Physicians sell their practices for a variety of reasons. Until recently the decision to sell a practice usually came at the point at which a physician was ready to retire or to relocate. Most often the purchaser would be a younger physician in the practice. However, recently there has been a change in the character of the parties interested in selling and purchasing a physician practice. Now the seller may be a physician in his middle years of practice and the purchaser may be a local health facility wishing to employ his services directly. Physicians pursue these transactions not because they are ready to leave the practice of medicine but as a way to continue the clinical aspects of medicine and caring for their patients without being burdened with the often frustrating and time consuming aspects of running the business of a physician practice.
The sale of a physician practice to a health facility usually has two parts. The first is the purchase of the business that is the physician’s practice and the second is the employment of the physician who previously owned the practice by the health facility. Typically, the health facility purchases the hard assets of the practice for fair market value and pays an additional amount based on the number of active and inactive patient charts. The health facility then hires the former owner-physician as its employee to provide care to the same patient group that is served by the practice.
Evaluating the Decision
Transferring the burdens of a business as complicated as a physician practice while retaining the ability to practice the best medicine possible can be not only an attractive but also a wise decision. However, physician practice owners should evaluate the decision to sell their practice with the same deliberation and caution as any business owner. Even if the terms and compensation are favorable to the physician, there are many other aspects of the sale a physician should consider. Since the selling physician intends to continue to practice medicine, he or she will be concerned about their ability to control the clinical aspects of their practice and the level of care available for their patients. In addition, giving up control of the business and becoming an employee also means no longer being in control of how the practice is run. As an employee of a health facility, the physician will have to comply with new rules and limitations, which is a very different experience than making the rules for his or her own practice. Physicians should balance the proposed purchase price for their practice and their ongoing compensation against the inevitable change in their level of control over the business of their practice including, to a lesser extent, some of the clinical aspects of their practice. One of the good things about selling a practice and becoming an employee of a health facility is that it allows the physician to focus entirely on the practice of medicine without regard to reimbursement, staffing, or everyday operational issues. On the negative side, after selling his practice, a physician becomes an employee of the health facility and may no longer be able to control what facilities are available to him or who will be the other physicians in his practice group. These are just a few of the aspects of a sale of a practice to be considered. Some of the other questions a physician should ask and consider when evaluating a transaction are:
- How is my practice being valued? Will I be left with any liabilities such as leases, loans or other obligations?
- What will happen to the other physicians in my practice? Will they take part in the sale? Where will they be employed?
- As an employee, what will be my responsibilities for physician “call “? Will physicians be compensated for call? Will there be an opportunity for more senior physicians to opt out of call responsibilities?
- What are my responsibilities to the health facility? Will there be limitations on my investment opportunities?
- How will I be compensated? Will I benefit from the addition of other physicians in my specialty? If compensation is based on RVU’s will I have a right to audit the financial information?
- Will there be an advisory board of physicians? Will there be any physician input on non-clinical decisions?
- How will my employees be handled?
- What happens if the health facility is bought by another company for which I do not want to work?
All of these areas and more should be considered and negotiated with any potential purchaser of your practice.
Once a physician has determined that it is in his best interest to sell his practice and comes to an agreement with a health facility on the principal terms of the transaction, the parties usually enter into a letter of intent and begin negotiating the definitive documents.
The Purchase Agreement
In all acquisitions, the purchase agreement will be the main document to be negotiated. The purchase agreement will set forth the terms of the transaction in more detail than a letter of intent. It will state the purchase price, the terms of payment and whether the transaction will involve financing. It will set out, and typically list in detail, the assets included in the sale.
The purchase agreement may contain restrictions on the selling physician’s right to compete with the health facility or to solicit health facility employees. These restrictions may appear in either the purchase agreement or the employment agreement. How the restricted activity is described is a very important term to be negotiated, as well as the geographic area that is under the restriction, and the duration of the limitation. All aspects of the covenant should be evaluated in the context of the physician’s future plans and the level of security of employment with the health facility. A very broad non-compete provision can be a significant negative aspect to a physician selling his practice since it can severely limit the physician’s choices if he leaves the health facility. Tennessee law provides a physician some protections if a physician decides to sell his practice and become an employee. Among other limitations, Tennessee law requires that if a physician’s right to practice is restricted by a covenant such as a non-compete, the physician must be given the option to repurchase their practice at a set price. Tennessee law also limits the time period and restricted area of the non-compete provision in such a transaction.
Another part of the purchase agreement with significant legal implications is the section that sets forth the physician’s representations and warranties. Although these provisions may look like boiler plate, their importance cannot be underestimated by either the buyer or the seller of any business. The physician’s representations and warranties set forth promises about the status of the practice, its financial position, and the potential risks that could be faced by the new owner relating to such matters as lawsuits, threatened claims by employees, or unpaid claims by third party payors. Typically, representations and warranties will cover the condition of any equipment or other assets and the absence of tax issues, among many other issues that are unique to a particular practice. A physician should keep in mind that these representations and warranties give the health facility a legal claim if a representation is not true or a warranty is not fulfilled. Therefore, from the selling physician’s standpoint, these representations and warranties need to be narrow enough to insure their accuracy.
The Employment Agreement
In the sale of a physician practice, the employment agreement is of almost equal importance as the purchase agreement. This will be the contract which governs the on-going relationship between the physician and the health facility. As in any employment arrangement, the most important issues in a physician’s employment are the compensation and the physician’s responsibilities. The selling physician should carefully consider his expectations of employment by a health facility and what protections and benefits he must have as an employee to make a sale attractive. An important issue that should be considered is who will be responsible for professional liability insurance, specifically any tail coverage for prior acts, particularly during the period that the physician owned his practice. Other issues that should be set forth in the employment agreement are the timing and basis for termination of the employment agreement.
Selling your practice is big decision. This article touches on only a few of the issues involved. There are legal, accounting, tax, and regulatory issues too numerous to be addressed here, as well as the unique issues and considerations of each practice and each physician, all of which a physician should discuss with his financial and legal advisors.
