Todd Petersen, CEO of VitalSkin Dermatology, covers the ins and outs of the due diligence, legal documentation and final negotiation stages of selling a practice.
In the previous Selling Your Practice articles, we discussed why so many physicians are selling their practices. Once you have made the decision to sell your practice, we counseled you to continue growing your practice, prepare early and assemble a team of experts. It’s also important to:
Next, we turned our focus to identifying and reviewing potential buyers before putting your practice up for sale. That was followed by developing a confidential information memorandum (CIM), approaching potential acquirers, signing non-disclosure agreements, creating and soliciting a letter of intent and negotiating the material terms of a sale of your practice.
Now that you have your signed the letter of intent, it’s time to discuss the due diligence, legal documentation and final negotiations phases.
The Due Diligence Process
Due diligence is the investigative process a buyer takes before entering into a purchase agreement with a seller. The purpose is to confirm the facts provided in the confidential memorandum, and thoroughly assess the selling practice’s business, assets, capabilities and financial performance, to help the buyer make an informed final decision. The scope of the process depends on the complexity of the letter of intent and the size of the transaction. The more complex and expensive the transaction, the more due diligence will be done. Warning – this can be a lengthy and time-consuming process.
There are multiple areas that buyers will want to investigate, including the following:
Material findings during the due diligence process that weren’t previously disclosed will often impact the final negotiations and adjustments to previously negotiated terms, and these will also be needed. These findings may even cause the buyer to walk away from the proposed sale. So, as we’ve mentioned in previous articles, sellers should be up front and disclose any material issues early in the process.
Legal Documentation and Final Negotiations
Legal documentation can be prepared after the due diligence process is completed, or during the due diligence process. There are often several documents that govern the sale of the practice and are dependent upon the structure of the sale. Regardless, practice sales will include a purchase agreement.
The purchase agreement is the master document that governs the overall sale of the practice. It often includes the following sections:
As you can see, the due diligence, legal documentation and final negotiation phases of selling a practice can be lengthy, complex and tedious. But they’re all critical parts of the process. Without a thorough completion of these steps problems may result on either side, causing a longer delay of the sale, or in certain situations a complete termination of the deal.
Again, being clear, up front and working together with the buyer will help ensure a smoother process for both. We’ll continue our series next month and discuss the final closing process in more depth.