What to look for in a Letter of Intent to Purchase a Medical Business

What to Look for in a Letter of Intent (LOI) to purchase or sell a medical business?

Not all Letters of Intent are the same, or across different industries.  When buying or selling a medical business, there are certain words of caution:

1) Do Not share patient files or data;

2) Do NOT refer to patient lives - if you refer to the number of patient lives in valuing the business, you will certainly run the danger of a patient referral violation;

3) Be Careful of the Parties you are about to get involved with, at least run a Medicare Exclusions check, and a background check. 

If you don't understand why the above suggestions are a must, you are probably new to the industry or have never worked on a competent professional acquisition or divestiture team. Also, please do check out our sample due diligence checklist to buy a medical business.

If you just wish to get some legal input and are not retain a full-on law firm engagement, you may consider making a 1 hour appointment  to discuss the specifics of your situation, for a prepaid legal fee of $475 legal, click here

The following is a guide on how to negotiate a Letter of Intent (LOI) , also called a "Term Sheet" or a "Memo of Understanding" (MOU).  When purchasing a medical business you better know what you are bout to get into.

Here is a letter of Intent with healthcare compliance language in it.

Medical Business Letter of Intent to Purchase or Sell a business
Medical Business Letter of Intent to Purchase or Sell

The Following Are the Key Pointers on What to Look For in a Medical Business Purchase or Sale Letter of Intent?

1) Buyer:

Who is the buyer - the actual real legal name? have you known them for a long time? where are they located? what is the buying company's size? Do they have a CFO or a Controller? Do they have financial statements to show? Are their operations capable of taking on a new medical business? Do they have the policies and procedures in place to handle added business volume? Do they have the financial reporting system that will reflect the proper accounting for the new business group?  Do they have the finances to pay for the transaction? Are they litigious? 

2) Seller:

Who owns the medical business you are about to buy? is there more than one partner? Do you know their actual names and done a license check?  Is the seller(s) willing to work for the buyer?

3) Business Assets to be Purchased:

What is the actual name of the business?  What assets are you purchasing from the practice? It must NOT be the patients, as that can be deemed paying for a referral.  Are there favorable / unfavorable health plan contracts? Is the equipment, phone number and website included?  Is there any medical equipment included in the deal?  Have you looked at the financials of the business (for the last 3 years)?  Do the financials show revenues or expenses that are expected to continue after the purchase is complete?  Will the physician then become an employee? do you have a physician employment contract to offer?

4) Purchase Price:

What is the purchase price, is it money or stock or combination of both?  Will there be an initial deposit before the transaction progresses much further? What will be the money paid at closing? Will there be seller financing or bank financing? Is there going to be a promissory note in place?  What is the structure of payments? What happens if the Buyer defaults on making Payments?

Is there a Closing Date? A date certain that the transaction will occur, so the parties are not dragged on and on and on till someone gets tired and walks away. 

5) Real Estate:

Is there real estate involved in the deal? Lease or purchase of real property? Is there Cyber Real Estate - meaning domain names and connected websites?

6) Financial Accruals and Bank Accounts:

Are there financial accruals to take into accounts? Meaning have things been prepaid or things purchased that there is an obligation outstanding. Is transferring control of the bank accounts a part of the deal?

7) Executive Employment Agreement:

Will any of the Executives continue to work in the practice or are the executives retiring or leaving the area? Will there be non-compete restrictive covenants? What will be the annual salary? What if the executive decides to work less hours because they are either retiring or just simply burned out?  What is the allowance for vacation and sick days? What will be the employee benefits package look like? Do you have an executive employment contract?

8) Due Diligence:

What are the obligations for due diligence? Here is a sample due diligence checklist to buy a medical business.

How many days does each side have to request for information, to then provide the information and then to review and respond to the information? That is essential so that transaction fatigue does not settle in. 

9) Termination of the Letter of Intent:

Under what conditions will the letter of intent be terminated?  Will there be any continuing obligations under the LOI that keeps the parties bound?  What happens to the Confidential Information that was exchanged?  What if another Competing Offer that comes in, can the LOI be terminated then?  It is extremely important as to how this provision is structured. 

10) Healthcare Compliance is Essential

In any healthcare transaction, healthcare compliance language is a must.  You better make sure that the letter of intent is healthcare compliant.  Otherwise it can be a federal offense, if the deal is not structured properly.  There is certain language that is critical to have in these physician practice acquisitions.  For a sample healthcare compliance language letter of intent, go here:

Medical Business Letter of Intent to Purchase or Sell a business
Medical Business Letter of Intent to Purchase or Sell

When dealing with a purchase or sale (buying or selling) a physician practice, there is typically a lot of money on the table, and there are serious potential pitfall if the transaction is simply for the referral of patients.  It is best to speak with an attorney about this. 

Here is an informative video seminar on How Mergers and Acquisitions are Done in Healthcare.

Hosted by the South Florida Hospital News and Healthcare Reporter. 

If you just wish to get some legal input and are not retain a full-on law firm engagement, you may consider making a 1 hour appointment  to discuss the specifics of your situation, for a prepaid legal fee of $475 legal, click here

Ben Mirza is not only an attorney but was formerly a CPA, with a masters of public health.  There are over 100,000 attorneys in Florida, less than 500 of whom were ever Certified Public Accountants, and even less have the trifecta combination of law/finance/strategic healthcare background.   The benefit of this combined and layered skillset works well for clients who want an advocate to approach the issues holistically.  

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