The market for buying and selling a medical practice is currently active, but that doesn’t mean that you will be guaranteed a good deal, especially if you fail to negotiate the terms of sale properly. Selling a medical practice is not an easy task, it involves careful planning and preparation to ensure that you have all bases covered. What most physicians fail to understand is that negotiating a sale can take up to 6 months or more if you are not clear about the terms of your contract. Having a basic understanding of how much your practice is worth by performing a practice valuation of your tangible and intangible assets (such as goodwill) and seeking professional help from a lawyer, accountant or medical practice brokers is a good place to start. However, there are a few more things to consider before negotiating the terms of your sale that could be the difference between getting the sale you want or settling for less than you expected.
Letter of Intent (LOI)
A letter of intent (‘LOI’) is a non-binding outline of the transaction commonly used when selling a medical practice(also known as “memo of understanding”). It includes the main terms of the what the buyer and seller believe will be put in the final binding formal contract and is a way to ensure that both parties are clear about the terms of the deal. This is also an opportunity for the buyer and seller to work out terms that they both agree to before the deal is fixed.
The most critical negotiations take place while the LOI is being drafted as this is where all the basics such as price and payment are discussed and agreed on. It is important to get this part right, as once the LOI is signed, there is less chance to negotiate the terms of the deal and sellers will not be able to shop around for new buyers. Sellers should take this opportunity to ensure that they have a thorough description of what assets they are selling to the buyer and should consider taking a deposit for compensation of time in case the deal does not follow through. In addition to this, the physician should detail how patients, referral sources and employees will be transitioned and how much time and assistance the physician will provide to the new owner. Finally, physicians selling a medical practice should also be aware that they don’t consent to a very restrictive convent for non-compete. The specific time frame and geographic locality of the non-compete agreement should be reasonable to the seller.
Electronic Health Records (EHR)
It is important to note that Electronic Health Records (EHR) system can carry a lot of value if they have been fully paid for and are not tied to a certain hospital or system that the new buyer does not support. Potential buyers take this seriously and may even turn down a perfectly run medical practice if they have not yet converted their medical records from paper charts to an EHR system. Converting the paper charts, one-by-one into EHR can be a lengthy process that is not worth the effort for some buyers.
Additionally, if the buyer is a hospital, then it might be necessary to transfer information over from one EHR system to another to avoid missing any medical records, in which case you might find it difficult to coordinate with your existing EHR system provider, particularly if they are another hospital. Be sure to take your EHR system into consideration when selling a medical practice so that you don’t run into any troubles with your potential buyers.
During negotiations it is good practice to address how outstanding accounts receivable will be managed between the buyer and seller, before and after the transition. The physician selling the practice might decide to collect its own accounts receivable after closing or might instead negotiate a deal with the new buyer to collect it for them.
Either way, it is important to note that some sellers, such as hospitals will restrict old employees from collecting accounts receivable on old accounts during work hours. Instead, they will either negotiate to collect them on behalf of the seller for a percentage of the fee or charge the seller per hour for using old staff. This is something that physicians selling a medical practice should negotiate with the seller and include in their LOI.
You can find more information on selling your medical practice on our website and blog. At Medlaunch our expert team of medical practice brokers is here to help answer any questions you might have about the process of selling a medical practice. Contact one of our friendly staff today.