Selling a Medical Practice

A physician selling a practice is usually selling two things at once: a business, and several more years of their own labor. Almost every transaction in this market requires the selling physician to keep working for the buyer afterward, on compensation terms that are part of the deal and frequently worth more than the purchase price. A seller who negotiates hard on price and accepts the employment agreement as presented has usually negotiated the wrong document.

The Law Offices of Albert Goodwin represents physicians and practices in New York City in sales, acquisitions, and affiliations.

Who the Buyer Is Changes Everything

Another physician or group. The most straightforward transaction. Usually an asset purchase, financed by a bank loan or seller financing, with the seller transitioning out over a defined period. The main issues are valuation, the lease, the records, and the seller's covenant not to compete.

A hospital or health system. The system typically employs the physicians directly or through an affiliated entity, acquires the assets, and takes over the practice's operations. Compensation moves to a system-wide model, autonomy decreases substantially, and the purchase price is constrained by fair market value requirements, because a system that overpays a referral source has a serious regulatory problem. Sellers should expect a rigorous valuation process and less price flexibility than in a private sale, and should focus on the employment terms, the term length, and what happens if the system later closes or relocates the practice.

A private equity backed platform or management company. Because non-physicians cannot own a New York practice, these transactions are structured around a management services organization: the investor group buys the practice's non-clinical assets and enters a long-term management agreement, while the clinical entity remains physician-owned, often by a designated physician with a transfer arrangement. Consideration frequently includes rollover equity in the platform, which is a bet on a future exit rather than cash, and the seller should understand exactly what that equity is, where it sits in the capital structure, and what happens to it if they leave. See practice structure and the corporate practice of medicine.

Deal Structure

Most practice sales are asset purchases. The buyer acquires equipment, the leasehold, the name and goodwill, the phone number, the website, and the patient records subject to the applicable requirements, and leaves the seller's liabilities behind. The seller keeps pre-closing receivables in many deals, or sells them at a negotiated collection rate.

Equity purchases appear where something in the entity is worth keeping: an unassignable payor contract, a favorable lease, an accreditation, or a licensure that is entity-specific. The tradeoff is that the buyer inherits everything, including billing exposure that may not surface for years, which drives deeper diligence and stronger indemnities.

Purchase price allocation is worth real attention, because the allocation between equipment, goodwill, non-compete consideration, and the employment agreement drives the tax result for both parties, and the parties' interests conflict. See asset purchase agreements and mergers and acquisitions.

Regulatory Constraints on Price

In an ordinary business sale, the price is whatever the parties agree. In health care, where the seller will continue to refer patients to the buyer, the price and the post-closing compensation must be consistent with fair market value and must not take into account the volume or value of referrals. This is not a formality. It is why hospital transactions involve third-party valuations, why compensation is benchmarked, and why a seller pressing for a price the buyer's valuation does not support will encounter resistance that has nothing to do with negotiating posture. See Stark and anti-kickback compliance.

New York Transaction Notice

New York requires advance written notice to the Department of Health for material transactions involving health care entities, submitted before closing and including specified information about the parties, the nature of the transaction, and its anticipated effects. The requirement reaches a range of transaction types subject to thresholds and exclusions. It does not create an approval process in the way a certificate of need does, but it does create a timing obligation, and it should be identified early in the deal calendar rather than discovered during closing preparation. Certain transactions involving facilities, as opposed to physician practices, carry their own separate approval requirements.

Diligence That Matters in a Practice Deal

• Billing and coding. The largest hidden liability in any practice. Buyers sample charts against claims, and sellers should expect it. Where a problem exists, discovering it during diligence is far better than discovering it after closing, and the sixty day overpayment rule may require action independent of the transaction. See audits and overpayments.
• Open audits, overpayment demands, and prepayment review, which follow the seller and can follow the practice.
• Payor contracts and credentialing. Whether contracts are assignable, whether rates survive, and how long it takes to credential the buyer's physicians. This is frequently the longest pole in the schedule and is regularly underestimated.
• Referral and vendor arrangements, reviewed against the exceptions and safe harbors, since a defective arrangement is a liability the buyer inherits.
• The lease. Whether it can be assigned, what the landlord will require, and whether the seller is released from a guaranty. See commercial leases.
• Equipment. What is owned, leased, or financed, and what the payoff is.
• Employment. Wage and hour practices, employment agreements with associates and their restrictive covenants, and any classification issues with contracted clinicians.
• Malpractice history and tail coverage, including who purchases the tail for the practice and for departing physicians.
• HIPAA posture, including whether a current security risk analysis exists and whether business associate agreements are in place. See HIPAA and records.
• Exclusion screening of the practice and its personnel against federal and state exclusion lists.

The Employment Agreement Is Half the Deal

For most sellers, the post-closing employment agreement determines the actual economics. Negotiate it in parallel with the purchase agreement, not after. The terms that matter: the compensation formula and whether the productivity thresholds are achievable given how the buyer will change scheduling and payor mix; the term, and what happens at the end of it; whether termination without cause forfeits any unpaid purchase price or rollover equity; call obligations; clinical autonomy over scheduling and staffing; the restrictive covenant, which in a sale context is enforced more readily than in an ordinary employment context because the buyer paid for goodwill; and the treatment of the tail. See physician employment agreements.

Deferred consideration deserves particular scrutiny. Earnouts tied to practice performance after the seller has lost control of scheduling, staffing, and payor contracting are difficult to protect. Where an earnout is unavoidable, the agreement should specify how the metric is computed, require the buyer to operate consistently with past practice, and provide access to the records needed to verify it. See earnout disputes.

Patients and Records

Patient records transfer subject to the applicable rules, and patients must be notified of the change and of how to obtain their records or direct them elsewhere. The transaction documents should address custody, access for the seller in connection with post-closing claims and audits, retention for the full period New York requires, and the content and timing of the patient notice. Where a physician is retiring rather than continuing, the notification and custodial arrangements are a licensure obligation as much as a contractual one.

If You Are Buying

We represent buyers as well, where the priorities invert: thorough billing diligence, indemnification with an escrow or holdback that survives long enough to cover a payor look-back period, representations covering compliance and the absence of pending investigations, confirmation that the seller's referral arrangements were compliant, and an employment agreement that actually retains the seller for long enough to transfer the patient relationships you are paying for. See due diligence.

You can contact us by phone at 212-233-1233 or by email at [email protected].