What you need to consider before selling your practice

What to consider before selling your practice: ©NewAfrica - stock.adobe.com

The medical profession has seen significant consolidation in the marketplace over the last several years. This increasing trend has resulted in lucrative valuations and can provide multiple benefits of being part of a larger organization.

But a strategic transaction is not right for every group, as certain groups may decide that staying independent is the best course. Nevertheless, if a group decides to explore potential options, there are various matters that should be assessed and addressed as far in advance as possible in order to ensure that in the event it decides to transact, it is best-positioned with respect to tax-efficiency, legal structure, and various protections to avoid potential devaluation and pitfalls later in the transaction process.

Each of these areas is common in medical practice transactions, however, each practice may have unique issues depending on its corporate structure. Thus, physician groups should engage legal counsel, accountants, and other advisors who have strong experience in health care transactions to provide them meaningful and pragmatic advance planning tactics to best position the group for any future transaction.

Understand your strategic options. Before considering any kind of partnership or transaction, it's important that physician groups are well-informed about how different types of deals work—whether it's with private equity, hospitals, or other organizations. This includes understanding the benefits, drawbacks, risks, and ways to protect your practice. Experienced health care consultants and attorneys can often provide this education at little or no cost and help you understand the landscape in a straightforward, unbiased way.

Align on whether to explore. Once the group understands the basics of how these deals work, it’s essential to agree on whether it’s worth exploring further. For smaller groups (two to four physician owners), full consensus is ideal. For larger groups (five to 30+), “substantial consensus”—typically 80% or more—is recommended. This step is not about agreeing to sell. It's simply about deciding whether to explore potential opportunities and get a clearer sense of what a transaction might look like. If there isn’t enough alignment at this stage, it may not be worth the time and energy to pursue.

Discuss proceeds allocation early. If your group does choose to explore a transaction, it’s critical to agree ahead of time on how any future proceeds would be divided among the physician owners. This should also take into account your group’s legal and tax structure. While these conversations can be difficult, addressing them early helps avoid major disagreements down the road that could potentially derail a deal after significant work has already been done.

Legal/Tax Structure. In connection with reaching agreement on proceeds allocation, physician owners need to take into account the legal structure and tax status of their medical practice, which may impact whether they can achieve their desired method of splitting transaction proceeds. Whether the medical practice is a “C” or “S” corporation under IRS rules, or a limited liability company taxed as a partnership or corporation, will impact tax consequences of the transaction and how physician owners are able to allocate proceeds in the most tax-efficient manner.

The existing corporate agreements of many groups provide that proceeds of transactions be split in based on ownership percentage. If this is not consistent with the desired approach for allocating transaction proceeds, then groups need to explore as far in advance as possible how best to amend their corporate documents, restructure, or take other actions to achieve such desired objective.

Fixing “Red Flag” compliance issues. Your buyer/partner will conduct thorough due diligence on all aspects of your practice.Groups should assess whether there are any glaring compliance issues and promptly correct them as much in advance of a transaction as possible, to avoid negative impact on valuation.The following are some examples of material “red flag” diligence matters that can be easily fixed.

• Monthly exclusion checks. If your practice participates in Medicare, then none of your group’s employees or contractors (at all levels, even receptionists, janitors, etc.) can be excluded from such programs. If you do not perform monthly checks of public exclusion lists (directly or via a vendor), then you should start doing so and document each check.
• Stark/DHS compliance. Medicare has very strict rules for groups that provide “designated health services” (aka “DHS”, e.g., imaging, DME, physical therapy, drugs, etc.). Profits from DHS can be split amongst physicians only in certain manners. Further, patients receiving advanced imaging services must be provided certain advance written notices. Even if your practice has previously received legal advice on Stark law requirements, there have been changes in regulations and interpretations over time, and it is strongly recommended that you get a fresh, second opinion on these issues well in advance of a transaction.
• Compliance Policies. Physician groups should have an up-to-date compliance program which is actively implemented, and on which all of its staff are trained upon employment on an annual basis thereafter. If your practice does not have such a bona fide program in place, it should implement one immediately.
• Co-Pay Waivers. If your group routinely waives patient co-pays, stop this immediately, as this violates Medicare rules and can also present commercial payor exposure. Any decisions on waiving co-pays should be on the basis of documented financial need in each instance.
• HIPAA Compliance. Every group should have in place up-to-date HIPPA privacy and security policies, on which all staff members are trained upon employment and on an annual basis thereafter. This includes, for example, using updated patient forms and business associate agreements, laptops being password protected, and using up-to-date encryption.
• Credit balances. If your practice has old “credit balances” which are due to patients or payors, they should be refunded in advance of a transaction, as this could present violations of the laws of many states.
• Employee compliance. It is not uncommon for medical practices to misclassify staff (e.g., 1099 independent contractors vs. W-2 employees), not pay overtime as required by law, and not comply with family leave, disability and other employee protection laws. These matters should be assessed and addressed in advance of starting a process.

Owned real estate. If some of the group’s physicians own the real estate on which one or more of the practice’s offices are located, then there should be in place a commercially reasonable, arms-length, triple-net lease with fair market value terms. If there is a “friendly lease” in place with rent that is above or below market rates, this should be changed far in advance.

In conclusion, the issues and topics addressed here are common in many physician groups and arise in major transactions. Groups should engage legal counsel and other advisors who have strong experience in health care transactions to guide them on these issues well in advance of exploring potential strategic transaction options.

Gary Herschman, Esq., has been advising physicians on strategic positioning and major transactions for over 30 years and is the Co-Chair of the Health Care Transactions Group and a partner at the national healthcare firm of Baker Donelson. He represents dozens of physician groups in all specialties on growth strategies, strategic partnerships and sale transactions. Gary’s email is: [email protected]

Dana Jacoby is the Founder and President/CEO of Vector Medical Group, a strategic healthcare consulting firm that advises medical practices across the country on improving operations and profitability, value-based care, and the pros and cons of various different kinds of strategic transactions. Dana’s email is: [email protected].

Randall Lee, Esq., is a seasoned healthcare transactions attorney and partner at the national healthcare firm of Baker Donelson. He represents many physician groups and other healthcare providers in a wide variety of strategic transactions. Randall’s email is: [email protected].