VIDEO: Five highly negotiated deal points in a private equity transaction
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Key takeaways:
- Negotiation of financial terms is one of the most important deal points for buyers and sellers.
- Indemnification is a heavily negotiated deal point that can be minimized with insurance.
In this video, Anjana D. Patel, JD, discusses the top five highly negotiated deal points in a private equity transaction.
The first highly negotiated deal point is the financial terms, which is one of the most important points for both the seller and buyer, according to Patel.
“Not only what the total purchase price would be but also things like, how much of that price will be paid in cash at closing vs. roll over equity going forward,” Patel, a member of the firm in the health care and life sciences practice of Epstein Becker Green, told Healio. “It’s also a key deal point because it will impact what, if any, networking capital has to be left in the practice at closing.”
The second deal point is rollover equity. Patel noted sellers will want to understand what rights and obligations the equity comes with and whether the equity has any vesting periods. She added the post-closing physician employment agreement is also often heavily negotiated to come to an agreement on the period of time physicians need to stay employed after the transaction, compensation and making sure there are no changes to the way the physicians historically practice.
“Lastly, when it comes to post-closing employment terms, [physicians] want to understand the scope of the noncompete and the duration of it, the geographic limitations and, especially, if there are going to be any specific carve outs for either activities that the physician’s engaged in prior to the transaction ... or things that they want to do in the future,” Patel said.
Patel noted the fourth deal point that is negotiated is whether the practice would want a seat on the board of the management services organization.
“If they can get an appointment, that’s a good thing. But, more importantly, it’s important for them to make sure that they have a voice and input on the day-to-day clinical governance,” she said.
Finally, Patel said the fifth most heavily negotiated deal point is indemnification. This includes who is going to bear the risk for a loss or claim against the enterprise for something that occurred either pre-closing or post-closing, as well as a cap on liability.
“Historically, and even today, [indemnification] continues to be a heavily negotiated deal point. But in recent years, there has been an insurance product that’s been available. It’s called representation and warranty insurance,” Patel said. “If that comes into play, it often minimizes a lot of the angst and heavy negotiations around indemnification because now there’s a third party that is underwriting an insurance policy over the sellers’ representations and warranties.”
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