Selling Your Health Care Practice? Consider Timing and Effort Before Saying “Yes”
For a number of reasons, the calendar is among the most effective tools for advancing a transaction from “potential transaction” to a “closed transaction,” and that holds particularly true in the final months of the year. For instance, the end of one year and the beginning of another creates a clean breakpoint for ownership, operational and financial implications, and allows a fresh start for a new owner.
After a buyer has been identified, a complex task in its own right, when considering whether to commit to selling a health care practice (or other health care business) before or at the end of the year, it is important to evaluate not only the deal terms, but also the business being sold and whether adequate preparations have been made for a sale.
Deciding to sell a practice involves a number of considerations that can be broken down into the following categories:
- Timing Considerations – Oftentimes, despite the greatest of efforts by a seller and buyer, transactions cannot close before the end of the year due to timing constraints created by regulatory requirements, payor contract requirements or other logistical considerations. For instance, many states, such as Pennsylvania, impose notice requirements in the event of a change of ownership (or CHOW), of a licensed health care facility. Similarly, and as mentioned below, a seller must consider whether the time is right to sell on a personal level. For instance, unless a practitioner-seller is ready to retire after completing the sale, the seller needs to be comfortable with the terms of the post-sale employment agreement or consulting agreement entered into with the purchaser – a customary part of a proposed deal. Is the term of the employment agreement with the purchaser of a duration agreeable to seller? If not, the seller must carefully consider the implications of customary restrictive covenants that severely limit available opportunities outside of employment with the purchaser.
- Readiness Considerations – A practitioner or medical facility owner should consider an internal check of various records and risk areas before negotiating and agreeing to a sale of the business. Particularly, a seller should:
- Confirm that its corporate or organizational records are compiled and, to the extent practical, up to date;
- Check with accountants to confirm that taxes have been paid timely;
- Create a list of all potential risk areas including audits, potential overpayment concerns, as well as insurance (or underinsurance) risks under professional liability or employment policies, involving the Center for Medicare & Medicaid Services, public and private payors, and other regulatory authorities,
- Review documents and balances associated with all outstanding financing; and
- Contact, on at least a consultative basis, professional advisors such as lawyers and accountants to help guide the sale process to the extent necessary.
Failure to adequately prepare a practice for sale can cause delays in the sale process and impede a timely closing. In addition, unaddressed areas of risk provide buyers with a strong argument for potentially obligating the seller to a higher level of indemnification in a sales agreement, reducing the purchase price, and/or shifting all of the risk of particular issues to the seller – all negative outcomes for a seller.
- Business Considerations – While the above considerations as well as others may play important roles in a seller’s decision, the business terms of a transaction are usually paramount. After the seller and potential purchaser agree to a proposed transaction structure (i.e., an asset sale or equity sale, both of which have benefits and drawbacks, especially regarding tax implications such as allocation of good will) and a purchase price for a practice or other health care business, the seller should have an accountant or financial advisor perform an analysis including debt payoffs and tax consequences so there is a clear picture of the take-home dollar amount – a figure that is often far lower than sellers expect! Further, sellers must be particularly mindful of restrictive covenants that are customary in sale transactions that limit the seller’s ability to engage in certain business enterprises after closing. For instance, a proposed covenant not to compete could prohibit a physician from serving as an instructor at a medical teaching facility. This would be very problematic for a seller who wants to pursue a career wind-down in education following retirement. Moreover, sellers of a health care business may be prohibited from investing in, even passively, certain other health care businesses for a period of years after the sale.
While there may be several reasons that make good sense to try to close a potential sale transaction before the end of the year, if a seller has not undertaken and considered pre-sale preparations, complications could arise that may ultimately delay closing the sale. Therefore, it is advisable to consider whether a practice or health care business has been properly situated for a sale before investing substantial time, effort and expense in a less than ideal sale process.