Determining Post-Transaction Expectations Between a Buyer and Seller in a Deal
The transfer of a healthcare business post-transaction can bring about substantial changes in the business flow, both positively and negatively. The first 90 days after a transaction are where important conversations between the new owner and previous owner should take place regarding the direction the business is going and where they each stand after the contracts have been signed.
Shannon Coleman Egle, Attorney with Kramer Rayson LLP explains that post-transaction, in healthcare there are some reasons that a seller would want to remain on board as an employee or an advisor for the first 90 days after the ink dries.
Coleman Egle says it is common in the healthcare marketplace for the seller to become employed by the buyer post-closing so that the buyer may maximize the value of the assets being purchased. However, she adds that if the seller is unwilling to become employed by the buyer, the purchase price the buyer is willing to offer will usually be much, much lower. The buyer buys a practice because it wants the physician-seller – not because it wants the used tangible assets of the practice.
“If staying on, the buyer and seller need to discuss the terms of the employment arrangement going forward, including compensation, employee benefits, paid time off and non-competition provisions. Call coverage is also an important topic of discussion,” Coleman Egle says.
“Most sellers are concerned not only about the details of the initial term of employment, but, especially if the physician-seller is not near retirement, the seller should also be concerned about the details of employment beyond the initial term, when he or she has lost negotiating leverage.“
Robert Zinkham, partner at Venable LLP says that in the hospital world, a lot of the hospitals are non-profit. If two hospitals merge, or one buys the other and they are non-profit, it’s not that unusual for the executive team to remain.
“If you are talking about outright ownership; take the Ambulatory Surgery Center world as an example. If one group buys out an existing ASC or group of ASCs, it’s really negotiated as to whether the former owners have a role going forward; it’s really up to the parties,” Zinkham says.
“If the buyer thinks the management of the existing healthcare facility is good, then they are more likely to keep senior management. However, in terms of ownership, if the owner has sold 100 percent of their interest, they are probably not going to have much say in how the company operates going forward.”
William J. Spratt Jr., healthcare partner with Akerman LLP, says that during the process for post-closing and integration there are substantial issues that are critical and need to be addressed on a priority basis.
“I think the biggest post-closing challenge from a business standpoint is basically integration of the target with the buyer. This is integration in terms of operational integration, management integration and systems integration,” Spratt says.
Spratt says that as far as integration with the buyer, probably the biggest challenge that he sees is cultural integration.
“This differs in response to whether the buyer is a financial buyer or a strategic buyer. Strategic buyers are looking to expand the scope of their existing operations and they already have robust systems. Whether they are compliance systems, management systems, billing systems, information technology, EHR systems; they want to try to get the target integrated into their organization as quickly as possible,” Spratt says.
According to Spratt, the time length of the integration depends on the size of the target and how compatible their systems are.
“That is one of the issues that should be focused on during due diligence. As lawyers, we are not the business people but we are sensitive to the fact that there are going to be challenges in terms of integrating various programs and systems. Typically, we try to surface those issues in diligence and create a post-closing checklist from a legal perspective of things that need to be done,” he says.
Zinkham says a lot of the post deal issues should be dealt with before the buyer actually gets into the company.
In a transaction, both parties make representations to each other about what’s going to happen and what’s the current state of the business, etc. Once the new owner gets in there and sees what’s actually going on, on the ground, they are going to want to make changes as quickly as possible. If the business is thriving, there are probably not that many problems. But if the business is in some trouble and that’s why they are selling, there are some heavy conversations that should be had.
“You have done due diligence, you have looked around, you have talked to people, but you don’t really know what the business will be like until you actually take over as the new owner,” Zinkham says.
“Typically, in an M&A transaction you would have some sort of hold back in the purchase price, maybe for an 18 month period. You would identify then that if it went wrong, you as the seller would have the ability to keep part of the purchase price. That is very common. Mostly they are economic remedies and not so much remedies of personnel. If somebody sold a business, they are going to be willing to talk to the new owners if personnel issues come up or things they don’t understand.”
While the focus has mainly been on buyer adaptation to the new changes in their business, Coleman Egle says the seller will also go through an adjustment period if staying on.
“The seller will need to adapt to no longer being his or her own boss, so to speak. Becoming an employee – and answering to someone else – is sometimes a very new concept to the seller. How a seller reacts to this shift in power is largely dependent on the attitude of the buyer (or the agent of the buyer in charge of managing the newly acquired practice) and the attitude of the seller. Some sellers react very well to having the stress of running the business of the practice removed, while others miss the control and authority of being the owner of the practice,” she says.
Zinkham says the most common thing that happen can be seen through a specific example.
“We represented a for- profit hospital that was owned by a family. They had run it for many years as an independent facility, and they sold it. The deal was, for the existing management team, they got contracts for a two year period. They knew that they were going to be able to continue to run the business subject to approval that the board was changed entirely but the management team stayed in place for a period of time and then at the end of that period, they were out. That’s pretty typical if the existing management is allowed to stay for a period of time,” he says.
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.