How to manage the sale or closure of a private medical practice
Your guide to securing valuation, transitioning roles, transferring medical records and notifying patients.
Whether you’re entering employed practice or retiring after a long career as a solo practitioner, understanding the options for selling your practice will help you maximize value before putting it on the market.
The following issues will play a key factor in the selling or closing of your practice:
Valuation of the practice
This issue is often the biggest focus of discussion and negotiation between a seller and buyer. Valuation should be used as a benchmark for negotiation of the purchase price. If you are selling, you should consider using a valuation firm to conduct a valuation of your practice. The outside valuation process, analysis and generated valuation report should identify the tangible versus intangible assets of your practice, including equipment, supplies, furniture and goodwill.
Selling physicians should utilize fair market value (FMV) in the valuation of a practice and determination of the purchase price in order to comply with regulatory requirements. While there is no bright line test for FMV of a practice, FMV should result from bargaining between a well-informed buyer and seller and should not take into account volume or value of referrals by the referring physician.
The valuation of the practice’s goodwill will also need to be agreed upon by the selling and purchasing physicians. Goodwill is an intangible asset generally based on the practice’s size, location, reputation, patient market and profitability.
The buy-sell agreement
The buy-sell agreement should include:
- the amount of the purchase price
- the allocation of the purchase price between tangible and intangible assets
- the exclusion of prepaid expenses
- the amount of any deposit(s)
- any adjustments to the purchase price
- the amount of any closing payments
Generally in the purchase of a practice, the accounts receivable are not an acquired asset and therefore are not sold to the purchasing physician. The selling physician usually retains the accounts receivable and there should be a mechanism in the seller agreement to ensure the purchasing physician’s ability to collect the selling physician’s accounts receivable post closing.
Additional practice assets not typically included in the sale of a practice may include:
- Real property
- Cash and bank accounts
- Pension funds
- Insurance proceeds/cash value of an insurance policy
- Artwork, personal effects, diplomas and certifications of the selling physician
The liabilities of the practice should also be listed on a schedule of the buy-sell agreement identifying those that will be assumed by the buyer at closing. These may include:
- Lease agreements, including equipment leases
- Service agreements for equipment, billing, staffing and janitorial services
- Government audits and investigations
Physicians will also need to determine the structure of the transaction and whether the buy-sell agreement should be a stock purchase agreement or an asset purchase.
Key documents for selling a practice may include:
- Non-disclosure and non-compete agreements
- Letter of intent
- Buy-sell agreement
- Consulting agreement
- Physician employment agreement
- Patient notification letter
- Staff termination and transition letter
The buy-sell agreement should include pre-closing and post-closing responsibilities of all involved parties. If the selling physician is remaining in the geographic area and will not have a continuing professional relationship with the purchasing physician, restrictive covenants should be included in the buy-sell agreement. Such restrictions are enforceable if reasonable in length, duration and geographic area in all states except California.
Indemnification provisions also protect the purchasing physician in the event the selling physician breaches any representations or warranties of the buy-sell agreement. A selling physician will most likely be expected to indemnify and hold harmless the purchasing physician from losses that arise for any misrepresentations of the selling physician.
Pursuant to state and federal regulations, patients must be given the option to choose another physician and have a copy of their medical records sent to the physician of their choice. Medical records should not be transferred to another physician or practice without the patient’s consent.
Physicians should check state and federal regulations regarding record retention. When selling or closing a practice, physicians should review their medical records to ensure that the records contain all information and documentation as required by state and federal law. During the sale or closure of a practice, the issue of who actually owns the medical records often is raised. Generally, the physical medical record is owned by the physician or corporate entity responsible for compiling and maintaining the medical record.
Medical record ownership is established by state law, licensing regulations, and judicial decisions. Physicians who are selling or closing their practice should ensure that the control, ownership and patient’s right to access their medical records is specifically addressed prior to transferring or storing any medical records in order to be in compliance with the applicable state law. Physicians, as custodians and owners of medical records, must take special care regarding the destruction, retention, or transfer of medical records when their practice is sold or closed.
The negotiations for the sale of practice and all related documents, including the Buy-Sell Agreement should be in compliance with all applicable state and federal regulations including: fraud and abuse laws, Stark Law, Anti-Kickback Statute, HIPAA, tax-exempt status (if applicable), anti-trust laws, and state and federal regulations regarding the transfer, maintenance and retention of patient medical records.
If the practice is being sold, the physicians who are selling and buying the practice should consider who will ultimately be responsible for the medical records upon the sale or transfer of the practice. When the medical records are transferred with other assets as part of a practice sale, the seller should advise and notify patients of such transfer to comply with the terms of the Asset Purchase Agreement, licensing requirements, and ethical and professional standards.
Physicians who are closing their practice should consult with their attorney regarding the storage or destruction of the medical records and consider providing patients with notice and an opportunity to retrieve their medical records prior to the practice closure. Upon identifying patients who have been treated by the practice, physicians should send a notification letter which:
- Informs the patient of the practice sale or closing
- Includes the last date of the practice’s operation
- Identifies where the patient can pick up their medical records
- Informs the patient where future medical record requests can be sent
Clarification of roles
Prior to closing on the sale of a practice, it is important for both the seller and buyer to agree on the role and involvement of the selling physician post closing. If the selling physician is leaving the geographic area and will no longer be practicing medicine, a formal written agreement regarding employment or consulting is likely not needed. However, if the selling physician is staying in the area and the purchasing physician wants to continue working with the selling physician during the transition, the physicians should consider executing an employment or consulting agreement outlining the roles and responsibilities of the selling the physician and term of such agreement.