Buying and Selling: A 300-foot High Overview

Whether you are considering buying or selling a radiology practice (or an imaging center), business continues to be brisk. That’s according to Jeremy Miller, JD, managing partner, Miller Health Law Group, Los Angeles, who provided a primer on buying and selling for the radiologists gathered at the annual meeting of the California Radiological Society, October 3, in Newport Beach.

Why are practices selling? They may be after broader subspecialty expertise, greater leverage in payor contracting or marketing and IT resources. Sometimes a sale is prompted when a hospital with which a practice contracts undergoes a merger. If leadership is lacking, a practice may tire of the increasingly complex burdens of management and wish to focus on reading studies.

Capital—or the lack of it—is another common reason for selling a practice or imaging center. Imaging center technology may need an upgrade or a practice’s 1980s-era buy-sell agreement may be coming due—and younger partners are pressed to meet buyout payments to retiring partners.

Who’s buying? The buyer pool includes other radiology practices, hospitals (through their medical foundations in California), regional and national imaging-center chains, private equity investors and public companies. Private equity thinks that radiology is a good play because there will be a greater need for radiology services and delivering them in a less costly way may fit into healthcare’s value proposition, Miller said.

“Many buyers are looking for physician leaders, which seem to be still in short supply,” he added.

Forward thinking, non-traditional leaders that can attract other radiologists could make a practice attractive to a potential suitor.

All of this has adds up to a great deal of activity in the medical imaging marketplace. “There are a lot of deals that have gone on and a lot of deals that are going on,” he said.

The acquisition process

At the outset, it is important to have a clear and shared sense of objective for both the buyer and the seller. “It’s surprising how often people don’t have a clear idea, or different people in the group have different ideas,” Miller observed.

The next step is to assemble a team, including physician and nonphysician leadership, accounting, an attorney and possibly an investment banker. “If you are a seller, an investment banker may help you find the buyer, shop your practice and maybe get a bigger rate, but they don’t work for free,” he said.

Before sellers enter into the acquisition process, they must make an honest assessment of themselves. They do not want to discover something negative about compliance or billing practices—for instance, excessive liberality in E&M coding—in the midst of a sale, which could result in the buyer lowering the purchase price.

That self-audit should include tax analysis as well as planning. “If you have a C corporation versus an S corporation, you could have a big corporate tax burden to pay before any money gets out to the owners of the practice, so you want to be thinking about that, because the buyer will have different interests.” A stock purchase versus an asset purchase confers capital gains treatment at a much lower rate.

In preparation, the seller also is advised to assemble due diligence information and review and organize financial records and billing records. “You want to get all of your due

diligence information—all of your contracts and your financials—organized and put into what is called a data room so that they are easily accessible,” Miller advised. “Rather than scrambling around, you look like your act is more together.”

If there are compliance problems, it is important to disclose them. “It is better to say, ‘We found this out and this is how we are dealing with it,’ rather than to have it discovered by the buyer during due diligence,” Miller emphasized.

Finding a seller often happens through networking, but sometimes practices engage a broker, place an ad in a medical journal or hire an investment banker, to broker, not fund, a sale. “It’s always helpful to have more than one person interested in buying your practice,” he said, which can be instrumental in driving up the price.

When evaluating a bid for the practice, don’t overlook what the buyer will pay for your services if the plan is to continue to work for the buyer.” Generally, this is much more financially significant than the purchase price,” Miller said.

A seller’s liabilities and how they will be handled also must be carefully considered. Miller mentioned a recent deal scotched by the California Attorney General in which the Daughters of Charity attempted to sell to Prime Care. A key deal point for the Daughters of Charity was that any buyer would assume the underfunded pension obligations for the sisters, which greatly limited the buyer pool.

LOI, due diligence, Other documents

All purchases begin with a letter of intent (LOI), in which major deal points are outlined. They include the deal structure (stock versus assets), how liabilities will be handled (debt assumption), price and payment, post-sale employment and standard representations, warranties and covenants.

The buyer will want to include an exclusivity or “no shop” agreement in the LOI. “They don’t want to enter into a due diligence process with you and start spending a significant amount of time and money while you are still considering selling to someone else,” Miller said. “You as the seller don’t want to be locked in longer than you have to, so there is a negotiation process there—60, 90, 120 days, as long as you want to go.”

The more detail in the LOI the better because there is less room for disagreement when you go into definitive purchase and sale documents. On the other hand, you can bog down in the LOI in trying to negotiate every term, so it is a question of balance. “You want to make sure there is a meeting of the minds,” Miller advised.

Due diligence is primarily a buyer responsibility, but the seller has a role as well, Miller said. It’s critical for the buyer to make sure they understand the business, verify what they have been told by reviewing payor contracts and billing records, making sure that there will be no unpleasant surprises.

Buyers also will do legal due diligence to ensure that service lines, partners and employees have the proper accreditation, licenses and credentials. All key paperwork will be scanned into the “document room,” and there are companies that specialize in this service.

Key documents must be prepared and negotiated, including the purchase agreement, any potential consulting agreements, employment agreements the bill of sale and the promissory note. “If a buyer is going to be paying you over time instead of all cash, which is frequently the case, then [the promissory note specifies] in what period you get paid, interest rates and security,” Miller said. Approvals and consents must be obtained from the shareholders, the board and, if real estate is involved as with an imaging center, the landlord.

If the parties are successful, the deal is consummated with payment of the purchase price after all documents have been signed, conditions have been met and assets have been turned over. The last acts of the seller will be to terminate all employees (they may be rehired), satisfy post-closing adjustments (utilities, for instance) and to notify patients, referral sources and vendors of the sale.

After delving into more detail on specific deal points and contract terms, Miller concluded by asserting, “Every deal is its own deal. The bottom line is this: Sellers are seeking a good purchase price and long-term employment, while buyers want to get what they think they bought. 

Reference: Girotra K, Netessine S. Four paths to business model innovation. Harv Bus Rev. 2014; 92(7/8):96-103.