How to Prepare to Sell Your Medical Practice to Private Equity
Create a Pre- and Post-Acquisition Plan
Pre-Acquisition Planning. If you are interested in having your practice purchased by a large organization, which will often be one that is supported by private equity, it is important to begin planning well in advance of placing your practice on the market. Pre-acquisition planning involves organization, documentation, data, and regulatory compliance. Any prospective buyer will want to conduct a thorough due diligence investigation. It is critical, therefore, that the practice be well organized such that important documents are readily available. Such documents typically include the following:
- Organizational Documents of the Practice Entity: For a corporation, this would include the Articles of Incorporation, Bylaws, any shareholders’ agreements, stock certificates, and a stock transfer ledger. For a limited liability company, documentation would include a Certificate of Formation and an Operating Agreement or Limited Liability Company Agreement. If there have been changes in ownership over time, documentation of the changes in ownership should be readily available in order to demonstrate that the current owners have full authority to act on behalf of the practice.
- Contracts: Complete and fully executed copies of all material contracts should be available. These would include 3rd party payor agreements, vendor agreements, and outsourcing agreements, which may include billing, practice management, and electronic medical records.
- Data: In order to market the practice, it is important to be able to demonstrate its financial viability. Therefore, the accounting should be up to date, with tax returns filed timely and copies readily available, as well as accountant-prepared financial statements. Computer systems should be capable of generating reports that break down revenue by provider, by CPT code, and by 3rd party payor.
- Regulatory Compliance: It is critical that the practice can demonstrate full compliance with regulatory requirements with supporting documentation, and must ensure that all policies and procedures are up to date, including HIPAA Privacy and Security Manuals, HIPAA training, Employee Handbooks, OSHA compliance, etc.
- Trusted Staff: Generally, it is important to keep any plans for a potential sale confidential for as long as possible. However, it will be necessary to have at least some staff available to assist in information gathering and planning. Therefore, trusted staff with whom information about a potential sale can be safely shared should be identified.
Post-Acquisition Planning. Your plan for life after the sale will involve setting goals that can be incorporated into the transaction. For example, are you more interested in long-term secure employment, or is the sale a first step toward retirement? The answer will determine whether you negotiate an employment contract as part of the sale, or an agreement to remain with the practice after the sale for the shortest term possible.
Establish Your Goals
As noted above, post-transaction planning is closely related to the establishment of goals for the sale. Goals may include the following:
- Long term security
- Relief from administrative burdens of running a medical practice
- Financing expansion
- Affiliating with other practices to create synergies
- Obtain cash for other business investments
Evaluate Your Financial Capability
Selling a practice can be an expensive proposition. Expenses may include:
- a valuation consultant to determine a reasonable asking price;
- accounting fees to prepare necessary financial statements;
- investments in computer hardware and software to assure that you can deliver necessary data and reports;
- overtime to staff to interface with a potential buyer during the due diligence phase; and
- attorneys’ fees.
Ensure Cultural Compatibility
Pay attention to interactions with potential buyers during negotiations and due diligence. The people you deal with are often the people you will be reporting to after a sale. The negotiation and due diligence phase is, in a sense, the “honeymoon” phase. While the potential buyer is evaluating whether to proceed with the purchase, they are also trying to convince you that you should do a deal with them. If there is excessive friction and tension at this phase, that is a sign of possible difficulties after closing. If possible, request references of people who have recently done deals with your potential buyer and contact them for reviews and feedback.
Speak with an Attorney
Finally, the sale of a medical practice is a complex transaction with many potential pitfalls. It is important to seek legal guidance from attorneys with specific experience and expertise in the purchase and sale of medical practices that can provide the information and advice you need to navigate the process.