By: Len Garza, Esq.
As a physician looking towards career growth, purchasing a practice can be a wonderful investment and likely the most important purchase in your lifetime.
Physicians looking to buy an existing practice approach the purchase with different motivations and expectations. In buying a practice, you want to be able to step into a robust practice rather than a flailing one and to avoid building one from scratch.
Whatever your reasons, do not let emotions get in the way of thorough evaluation and careful decision-making. Rushing in can take you down a disastrous path.
Proceed with your eyes wide open. This, combined with the guidance of experienced healthcare legal and tax advisors, will help you along the path of a lucrative and fulfilling medical career and a welcome windfall when you retire.
For starters, do some soul-searching. Ask yourself critical questions that will save you time and money and give you clarity in your objectives. The answers will help dictate the nature and location of the practice you are seeking and position you as a confident, serious buyer as opposed to a less-focused, wishy-washy prospect.
For example, what does your ideal opportunity look like?
Do you want to immediately take charge, or would you prefer a mentor-mentee relationship with the existing practitioner?
Are you looking for a small healthcare practice which is typically owned by one or more of the physicians in the practice? These practices are typically organized as professional corporations (PCs), professional associations (PAs), professional limited liability companies (PLLCs), or other type of entity approved for such medical professionals depending on state law.
PCs and often PLLCs are generally considered corporations for legal and tax purposes, and the owners are technically referred to as “shareholders.” Colloquially, however, owners of a medical practice often refer to themselves as “partners.”
2. Due Diligence: Make It Thorough
Once you have clearly identified your personal preferences and have your eye on some specific targets, it will be time for you to exercise thorough due diligence in legal, financial, and practical areas.
3. What is the Practice Worth?
Valuation comprises the worth of the hard assets, the accounts receivables, other intangibles, and goodwill. There are three primary methods used in business valuation: asset, income, and market methods. A hybrid approach, called excess earnings, is also often used.
Many physicians are tempted to use a rule of thumb approach to value a practice, but proceed with caution as such an informal evaluation may risk being woefully inadequate and may grossly over- or under-value the practice. Instead, it is strongly recommended to have a licensed appraiser perform a formal valuation so both you and the seller are working with an accurate number. Although professional valuations can be expensive, the cost is small compared to the cost of getting it wrong and either you or the seller leaving money on the table or facing any scrutiny under anti-kickback laws.
4. Buy-In Timetable Can Vary
The timetable for buying into a practice varies: full ownership at the outset or a buy-in over time in which the seller is paid in installments based on the cash flow of the practice. This is called an earn-out.
Some buyers or solo practitioners often have less capital to buy-in to a practice all at once. There are multiple ways a practice purchase could be structured to occur over time, limited only by the creativity of the parties and their advisors. For a rather straightforward example, if a buy-in were to take place over the course of five years, the purchasing physician could pay one-fifth of the total purchase price every year and incrementally purchase her partnership in the practice or, depending on the agreement, completely buy-out the selling physician’s interest in the practice. Conversely, a practice might grant the physician looking to buy-in a full ownership interest at the outset, and still treat the buy-in like a loan being paid off over time.
Physicians can also buy a practice with “sweat equity” and work for a physician who is looking to retire and transition his business to another physician. In this case, you typically have the right to take on patients in the existing practice while learning how the practice operates. This can allow you to gain the trust of the patients and the community. With this type of transition plan, the buying doctor can negotiate payment over a specified term during which the retiring physician leaves the practice.
5. Written Agreements … Don’t Go In Without Them
With all the variables in terms and conditions in play, it is absolutely critical to have the transaction documented in writing, because there are any number of pitfalls along the way that can harm both parties. If there is no documentation, both parties face significant risks and uncertainty. Written agreements are also often required by applicable healthcare laws.
For example, what if the senior physician owners in the practice get cold feet and decide they don’t want to sell to you after all? Or what if they want to alter the terms of the buy-in? Also, what if you are unable to get sufficient financing or you default on a payment? Similarly, what if the parties rush into a binding agreement without any kind of trial period, and you discover that one of the senior physician practice owners is disagreeable, unethical, incompetent or an otherwise bad fit? Without adequate provisions in the contract, you may find yourself locked into the agreement with no way out.
6. Exit Plans: Know How to Get Out Before You Get In
Before you buy-in, you need to understand how to get out. Can you leave the practice and under what circumstances? Are you entitled to a buy-out or repayment of the capital you invested in the practice?
In a professional corporation or association, these terms are typically detailed in a shareholder agreement. In a PLLC, a well-written operating agreement would spell out these terms. In any event, well-drafted contract language should set forth clear procedures for a physician owner to separate from the practice in an orderly and predictable way.
Typical events of a physician owner leaving a practice can include employment termination, retirement, death, or long-term disability. Procedures for valuing the exiting-partner’s ownership are also essential to include in the agreement. Restrictive covenants prohibiting the separating physician from competing with what will now be your practice are also standard provisions.
7. Structuring the Transaction – Asset-Purchase or Stock-Sale?
Typically, the answer to that question is determined by which side of the table you are on and what you are looking to achieve by closing the transaction.
Generally, sellers prefer stock sales. When a seller sells the stock, all the liabilities that attach to the stock generally pass with the stock to the new owner. Liabilities can include contractual liabilities arising from anything from a loan agreement to a purchase contract, tax liabilities, and fraud and abuse claims by the government and insurance carriers.
It is wise to have an experienced healthcare CPA weigh in on tax management issues regarding the choice of an asset or stock purchase and a beneficial purchase price that passes muster with the IRS. Stock sales tend to be more tax advantageous to sellers who will be taxed at a more favorable capital gains tax rate. (An asset sale may be realized as income and highly taxed if the purchase price is not properly allocated.)
Stock sales can pose a risk to buyers.One of the prime risks being the fact that despite your exhaustive due diligence, some liabilities only the seller would know about may still exist.
8. Still, Pros and Cons
Buyers generally prefer to purchase only the assets of the practice. In an asset purchase, the buyer can specify which assets to purchase and which liabilities to assume, if any. It is crucial to have an experienced healthcare attorney identify and scrutinize the seller’s material contracts, together with any of the seller’s liabilities for unpaid federal, state and local taxes, among other liabilities.
Still, stock sales can work to your advantage in absorbing contracts. Notwithstanding the above, you may prefer a stock purchase because of the seller’s existing contractual agreements with insurers, Medicare, and other payors. In a stock sale, these contractual agreements transfer with the stock to the buyer, allowing you to become a provider under the managed care contracts that you might not otherwise have been able to secure without applying for credentialing. That credentialing process can take a long time. Six months or more is not uncommon.
When the medical practice does change ownership, you are required to give proper notification to Medicare, Medicaid, and other payors. You must also understand the current practice billing codes and submission procedures. Improper claim submission could result in a violation of the federal False Claims Act or a state false claims laws, among others.
9. Do Not Forget Patients and Employees
Patients are required to be informed of the sale in a timely manner. Patients must also be informed about their right to access and manage their medical records, including transferring them to another practice. Typically, that transfer requires an authorization that meets HIPAA standards.
Similarly,the current staff must be properly informed of the sale.Expectations should be set surrounding their employment or contractual continuity when the medical practice ownership changes hands.
At The Nan Gallagher Law Group, we know all the intricacies involved with a medical practice buy-in. We are committed to safeguarding your best interests by, conducting thorough due diligence, partnering with CPAs and financial advisors to analyze your specific situation, and guide you in the best course of action.
Call us at 973.998.8494 and be confident about your investment, knowing you are taking all the necessary steps to make this important purchase and further a rewarding and successful medical career.