Medical Practice Sales Contracts
[Reviewing Terms, Conditions and Agreements]
By Charles F. Fenton; III
Yesterday is a cancelled check. Tomorrow is a promissory note. Today is cash – Unknown
Dealing with many issues concerning the actual contracts that affect the purchase or sale of a medical practice can be daunting. For example, this chapter will not deal with issues of determining whether or not the practice should be bought or sold. Nor will it determine the proper price of the practice. These topics have been addressed earlier in this book.
Yet, in actuality, agreement on the purchase price is but the first step in agreeing upon the sale or purchase of a practice. After agreement on the purchase price a determination of the various other terms of the agreement may become more difficult than the agreement that was reached on the price.
To the physician, many of the terms may seem like “lawyer posturing.” However, it is the responsibility of the lawyer to act as an advocate for the client, determine certain contingencies that might occur, and protect the client from the adverse effects of such contingencies.
The first issue is a determination of the parties that will be bound by the terms of the agreement. Although at first blush such a determination may seem apparent (buyer and seller)! However, there may be other parties at interest that should be made part of the agreement to protect certain interests.
The first determination is whether the party at interest is an individual, group of individuals, or an entity (such as a partnership, limited liability partnership, limited partnership, limited liability company, or corporation – whether an S corporation, C corporation or a professional corporation). In many instances, even if the party at interest is an individual is an entity, the individual or individuals behind the entity should be made parties to the agreement.
From the buyer’s perspective, the purchase of a medical practice is a highly person-oriented business. The practice value depends much upon the personality of the current treating physicians. If the current treating physicians are also the owners of the entity, then binding those individuals (especially as applies to the restrictive covenant) is of primary importance.
If the current treating physicians are not owners of the entity, but rather employees, then a determination of whether they will continue in their same positions or whether the buyer will be taking over the treatment of patients becomes the prime focus. If the current treating physicians will be continuing in their same positions, then their current employment contract must be reviewed to determine whether the rights of the seller will accrue to the buyer.
If the rights of the seller will not accrue to the buyer, then the Purchase and Sale Agreement must have a provision that makes the continued employment of those current-treating physicians a condition to consummation of the sale. In such instances, the new employment agreement might be an exhibit to the main agreement and executed contemporaneously with the main agreement.
If the current treating physicians will not be continuing in their same position and if the purchaser will be assuming treatment of the patients, then the main agreement must provide for the dissolution of the employment agreement and provision must be made for restricting the ability of those physicians from competing with the buyer. If the employment contract with the seller contains a restrictive covenant, then the buyer must ensure that such covenants will accrue to the buyers benefit. Otherwise, the buyer should insist that those physicians sign restrictive covenants. In such an instance, a portion of the purchase price may need to be allocated towards the consideration for those restrictive covenants and paid directly to those physicians.
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