The Executive Suite: 5 new issues physicians should consider prior to selling their practice

Recent legislative and rulemaking activity at both the federal and state levels, along with changes in certain deal dynamics, are sure to impact physician practice transactions going forward. Below is a list of five new issues physician practice owners should consider in advance of a transaction. Many of these items should be addressed in advance of going to market or accepting indications of interest from potential buyers.

How will you treat employed physicians in a transaction in the absence of non-competes? The Federal Trade Commission’s (FTC) final rule prohibits post-employment non-competes. However, non-competes remain permissible in connection with the sale of a business or an ownership interest. Although the final rule currently is subject to challenge in the courts, the FTC appears confident that the rule will be upheld.

Consider whether employed physicians should become owners in the practice prior to a transaction and receive proceeds and rollover equity in order to ensure that they will be bound by post-transaction non-competes. In addition, consider beefing up confidential information, trade secret and other restrictive covenants.

Will your transaction require notice to or approval from a state agency? Fifteen states (California, Colorado, Connecticut, Hawaii, Illinois, Indiana, Massachusetts, Minnesota, Nevada, New Mexico, New York, Oregon, Rhode Island, Vermont and Washington) have enacted some form of legislation requiring notice to or approval from state agencies for certain healthcare transactions. The applicability of these state laws generally turns on the type and size of the transaction as well as the amount of business the buyer has in the state.

Knowing in advance whether these statutes could be implicated is important both in terms of evaluating buyers and planning timing - the notice and approval requirements can add anywhere from 30 to 180 days to a transaction timeline.

Is your CTA compliance house in order? The Corporate Transparency Act (PDF) (CTA) requires that Beneficial Owner Information (BOI) Reports be filed by January 1, 2025 for reporting companies in existence as of December 31, 2023; for entities formed after December 31, 2023 and before January 1, 2025, BOI Reports should be filed within 90 days of formation. A physician practice most likely will be exempt by qualifying as a large operating company. This exemption requires that the entity have more than $5 million in annual revenue as shown on its most recent tax return and more than 20 full-time employees who work 30 hours a week. Leased employees do not qualify.

Ensuring that you have analyzed the applicability of the CTA reporting requirements and your organization’s compliance is paramount as buyers will require new representations to that effect.

What are expectations around the vesting of rollover equity and a second sale transaction? Except in extraordinary circumstances, the rollover equity physician owners receive will be subject to a vesting requirement. Traditionally, vesting was linear and tied to the initial term of employment (such as five years). Increasingly, it is becoming more common that some portion of rollover equity, such as 20-50%, vest on the later of a stated term or a change of control transaction. Rollover equity typically is subject to optional buyback in the event of death, disability and termination of employment, with a discount of up to 50% applied in the event of termination for cause, resignation without good reason or violation of restrictive covenants.

It also is increasingly common that physician owners are required to commit in advance that they will retain up to 50% of their initial rollover equity in a second transaction. In addition, if the rollover equity is still subject to vesting, second transaction proceeds may be held in escrow and not distributed unless and until vesting requirements are met.

Evaluating in advance your desired amount of rollover equity, vesting and participation in a second transaction will allow you to engage in thoughtful discussions with potential buyers.

Are there any assets outside the practice that you want to retain or ensure are sold along with the practice? If you have ownership in an ambulatory surgery center (ASC) or other entity, you may be able to retain ownership outside of the practice transaction. Likewise, you may be able to sell all or a portion of your ownership to provide additional proceeds in a transaction.

We are increasingly seeing buyers in a physician practice transaction desire to joint venture assets such as ASCs with physician owners at the local level in order to promote alignment and provide distributions to physician owners. This can be open to negotiation depending on your long-term goals.

Although the above list is non-exhaustive, these recent changes in legislation, regulation and deal dynamics present new issues for physician owners to consider in advance of going to market and choosing a long-term partner. Evaluating these five considerations in advance provides the information needed to reach a satisfactory resolution of these issues with potential buyers.