The succession, merger or sale of your practice is one of the most significant milestones in your practice's life cycle and perhaps, your professional career. Properly accomplished, it can achieve major personal goals. Improperly structured, it can be financially ruinous.
Characterizing the Transaction
What type of "merger" or "sale" is contemplated? A merger could be your joining with a colleague as your exit strategy in contemplation of retirement. A merger into a larger, dominant practice may be indistinguishable from a sale. If instead, you merge into a similar sized practice, you need to monitor the practice more as the revenue base supporting your payments. The steps to safeguard your payout and the post-transaction use of your name will vary depending on the transaction. The transaction documents cannot be based on the terms used to describe the transaction but rather should reflect the specific aspects of your transaction. Most transactions are a conglomeration of different types of transactions, yet too often, the governing documentation is standard and not reflective of these nuances.
Letter of Intent
Once negotiations become serious, some of the key terms are documented in a letter of intent. Although often informal and nonbinding, this can be an effective way to identify key points of agreement, open issues, future steps and move the transaction forward. If prior agreements were signed governing confidentiality, non-disclosure, etc. they should be coordinated with the subsequent letter of intent. If not, these concepts should be embodied in the letter of intent but excluded from any provision providing that the agreement is nonbinding.
Due Diligence
Be certain significant facets of the practice you are selling to or merging with are addressed. Ascertain the veracity of the representations made during the negotiations and those contained in the contract documents. Ferret out issues that might affect the price, deal terms or even the viability of the deal. Obtain good standing certificates on the entity involved to ensure it is properly formed and obtain copies of all corporate, LLC or partnership documents filed with the Secretary of State. Conduct Internet searches with variations of each person's name and the firm. Have intellectual property counsel confirm the status of logos, trademarks and any fictitious names the practice operates under. Telltale signs of potential issues often turn up in some of these basic steps.
Liabilities
There is no substitute for skepticism. Obtain credit reports, UCC and lien and judgment searches on the principals. If the practice owns real estate obtain a title search. This might identify suits or claims that were missed on other searches. Order searches on the names of the practice and its partners to identify outstanding lawsuits, claims or other issues. Obtain a Dunn and Bradstreet report on the target practice and a state level tax search to ascertain that all required tax filings have been made. These types of credit reports can often be telling as to the real financial status of a purportedly successful practitioner.
Equipment
Leases of personal property or other assets should be identified. Copies of all leases, even for insignificant equipment should be obtained and terminated or assigned as permitted under the agreements. Be alert for loans or other obligations. Sometimes mishandling of small lease obligations might give an important indication of how other business issues have been handled.
Real Estate
Obtain a title report on real estate if you are purchasing real estate as part of the assets of the practice. Ascertain if there are any issues with the property — environmental, use restrictions, liens or judgments. Have the lease reviewed to determine if a change in control provision requires landlord approval that could undermine a key lease or could provide a contentious landlord a door-opener to renegotiate rent. If you're selling, consider having your lease "assigned" to the buyer (or if the buyer is not taking over your lease, to a third party) instead of merely sub-letting it. With an assignment you should be removed from liability, however, you may have better security for a deferred payment purchase price with a sublet to the buyer. The sublet could include a cross default provision in the lease. This provides that if the buyer fails to make a payment under the purchase contract, the sub-lease will automatically be in default.
Representations
A key of the contract documents are the representations of the other parties to the transaction. Be proactive to make certain that they are finely tailored to address specific nuances of the practice you are selling to or merging with. Each item on your due diligence checklist should be addressed. How should the agreement define "material" when it is applied to representations? Modest variation from represented amounts may be insignificant and should not undermine the transaction. But, if significant, they should have consequences. A tailored materiality standard can be defined for different representations. At what point should a violation of a representation be considered a default? What should the consequence of the default be? How should the purchase or merger agreement define the standard for the level of representation: (i) "absolute"; (ii) "to the best of knowledge"; (iii) "to best of knowledge without duty of inquiry"; (iv) "to the best of knowledge after due inquiry"; etc? These linguistic differences can be significant. Often, if the other party objects to a particular representation, resolutions can be found by lowering the standard of the representation.
Meaningful Security
There are many ways to secure the payment of the purchase price for your practice. But, if it's not paid in full, what recourse will you realistically have as the seller? If you're an older practitioner, or are ill, the typical recourse is for the seller to recover the practice from the defaulting buyer. If the buyer defaults on a note, you should accelerate the balance, applying a higher default interest rate, etc. The value of these remedies will depend on the depth of the pockets supporting them. Contingent payments based on future earnings or revenues may be difficult to protect. A simpler, self executing remedy may be more practical than a complex one requiring layers of proof. Holding documents in escrow pending the seller's achieving certain milestones is helpful. Review and understand the nuances of the escrow agreement so that drafting laxity won't undermine you.
Schedules and Exhibits
Obtain clearer protection by attaching exhibits referred to in the documents rather than having longer representations and other provisions. Another key advantage of using extensive schedules is that it avoids potential ambiguities or issues over which documents the representations referred to. Whether or not the lease is available, indicating that you want a full copy of the executed lease early on avoids complaints later if you keep adding new requests.
Stub Period
If you're doing a simultaneous closing, you still need to address the interim period between contract discussion/signing and the actual closing. Is all your due diligence current? If not, what updating is necessary? This might include requiring each party to update the schedules attached to the contract at signing to reflect data up to the closing. The contract should also clarify what each party's rights are if the differences are significant.
Survival of Representations
Consider what survival terms/periods are acceptable to the parties for each representation and warranty. If you're looking at the transaction as a retirement exit strategy, you should prefer to end the survival periods sooner. Too often, contracts simplistically contain an arbitrary one-year survival period. Tailoring reasonable survival periods for each representation will take a bit longer and make the documentation a bit more complex, but this approach will often help create the reasonable middle ground that can address the legitimate concerns of each party.
Post Closing
Be certain to include adequate reporting and auditing rights to assure post-closing payments can be monitored. The fact that you may be working as a consultant for the practice that is buying your practice or that you are merging into, may give you access to this information, but if that arrangement does not work out or the situation becomes more antagonistic, you need the protection. You should reserve reasonable and complete access to financial statements, contracts, books, records and other relevant business information of the buyer. What time limits should apply? What does the phrase "books, records and other relevant business information" include? Should more specific reports and time periods be used? Audit rights must be addressed in the agreement. Some reasonable rights should be negotiated so that once a year or prior to major events, audits should be permitted. What happens if the buying practice purchases another practice, mergers or is taken over? Be certain that any new debt issued will be subservient to your practice sale debt
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