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Buying or Selling Medical Practices

Steven D. Brownlee

There are a variety of legal issues to be addressed when buying or selling a medical practice. You'll want to focus not only on the details of the transaction itself, but also the long-term effects of the deal and your individual needs, whether you are the buyer or the seller.

Buying or selling a practice is much more than just having an attorney draft a standard buy-sell agreement. It is important to identify practice assets, conduct due diligence, and consider all relevant regulatory issues. As a result your buy-sell agreement will be tailored and structured to address all the specific considerations of your transaction. Your comprehensive buy-sell agreement will encompasses legal doctrine and financial considerations, protect your practice, comply with the law, and help minimize possible disputes.

Use Due Diligence to Determine a Value
Before starting the due diligence process, the buyer and seller should execute confidentiality and non-disclosure agreements. Those agreement are to ensure that information exchanged between the buyer and the seller during the due diligence process is kept confidential and not disclosed to third parties. Not all sale transactions make it to completion; therefore the parties must protect their information from disclosure. 

The buy-sell agreement starts with defining and appraising the practice’s assets and liabilities. Tangible assets may include, among other things, real property, vehicles, equipment, supplies, and accounts receivable. While liabilities may include, among other things, accounts payable, mortgages, any active litigation and legal claims, and leasehold rights. These assets and liabilities are used to determine the practice’s value, which will enable the parties to reach an agreement on price.

Once price and other general terms are agreed to, it is wise to document these in a letter of intent. The benefit of a letter of intent is to surface major disagreements prior to incurring the costs of preparing the purchase agreement. Generally, letters of intent are not binding on the parties. In contrast, the purchase agreement is the binding and controlling document containing all the understandings of the parties. 

Structure the Purchase to Meet Your Needs
With a letter of intent, it is time to determine how the purchase should be structured. Purchase transactions usually structured as an entity (e.g. stock or equity) purchase or an asset purchase. In an entity purchase, the buyer acquires the ownership interest of the entity that operates the medical practice. 

Sellers usually prefer entity transactions due to the favorable capital gains tax treatment it provides. Entity transactions are usually less desirable for buyers because buyers usually assume the liabilities of the entity as part of the acquisition. In contrast, in an asset purchase the operating entity sells the assets to an existing or new entity owned, or to be formed, by the buyer. Certain assets such as personal property of the physician(s) and/or the accounts receivable of the practice and certain liabilities such as accounts payable or existing bank debt may be retained by the selling entity. 

Do Not Neglect Regulatory Restrictions
The parties must not only be concerned with the realization of an economic benefit, but also with the pitfalls of non-compliance with applicable statues and state and federal regulations, including healthcare regulations. Failure to comply with all applicable regulations can expose buyers and sellers to significant legal liabilities.

There are several complicated regulatory restrictions applicable to the purchase transaction, including fraud and abuse regulations (like the Anti-Kickback Act), the Stark law, Tax Exempt statutes, federal and state antitrust and unfair competition laws, and medical records law/rules. These restrictions are primarily designed to prevent buying and selling parties from disguising the sale to secure future patient income or referrals, creating unfair competitive advantages, engaging in practices contrary to the tax-exempt status, and/or ignoring patients’ rights.

Ensure a Smooth Closing
Getting to the closing of the sale of a medical practice is a complicated and sometimes stressful matter.  However, proper guidance and structuring can minimize the stress and facilitate the best possible outcome for you and your business partners.

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