October 2007

 

PRACTICE MANAGEMENT

 

Purchasing a medical practice


by Bruce Armon

 

 

Besides buying a home, the purchase of a medical practice is likely the most expensive acquisition you will make in your lifetime

In many respects, purchasing a medical practice is more important than purchasing a home because your professional livelihood can be significantly affected if you pay too much for the practice or do not fully understand what you are purchasing. If done properly, the purchase of a medical practice can also be a wonderful investment that will provide a steady stream of income for you and your family during your professional career and potentially provide a nice retirement windfall when you are ready to sell. There are several key considerations that any potential purchaser should heed prior to executing any final documents with a seller.

Knowledge is key

You and your professional advisors need to know as much about the medical practice as the selling physician(s). If you are currently working in the medical practice as an employee this is an ideal way to have ongoing due diligence. In the ideal scenario, there are no surprises in store for you once you own the medical practice because you have done all of the necessary homework. “Caveat emptor” (let the buyer beware) should be your guide for the transaction. You should not be afraid to ask any questions of the selling physician and his or her staff. You should prepare a detailed list of the information you request from the selling physician so you have as complete a clinical and financial picture of the medical practice as possible. You can never have too much information when making an informed decision. As a way to ensure continuity in the medical practice with the patients, you may wish to consider some transition period in which the selling physician will remain a part of your new medical practice as a clinician or an informal consultant who is available on an as-needed basis. If you envision that some or all of the selling physician’s staff is going to stay on board with you once you own the practice you should carefully scrutinize each person’s abilities. You will likely spend more time with your staff than your own family. You need to have full confidence in each person’s abilities and trust that each person will have your professional interests as their primary workplace goal. If you do not know everything about the medical practice opportunity and the potential risks and rewards, you could literally be purchasing trouble with little recourse. It is not uncommon for a selling physician to seek to include in the agreement effectuating the sale of the medical practice a provision that he or she has no further liability to the buyer once the transaction is complete.

Letters of intent

In certain circumstances, a letter of intent can help memorialize the respective expectations and obligations of the buying and selling physician. The letter of intent should not be a binding document. A well-drafted letter of intent can establish the groundwork for the actual purchase documents. The letter of intent may also help you “smoke out” potential contentious issues with the selling physician and understand where compromise may be appropriate. If the parties cannot agree on the terms to be included in the letter of intent it is unlikely that an actual transaction will take place between the parties.

Asset or stock deal

Your professional advisor can explain to you the merits of a stock vs. asset transaction. Unusual circumstances notwithstanding, a purchaser of a medical practice should seek to do an asset deal. From the seller’s perspective, there are likely tax advantages to using a stock transaction to get capital gains treatment from the transaction. In a stock transaction, the seller also disposes of all liabilities of the medical practice up through the transfer of the stock to the purchasing physician. The purchasing physician would be saddled with any accounts payable of the medical practice and current or potential litigation through the actual date of transfer of the stock. Note that the purchase price for the medical practice may be affected depending upon whether an asset or stock deal is used. As a purchaser, you may wish to add a slight premium to the purchase price to entice the seller to use an asset (not stock) transaction.

Choice of entity

Assuming you purchase a medical practice through an asset transaction you will need to select the type of entity that will actually purchase the assets from the selling physician group. The entity you choose for your medical practice will be based upon legal and tax considerations and the ultimate decision is not the subject of negotiations with the selling physician.

Identifying the assets to be purchased

This is one of the most obvious yet most misunderstood aspects related to the purchase of any existing medical practice. The assets that are actually included in the transaction can have a significant impact upon the purchase price negotiations. Certain items are generally included in every asset transaction. Furniture, fixtures and equipment usually make up the bulk of each transaction. It is important that these items be individually identified in an exhibit to the agreement and that you confirm the title to each of these items so you can actually gain possession of what you believe you are purchasing. Confirm where the items are owned outright by the practice or whether there is an existing lease. If there is a lease, what are its terms and can the lease be assigned? Medical charts are the lifeline of any practice. While a patient always has the option to select medical care from any clinician, you should know how many and what medical charts you are purchasing. If the medical practice is computerized, this may be a much easier task to confirm. If the practice is in the paper-only phase, moving to an electronic medical record system may be one the first things that you consider once you have acquired the practice assets. You should also understand how long you must retain the selling physician’s medical records pursuant to state law and the rules of the various third party payers. Medical supplies and supplier relationships can also be a very important consideration. You may not be able to get the same generous supplier deal negotiated by the selling physician. It is important to understand the supply and demand of the practice so you can ensure that you are fully equipped from day one to handle all patient needs.

Running the practice from day one

Keep in mind that most selling physicians will require full payment of the purchase price at closing. There may be circumstances in which a selling physician will have extended payment terms of the purchase price, but this is most likely in a situation where the purchasing physician was an employee of the selling physician and the parties have developed a professional rapport and the purchasing physician has earned the trust of the selling physician. In addition to paying the purchase price, as the purchasing physician you will likely not be acquiring the accounts receivable of the selling physician’s practice. Therefore, you will need to have arranged for your cash flow needs for the first several months while you are awaiting your payments from third party payors to pay staff salaries, lease payments, vendors and other day to day expenses. Banks are generally amenable to providing loans to physicians acquiring a medical practice. It would not be unusual for a bank to ask the physician to execute some form of personal guarantee if the bank is unsure about the short-term or long-term finances of the medical practice opportunity. Negotiating with prospective lenders can be just as time-consuming and difficult as your negotiations with the selling physician.

Getting the process started

It is very important that the transaction be delineated in writing. Handshake arrangements give you no enforceable protection. Most people purchasing a home rely on professional experts to help guide them though the process. As a clinician, you may not be skilled in all of the business nuances of buying a medical practice. It is very likely that the selling physician will have professional advisors because of the potential windfall resulting from the transaction and you should ensure you are appropriately protected. Protecting your business interests will help give you the necessary piece of mind so that you can be a successful clinician.

ABOUT THE AUTHOR

Bruce D. Armon, Esquire is a partner in the health care group of the law firm Saul Ewing LLP (www.saul.com). Bruce is a frequent speaker to physician audiences on corporate, regulatory and compliance topics. Contact him at barmon@saul.com or 800-355-7777, ext. 7985.

Purchasing a medical practice Purchasing a medical practice
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