Do’s and Dont’s For Physicians When Selling Their Practice
Many physicians will need to face a big decision at some point during their career: the prospect of selling their medical practice. As Sacramento business broker Andrew Rogerson has told many of his clients, the sale of a medical practice must be structured and executed to best attain the selling physician’s two primary objectives: (1) maximum the sales profit; and (2) minimum any liabilities or issues after the sale is completed.
Here are a few of the mistakes and missteps that physicians have made when selling their medical practices. Work with an experienced business broker like Andrew Rogerson in Sacramento to avoid them and to take the actions necessary to be certain that your two primary objectives are met.
Agreeing on Price Before You Talk with a Valuation Expert. The biggest mistake that a physician can make is failing to get an appraisal of the medical practice by a qualified valuation expert. A third-party appraisal is critical to be certain that you receive a fair price for your practice and to dispel any unrealistic thoughts about what that price may be.
You’ll be selling yourself short if you take a do-it-yourself approach to valuing your practice, especially when you base your “appraisal” on criteria that may have no applicability to a given situation. This can lead to either selling the practice for much less than it’s worth or frightening potential qualified buyers from looking further at the sale. Andrew advises that prior to offering your medical practice for sale, you hire a professional valuation expert who’s qualified to appraise medical practices in Northern California or in the specific geographical area.
Agreeing on Terms and Conditions Before Speaking with an Expert. It’s not uncommon in the sale of a medical practice for the parties not to have attorneys involved, but trying to hammer out the essential terms of the transaction. After that, the seller usually will ask an attorney to “draw up the documents” based on what the parties discussed. However, at that point in time, it may be too late to add or modify any of the terms recommended by the attorney to better protect the seller…because the prospective buyer believes that he or she has already reached a binding agreement. The sale is then either scrapped or carried out against the advice of counsel. Even worse, the disappointed buyer may sue based on the “cocktail napkin” agreement the two sides created. Working with a business consultant like Andrew would avoid this. He has been involved in hundreds of medical practice transactions and has assisted selling physicians in teaming with qualified business transactional attorneys early in the process to prepare a draft contract that’s “seller-oriented.” That agreement can then serve as a starting point for negotiations.
Making Unsupported Representations and Warranties. When a buyer has a draft purchase agreement in hand, either before or after sale negotiations have begun, it may include a list of seller’s representations and warranties, like “no pending litigation proceedings” (which is reasonable) to “no unknown liabilities” (which is impossible). A selling physician can easily skim through this “legalese” (like many of us do!) and focus on more interesting parts, like the payment figure. That leaves the possibility of an unsupportable representation coming back to nip the seller in the form of a fraud or deceit claim. Physicians must carefully review each requested representation and warranty… and should consent only to those that they know they can reasonably make.
Not Getting Certain Representations and Warranties from the Buyer. Buyers will usually require fewer representations and warranties than sellers, but some are critical if the selling physician wants to rest easy after the transaction is complete. Some of the most significant are warranties that the buyer is licensed to practice medicine in California or the state in question; is in good standing with the state medical board; and isn’t subject to any actual or threatened discipline. These representations and warranties may not ensure the selling physician against being named in a malpractice suit or an administrative action arising solely out of the buyer’s conduct, but they’ll provide the basis for additional remedies if they end up being been false when they were made. Make sure to include in the terms of sale buyer’s representations and warranties on his or her qualification to practice and absence of disciplinary action, as well as along a duty of indemnification from third-party suits or other proceedings.
Failing to Examine the Assignability of Key Third-Party Contracts. A doctor who tries the DIY style of selling his or her medical practice may be surprised during the sale process that their office lease—or the lease for medical equipment or maybe a service contract—isn’t readily assignable to the new owner of the practice. While usually it’s not hard for them to sign a new lease or contract from the third-party, a deal can fall apart for the sale of the medical practice where it was extremely attractive to the buyer because of a below-market, long-term agreement on the office space, lease of equipment lease, or a service contract.
A failure to find any limitations on assignability beforehand can mean delays in the transaction process, a reduction of the sale price, the sale can fall through, or any number of other issues that can complicate the transaction. Review the assignability provisions of each third-party agreement with your business broker to determine if it’s to be assigned in the sale. When an assignment is restricted and the third party refuses to give its consent, physicians must expressly exclude the agreement from the terms of the sales contract.
Successfully Sell Your Medical Practice — Read Our Book!
Andrew Rogerson specializes in helping business owners sell their business including a Medical Practice and its many steps. This includes a practice valuation, creating a marketing strategy to find qualified buyers, and handling all phases of the transaction including third-party finance for the buyer, due diligence and escrow. He is the author of “Successfully Sell Your Business” which is available for immediate download. Contact us today to order this book.