Selling Your Practice
I Want Out. Thinking About Selling Your Practice? Some Thoughts To Consider
“We gotta get out of this place…there’s a better life for me and you.” - The Animals (1965)
Physician owners of medical practices may consider selling for a variety of reasons. Some owners may be nearing retirement. Others may be seeking outside business opportunities. Some owners may simply want to rid themselves of the headaches related to owning a business, especially post COVID. Whatever the reason, providers should weigh the advantages and disadvantages of selling their practices before doing so. We'd like to offer some practical points for you to consider.
Formal Valuations: Are They Necessary And Worth The Expense?
If you feel confident in a potential buyer (maybe you have one identified), it may be worthwhile to consult with a third-party appraiser who will determine the fair market value (“FMV”) of the practice. A seller must understand what is and what is not being sold in order to secure the best possible deal. Is the seller selling both tangible and intangible assets (an asset sale)? How is the value of these assets calculated? Is the seller solely relying on the buyer’s evaluation? Is the buyer agreeing to assume the debts, obligations or liabilities in exchange for a lower purchase price (a stock sale)? Does the “good will” of the practice have a value? These are important questions to consider before signing any agreement. A valuation report is something that an owner can show to a potential buyer. A written valuation report does not mean that a buyer cannot dispute the value. The analysis as to whether to obtain a formal valuation will likely include the cost of the valuation. Cost can range in the thousands of dollars depending upon the size of the practice and the experience and firm doing the valuation. Hospitals and health systems routinely obtain valuations of practices that they want to purchase to document “fair market value.” It may be best if selling to a hospital to allow the hospital to produce the report and use your own expert to agree or refute the findings.
Continued Employment For The Seller Can Be An Option
If the seller is retiring, he or she may not be interested in future employment with the buyer. However, it is not uncommon for a buyer to insist that the seller stay on after the sale of a practice to help transition patients to the new owner. If the seller desires to be employed by the buyer, here are some additional aspects the seller should consider:
Term. Before signing an employment agreement with the buyer, the seller should ensure he or she is comfortable with the duration of the term. Is it too long or too short? Is the term long enough to justify selling the practice?
Termination without Cause. Does the Employment Agreement include a termination without cause provision? Is the new owner prohibited from terminating the agreement without cause during the Term? The last thing a seller wants to find out after signing an Employment Agreement is that the owner may terminate the agreement at any time for any reason, especially if the seller sold his or her practice and relied on the fact that he or she would be employed by the buyer for a certain period of time.
Ability to Revert to Original Ownership. Can the seller buy back the practice in the event that the employment relationship with the buyer does not work out as envisioned? This can be done if the parties agree; however, these provisions must be carefully crafted in the written agreements.
What Does The Paperwork Involve?
Generally, sales begin with a Term Sheet that specifies the main points of the sale, such as which assets will be sold and for what amount. After agreement on Terms, a Purchase (or Sale) Agreement needs to be created and agreed upon. The transaction should be in writing and should be reviewed by an attorney with experience in practice transactions.
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