Legal Issues to Consider When Buying or Selling a Medical Practice

Buying or selling a physician’s practice can be a complex process that requires careful consideration of various legal issues. Both parties must navigate regulatory requirements and contractual obligations, as well as the associated financial implications of the transaction. Whether you are a buyer looking to acquire an established medical practice or a seller preparing to transition out of your current role, understanding the legal landscape is crucial. Here are some of the key legal issues to consider during this transaction. Consider them now, and hopefully, the transaction will not have any hiccups.

Do Your Due Diligence

The buyer needs to thoroughly investigate the practice’s financials, legal status, and operations to understand its value and identify potential risks. This involves reviewing a wide range of documents, including financial statements, tax returns, employment contracts, and lease agreements.

It is important to note that, even when buyers do their due diligence, it is possible for some liabilities to remain hidden at the time of the sale. To protect against these risks, buyers should negotiate indemnification clauses in the purchase agreement. These clauses require the seller to indemnify the buyer for certain liabilities that arise after the sale, such as unpaid taxes or legal claims. 

Consider the Cost

The top thing on your mind, whether you are the buyer or the seller, is probably the price. While the price of an asset such as a used car might be fairly easy to establish, determining the value of a medical practice is not as simple. Yet, it is essential for both buyers and sellers. You want to figure out the fair market value of the practice. Several factors impact the fair market value, including financial performance, assets and liabilities, and patient base.

Assets and Liabilities: This includes physical assets, such as medical equipment, real estate, and any outstanding debts or obligations.

Financial Performance: Profit and loss statements, tax returns, and accounts receivable can be used to gauge the practice’s financial health.

Goodwill: Beyond looking at the sheer numbers, consider patient demographics, staff loyalty, growth potential, convenience of location, operational efficiencies, or proprietary processes that will endure after the sale. This can be very difficult to quantify. Proper negotiation can ensure that you do not pay too much for goodwill or sell for too little. 

Both parties should consider hiring a professional appraiser with experience in valuing medical practices. A third-party valuation can provide an unbiased estimate of the worth of the medical practice.

Assess the Business Structure

Not all medical practices are structured identically. The structure of the medical practice is a significant legal consideration in the transaction. Whether the practice is structured as a sole proprietorship, partnership, limited liability company (LLC), or corporation will influence how the transfer of ownership works

Asset Purchase vs. Stock Purchase

The parties will need to decide whether the transaction will be an asset purchase or a stock purchase. In an asset purchase, the buyer acquires specific assets of the practice, such as equipment, patient lists, and real estate, without assuming all the liabilities of the business. In a stock purchase, the buyer purchases shares of the practice and takes on both its assets and liabilities. These liabilities, such as tax obligations and government, can pose risks for the purchaser, especially if unknown liabilities exist. In a stock sale, the buyer may benefit from acquiring existing contracts that they might not have been able to land on their own. 

Both of these types of purchases have tax implications. In a stock sale, the seller typically realizes a capital gain, which is taxed at a lower rate than ordinary income. In an asset sale, the seller may face higher taxes if more of the purchase price is allocated to assets that are taxed as ordinary income, such as personal property.

Assignment of Contracts

Medical practices often have contracts with insurance companies, suppliers, and landlords. Buyers must ensure that these contracts can be assigned or transferred, as some may contain non-assignment clauses. Sellers should review existing agreements to determine if any revisions or approvals are required for a smooth transition.

You want to consider things such as leases. If the medical practice operates in a leased space, the buyer will need to review the lease agreement to determine whether it can be assigned or whether the landlord will require a new lease. 

Additionally, you will need to consider insurance provider agreements. The buyer should ensure that these agreements can be transferred or renegotiated without a significant disruption in cash flow.

The buyer should review existing employment contracts to determine whether they will be assumed as part of the sale. In many cases, the buyer will need to renegotiate contracts with key employees, such as physicians and administrative staff.

Comply with Applicable Regulations

The buyer must ensure the practice complies with federal and state healthcare laws. This includes confirming that the practice is operating in regulatory compliance with key regulations such as HIPAA and the Stark Law and Anti-KickBack Statute. Non-compliance can lead to legal penalties and reduce the practice’s value. Also, the buyer must ensure that there is the correct licensing and accreditation. Finally, the buyer should learn if there are potential liabilities related to compliance. For example, if the seller has violated healthcare regulations, the buyer could inherit these issues, even if the violations were unintentional.

Contact a Georgia Healthcare Transactional Lawyer

Buying or selling a medical practice involves numerous legal considerations that require careful planning and expert guidance. Whether you are a buyer or a seller, it’s essential to conduct thorough due diligence, structure the transaction properly, and ensure compliance with regulatory requirements. Consulting with an experienced healthcare transactional lawyer can help you navigate these challenges and ensure a successful transaction, whether you are the buyer or the seller. 

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