Medical practice purchase agreements can be complicated. The purpose of this post is to give you a sense of some of the issues you will run into.
One of the first things you have to do is make sure that everything that was agreed to in the letter of intent is included in the final agreement.
In addition, because of the nature of many small practices, it is not unusual to find that personal property in the practice is owned by the physician. In many instances, even if the practice holds title to the asset, the physician still views it as his or hers. For example, laptops and artwork are often “not for sale”, even if the practice paid for them. Developing a listing of what is being sold can be a challenge. Often this is done as a room by room inventory.
Negotiation over assigned contracts can become a major issue. Unfortunately, some physicians sign the document that was presented to them as the “standard contract” by the vendor. Accordingly, practices are often signatories to long-term commitments with no termination provisions.
One common issue is electronic medical record agreements. If the health system is implementing one electronic records system, it is extremely unlikely it will want to accept assignment of a long-term commitment for a different electronic records system. At the same time, the physicians certainly do not want to continue paying for an EMR system out of their own pockets after selling the practice. I have been able to convince EMR companies to terminate the agreement at some point in the future (after the information has been transferred to the hospital’s EMR), and convinced the hospital to pay for the EMR during that time. It’s rarely an easy negotiation, though.
Developing a list of on-going expenses that the health system is willing to accept can be a challenge. In addition, the list of excluded assets (what the practice keeps) and excluded liabilities (obligations the hospital will not assume) can become the subject of extensive negotiation.
Although it isn’t something most physicians want to spend their time on, the physicians must read and consider the representations and warranties in the agreement. Even though you may view these provisions as mindless insignificant legalese, these provisions in the agreement can produce significant liabilities if they are not accurate. In particular, physicians may be unaware of any liens on their assets, including liens on hard assets included in bank documents for lines of credit or other loans. If you represent that there are no liens, the hospital can seek indemnification (see below) when the liens are discovered.
Covenants not to compete are very likely to be included in the asset purchase agreement as well as the employment agreement. These covenants should be the same, so you don’t inadvertently agree to a longer or more geographically expansive covenant in one of the documents.
Indemnification provisions have to be the subject of negotiation. Many health systems want unlimited, “first dollar” perpetual indemnification. Your lawyer will attempt to limit the survival of these indemnifications (i,e, how long you are on the hook), limit the amount of the indemnifications (at a minimum, to assure that the indemnification commitment will not exceed the purchase price) and insert a materiality provision to prevent “nickel and diming” from the health system (e.g., if it develops that a few dollars’ worth of supplies were not present at closing, you don’t have to cut a check for a few bucks). Various compromises are possible in this regard, from limiting the overall amount of the indemnification requirement to developing “baskets” of various potential liabilities so that, for example, an undiscovered tax lien will not require repayment in excess of the value of the underlying fixed assets.
Selling your medical practice is a huge decision on your part. This is a major transaction, that requires your careful attention, and involvement by an experienced physicians’ lawyer.
You may also be interested in my posts about negotiating physician employment agreements, letters of intent, selling your medical practice, and physician compensation after the sale of a medical practice.