Many physicians in California will need to face a big decision at some point during their career: the prospect of selling their medical practice.
As California business broker Andrew Rogerson has told many of his clients, the sale of a medical practice must be structured and executed best to attain the selling physician’s two primary objectives:
(1) maximum sales profit and (2) minimum 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, such as Andrew Rogerson in Sacramento, to avoid pitfalls. This can help take the necessary actions. It ensures that your two primary objectives are met.
Agreeing on Price Before You Talk with a Valuation Expert
The biggest mistake a physician can make is failing to obtain an appraisal of their medical practice. This should be from a qualified valuation expert. A third-party appraisal is crucial to ensure that you receive a fair price for your practice. It also helps dispel any unrealistic expectations about what that price may be.
You’ll be selling yourself short if you take a do-it-yourself approach to value your practice. This is especially true 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 significantly less than its worth or deterring potential qualified buyers from further consideration of the sale.
Andrew advises that before offering your medical practice for sale, you hire a professional valuation expert who’s qualified to appraise medical practices. This should be someone knowledgeable in Northern California or a specific geographical area.
Agreeing on Terms and Conditions Before Speaking with an Expert
It’s not uncommon in the sale of a medical practice in California for the parties not to involve attorneys. Instead, they often try to hammer out the essential terms of the transaction.
After that, the buyer will usually ask an attorney to “draw up the documents” based on what the parties have discussed. However, it may be too late to add or modify any of the terms recommended by the attorney to protect the seller better, as the prospective buyer believes they have already come to a binding agreement.
The sale then either fails or continues 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 in California. He has assisted selling physicians in teaming with qualified business transactional attorneys early in the process. They 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 the seller’s representations and warranties. These range from “no pending litigation proceedings” (which is reasonable) to “no unknown liabilities” (which is impossible).
A selling physician in California can easily skim through this “legalese” (like many of us do) and focus on more interesting parts, such as 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 to ensure accuracy. They 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 relevant state. The buyer should also be in good standing with the state medical board. They should not be subject to any actual or threatened discipline.
These representations and warranties may not ensure the selling physician from being named in a malpractice suit or an administrative action. This can arise solely out of the buyer’s conduct.
Still, they’ll provide the basis for additional remedies if they prove to be false when made.
Ensure that the terms of sale include the buyer’s representations and warranties regarding their qualification to practice and the absence of any disciplinary action. Additionally, there should be 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 their medical practice in California may be surprised during the sale process. They might find that their office lease—or the lease for medical equipment, or perhaps a service contract—isn’t readily assignable to the new owner of the practice.
While it’s usually not hard for them to sign a new lease or contract with a third party, a deal can fall apart when it comes to the sale of the medical practice. This is particularly true where the arrangement was attractive to the buyer. It might have been due to a below-market, long-term agreement on the office space, equipment lease, or a service contract.
A failure to identify any limitations on assignability beforehand can result in different outcomes.
These include:
- Delays in the transaction process,
- A reduction in the sale price,
- The sale falling through,
- Or some 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
Andrew Rogerson specializes in helping business owners sell their businesses, including strategies for selling medical practices in California and their associated steps.
This includes practice valuation, creating a marketing strategy to find qualified buyers, and handling all phases of the transaction, such as third-party financing for the buyer, due diligence, and escrow.
Andrew is the author of “Successfully Sell Your Business,” which is available for immediate download.
Andrew Rogerson is a certified business broker based in Sacramento, California. Call Toll-Free at (844) 414-9700. If you prefer, email him at support@rogersonbusinessservices.com. Andrew serves the whole state of California.
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