Three Under-Appreciated Issues in a Practice Purchase Transaction
When purchasing a practice, there is a veritable cornucopia of things to do. Based on the sheer number of tasks to complete to get ready to close, it is easy to overlook any number of potential risks and issues, not realizing the problem until you find closing is delayed or there is a post-closing problem with the numbers. This blog presents a very brief introduction to three of these items, because these are three deal subjects most likely to cause delays or problems down the road.
Credentialing. Like any other business, healthcare providers want to get paid for services rendered. As such, start the credentialing process early in the purchase process: as soon as the ink is dry on the letter of intent, start the process. Different networks have different requirements, and some are easier to deal with and have a quicker process. How relevant the credentialing process is to you depends on the nature of the business you plan to operate. But almost all service providers will need one degree of credentialing or another. And if you can’t bill networks for services provided once you have the practice, that can pose a major risk to the cash flow. So start early to avoid delays to closing.
Accounts Receivable. Unless a buyer can get AR on overwhelmingly friendly terms (e.g. a drastically reduced % of current book value), it is typically wiser to leave the existing AR of the practice with the seller. While money that is owed to the practice for services already rendered can seem like an easy bump to the cash flow, taking on the seller’s AR brings with it any number of problems. One of the most common is any issues with the bookkeeping of the seller prior to closing; in my experience, the leading driver of disputes between the parties after closing is inaccuracies in the numbers and the buyer not getting what is promised. Generally speaking, it’s best to let the Seller continue to collect its AR, particularly as the deal structure typically includes a collection fee that the buyer can charge the seller for collecting outstanding AR.
Patient Credits. Perhaps the most misunderstood budget line item, patient credits represent money owed by a practice to a patient, typically resulting from an overpayment. Sellers will usually want the buyer to take on responsibility for patient credits after closing. That way the seller can walk away clean and not have to worry about completing this ongoing responsibility. And that is what patient credits are: a responsibility, as the practice is under an ongoing duty to reimburse the patients the balances on their accounts. Failure to do so can create major issues for the patient. As a general rule, the buyer should push the seller to reimburse all patient credits by closing. This means cutting a check, even though this can be a major inconvenience to the seller. This should be accompanied by appropriate risk allocation and indemnification terms in the purchase agreement.
Terms, deals and relationships vary. And, of course, different purchase deals can accommodate alternatives to the above based on the pertinent terms and relationship between buyer and seller. But as a general rule, a buyer should avoid varying these approaches unless strongly incentivized to do so.
The information herein is not legal advice and does not create an attorney/client relationship. The information is in the form of legal education and is intended to provide general information about the matter. The above is not, nor is it intended to be, legal advice. Consult your attorney with questions.