The Executive Suite: Asset protection for medical practice exits

In part six of our look at asset protection issues in the news we look at why asset protection is vital when you exit a medical practice.
Owner risk does not end when you sell a practice (or any other business)

As a wave of private equity acquisitions of private medical practices continues across the country, asset protectionis just as important for doctors who are exiting a practice (or any other business) as it is for those who are running one. In part 4 of our look at Asset Protection in the news I warned Physicians Practice readers about the risk involved in the use of abusive trusts to avoid taxation at the exit of your practice, bub there are many others. Most succession and exit planners are focused on important issues like valuation, taxation, life insurance and financial planning and estate planning to pass your success onon when you are gone.What is often overlooked however, is any real plan to protect this additional sudden wealth, while you are alive.

The first and most obvious example of this failure is not being adequately insured for traditional malpractice, E&O or D&O coverage (as appropriate) after you sell or retire. This takes the form of “tail” insurance at or above the same level of coverage they carried while running the practice. This coverage is important for several reasons; first is the liability of a claim itself and second, the damage the claim can do to you and how aggressively it will be pursued is actually magnified when you are no longer in practice. The costs of defense alone can put many sellers at a disadvantage or back them into a corner where they have to settle a claim they shouldn’t have.

Suddenly cash-rich sellers are also more vulnerable to any litigation or any other personal and professional liability than ever before because:

They are more liquid and their lawsuit target value is bigger than ever than ever before
They have replaced a recurring income stream with a single lump sum that may have to last them “forever”
The fact that they sold their practiceand in many cases, the dollar amount they received are usually a poorly kept secret, this often motivates “latent plaintiffs” including disgruntled employees and current and even former partners and patients
Most fail to contractually assign any payment stream to a protected legal entity so that it is properly protected from their unrelated personal and professional liability

Doctors should also consider that in many cases they will no longer have the same practice income stream (and the flexibility to take money out of their business) thatthey previously did to offset any claim-related losses and that they are a much better target (more collectible) than ever before. Why? Because even physicians with high incomes have rarely received a lump sum of cash as large as what they get when the close thesale of a medical practice, surgery center, etc.

Finally, I warn every client who is selling any business that asset protection planning is vital at the time of sale to protect the proceeds from the litigation risk with the buyers themselves. If the buyer is not as successful at running the practice as the exiting physicians was, for any common reason like patient retention, staff retention industry knowledge or business and management skills), they and their lawyers will inevitably point to some alleged representation, act or omission on the seller’s part, and will want to give the seller back the broken pieces of their business and get a refund.

In many cases they want this refund only after they have destroyed the businesses’ credit, patient base, and professional reputationand relationships that may have taken decades to develop. Add to that an overwhelming imbalance in legal spending power between, for instance, even the most successful physician selling her practice and the private equity group buying it, and the need for caution and careful planning becomes even clearer.

Making sure that the proceeds of sale are well protected from such an exposure with insurance, expert legal representation on the transaction and your personal asset protection planning and the right legal structures and contractual protections that limit a buyer’s claims and remedies on the front end is vital part of an exit plan that will help ensure your continued solvency and success.