When physicians decide to sell their healthcare practice, they are faced with a number of legal considerations. There are many things that can go wrong if the proper steps aren’t taken during the sale process.
In this article, we will discuss some of the biggest legal mistakes physicians make when selling their practice.
Table of Contents
- You Agreeing on Price Before Consulting a Valuation Expert
- You Make Agreements That Can’t Be Supported
- You Don’t Review The Assignability of Key Third-Party Contracts
- You Don’t Get Adequate Security for Seller Financing
- You Agree to an Unrestricted Noncompetition Clause
- You Agree to Buyer-Controlled “Holdbacks”
- You Forget To Include Termination Provisions in the Agreement
You Agreeing on Price Before Consulting a Valuation Expert
In both obtaining a fair price for the practice and dispelling any unrealistic preconceptions about what that price might be, an expert appraisal of the approach is critical. Few individuals would ever consider selling their house without first consulting with a professional real estate broker or appraiser to establish a realistic asking price, yet sellers of professional services frequently take a DIY approach to valuing their practices based on criteria that may not apply in every situation.
You Make Agreements That Can’t Be Supported
The buyer may approach the seller with a draft purchase agreement in hand, either before or after sale talks have begun. In this instance, the draft agreement usually contains a laundry list of seller guarantees and representations, ranging from “no known liabilities” to “no pending litigation actions” (a reasonable warranty) to “no outstanding liabilities” (an unattainable guarantee).
Physicians who are selling their practices may skimp on the “legal speak,” focusing instead on more intriguing subjects such as payment amount and conditions, only to have an unconstitutional statement come back to haunt them in the form of a fraud or deceit claim.
You Don’t Review The Assignability of Key Third-Party Contracts
Occasionally, it comes as a surprise to selling physicians when they realize, typically throughout the sale process, that their office lease or an equipment lease or service contract is not freely transferable to a new owner of the practice.
In most cases, obtaining a new lease or contract from the third party is not difficult, but if the transaction was particularly appealing to the buyer because of a below-market, long-term office or equipment lease or service contract, failing to examine limitations on assignment beforehand may result in delays, a reduction of the sale price, rescission of the sale, or other issues.
You Don’t Get Adequate Security for Seller Financing
When the selling physician is responsible for financing, it’s usually because commercial finance is too expensive, but occasionally because a buyer has been labeled by commercial lenders as a poor credit risk. Most selling physicians are skilled enough to review a potential buyer’s credit history before offering financing, but they frequently either fail to get the loan at all or negotiate it with the seller (which could be disastrous if the new owner fails to succeed in business).
You Agree to an Unrestricted Noncompetition Clause
Noncompetition clauses are less enforceable in some states than others. These clauses, which limit the selling physician’s right to practice medicine after the sale, are generally legitimate if they are limited in terms of duration (e.g., five years), location (e.g., no competition within the same county or a 25-mile radius of the transferred premises), or both.
However, to wait until a real dispute arises later and then rely on the courts to interpret and limit an overly broad non-competition clause would be a costly mistake.
You Agree to Buyer-Controlled “Holdbacks”
A buyer may try to “hold back” a portion of the purchase price until a condition is met, most often through an escrow agreement.
Holdbacks are another example of a tool that might be used to give teeth to a non-competition clause. Adding “teeth” to a non-competition clause by allowing any breach on the seller’s part to result in forfeiture of all or a certain portion of the holdback amount, which would otherwise be given to the seller after the non-competition term expires.
It would be an egregious mistake for a buyer to possess absolute control over the escrowed money if this was unavoidable.
You Forget To Include Termination Provisions in the Agreement
Despite the best efforts of both sides, a transaction may fail to close by its planned date. It is certainly understandable to extend the closing date upon mutual agreement of the parties, but if the buyer is having difficulties financing or raising the required cash, or if one party cannot meet some other preclosing obligation, it makes sense to terminate the transaction and reoffer the facility for sale at some point.
In the absence of explicit termination provisions, the buyer may be able to prevent the transaction from closing indefinitely, or, where the seller is having difficulties closing, the buyer can ask to keep the seller to its obligations.
Physicians who are looking to sell their healthcare practice should be aware of the common legal mistakes made during the sale process.
The absolute best thing that you can do to avoid these mistakes is by hiring a professional medical broker. They will help you avoid these mistakes, which can help you ensure a smooth and successful transaction.