and dispose of controlled substances in his or her possession per DEA requirements, including by destruction of the controlled substances (and keeping records of the destruction). Tail Insurance Sometimes the buyer requires that the selling physician purchase tail insurance. For more information on malpractice tail policies, see Leaving a medical practice / closing a medical practice. Non-Competition Clause. In most cases, the buying physician should receive a non-competition agreement from the seller. Otherwise the buyer is at risk that, after collecting the purchase price, the seller will set up a competing practice across the street. For more information on non-competition clauses, see May a physician compete against his or her former practice? and Stealing employees. DEAL DOCUMENTS The first deal document is a letter of intent, also called a term sheet. The parties use a letter of intent to confirm basic deal terms. The letter of intent should not bind the parties, except for such matters as due diligence procedures and perhaps a lock-up or exclusive period within which the selling practice may not field other offers. Once the parties agree to the basic deal terms in the letter of intent, they move on to the deal documents including the purchase agreement. In the purchase agreement, the seller makes representations about the practice. This allows the buyer to recover back some of the purchase price if any of the representations is materially misleading, for example, the seller did not disclose certain liabilities. Representations are not a substitute for due diligence, but they do provide additional security to the buyer. This whirlwind tour is over. Remember that buying or selling a medical practice is a complex process. Legal, tax, accounting, valuation and psychology issues are all involved. Before you do anything, get competent legal counsel to help you.

Preparing to Sell a Solo Medical Practice

In this article, I give some thoughts on preparing to sell your solo medical practice. SELL YOUR PRACTICE, DON'T JUST WALK AWAY It’s better to sell your practice than to walk away. The benefits are: you cash out, and the buyer takes over a large part of your practice obligations, including for example, payment on real property and equipment leases, collection of accounts receivable, and the maintenance of medical records. In brief, by selling you get cash + a cleaner exit. OPTIMIZE PRACTICE VALUE You should prepare your practice for sale. You want the financials to look good. Most buyers require 3 years of tax returns and financial statements for your practice. Here is a short checklist to make your numbers look better: Get a good accountant. A good accountant can help you present a better picture in your tax returns and financial statements, for example, by pulling out personal expenses that you run through the practice (the car lease). Reduce payroll. Cut out overtime – a policy of zero tolerance for OT can reduce payroll costs substantially. Reduce staffing levels by staggering schedules. Here you staff-up for peak times and staff-down for quiet times, and thereby reduce a couple positions from full-time to part-time. Last, use less expensive health care providers where possible. Code everything you do. Don’t just code what you know you can collect. Code for everything you do because the payers frequently change their reimbursement rules and it’s worth a try. Collect every dollar. Be strict with your accounts receivable. Do not waive co-pays and coinsurance: you rarely get full reimbursement for your services, so there is no reason to take a double discount from the payer and from the patient. Waiving co-pays also might breach your payer contracts. Patients should pay for non-covered services. Most payers allow you to collect payment on services that are not covered by benefits, provided that the patient has been fully informed and signed a waiver stating that they understand their liability for payment for those services. Collect for these services. Lastly, clean up the physical appearance of your office. It makes a difference. Don’t invest in new equipment, however, or spend too much on renovations. FIND A BUYER When you’re ready, go find a buyer. Talk to physicians in your area. Find out if there is a physician who wants to set up his own practice, especially an up-and-coming associate. If you have a longer timeline, consider hiring an associate and grooming her to take over. If that doesn’t work, hire a broker who specializes in the medical industry, because they sometimes know of a relocating doctor who wants to buy or a group that wants to expand. For more on the details of the practice sale, see Buying and selling a medical practice and Merging medical practices. WORD TO THE WISE - START EARLY You should begin the retirement planning process a few years in advance. First, it takes a while to find a buyer, and longer to groom an associate. Second, it takes time to reduce your costs as described above. Third, assuming you’re retiring and you want to scale back your hours in your last couple of years, you should sell your practice while still practicing at 100%. The value of your practice is at its highest then – when you scale back your hours you reduce the practice’s income. Fourth, as you approach retirement, you lose leverage at the negotiating table because the buyer thinks you have no other options. No matter how you exit your practice, be sure to read this article, Leaving a medical practice / closing a medical practice. See also my articles on exit planning – Exit & Succession Planning (Short Summary); Exit & Succession Planning (Long Version). I hope this article helps you. Remember that selling a medical practice is a complex process. Before you do anything, get competent legal counsel to help you.

Avoid Successor Liability When Buying a Medical Practice, Including Provider Numbers and Taxes

In this article, I explain how to avoid successor liability when buying a medical practice, specifically as regards provider numbers and taxes. It’s a nasty surprise to discover, after you’ve paid the purchase price for the practice, that you must pay the seller’s debts and liabilities from before the closing. RULE OF THUMB: BUYER ASSUMES LIABILITIES IN A STOCK DEAL, NOT AN ASSET DEAL The structure of the purchase initially determines whether the buyer will assume the liabilities of the seller. As a rule of thumb, the buyer assumes liabilities in a stock deal, but not an asset deal. ** In a stock deal, you buy the stock of the target corporation. The corporation does not change, other than getting you as the new owner. The corporation and all its assets and liabilities remain in place. This means the corporation keeps all liabilities that it had before you purchased it. In sum, you become the shareholder of the target corporation, which keeps its assets and liabilities in place. ** In an asset deal, your shell corporation buys the assets of the target company, and your shell only assume the liabilities and debts that you want. The buyer can pick and choose among the assets and liabilities of the seller. Hence you do not buy the target corporation; instead your shell corporation buys its assets, and leaves unwanted liabilities behind in the target company. After the deal, the seller still owns the target corporation, which keeps its debts and liabilities. Most deals are structured as asset purchases to avoid the automatic assumption of unwanted debt. Usually you only do a stock deal if you need the target corporation itself. For example, the target might have contracts in place that you can’t have assigned over to your shell corporation, or you need its tax ID number or provider number to keep a steady flow of Medicare or insurance reimbursements. PROVIDER NUMBERS As I mentioned, sometimes a buyer wants to take assignment of the seller’s provider number to ensure continuity in Medicare payments. I do not advise this. When you take a seller’s provider number, legally you assume the seller’s Provider Agreement. This means you assume the seller’s obligation to repay all Medicare overpayments that were previously made to the seller, and you become liable for all other damages and penalties that the seller may owe to Medicare. Get Your Own Number. I prefer that you to get your own provider number before the purchase. I understand that the application process can take over a year, and that you might not be able to satisfy all conditions for issuance of the provider number before the purchase. Starting early will reduce your wait time to receive Medicare reimbursements, however. A short gap in reimbursements is worth the avoidance of liability. Start early. In the alternative, if you feel you must take assignment of a provider number, then perform due diligence on the seller’s Medicare liabilities, and holdback a portion of the purchase price to cover you for unexpected liabilities that flow to you through the seller. Automatic Assignment of Provider Number. On the sale of certain defined providers, Medicare law automatically assigns the provider number and Provider Agreement to the buyer. The benefits of automatic assignment are (1) buyer receives uninterrupted Medicare payments; and (2) buyer is generally not required to undergo a survey by the accrediting organization. The cost is that the buyer automatically assumes the seller’s outstanding Medicare debt and liabilities. Automatic assignment usually does not apply to physician practices. It applies to rehabilitation facilities and agencies, home health agencies, clinics, and physical therapy facilities, among others. TAXES Taxes are a big exception to the general rule that, in an asset purchase, the buyer does not automatically assume the seller’s debts. The buyer corporation (and even you, its shareholder, personally) can be liable, by operation of law, for a number of the target practice’s tax obligations. Remember that the king writes the law, and the king gets paid his taxes no matter what, even by making the buyer responsible for the seller’s taxes. Here is a list of the primary taxes for which successor liability applies: ** Federal income and social security taxes. ** CA sales and transfer taxes. ** CA payroll taxes including unemployment insurance contributions. In all cases, the buyer should perform an extensive due diligence on the purchased practice, and demand representations in the purchase agreement for problem areas. For tax liabilities, consider getting tax clearances. Lastly, the buyer can require that the seller leave a portion of the purchase price in escrow, or the buyer can pay a portion of the price via promissory note, in both cases to ensure that funds are available to cover any undisclosed liability flowing through seller.

Merging Separate Medical Practices

In this article I discuss the merger of medical practices, from a legal perspective. LEGAL STUCTURE OF THE MERGER There are a number of possible legal structures for a merger, but usually the choice is either the classic merger or the newco merger. You choose based on the facts of your merger. Classic merger Here you merge PC 1 into PC 2. PC 2 is the surviving corporation. PC 2 takes the assets of both PCs 1 and 2, and it carries on their combined practice. PC 1 dissolves not long after the merger. The shareholders of PCs 1 and 2 divide up ownership of PC 2. [PC = professional corporation] PC 2 inherits all contracts and liabilities of PC 1 and keeps its own old contracts and liabilities. This creates risk for each merger side that it takes on the unknown liabilities of the other. The parties mitigate the risk through pre-merger due diligence on PCs 1 and 2. The shareholders of PC 1 also indemnify the shareholders of PC 2 for pre-merger liabilities, and vice-versa. The IRS treats a classic merger as a tax-free reorganization. Regarding provider numbers, PC 2 (as the surviving corporation) uses its old provider numbers to bill the post-merger services of all physicians. The provider numbers for PC 1’s shareholders are reassigned from PC 1’s old corporate number to PC 2’s corporate number. Newco merger The alternative to a classic merger is to start a new company, called PC 3 (aka Newco). PCs 1 and 2 transfer their assets (but not their receivables or liabilities) to PC 3. This transfer can be direct to PC 3 or via an intermediary distribution to the shareholders, who then contribute the assets to PC 3. The shareholders contribute cash to PC 3 to cover its startup period until post-merger receipts come in. The shareholders divide up ownership in PC 3. The primary benefit of the Newco is limited liability. PCs 1 and 2 dissolve, giving PC 3 and the shareholders an argument that old liabilities died with the old PCs. These liabilities might include, for example, Medicare audits, tax audits, past malpractice, employment law claims, etc. If this argument holds, the shareholders of PCs 1 and 2 can feel safe that the new venture doesn’t take on old liabilities, including the liabilities of the other PC to the merger. This limited liability benefit is not full-proof, however, and the creditors have a counter-argument. The creditors can sue PC 3 for liabilities of PCs 1 and 2 on grounds that PC 3 is the successor to PCs 1 and 2. The facts of the merger will tell you the strength of the creditors’ argument. As for taxes, the IRS can characterize as a taxable sale the transfer to PC 3 of assets out of old PCs 1 and 2. This can be painful. PC 3 must get new provider numbers, too, which can be painful depending on the number of carriers. Delays in getting the new numbers affect cash flow at startup. CONTRIBUTIONS TO OWNERSHIP The hardest part of a merger is figuring out how the shareholders of PCs 1 and 2 divide up ownership of the new practice. In any merger, expect to spend a majority of the negotiation on this problem. The problem is accounting for differences in value between PC 1 and 2 so that you divide ownership of the new practice in a fair way. It’s rare that PCs 1 and 2 are so equal in value that shareholdings translate directly across from the old to the new. One way to solve this dilemma is to put a dollar value on all assets to be contributed to the new practice, and base new shareholder percentages directly on the dollar values. The parties can use cash to equal out the asset values / shareholder percentages. EXIT CLAUSE Sometimes a party to a merger wants an exit clause in case the merger isn’t working out, usually within the first year. With the exit, the party receives the return of its assets, plus patient lists, charts, phone numbers, office leases, staff, equipment, and corporate name and entity. Note that items acquired jointly (post-merger) need a special mechanism to ensure a buy-out at fair value. MISCELLANEOUS ISSUES Some additional issues to consider in the merger: * How to divide corporate control, including membership on the board of directors, veto rights and super-majority votes. * How to set the formula for compensation of the practicing shareholders. * Drafting a Buy-Sell Agreement for the shareholders. * Dealing with insurance companies, including getting the physicians accepted by the applicable insurance companies that reimburse medical services. * Buying malpractice insurance for the new practice that covers all physicians. For more on mergers & acquisitions for medical practices, see Buying and selling a medical practice. To learn how to prepare your medical practice for sale, see Preparing to sell your solo medical practice. Remember this is complex stuff. Before you do anything, get competent legal counsel to help you.

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