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larger organizations. For example, a medical practice may be able to sell the practice to a hospital system. Another example is that a specialty practice may be able to sell to a much larger practice organization specializing in the same type of practice. For exam- ple, a smaller general dental practice may sell to a larger general dental practice organization.
In some instances, health professionals in private practice are seeing their younger colleagues opting for institutional employment, as opposed to pursuing private practice, which reduces the pool of potential purchasers for private practices. This can pose a challenge for practices with one or more senior professionals who are nearing retirement and who may not be able to attract junior professionals to purchase the practice.
On the other hand, younger professional
practice owners may not be so inclined to sell to private equity firms, unless they perceive that the potential rewards will outweigh the burdens of employment, noncompetition agreements and other employment terms, over the remainder of their professional careers.
How do private equity transactions differ from sales to other professionals or health systems?
Generally, transactions with private equity firms tend to be much more intensive in terms of negotia- tions, transaction documentation and related pro- cesses, than sales to other health professionals or even health systems. In many instances, and particu- larly when the purchaser is another health profes- sional, the negotiation of the sale of a professional practice may be relatively simple and straightfor- ward. For example, the pricing may be based on a multiple of average billings or collections. It is not unusual for the seller to retain the receivables and cash on hand. The transaction documentation may consist of a relatively simple purchase agreement and employment agreement, if the selling profession- al will remain employed by the practice for some period of time following the sale.
In contrast, transactions with private equity firms tend to be much more complex. The pricing of the transaction will normally be much more elaborate and often will be based on the practice’s “enterprise value,” similar to how the acquisition of non-health care businesses are priced. Enterprise value mea- sures a business’s total value and often assumes the lack of indebtedness and the value of cash on the balance sheet. The transaction documentation will be
much more extensive, as will be the transaction process (discussed below). Also, the purchaser will often require the selling professionals to accept their payment in a combination of cash and securities of the equity fund. While this places the selling profes- sionals at financial risk for the performance of the fund, it can also result in increased payouts to the selling professionals in the future if the fund suc- cessfully sells to others at a profit.
What is the transaction process?
As with transactions for the sale of any business, transactions for the sale of professional practices consist of a process with beginning, middle and end phases.
During the beginning phase of the transaction, and following initial discussions between the practice and the potential purchaser, the practice and the inter- ested party will typically sign a non-disclosure agreement, so that they may exchange documents and information on a confidential basis throughout the transaction process. At the outset, it is advisable for the owners of a practice to ready the practice for sale by collecting and organizing documents and information which the potential purchaser will ordinarily wish to review. This may include employ- ment and stockholder agreements, third-party payer participation agreements, agreements with vendors (including license agreements for electronic health record systems), billing and collection reports, financial statements and tax returns, payroll records, compliance documents such as HIPAA policies and notices, any loan documents, and lease agreements for office space and equipment.
Assuming continued interest by the parties, the potential purchaser will then furnish a letter of intent, which will address high level issues including the purchase price methodology, the allocation of the purchase price between the payment of cash and securities of the equity fund, the amount of the purchase price to be placed in escrow at closing as security for the purchaser’s representations and warranties made in the purchase agreement, the transaction structure, any continued employment relationship with the professional post-sale, and other issues. Although letters of intent are normally not legally binding, except for certain specified terms, the terms addressed in the letter of intent will need to be thoroughly reviewed and negotiated, as the letter of intent will set expectations for the negotia- tion of the transaction documents.
During the middle phase, after the parties sign a non-disclosure agreement and letter of intent, the potential purchaser will normally begin its “due
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