The Essential Steps in an M&A Transaction in Healthcare

Healthy Habits of Billing and CodingHealthcare M&A Transactions can be extremely complex and require numerous steps, negotiations and processes to be accomplished in order for the deal to finally go through.  From Letters of Intent to Earn Out Provisions, the process can be one that relies on details and the knowledge of its inner workings in order to be accomplished properly.  The Ambulatory M&A Advisor takes a look at the essential steps in an M&A transaction and what they mean to the development of the overall deal.

Christina Van Vort, partner with the law firm of Garfunkel and Wild says that  the first essential steps in an M&A transaction come in with the Letter of Intent (LOI).

“The letters of intent can be useful to help the parties shape the transaction and to ensure that they are on the same page as to essential elements.  Sometimes, you can go directly to contracts but this often can lead to further delay as the parties begin to “work out” their issues as the draft goes back and forth,” Van Vort says.

At the outset, the parties need to make a calculation as to whether the time to put together an LOI will save time down the road.  Often times, the answer is yes and an LOI should be executed, she says, adding that either party can draft the LOI, as the non-drafting party will review and provide comments.

Jay Hardcastle, partner at the law firm of Bradley, Arant, Boult, Cummings says that usually the drafting of a letter of intent follows the execution of the non-disclosure agreement.  Meaning, once the parties have exchanged enough confidential information to determine that they want to proceed, the lawyers will draft an LOI.

“Usually lawyers will draft them because they often have a few binding provisions.  The binding provisions would typically be a “no shop” clause where the seller would agree to negotiate exclusively with the proposed buyer for a certain number of days, and another covenant to not issue any press releases or allowed to go public with the transaction until both parties are ready,” Hardcastle says.

“I think lawyers should draft them because of those issues, the rest of it is unbinding and generally just contains an outline of the proposed transaction.”

Van Vort agrees that the LOI needs to be done early in a transaction and the parties need to decide what terms, if any, will be binding even if the transaction does not proceed.

“In addition to the important listed above of a LOI, another useful purpose of the LOI is to have a document which can be taken back to a Board for approval before marching into drafting documents.”

Purchase agreement and it’s contents:  The purchase agreement is essentially a road map for getting from signing the agreement to closing, and a risk allocation covenant.  In terms of the roadmap, it will describe what each party has to do to get the transaction closed.  In terms of risk allocation, the purchase agreement will allocate risk for pre-closing and post-closing problems in accordance with the negotiated deal between the parties.

The purchase agreement will contain representations and warranties as to the state of the facility as of the closing date.  The seller should do their own due diligence to make sure that those reps and warranties are true to avoid indemnification claims based on falsity of representation.

Alice Gosfield, attorney and owner of Alice G. Gosfield and Associates says representations and warranties are different kinds of provisions in a contract that are essential to the success of the M&A process.

“Typical representations will be things like the entity has been dually authorized throughout its existence necessary for it to conduct its to conduct business as it has; the practice has maintained all of the licenses and approvals that are business.”

According to Gosfield when examining representations and warranties, the first thing to do with the representations and warranties is to ensure that the information provided is as accurate as possible and to the best of the seller’s knowledge.  Gosfield says this is important because one of the items they will be asked to represent and warrant is proof of compliance with the law in terms of Stark, Anti-kickback, false claims, and other regulations.

Gosfield says there are some essential or fundamental representations and warranties, and there are others that may be a little bit more peripheral.

“The more fundamental ones tend to be that the people representing own the business and in fact are the ones who owns the business and nobody else has claim to a portion of the business or a portion of the sale proceeds,” Gosfield says.

Also in the representations and warranties, Gosfield says tax areas are examined such as tax returns paid timely and that taxes owed by the business have been paid.

What would representations and warranties be without the process of due diligence? As with any corporate transaction, due diligence is crucial to determine liabilities, responsibilities and potential issues.

According to Van Vort, the due diligence may need to focus on licensure (and any limitations), HIPAA (e.g. and any breach notifications that have occurred and whether a HIPAA plan exists), compliance (e.g. has there been any qui tam allegations and is there a robust program) and billing practices (e.g. have there been any third party audits resulting in payback by the provider).

“However, in healthcare there are some specific and unique concerns. For example, an investigation by a governmental payor could result in a significant financial obligation of the provider.  Also, regulatory due diligence is very important because of the complexities of the health care environment,” Van Vort says.  As far as due diligence goes, Hardcastle explains that it is beneficial for both sides of the proposed transaction to perform diligence on the selling business.  This will prevent unexpected issues and possible indemnifications that could pop up post-sale.

For more information on post-sale liabilities visit our article on the topic here

In an M&A transaction there are various types of acquisition structures that can apply.  According to Andrew Blustein, partner at Garfunkel Wild,  selecting the right structure for one’s healthcare business depends on many factors.  Blustein says this mainly includes the type of entity and the goals of the parties.

“When for-profit providers are acquired, deals are usually structured as asset or stock sales.  Not-for-profit providers may also sell assets, or a party may acquire control in a different manner.  In short, choosing the right structure is very particular to each transaction,” Blustein says.

Hardcastle says the more common structures for physician related outpatient ventures would include asset purchases and partial purchases of interest in the entity that is the actual provider.

“In an asset purchase, the seller sells all of its assets and the buyer assumes selected liabilities.  In an interest purchase the buyer buys an interest in the actual entity.  The end result is that the existing seller still retains an interest and the resulting entity could be called a joint venture,” Hardcastle says.

Hardcastle goes on to discuss the eaarn out provision.  These provisions usually state that a seller may obtain future compensation based on future financial goals of the entity.

Hardcastle says that earn outs occur very infrequently in transactions of this type due to being problematic in the healthcare business.

“This becomes a problem when the seller has any influence over referrals, after the transaction closes.  For example, in a surgery center acquisition where the buyer is buying partial interest in the surgery center from surgeons who use the center, an earn out would be inappropriate because the surgeon’s post closing utilization would affect the ultimate purchase price,” Hardcastle says.

For more information on Earn Out Provisions, read our article on the topic here.


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

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