October 2024 Legal Intelligencer article by Lamb McErlane Health Law attorneys Vasilios Kalogredis and Sonal Parekh.

No matter the region, medical and dental practice sales are common and take place for a myriad of reasons in a manner that best suits the selling practitioner’s goals and objectives. Often, physicians sell their practices to hospitals, healthcare systems, private equity, practice management companies and similar organizations and continue to practice as an employee of the acquirer thereafter. Another option considered by many practitioners is to become part of a larger, independent medical group through a merger where the medical practice is controlled and owned by physicians. Practitioners also engage in practice sales for the purpose of succession planning and preparing for retirement where the practitioners choose to sell their practices to another younger solo-practitioner who then employs the senior practitioner on a wind-down basis until retirement. Understanding the reasons for and goals to be accomplished by a transaction can help an advisor to a doctor narrow down which transaction structure (e.g., merger or sale/acquisition (collectively “Practice Transaction”)) would be in the best interests of one’s client.

One thing to be cognizant of for solo practitioner and small group practice clients is the lack of protection in the event of death, illness, disability or retirement. In too many cases, physicians become absent for extended periods due to disability and, in some cases, they pass away without a clear plan of practice transitioning in place. In these circumstances, their practices were often decimated from greatly reduced volume and economic standpoints, shifting from being an asset to becoming a liability.

Taking the time to develop proper forethought, negotiated documentation, and proper plans in place builds in protections for practitioners against a “distress sale,” which greatly reduces the chances for a reasonable buyout on a “short notice” sale. These plans also help to maintain a strong reputation for the practice while maintaining its patient base and intangible value.

Mergers

A common trend we see is when solo practitioners or smaller practices merge with others to provide the cash flow protection and manpower coverage to allow the practice to be best “maintained”. It also provides for an automatic buyer upon death, disability, or retirement. When properly analyzed, organized, and executed, a merger may strengthen the physicians’ negotiating position with hospitals, employers, third-party payers, suppliers, and other vendors. Depending on the size, revenue and importance of a practice in a particular community, some payers may even be willing to provide better reimbursement. The opportunity of having more practitioners involved provides for increased financial resources which can translate into a number of advantages including, but not limited to: new purchases of major medical or dental equipment; added ancillary services; more sophisticated information technology; recruitment of higher-level lay management staff; additional doctors, specialists, ancillary personnel and physician extenders; group purchasing; increased marketing capabilities; and the ability to more readily add space, offices or hospital locations.

Likewise, a merger between two solo practitioners in a community can provide enough resources to enable them to jointly hire a third doctor for a newly formed entity and expand their practice beyond what each practitioner would have been able to do individually. This is something we have seen more of in suburban and rural areas.

Sales and Acquisitions

We most commonly see practice sales due to a practitioner wanting to transition towards retirement. A practice sale that outlines a clear succession plan allows an older or retiring practitioner to sell to a younger practitioner looking to expand his or her patient base. This facilitates a smoother transition where the selling practitioner sells before the practice diminishes, continues to serve the patients who knew him, and helps to integrate the patients into the acquiring so patients are likely to stay with the practice after the selling practitioner leaves.

Practice Transactions in General

It is important to understand and explain to the client what control and autonomy the client will retain post-transaction. Further, it is essential to keep in mind and keep in the client’s mind that each practitioner involved in a Practice Transaction may have very different reasons for entering into a Practice Transaction. They may be at different stages of their professional careers or have different goals regarding what they wish to accomplish in their professional lives going forward. Such differences may lead to serious and significant disagreements when it comes to specific terms and aspects of the practice (e.g., type of patients, hours worked, capital contributions, and compensation and profit sharing). Compatibility extends beyond simply practicing the relevant profession together. It is essential that a client understand that just because two practitioners may get along while providing professional services, does not mean they are necessarily compatible relative to a Practice Transaction and transfer of ownership/co-ownership of a practice. A Practice Transaction should not be rushed into.

Conclusion

As an attorney/advisor, one should look at things from both sides in order to determine what strategic vision would be in the best interests of the parties involved. The practical, economic, tax, personal and professional ramifications of each Practice Transaction type should be carefully considered. It is crucial that all terms and details of the Practice Transaction are expressly laid out to ensure there is no future confusion or disagreement.

As part of our Healthcare Practice at Lamb McErlane, we advise our clients on the pros, cons and key considerations of each Practice Transaction option to enable our clients to choose the option that best aligns with their professional vision and desires. Once all factors are considered, we assist our clients in turning that professional vision into reality, legally and pragmatically.

If you are considering whether or not to enter into a Practice Transaction, feel free to contact Vasilios J. Kalogredis, Esq. at bkalogredis@lambmcerlane.com or 610-701-4402 or Sonal Parekh, Esq. at sparekh@lambmcerlane.com or 610-701-4416.

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Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory and transactional matters for 50 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.

Sonal Parekh, Esq., who contributed to this article, is a practicing attorney at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers, and is a pharmacist by education and training. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.

*This alert is for educational purposes only and is not intended to be legal advice. Should you require legal advice on this topic, any health care matter, or have any questions or concerns, please contact Vasilios J. (Bill) Kalogredis, Esq. or Sonal Parekh, Esq.

Read the article online on Law.com here.