6 considerations for negotiating LOIs

Lately, I have seen an uptick in the number of physician practices being purchased and sold. Many of my clients prefer to handle the negotiations themselves and only come to me once they have a signed letter of intent (LOI) or another similar document.

Although I can appreciate that many practices would like to limit their legal costs, sometimes a poor or incomplete LOI can pose expensive problems or cause a transaction to fall apart. When negotiating a LOI, I recommend you consider the following:

Verify party involvement.

Make sure the correct parties are identified, and it’s clear whether stock or assets are being sold. In many states, only physicians can own professional entities, so deals where nonphysicians are involved need to be carefully reviewed. Additionally, certain types of corporations can only be owned by human beings, so the parties need to be aware that incorrectly structured transactions might cause unanticipated legal and tax consequences.

Itemize what’s for sale.

Physician practices sometimes operate multiple locations and entities, which may or may not be part of the deal. The LOI should be very clear about what is being sold. An essential term of the LOI is to also list the assets, equipment, service lines, and so forth not included in a deal.

Plan to get paid.

How will accounts receivable (AR) be handled? Many clients are very casual about this issue and assume it will be “figured out at a later date.” This can be a mistake. The parties need to decide how AR will be collected. Will the seller work on the weekends to collect AR? Will the seller pay the buyer’s staff to perform the work? Can the buyer’s staff do it during work hours? Will the buyer collect the AR and turn over the money to the seller for a fee?

The parties also need to confirm how their electronic health record (EHR) systems will interface and how EHR records can be accessed for billing and collections.

Define post-deal terms.

What commitment is the buyer making to the seller to retain their services once the deal is completed? Will the physician(s) be offered an employment agreement? Will the agreement reflect similar terms related to the location, hours, compensation, and benefits they enjoyed prior to the sale? What about tail and noncompete clauses?

Many sellers make assumptions based on oral discussions and are later surprised when the offered terms are different-to the point of being unacceptable. I also think it’s a great idea if the LOI identifies essential nonphysician employees in the practice and the terms they will be offered, including the preservation of their seniority as it relates to benefits.

Determine patent record management responsibilities.

In addition to EHRs being compatible, the parties also need to determine who is responsible for inactive records and how they will be stored and maintained in accordance with HIPAA and other applicable laws. This issue is often overlooked.

Set a closing date.

How long will the parties have to bring the deal to a close? Often, buyers want a commitment from the seller that they will not negotiate with anybody else during the due diligence period. However, these periods can last far longer than expected, and few LOIs contain a deadline. If a seller has expended resources through the due diligence process, and the buyer elects to walk away, this is an unfair outcome. An LOI should address the deposit of earnest money-or at least a promise to pay legal fees of the seller- if the buyer walks away without a material reason.

Beyond these six areas of consideration, sellers and buyers should also take time to review health insurance, malpractice insurance, pension plans, and other benefits the seller may offer. Special consideration should also be paid to how the seller’s offerings may compare to what the buyer brings to the table. Additionally, transitioning and/or terminating such plans can require careful planning that many parties overlook.  

Ensuring that these and other significant issues are included an a LOI can assure a smoother and less expensive transaction. That can make it easier for the everyone during the transition, including employees and patients.

Ericka L. Adler has practiced in the area of regulatory and transactional healthcare law for more than 20 years. She represents physicians and other healthcare providers across the country in their day-to-day legal needs, including contract negotiations, sale transactions, and complex joint ventures. She also works with providers on a wide variety of compliance issues such as Stark law, Anti-Kickback Statute, and HIPAA. Ericka has been writing for Physicians Practice since 2011.