Preparing for a Healthcare Transaction Sale
Shortly after the passage of the Affordable Care Act (ACA) in 2010, the health care industry saw an increase in mergers and acquisitions activity. Five years later, there is no sign of a slow-down. Locally, Via Christi Health’s acquisition of Wichita Clinic PA in December 2010 and Wesley Medical Center’s acquisition of Galichia Heart Hospital in February 2012 are the most notable acquisitions to date. In addition to those transactions, several Wichita physician practices and other health care entities made deals.
Most transactions have one thing in common – bigger is better. One driver is a desire by providers to participate in one way or another in accountable care organizations (ACOs). ACO’s that can provide better patient outcomes using less taxpayer dollars are eligible to share savings of Medicare dollars. Size is critical for those providers wanting a seat at the table and to be in a position to successfully advocate for themselves as to how much of the shared savings amount paid to the ACO should be allocated to the provider’s organization.
The sales process typically starts with the negotiation of a letter of intent in which the parties agree to the basic economic and business terms of the sale. Due diligence of the seller’s business then commences and continues during the negotiation of the purchase agreement. Closing occurs when the buyer is satisfied with its due diligence review and the parties have agreed to the terms of the purchase agreement. Preparation for a sale should commence well in advance of the start of this process.
On sell-side, the two most neglected steps in preparing for a sale, and the ones most likely to maximize the sales price, achieve desired outcomes, and minimize legal fees, are:
- Not Properly Negotiating the Letter of Intent
A seller’s negotiating leverage is highest immediately prior to execution of the letter of intent. The seller’s leverage then declines precipitously through the process and is lowest immediately prior to closing. Because of this dynamic, the seller’s best shot at achieving its desired outcome is to take care to negotiate the letter of intent. I advise clients thinking about a sale to identify the outcomes they hope to obtain and discuss them with counsel of their choice prior to extensive discussions with buyer. Seller’s counsel will be able to assist seller reach these desired outcomes. Part of this strategy will include negotiating all deal points desired by seller for inclusion in the letter of intent. There are a couple of advantages the seller can obtain in this type of preparation. First, if the buyer is unreceptive to seller’s “wish list”, seller may decide that the transaction is not worth pursuing. The sales process is time-consuming and places a great deal of stress on the seller’s organization. It should not be entered into lightly. Second, agreeing to most of the economic and business concepts at the letter of intent stage will help minimize the amount of time spent negotiating the purchase agreement. This is important for several reasons. One of which is that the seller’s attention is often divided between negotiating the purchase agreement and managing the due diligence process which ultimately reduces the amount of time the seller can devote to big picture strategy. Another is that developing and agreeing to general business and economic terms is less labor intensive than hashing out the details of these terms. This means that failure to agree to the majority of general business and economic terms early in the letter of intent stage will result in higher transaction costs during the more labor intensive purchase agreement negotiation stage.
- Get your Compliance House in Order
“Let’s scrub this pig!” is perhaps one of my favorite quotes from a client made many, many years ago to kick-off preparation a month before the sale of a company. Unfortunately, for a health care provider, good compliance doesn’t happen that quickly. It oftentimes takes years to develop a compliance plan tailored to address and manage the risk of a particular organization. It also requires constant and ongoing diligence to implement and administer a compliance plan once developed. The worst thing a health care provider can do is to put off paying attention to compliance until immediately prior to sale. Holes in the seller’s compliance plan and implementation can lead to lower transaction valuation or worse – no deal at all. It typically will also significantly increase the cost of a transaction to address compliance issues with regulators while simultaneously disclosing them to the buyer during due diligence. From an attorney’s perspective, third-party scrutiny from a buyer is less than ideal in a situation in which the maintenance of attorney-privilege may be important. A health care provider wanting to sell should make sure that it has up-to-date federal and state privacy, self-referral, anti-kickback, and billing compliance plans and that it is implementing and administering those plans as well as it can before embarking upon the sales process.