What Otolaryngologists Should Consider Before Merging Their Practices

The second option involves Practice A and Practice B merging into a new entity formed for the purpose of the merger (let’s call this new entity Anytown Medical Institute). In this scenario, Practice A and Practice B each retain their own liabilities. The owners of Practice A and Practice B then transfer or lease the assets to the new entity, Anytown Medical Institute. The attractiveness of this option is that it provides a cleaner break between the old and the new in terms of past reimbursements, malpractice, and so forth. With this approach, the owners of Practice A are less concerned with the contingent claims of Practice B (and vice versa), such as tax issues, employment-related claims, and payer audits. While there are advantages from a liability standpoint, and the new entity offers both practices a “fresh start,” the creation of a new entity may create additional planning and cash flow considerations. For example, provider numbers will need to be obtained for the new entity, possibly causing initial cash flow delays. As is usually the case, the risks and benefits of each strategy must be analyzed before the partners agree on an approach.

Governance

Post-merger governance is an important issue that should be established pre-merger. Who will make the key decisions on behalf of the post-merger practice? Will there be decision-making committees (e.g., board of directors, executive board), with seats filled by an equal number of physicians from Practice A and Practice B? How much post-merger autonomy will each physician have?

Noncompetition and Buy-Out Provisions

In general, either all or none of the parties to a merger should be subject to a noncompetition clause. Absent extraordinary circumstances, it would not be fair for physicians from one practice to be subject to a noncompetition clause if physicians from the other practice are not. A less restrictive alternative to a noncompetition clause is a limitation on future buy-outs. The departing physician may have the right to leave and compete—at the disincentive of a reduced buy-out price to the departing physician. This type of restriction acts as an incentive for physicians to remain with the merged practice.

Initial Exit Plans

Parties sometimes want a “bail out” clause, which permits a merging party to reverse or “unwind” the transaction within an initial period of time—typically no more than 18 months—if a party feels that the merger is not working out as intended. This helps place both groups as close to their pre-merger state as possible. Remember, after the merger closes, there will likely be assets that have been acquired as well as duplicative assets that have been discarded. A bail out clause should address these matters by allocating assets fairly between the parties in the event of a “de-merger.”