Legal Mistakes to Avoid When Selling Medical Practices, Businesses

SELLING PRACTICEMany doctors and business owners across the U.S. are in the process of working on selling their practices and/or on a succession plan. Here are four common legal issues to watch out for when selling your medical practice, or any other business:

1. Failing to be independently represented

Whether buying or selling a practice, it’s vital to have independent representation. Remember that most practice brokers are not lawyers and use a variety of form agreements that may not represent your best interests and fail to include detailed options on dispute resolution, valuation methods, etc. Even if the broker is a lawyer, I’d insist that all my clients have their own lawyer review the contract, and even more ideal, be involved in the process sooner rather than later. I see too many cases where a buyer and seller hash out a rough deal on their own, only to have the sale delayed or killed when a lawyer starts to review it and ask questions or objects to certain issues and terms.

2. Not knowing what your practice is really worth

We often see that these kinds of valuations lack a formal documented and defensible approach. Remember that as a seller you are called upon to not only set a price for your practice, but also to make some specific legal and financial representations that the buyer will rely upon, and which create liability for you as the seller. You must have a team in place to help you understand proper valuation methods and the empirical evidence required to support it.

3. Failing to keep the negotiations confidential

The level of disclosure required in the sale or purchase of a medical practice is very high and should be protected by a written agreement that protects both parties — they will be disclosing a variety of personal and business related information that goes far beyond tax returns. A good buyer (and her lawyers and accountants) will ask lots of questions about how your business works, where your referrals come from, who the key employees are, etc.This information could be used against you and your business in a variety of ways, so make sure you control how it can be used. Remember that not every deal closes and if you can’t get this past this issue easily and cooperatively, you may have bigger problems ahead.

4. Failing to protect your assets

The core focus of this column is asset protection, and this issue, perhaps counter intuitively, is just as important for a doctors who are selling their practice as it is for those who are running one. The first and most obvious example of this failure is not being adequately insured for traditional malpractice after you sell or retire — this should take the form of “tail” insurance at or above the same level of coverage you carried while practicing medicine. This is important for several reasons; the obvious one is the liability of a claim itself, the second is that the damage the claim can do to you and how aggressively it will be pursued is actually magnified when you are no longer in practice.

Remember that in many cases you will no longer have the income stream you previously did from your practice to offset any claim-related losses and that you’re a much better target than usual. Why? Because even people with high incomes have usually not held a lump sum of cash as large as what they get from the sale of a business or practice.

I also warn every client who is selling a business that asset protection planning is vital at the time of sale to protect the proceeds from the buyers themselves.

Remember that if the buyer is not as successful at running the business as you are, for any reason (including their own lack of bedside manner or business or management skills), they and their lawyers will inevitably point to some alleged act or omission on your part, and want to give you back the broken pieces of your business and get a refund. Make sure that the proceeds are well protected from such an exposure by both the right legal structures and the right contractual protections that limit their claims and remedies on the front end.

I will continue to examine other issues related to buying and selling a practice in future columns to give you a starting point for your own conversations with your counsel.

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