In today’s medical/dental world, there are many outright sales of medical or dental practices.  The buyers run the gamut from medical or dental practitioners, to an institution (such as a hospital) or to a larger entity (such as Public Companies, Private Equity (“PE”) or venture capitalists).

1. LETTER OF INTENT.

1. In some transactions I see, one or both parties push to have a Letter of Intent executed before digging more deeply into the negotiations and the Definitive Agreements.

There are pros and cons to this.  Often the Letter of Intent (“LOI”) is not a legally binding document.  Other than for a few of its provisions, this is usually the case.  The question then becomes what is the benefit of doing this?  Often it is the buyer who pushes to have a LOI.  This is particularly true when dealing with some of the bigger buyers out there.  Even though LOIs are not legally binding, some use the terms of the signed LOI to discourage and “guilt trip” the seller and/or its advisors from attempting to change any of the deal after the LOI is executed.

Often the “legally binding” elements of the LOI relate to exclusivity (whereby the potential seller is agreeing that for some time frame it shall only negotiate with this potential buyer).  Confidentiality is also an important part of things.  Before even sharing any information (well before the LOI stage), I urge my clients to have a signed Non-Disclosure and Confidentiality Agreement in place.  Among its important provisions should be language whereby each party promises the other to keep any shared confidential information confidential (only sharing with its advisers who are assisting with the possible transaction).  I also usually like both parties to agree not to share the fact that the parties are even talking about a possible transaction until both parties agree otherwise.

Quite often, I encourage my client to attempt to move quickly into the Definitive Agreements (particularly including the Asset Purchase Agreement and Employment Agreement relating to post-sale arrangements).  Too often the LOI is not detailed enough.  Sometimes the “devil is in the details.”  Therefore, the sooner one can get into the meat of the matter, the better.

2. EMPLOYMENT AGREEMENT.

1. As a general rule, the purchaser (particularly if it is a Hospital or a PE buyer) wants the principal doctors in the selling entity to stick around for a period of time. Depending on the economics of the deal and who has the most leverage, this could be anywhere from one (1) year to up to five (5) or more years.

2. The Employment Agreement should set forth the Term of Employment. It should also set forth how the employment arrangement may be terminated.

3. The Employment Agreement should also clearly set forth exactly the compensation for the work being performed. This would include W-2 pay.  It also includes business expenses and fringe benefits.  The important thing is to have it all clearly set forth in the documentation.  Paid Time Off (PTO) is also an important part of the equation.
4. Very important in most of these contracts are the terms of Non-Competition. When a doctor is looking to sell, besides determining the economic terms such as what the purchase price and post-sale remuneration will be, restrictions on that particular physician or dentist pursuant to the terms of the sale document and when the employment relationship ends are key provisions.  This can often be a most contentious part of the negotiations.  And there is no one answer that fits each situation.  One needs to understand what happens if and when this deal ends.

5. Non-Solicitation and Confidentiality Provisions are also part of these contracts. They should be carefully reviewed, understood and agreed to.

6. One also needs to be clear as to with whom one is contracting. For example, sometimes the buyer of a practice can be different from the entity actually employing the physicians.  It all depends on how the buyer and its affiliates are structured legally for regulatory and other reasons.  It is important to understand with whom one is contracting and the economic soundness of that particular entity.

7. A big question in any of these arrangements relates to what type of malpractice insurance the buyer will provide. If it is an occurrence coverage policy (which means that once the premium is paid for a given year, the covered doctor is always protected from any malpractice claims that arise pursuant to the acts and omissions of that particular time frame no matter when any lawsuit relative thereto may take place) then no extended endorsement or tail is needed.  Often, claims-made coverage is provided.  In that situation, tail premiums must be paid “at the end of the day.”  It is important that one clearly set forth and understand how that will be addressed.  It is important to go in with one’s eyes open. To not do so can get expensive.  One also needs to clearly understand what type of malpractice coverage is currently in place on the seller’s side.  If it is claims-made, who is going to pay for the tail (seller entity, the doctor or the buyer?)  On a recent transaction with which I was involved the deal almost fell apart when the seller mistakenly thought she had occurrence coverage and was shocked to learn at the last minute that she was incorrect and that the tail premium was going to be over $50,000.

3. ASSET PURCHASE AGREEMENT.

1. A very important part of this is, of course, the purchase price. What is the number?  How it is determined?  What are the payment terms?  What are the tax ramifications?
2. In some deals, a portion of the purchase price is escrowed.

3. In addition, all should clearly set forth what exactly is being sold and what is not being sold.

4. In addition, what, if any, liabilities of the seller is a buyer assuming? This could relate to contracts, leases (for office space or equipment) or other obligations.  Who would be responsible for payables and other liabilities and debts?  Usually the buyer insists upon buying assets free and clear of all liens as of the purchase date.  UCC filings need to be looked at to see what comes up.
5. In addition to the provisions within any post-sale Employment Agreement, the Asset Purchase Agreement generally would have its own Non-Competition and Non-Solicitation provisions that relate to the protection to be provided by the seller to the buyer as part of the sale transaction itself.

6. A very important part of all of this relates to the full and proper completion of the Schedules and Exhibits of the Agreement. Quite often execution of these documents is held up because of the time involved and the clarity needed in order to clearly set forth what is needed in the Schedules and Exhibits.  This relates quite often to Representations and Warranties of both parties.   In addition, indemnification language often relates to what is set forth in these Schedules and Exhibits.  This can be the “fun part” of getting everything to the finish line and Closing.  But they are very important aspects of the Due Diligence and finalization of the documentation.

7. Here again, find out who the parties are and with whom each is contracting. Who is doing what to whom?

4. OFFICE REAL ESTATE.

1. One question is who owns the real estate?

2. If it is an outside party from whom the space is being leased, it is important that the current lease be looked at to determine how easily it may or may not be assignable by the seller to the buyer. Sometimes this can hold things up if one is dealing with a difficult landlord, particularly if a lease is strongly pro-landlord.

3. Sometimes the office space is owned, directly or indirectly, by some or all of the selling doctors. In that situation, the parties generally have to decide what they wish to do going forward.  On the one hand, the parties may agree that a new lease (at fair market value in a negotiated arms-length transaction) should be undertaken.  The term of the lease and its “costs” become a couple of the more important elements.  In some situations, the buyer may or may not want to buy the real estate immediately.  It may want an option to buy the real estate at some point.  It may want a right of first refusal to match any offer which the selling doctors may receive if and when they attempt to sell the real estate.  All of this needs to be talked out and negotiated and should be done as part of the whole process.

4. People sometimes forget the security deposit which the seller may have paid the landlord (in some cases many years earlier). I generally try to build into the documentation that the buyer will pay this amount back to the seller as part of the deal, since the buyer will receive the benefit of this going forward.

5. It is important that whatever terms are agreed to regarding the office space are legally compliant, including from fair market value perspectives.

5. EQUITY RETENTION/ROLLOVER.

1. In many of the transactions I see today, the sellers retain some equity either in the practice, the buyer or the buyers’ related entity or entities. Depending on how things are structured, sometimes this equity opportunity is in a Management Services Organization which “runs the show.”

2. The important thing here is to recognize that this is something that may be available in many opportunities being considered by physicians and dentists today. One must consider and evaluate the potential risks and rewards of either approach.

6. PRAGMATIC ISSUES.

1. There are several pragmatic points that I generally raise to my clients who are considering and/or negotiating transactions along the lines of what we are talking about here.

2. A lot of these sellers have been “the boss” for many years. The question then becomes whether he or she will be able to adapt and work for “a boss”?  If the answer to that is yes then the next question is can he or she work for “this boss”?  It can be very traumatic for some to become part of “Corporate America” after decades of “running the show.”  Some cannot wait to get rid of the headaches of management.  Some can never get comfortable having others telling them what to do.

3. Are the parties’ goals aligned? Too often, people get “married” even though they have very different expectations and goals.  This is why it is important to openly discuss what each is looking for out of any such arrangement.  This becomes very important.  Without it, one reduces the chances of a successful relationship.

4. Some of my clients are very interested in protecting their current personnel and what their roles may or may not be with the buyer if a transaction such as this were to take place. This relates to not only whether they may have a job opportunity with the buyer, but also what their remuneration, job description, locations of the work, and fringe benefits might be.

5. If one is joining a larger employer, it becomes more important than ever to be very clear as to exactly what locations of work the new employer may require of the physician or dentist.

6. Culture does matter. It may sound corny.  However, one should not discount how important this is.  It helps to work with people that you “like.”  It does not mean that you have to be the best friends in the world.  But, one’s philosophies and goals should be compatible for the best possible result and happiness to be attained.

7. One should put together a good and experienced advisory team when dealing with transactions such as this. This includes from the consideration and evaluation stages all the way up to finalization.  Often this team would be composed of an experienced health care attorney, health care consultant, and/or accountant.

Vasilios J. “Bill” Kalogredis has been advising physicians, dentists, and other health care professionals and their businesses for over 40 years.  He is Chairman of Lamb McErlane PC’s Health Law Department.  bkalogredis@lambmcerlane.com; phone, 610-701-4402; or fax, 610-692-6210.

This publication is for general information and should not be construed as legal advice on any subject matter.