What physicians need to know when negotiating a medical practice sale or merger

September 10, 2013

Experts identify the top factors physicians should consider when negotiating a practice sale or merger.

Among the major challenges posed by the Affordable Care Act, there’s an undeniable trend: Practice owners are looking to sell or merge with other organizations as a means to adapt and thrive in today’s healthcare environment. However, it can take years to identify the partners and circumstances that best meet
your practice’s needs.

According to a July 2013 report from Wolters Kluwer Health, 34% of primary care, family medicine, and internal medicine physicians said that over the next 3 to 5 years they would be “exploring different business models,” which could include “mergers [or] becoming part of a hospital system.”

For practitioners who are part of this statistic, there is far more work involved beyond deciding if alignment or consolidation is the right choice.

“This is not the kind of thing you can do on the fly,” says Kenneth T. Hertz, FACMPE, a principal consultant with the Medical Group Management Association. “There are so many details and so much complexity involved that unless you take the time to put together a comprehensive checklist and check it twice, you’re going to run into problems. It’s virtually guaranteed,” he says.

Start planning before talking to partners

With so much legwork to be done, practices can put themselves at an advantage by thinking about their alignment strategy even before finding a specific partner, Hertz says.

To start with, your practice needs to identify what its goals are in joining another, potentially larger, organization. “This means deciding what you’re trying to achieve, what the deal breakers are to you, and understanding your practice and what you’re looking for in a partner,” he says.

In addition, you can use this preplanning phase to prepare for the due diligence process that will start once you begin discussions with a potential buyer or partner. For example, how current is your list of assets? Do you have documentation for your software and hardware? Can you easily access information about malpractice suits and insurance coverage?

Gain trust with full transparency

Once you identify a potential partner and begin talks, one of the keys to gaining the other party’s trust is to be as open and transparent with information about your organization as possible says Tejas Mehta, MD, who took over his father’s primary care practice, Mehta Medical Group in Humble, Texas, 15 months ago.

As part of his growth strategy for the business, Mehta merged with a nearby solo physician in March 2013. However, prior to the actual merger both practices engaged in talks for more than 4 years, Mehta says.

The biggest challenge to making the deal finally happen, according to Mehta, was gaining the other physician’s trust. “This guy was an independent physician, but even groups are leery of joining somebody else,” he says. “There are a lot of docs out there, unfortunately, who sort of gloss over the numbers. There’s a lot of opacity in the structure of the company and the finances of the company, so at the end of the day, there’s very little faith to push the company or those working for him.”

To prove that he would make a trustworthy and valuable partner, Mehta promised the other practitioner upfront full transparency of numbers and operations, as well as assuring him that he would be treated the same as the other primary care physicians in the group.

“And I think that helped sell him,” Mehta says, adding that the materials he provided also proved to the other doctor that he would be coming into an organization that was professional and well- run.

“I’ve got the appropriate managers in place and we pay attention to our finances; we watch every single penny,” he says. “At the end of the day, they [potential partners] need to know that they’re coming to an organization that’s accountable to them as the group moves forward.”

While also advocating for honesty and transparency, healthcare attorney Bill Kalogredis, JD, CHBC, of Kalogredis, Sansweet, Dearden and Burke, Ltd., in Wayne, Pennsylvania, warns that both parties should sign confidentiality agreements before opening their books to each other (which Mehta did).

Kalogredis recommends that the parties agree not to tell anyone that they are talking, and that they will return all documentation to each other should the deal not go through. “The one thing you don’t want to have happen, especially if you’re a practice that is looking to sell or merge with a bigger group, hospital, or hospital system, is that you don’t want them to take advantage of what they learned about your practice,” he says.

Common discussion points

Once both parties’ information is on the table and there is a shared interest in moving forward, there are still numerous potential sticking points the buyer and seller or merging entities will need to work through.

This is the current task before Richard Morgan, administrator of Augusta GYN, P.C., in Augusta, Georgia, whose group is in the early stages of exploring a merger with a nearby practice.

At this point, he is confident that, “the personalities and blending of the practices really shouldn’t be a problem,” Morgan says. “It’s just some of the hot topic items we have to work out.”  These topics will vary by practice, but some common discussion points may include:

  • Governance-Who will have decision-making authority? What will be the new group’s track to partnership?

  • Distribution of earnings and expenses-Will previous arrangements made for one group’s part-time doctors be honored? How will fixed and variable expenses be allocated? How might physicians’ compensation formulas change?

  • Electronic health records-If the two entities are using different systems, will one migrate to the other, or will they adopt another system altogether?

  • Staffing-Will each practice’s administrator still have a role? How will absences, such as maternity leave, be handled? Will employees with overlapping responsibilities be let go or transferred to different positions? How will employees’ benefits, payroll, and policies be affected? What information about the transaction will be shared with staff and when?

  • Physical location-Will either or both parties be moving locations? Will a new owner have the right to move physicians to practice in another location after the sale?

Primary care practices in particular should discuss with potential partners their concerns and expectations regarding patient access, volume, and physician workloads, says Hertz. “Those are going to be the big issues because there’s going to be this kind of tsunami [with healthcare reform]. The question is whether there is a thoughtful plan for the practice in terms of how to address that.”

Make agreements as clear as possible

Even when the parties are extremely careful to address the myriad implications of a sale or merger, practitioners should be sure to read over their final contract or employment agreement thoroughly before signing, warns Owen Dahl, MBA, FACHE, a consultant based in The Woodlands, Texas.

“More often than not I find a few changes in that final agreement,” he says. “So I would suggest that with the last final agreement, don’t assume that all the terms are the same as you discussed. Make sure you read with a fine tooth comb because that’s where the surprises are.”

When it comes to negotiating contracts in general, be especially mindful of avoiding provisions that are vague or subject to later  interpretation, Kalogredis adds.

“The biggest advice I can give is to clearly define what the deal is,” Kalogredis says. “I don’t like vagueness from either side if I can help it. Nobody’s going to come up with the perfect document every time, but you try to at least address the issues. And by addressing the issues, you’re at least saying, ‘Yes, I agree’ or ‘No, I don’t.’” 

Next Issue:

Looking to buy? Check out our next issue for tips from our experts on how to identify and acquire practices if you are in the market to buy.

More Resources:

Selling your practice? Planning is crucialSelling a solo practice