Selling a medical practice can be a lucrative endeavor. One of the most important phases of any sale transaction is the due diligence process. During this phase, a potential buyer and their advisors have the opportunity to examine the seller’s books, records and files in great detail to ensure that the buyer is comfortable purchasing the practice. Due diligence usually involves an investigation of records and documents by attorneys and financial experts. Because of the people involved and the level of detail the potential buyer usually expects in the information they review, the process can be somewhat burdensome and, at times, disruptive to a practice’s daily operations, especially if a seller is not prepared for what the process may entail.
A medical practice owner can take a number of steps now to ensure the practice is attractive to a buyer in the future.
Corporate Records and Documents
It is essential for the practice to keep organized and up-to-date corporate records. These records include formation documents, such as certificates of organization or articles of incorporation; and organization documents, such as operating agreements, bylaws, meeting minutes and written consents.
A potential buyer will want to ensure a practice is ready and able to properly and legally conduct business the moment the transaction closes. A potential buyer will also want to determine what is required to consummate a sale. For example, if multiple shareholders own a practice and the organization documents require unanimous approval, a seller will need to take certain steps to obtain proper authorization. This may take time and can alter the timeline to closing, so the seller should review the corporate documents before the onset of a transaction to understand what is necessary to sell the practice.
Licenses and Permits
Licenses and permits are crucial in any healthcare practice, and determining how to handle the transfer of these licenses and permits can be time consuming and costly. To help expedite a potential sale process, the seller should have all licenses and permits organized, readily accessible and current.
A potential buyer will want to ensure that a practice is ready and able to properly and legally conduct business the moment the transaction closes.
One of the biggest issues in a potential healthcare transaction arises when the seller has not complied with all regulations. A potential buyer may not want to expose themselves to liabilities surrounding outstanding and unresolved regulatory issues. Therefore, to make the seller’s practice as valuable as it can be, the practice must comply with both state and federal laws. This includes complying with billing and coding requirements, HIPAA laws (both at the state and federal levels), data privacy and security regulations, and all licensure and accreditation rules and requirements.
To ensure compliance, a seller may consider auditing the practice internally or contracting with a third-party auditor who can identify any problems and issues with the organization’s policies and procedures, practices and day-to-day operations.
One of the most onerous phases of due diligence for a buyer is the agreement analysis. A potential buyer will want to see all material agreements the seller is party to in order to determine various pieces of information, such as whether the agreements can be assigned or transferred. A contract review may seem straightforward in theory, but in practice it can become quite difficult, especially if the selling practice does not keep good records. To make this process as seamless as possible, a potential seller should keep copies of agreements in a readily available place, monitor agreements on a monthly basis and make sure that all agreements are valid and current.
A seller can disclose certain information to a buyer in a disclosure schedule, which is specific to each transaction. Each purchase document asks for different information depending on the deal structure, business terms and the representations made by the seller in the purchase documents. However, some common pieces of information are quite often included in the disclosure schedules, including lists of patients and suppliers, permits,
licenses and material agreements, as well as information regarding any noncompliance issues and finances. Having a handle on this type of information preemptively will help make the disclosure schedule process easier, which will, in turn, help reduce legal costs.
Although there will likely be some aspects of due diligence that cannot be anticipated, having a good understanding of the process will make due diligence more efficient and productive. The key to any due diligence is organization. As a potential seller, it is vital to be organized during a transaction. However, it is equally important to be prepared before a transaction begins, because this can help expedite the transaction process and result in a less expensive, faster and better end result for both the buying and selling parties.
Steven M. Harris, Esq., is a nationally recognized healthcare attorney and a member of the law firm McDonald Hopkins LLC. Contact him via email at email@example.com.