Buying a practice is not unlike dating. You see someone that looks good to you, evaluate the situation, and think only of all the great possibilities. Then, you enter a final “transaction” and once you are committed to that transaction, BAM!, you discover some horrible skeleton in the closet. Unfortunately for you, now you are in and extricating yourself from the situation is difficult.
Without extending that painful analogy further, let’s take a look at some things that have gone wrong in acquisitions. We’ll also discuss how you can prevent yourself from becoming a victim. And here, we’re not talking about the normal due diligence issues that arise: unpaid tax bills, bad credit ratings on purchased corporations, looming lawsuits, etc. We’re digging a bit deeper here to find a few of the messier situations that you might run into.
The receivable surprise
Here’s a situation that, while not common, occurs enough to mention in the top spot. As part of an acquisition, the purchaser agrees to buy the patient contracts and amount due on those contracts. There’s about $400,000 of unpaid balances on those contracts, all documents are signed and the deal is set to close in about a month. Nothing unusual or weird there.
Where it gets weird in when the selling doctor decides to offer a 15% discount to all existing patients for paying off their remaining contract amounts. There’s no issue for the selling doctor. He gets some extra cash on top of the purchase price. Sweet. For him. For the selling doctor, not only is he about to collect substantially less from the existing patients than he thought he would, but now he has to do all the work to finish treatment without funds coming in to pay for that treatment. The purchaser now walks into a practice losing money and has to pay the purchase price on top of that. Just ugly on top of ugly.
To prevent this from happening, it makes sense to build a clause into the contract related to the contract balances at the closing date. The clause goes something like this: “as of date x, there were $400,000 of unpaid contract balances. As of the closing date, if those balances fall by more than 10%, the purchaser has the option to walk away from the deal.” This gives both sides the incentive to maintain the status quo during the final days – which is what you want.
Disappearing equipment
Remember the scene in the Richard Pryor movie, “Moving” where the guy selling the house takes the doors, swimming pool AND the kitchen sink? This has happened more than once. A purchasing doctor walks into the office on closing day to find everything not bolted down – and some things that were—gone from the office. Good luck trying to see a full day of patients with nothing more than the dirty plastic fork left lying in what used to be the X-ray area.
Again, your rescue here is the purchase document. Take the time to list out what supplies and equipment will be taken by the purchaser so that there’s no confusion and protection for all parties involved. Usually, this equipment listing involves the big ticket items. Both parties in a sale don’t have to worry about listing the paper towel holder, and other minor items, as an item to be kept. Of course, those stay. If you do, you are probably dealing with a dirtbag. Expect future problems to result.
The “I was told” deal
Here’s what happens in this situation: you get a transaction done to purchase an office. When you subsequently meet with the staff, you are notified that they were promised a bonus for going through the transition. A bonus? You are going to have enough trouble getting the practice going in the right direction as it is –without any cost on top of that. We’ve seen this a lot. Associates were told they’d be getting a piece of the profit. Banks were told they’d be paid early. Vendors were told they’d be getting more purchases. And so on down the line. In any event, you are left holding the bag with potentially disgruntled people or entities. You didn’t know about these deals primarily because these people were not involved in putting together the purchase transaction. You didn’t speak to them until after the fact. Exciting, huh?
To deal with this, you could run back and forth between the person asking for the deal and the seller to play a little “he said, she said.” But that is unproductive and a bit high schoolish. Rather, you can simply ask the seller before signing day to let you know what other arrangements are out there. Alternatively, simply let people know that if it’s not in the purchase document, you cannot verify the deal and cannot honor it. There’s a new owner in town and you need to be permitted to run the practice your way. Still have disgruntled individuals? Replace them.
The popular former doctor
The selling doctor leaves and so do his patients. Maybe he opens up down the street (noncompete portions of contracts regularly prove to be unenforceable). Maybe he tells his patients to go see a buddy of his or hers instead of you (after all, you are just a check). And most commonly, the doctor’s personality was such a force in the office and surrounding area that his or her leaving has new patients looking elsewhere.
There are a lot of ways to deal with this up front. First and most importantly, know the situation with which you are dealing. If the selling doctor is particularly popular with patients and staff, you should probably work out a deal with that doctor to introduce you to patients on certain patient days and to phase out over time instead of simply leaving on the closing date. Second, understand how you plan to attract new patients. Work with the selling doctor to maintain other relationships with referrers, local businesses and major employers if they represent sources of new patients. Finally, a number of purchase contracts include lookback provisions. After 3 months or 6 months, if patient transfers increase by, say more than 300% over the past year’s average, the purchaser is allowed a set reduction in the price of the practice.
As with a lot of things, a number of pitfalls can be avoided with good common sense. If something doesn’t look right to you, don’t be afraid to walk away. The worst deals are the ones you absolutely have to have. The necessity to do them causes you to overlook problem areas that become significant later on.
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