Second to buying a home, purchasing a medical practice the most expensive acquisition you will make. In some aspects, purchasing a medical practice can be more important than purchasing a home. This is your professional livelihood and it can be significantly affected if you pay too much for the practice or if you do not fully understand the practice you’re purchasing. When done properly, the purchase of a medical practice can be a wonderful investment that will provide you with a steady stream of income for years to come. Now there are several key considerations that any potential purchaser should know prior to purchasing a practice from the seller.
Knowledge is key
You need to make sure that you know as much about the existing medical practice as the selling physician(s). If you’re currently working at the medical practice as an existing employee then this is an ideal way to have ongoing due diligence. In an ideal scenario, you would have no surprises for you once you own the medical practice. If you have done the necessary homework then should be achievable. “Caveat emptor” (let the buyer beware) should be your guide for the transaction.
Do not be afraid to ask as many questions as you see fit to the selling physician including their staff. You want to prepare a detailed list of the information you want from the selling physician. This will give you a complete clinical and financial picture of the desired medical practice. There is no such thing as too much information when making an informed decision.
In order to ensure continuity within the medical practice with the current patients, you might consider a transition period where selling physician remains a part of the new medical practice. They would serve as a clinician or an informal consultant who would be available on an as-needed basis. If you envision or want some or all of the selling physician’s staff to stay on board with you once the practice is yours, then you need to carefully scrutinize each employee’s abilities. You will want to spend an adequate amount of time each employee. You should have full confidence in each of their abilities and trust that each employee will have your professional interests as their primary workplace goal.
If you do not have all the information about the medical practice opportunity and understand all of the potential risks and rewards, then you could be purchasing trouble. It is common for a selling physician to include in the agreement effectuating the sale of the medical practice a provision that he or she has no further liability to the buyer once the transaction is complete.
Letters of intent
A letter of intent can help memorialize the respective expectations and obligations of the buying and selling physician. Now the letter of intent should not be a binding document. Having a well-drafted letter of intent can be a starting off point for the actual purchase documents. The letter of intent can also “smoke out” potential contentious issues with the selling physician and help to understand where a compromise may be appropriate. If both parties cannot agree on the terms included in the letter of intent then it is unlikely that an actual transaction will take place between parties.
Asset or stock deal
Make sure to consult with your professional advisor so they can explain the merits of a stock vs. asset transaction. Unusual circumstances notwithstanding, a purchaser of a medical practice should seek to do an asset deal. From the seller’s perspective, there is likely a tax advantage to using a stock transaction in order to get capital gains treatment from the transaction. In a stock transaction, the seller also disposes of all liabilities of the medical practice up through the transfer of the stock to the purchasing physician. The purchasing physician would be saddled with any accounts payable of the medical practice and current or potential litigation through the actual date of transfer of the stock. It should be noted that the purchase price for the medical practice may be affected depending upon whether an asset or stock deal is used. As a purchaser, you may wish to add a slight premium to the purchase price to entice the seller to use an asset (not stock) transaction.
Choice of entity
Assuming you purchase a medical practice through an asset transaction you will need to select the type of entity that will actually purchase the assets from the selling physician group. The entity you choose for your medical practice will be based upon legal and tax considerations and the ultimate decision is not the subject of negotiations with the selling physician.
Identifying the assets to be purchased
One of the most obvious but most misunderstood aspects when it comes to purchasing an existing medical practice. The assets that are actually included in the transaction can have a significant impact on the purchase price negotiations. There are certain items that are included in every asset transaction. Furniture, fixtures and equipment make up the bulk of each transaction. It is important that these items are individually identified in an exhibit to the agreement. You also want to confirm the title to each item so you can gain possession of what you think you’re purchasing. You need to confirm if the items are owned outright by the practice or if there is an existing lease. If there is a lease, then you will need to know the terms and if the lease be assigned.
Medical charts are the lifeline of any practice. A patient always has the option to select medical care from any clinician, but you need to how many and what medical charts you are purchasing. If the medical practice is computerized, then this might be an easier task to complete. If the practice is still in the paper-only phase, moving to an electronic medical record system may the first thing that you do once you acquire the practice assets. You should also understand how long you must retain the selling physician’s medical records pursuant to state law and the rules of the various third party payers.
Medical supplies and supplier relationships are also a very important consideration. It should be noted that you may not be able to get the same supplier deal negotiated by the selling physician. It is vital to understand the supply and demand of the practice. You want to make sure you are fully equipped from the start so you are able to handle all patient needs.
Running the practice from day one
Most selling physicians will require a full payment of the purchase price at closing. There may be circumstances in which a selling physician will have extended payment terms of the purchase price, but this is most likely in a situation where the purchasing physician was an employee of the selling physician and the parties have developed a professional rapport and the purchasing physician has earned the trust of the selling physician. In addition to paying the purchase price you will most likely not be acquiring the accounts receivable of the selling physician’s practice. So you will need to have the cash flow needs arranged for the first several months while you are awaiting payments from third party payors in order to pay staff salaries, lease payments, vendors and other day to day expenses. Banks are generally amenable to providing loans to physicians acquiring a medical practice. Keep in ming that negotiating with prospective lenders can be just as time-consuming and difficult as the negotiations are with the selling physician.
Getting the process started
It is very important that the transaction be delineated in writing. Making a handshake arrangements will give you no enforceable protection. When most people purchase a home they rely on professional experts to guide them through the process. As a clinician, you may not be skilled in all of the business nuances that are required when buying a medical practice. It is likely that the selling physician will also have professional advisors. Protecting your business interests will help give you the necessary peace of mind needed to be a successful clinician.
Now that you have read some basic tips and things to consider you are ready to purchase a practice. After you have found a place that meets your needs you will still need to make on offer, secure financing, sign the practice sale agreement and lease, and complete the purchase. As you can see a lot of important factors go into this decision. Make sure you are being properly advised. Practice Advisors 360 is the nation’s leading dental advisory company. Contact us today at (844) 360-8360 or visit us online at practiceadvisors360.com