The Perspective of the Buyer in a Healthcare Transaction
In a healthcare transaction, a lot of the focus is placed on the seller who has to make numerous representations and warranties, and present financials to the prospective buyer or buyers involved in the transaction. The Ambulatory M&A Advisor flips the coin to examine the other side: the point of view of the buyer in a transaction. From structure, to due diligence, the buyer travels a path that deals with several components that can either make or break the success of the deal.
Thomas Hess, partner with Dinsmore & Shohl LLP says that negatives and risk come with the fact that the buyer is purchasing an unknown quantity.
“The buyer is somewhat familiar with the business that is being bought, but they don’t know the insides of what is being bought, and everything related to the business until they actually get in and start doing the deal,” Hess says.
“For example, from a nursing home standpoint representing the buyer, the first question is whether it is going to be a stock deal or an asset deal. If it’s a stock deal, the buyer is automatically assuming all liabilities both known and unknown. From a buyer’s aspect, I always like to do an asset deal where I am buying those things to which I agree.”
Hess says one of the many questions a buyer must ask themselves is if they are going to assume partial liabilities, any liabilities or none of the liabilities.
“If it’s a Medicare certified provider seller, I would recommend that the buyer assume the Medicare number. But. when assuming the number, the buyer also assumes the liabilities both known and unknown even though the asset purchase agreement may state that the buyer is not going to assume any of the liabilities; federal regulations and case law states that when you assume the Medicare number, you are assuming the Medicare liability of the seller,” Hess says.
“Since you are going to be assuming the Medicare liability of the seller you have to make sure that your due diligence is complete; for example, what is the Medicare over-payment history? Next, the seller is going to make representations and warranties regarding the condition of the real estate or the physical building? Or is the seller going to say to the buyer that the buyer must take the real estate building in their ‘as is where is’ condition.”
If the business is taken under this condition, Hess says the buyer needs to do a thorough investigation of the land and the building from the basement to the roof, and everything in between.
Hess adds that the buyer may want to hire an architect or a structural engineer to come in and perform an assessment of the building to see what may have to be repaired soon after the sale.
Regarding real estate and the buyer experience, most lenders will require a phase one environmental survey. So, you have to make sure that that survey is clean from a buyer’s aspect. If the survey is not clean, then ensure that the deficiency can quickly be remedied by the seller.
“As part of your due diligence you are going to be looking at the seller’s contracts with various vendors to see what contracts can be assumed, then decide if you want to assume those contracts,” Hess says.
“Sometimes a seller’s facility is financed in a certain way or they have secured HUD financing. See if the buyer has the ability to assume that HUD loan or if it is expected that the buyer is going to have to go out and seek new financing for this particular purchase.”
Also, the buyer wants to check for key employees on the seller’s end and whether the buyer is going to make an offer to retain those key employees. Payment may not necessarily be offered at the same salary that the seller has been providing, but the buyer should determine who the key employees are in the facility and determine if they will offer them employment.
As a closing structural point, Hess says that whenever a business is selling, there is always a start up time and the buyer should try to minimize the competition. Hess recommends the buyer secure a non-compete agreement with the seller. This way the seller does not have the ability to go out and open up a competing business just down the road.
Rodney Adams, leader of the Professional Liability Defense Team at LeClairRyan says that the development of an agreement needs to be crafted very specifically to the jurisdiction that the parties are in to make sure it is complying with the nuances of that state’s interpretation of non-competes.
“If you are the buyer you want to make sure they are enforceable. If you’re the seller, the broader or more overreaching the better, because then it’s not enforceable. However, if the goal for the buyer is to force a non-compete, then you need to be very careful in crafting those,” Adams says.
“I’ve seen physicians who have sold their practices and sold their clinic and within six months or less, they have gotten the itch or the need to go back to work and they open another office. That’s when you get into the fight over whether or not the non-compete is enforceable or not.”
Paying for the Deal
When paying for the overall transaction, the buyer is often faced with several choices. A buyer needs to figure out where they will gain financing from, how much is required, and how much time they have to obtain the funds,
Hess says that in the process there is generally a LOI that says the purchase agreement will be signed 45 to 60 days after the execution of said LOI.
As soon as the LOI is signed, the buyer needs to start doing its due diligence. It needs to start asking for all items of the seller so that it can start its’ review; start the phase one survey, start contacting its potential lender.
This is where the buyer finds out if the lender will offer a letter of commitment because sometimes the purchase agreements will say that the buyer must be prepared to finance the deal within so many days of execution of the asset purchase agreement.
“It could say the letter of intent is going to be signed on August 1; the asset purchase agreement will be negotiated by September 15, and by November 1, all diligence and contingencies including financing will be resolved. If they are not resolved, the buyer can then say on October30, they are not going to do the deal or extend the deadline,” Hess says.
“The buyer may be able to negotiate a hold back on a percentage of the purchase price. For example, if it is a 9 million dollar deal and the buyer is going to assume liabilities, sometimes they may want to hold back 200,000 dollars from the closing. 100,000 dollars will be released six months after closing, then the balance will be released six months after that. The hold back would be used to pay for any liabilities which have occurred because of seller conduct pre-closing but not presented post closing.”
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.