Legal Keys Every Medical Doctor Must Know Before Merging With or Acquiring A Medical Practice

TRANSCRIPT

Greetings. This is Michael H Cohen. President and founding attorney of Cohen Healthcare Law Group.

M&A Definition

I’m going to talk to you today about M&A, also known as mergers and acquisitions. One of our physician clients wondered what M&A was and they wondered if it was any relation to the candy M&M. I’m sure that is not you, but no, M&A is not a candy. It stands for mergers and acquisitions.

And essentially, this physician is intending to acquire another physician practice. This is quite a common scenario and in some senses, this transactional part of our practice is straight M&A and in other senses, there is a medicare/healthcare regulatory flavor to this. The very first step in acquisition of a medical practice is that somebody signs a CDA or a confidentiality agreement, also known as an NDA, a non-disclosure agreement.

The CDA or NDA can be fairly formulaic. You can find a ton of these on the web. The thing to remember, as for all legal documents, when you’re signing your name to it, it would be very prudent to review it. Or in plain English, you better have it reviewed.

How many of you have signed a legal document, a legally binding agreement without having attorney review?

I’ll include myself in that list. Any lawyer who has himself for a client is a fool or some expression like that so, it’s not uncommon to err is human, to forgive is divine. Right. So, it’s not uncommon, but it’s a bad idea. And so when you have an NDA, like any legal document, your name goes on it. Even though these documents are fairly formulaic, they can also be tricky.

Remember, a lot of times, it’s not you or your attorney drafting it. If you’re thinking of signing it without having attorney review, that means that the document was drafted by the other side’s attorney. And he might slip in something sneaky.

I personally don’t like NDA’s to last for more than three years. Three years is a long time. But of course, if you’re the one that’s divulging the confidential information, then you want it to last as long as possible. Five years is pretty typical phase and things can change a lot in five years. But they can go even longer, sometimes 10 years.

When you signed the non-disclosure agreement, the idea is that if you are, for example the buyer, it means that the seller can now provide you information. And you’re sworn to secrecy, pledge to keep it confidential. So it gives the seller peace of mind that they can actually in fact give you that rich information, so that you can evaluate their business.

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Due Dilligence

Now the next thing that happens is potentially the biggest, costliest and lengthiest part of the overall transaction. And that is called due diligence.

Here’s a simple analogy.

When you’re buying a car, do you want to know if it’s the fresh paint that the manufacturer put on? Or whether the seller of the car spray painted the car just yesterday to cover up an accident. And they put the spray paint on in their garage. And you, not being an expert, will never know. Or do you want to know whether there was an accident that compromised the safety of the vehicle? Do you want to know whether the tires need to be replaced? Do you want to know whether there’s something wrong with the transmission? What are you going to do? Are you going to look under the hood yourself? Kick the tires?

You’re going to hire an expert.

You’re going to hire a mechanic.

And in the same way for due diligence, you want to get all of the documents that show the overall health and wellness of the company, of the medical practice that you’re buying. Typically this process begins with a due diligence checklist. This is the checklist prepared by your attorney if you’re the buyer. Is you’re the seller, you’re on the receiving end. And it says, “We would like to see the following things.” And typically, there’s some big bucket items. And within each of those, there are lists within lists, if you will.

MEDICAL SPA DUE DILIGENCE QUESTIONS – M&A DUE DILIGENCE CHECKLIST FOR BUYER

If you the buyer of a medical spa in an M&A transaction, what kinds of due diligence questions should you ask regarding regulatory compliance?

So number one, you want to look at the business and financial aspects of the company or the medical practice that you’re buying. You want to see all of the accounting, all of the financial records.

Number two, you want to look at HR and employee matters.

  • How many employees are there?
  • What do they cost?
  • What are the agreements?
  • Do you owe anything to any of these employees if they get terminated?
  • Are there any ticking time bombs that you need to be aware of when you buy the company? Does the company have all its licenses?
  • Does it have compliance in place?
  • Are there trademarks?
  • Are there patents?
  • Are there licensing agreements that are critical to the health of the company?
  • What about other things?
  • Other leases? Are there sub leases?
  • Are there vendor contracts? What is it that you’re getting?

And next you want to know the valuation of the practice. What is the medical practice actually worth? Is the valuation process itself dictated by some document in the company’s governing structure, such as for example, the bylaws or shareholder agreement. There are a lot of documents that you’re going to be asking for as a buyer, a lot of legal documents that you’ll be requested to provide as the seller of the professional medical corporation or other healthcare entity or healthcare company. These take a while to assemble, they take a while to analyze. Essentially the buyer’s attorney is looking for ticking time bombs.

For example, are there significant liabilities that haven’t been disclosed? Did you dump some waste and now you’re responsible to EPA? Did you get some kind of letter of violation from OSHA or from Medicare? Is there some calamitous regulatory action that is under way that you the buyer are going to inherit when you get the company.

There’s some new movie out. I think it’s called Hereditary or something like that. I don’t like Horror movies, but I’m always on the look out for metaphors and I guess there’s some maleficent gene that causes people to do horrible, shocking things that titillates and enthralls the slightly sadistic viewer. So, I’m not recommending that movie, I’m not going to go see it personally, but the point is that you don’t want to have a hereditary calamity in the form of buying a company that has some terrible, built in, toxic flaw.

The way to do this is you want to actually examine the DNA of the company, put it in the centrifuge and that is my quasi-scientific metaphor for the due diligence process. It’s a very important process. It goes to the deal. And it requires attorney review.

Now, the next thing is, you want to look at the deal structure. The bottom line is that you have two types of sales and purchases. One is stock and one is an asset acquisition. When you buy the stock, you get the company lock, stock and barrel. You get everything in the company. You get all of the assets and you get the liabilities. You get the good, the bad and the ugly.

When you have an asset acquisition, you have the opportunity to carve out the assets and exclude specific liabilities. So for example, if you’re buying an oil company and you know that the oil company spilled in some river, then you might say that the liabilities relating to that oil spill remain with the company and are not passed on to you in the purchase. So obviously, if you’re a buyer, which one would you favor? Well, the asset acquisition is more complicated, but it leaves liabilities that you as a buyer specify in the hands of the seller. And so it’s more advantageous. And if you’re a seller and you want to exit, you just want to get out, then you would prefer a stock sale. In that case, the buyer buys the whole company and you as the seller are done. You’re out.

We have to look at the deal structure. In addition to the bottom line choice as to whether you have a stock sale and purchase or an asset acquisition, another question is whether the seller is going to stay on under some kind of employment or consultant agreement. This can be a cost to the buyer.

At the same point, the buyer can potentially benefit from the seller’s experience and expertise. The seller can contribute something. The seller can help the buyer transition. Sellers often want this kind of agreement. And whether or not you have one should be one of the bullet points in your deal structure.

What comes next after doing due diligence

After you sign the CDA or NDA, the non-disclosure agreement, you almost always have a letter of intent. Sometimes you might hear the term MOU or Memorandum of Understanding or LOI.

LOI is not laugh online with an I. LOI is Letter of Intent.

A letter of intent is essentially the deal reduced to a piece of paper. It’s sort of like the back of the napkin deal. The buyer is going to get this, if this is the type of sale that it’s going to be. These are, there is or there will not be an employment or consulting agreement for the seller. This is how much he’s going to get paid. This is, there may be some earn out. Some amount that the sellers get over time when certain conditions are met. And those fundamental deal points go in the LOI, or letter of intent.

The most important thing to know about the letter of intent is that it’s non-binding. It should say that it’s non-binding. Because whether you’re a buyer or a seller, you only want to be bound to the terms of definitive agreements. The LOI should be subject to a definitive agreement.

Okay. You signed the dots so then we might have some interim phases. We might have different versions of the LOI going back and forth. We might have different phases of due diligence. We might have some notifications to the government, some compliance checks. Then we get the definitive deal documents, like a stock purchase agreement, trademark assignments, draft employment agreements for key individuals. Those are all garden variety M&A requirements.

Then, next, we will have provisions to notify the patients, any HIPAA requirements, there might be some specialized healthcare regulatory notifications, like a CHOW or Change of Ownership for Medicare, per 42CFR424.520B. Which should just roll off the tongue. A CMSA55A. Any Medicaid parallels. There might be a notification to the state medical board a change of ownership. So there’s the whole regulatory piece that has to be done, that is specialized to medical and health and wellness transactions especially involving the change in ownership of a medical practice.

Then, we have the closing, the funds transfer. We transfer the ownership of the entity. Finally, there might be some post-closing filings.

Completing Your Medical Acquisition Checklist

That is the basic checklist for acquisition of a medical practice. There are some miscellaneous items that we have not included on this list. If and when you plan to acquire a medical practice or any healthcare venture, it’s a smart idea to consult a healthcare and FDA attorney who understands the specific legal and regulatory landscape related to healthcare transactions. There are healthcare related nuances and a good healthcare M&A attorney will pay attention and help protect you.

Contact the Cohen Healthcare Law Group with any questions about your M&A healthcare transaction.

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Michael H Cohen Healthcare & FDA Lawyers

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