Selling to a corporation poses challenges

April 25, 2011

Selling a medical practice to another physician or partnership in advance of retirement can be a thorny and emotionally trying undertaking.

Key Points

Selling a medical practice to another physician or partnership in advance of retirement can be a thorny and emotionally trying undertaking. Selling a practice to a healthcare corporation, however, can be an even more complicated transaction, fraught with financial and emotional risks, precisely because the contract involves both selling a practice and establishing employment with the corporation. If you find yourself in this situation, take these presale cautionary steps to ensure against certain pitfalls and exponentially increase the likelihood that the final agreement provides the terms you think it provides.

THE NEW FACTS OF LIFE

Cascading paperwork, slow reimbursement, increased hours, less respect, rapidly increasing malpractice insurance payments, unrealistic demands, higher expectations by patients, greater stress, and less satisfaction. For many physicians in the United States, these conditions now are facts of life and are leading them to put their practices up for sale.

Those selling their practices look to gain the safety and stability of employment with a large company while lessening their exposure to the aforementioned issues now inherent in today's healthcare system.

The corporation, on the other hand, wants to expand and capture market share. The larger the company's market share, the stronger position it has to negotiate deals it considers more favorable.

By selling your practice and signing an employment contract with a company, you may expect a win-win-that is, a mutually beneficial-situation. But mutual benefit is not always what occurs, and when it does not, invariably it is not the company that is the loser.

AN OBJECT LESSON

Here's a case in point. A start-up company with a new medical treatment became a publicly traded corporation. The company's top managers were not physicians; they were finance and business experts familiar with the ways of Wall Street.

To meet the corporation's goals and Wall Street expectations, the company used stock sale proceeds to aggressively market itself to doctors and buy established physician practices around the country. It quickly captured market share, exponentially raised the number of patients by the practices it owned, and developed substantial revenue streams.

The physicians who sold their practices thought that selling would be a win-win situation for them and for the corporation. As marketed to them, the company would handle the business aspects of owning a medical practice-the ubiquitous paperwork, employee issues, and all the rest of the nonclinical tasks so distasteful to doctors. The physicians would spend all their work time practicing medicine using the latest technology. Benefiting from the company's promotions to the public, they would see an increase in their patient base. They would receive a base salary and, most significantly, a percentage of the profits of their practice. They also would participate in any Wall Street windfall. As employees, they would take part in the company's stock plans; indeed, in selling their practices, many chose to take payment in stock. The company, in turn, would gain market share.

For these doctors, everything proceeded as planned during the first year of operation after the sale. Predictably, they had to make some adjustments inherent in working for a corporation, but the physicians did see their practices expand. Most of the doctors doubled-and some even quadrupled-the number of patients they treated.

Everything was great until the end of the first year. The physicians expected large payments from their practices' increased profits, but the large bonuses never came. In negotiating the sale of the practices and the employee contracts, the doctors had not required the company to specify in writing what expenses the corporation would charge an individual practice and what accounting rules would be followed. So the corporation charged the practices for marketing, accounting, human resources, financing, and other services, wiping out the profits of each practice. The corporation recorded practice income not on a practice's income statement but on the company's income statement. According to the corporation, the individual practices had little or no profit.

In negotiating with the physicians, the corporation knew exactly what it was doing. The contracts specified in precise terms the physicians' responsibilities, noncompete provisions, confidentiality, dispute resolution, and the like. But although the contracts stated the corporation's initial responsibilities-mainly making payment on the negotiated purchase price-it phrased the company's other obligations in remarkably vague terms or, astonishingly, did not specify them at all. The company was to make its "best efforts" to accomplish certain goals, but the contract left the phrase "best efforts" undefined. The phrase turned out to be quite malleable. The company's other responsibilities were to be determined at a later, unspecified time.

The company's best efforts always turned out to be whatever efforts it chose to make. When the time arrived to determine the corporation's unspecified other responsibilities, the determination always favored the corporation to the detriment of the doctor.