BLOG: Time to get your house in order
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So, you’ve reached consensus with your partners that it’s time to sell the practice. You’ve done your research on potential platforms/buyers, and you’ve started to engage advisers. What’s next? Time to look inward.
Before putting your practice on the market, you should first determine if there are any business or regulatory issues present in your practice. If there are, they could materially impact your transaction. Getting your house in order in advance of a sale transaction is crucial to maximizing value and ensuring a smooth and efficient transaction process. Any buyer will conduct a detailed diligence review of your business; your goal is to minimize surprises that turn up during that review. If there are issues or surprises, the buyer may require certain actions be completed before a sale can close, or it could impact overall valuation. So, before you start down the road to a transaction, you should consider what issues, if any, may be present and whether any pre-transaction remediation is required. For example:
- Is your organization structured tax efficiently?
- Do you have clean and clear ownership structure and history?
- Do you have true and complete accounting records to help expedite financial diligence?
- Do you have key employees who will need to be incentivized to help get a deal done?
- Do you have good (and legally compliant) relationships with landlords or leases coming up for renewal?
- If you own real estate, are the arrangements with your practice arms’ length and in writing? Has your practice guaranteed your mortgages (or pledged its assets to secure those loans)?
- Do you face any significant current or potential liabilities or litigation that can be resolved in advance of a transaction?
Not surprisingly, there are also many legal and regulatory risks that must be carefully evaluated before proceeding with a transaction. For example:
- Is your business structure compliant with state law restrictions and licensure requirements?
- Are your sales and marketing activities compliant?
- Are your financial arrangements with referral sources compliant?
- Are your physician compensation arrangements compliant?
Any buyer looking at your practice will have a different risk tolerance. The more issues a buyer uncovers, the more risk a seller will be asked to take (whether in the form of indemnification exposure or, worse, reduced deal proceeds). If there are too many issues uncovered during the diligence process, it could jeopardize consummation of the deal itself. To the extent you are able to reduce issues and resolve risks prior to a transaction, the more leverage you will have when negotiating transaction terms. So, it’s time to look in the mirror and be honest about any potential issues that need to be addressed.