Ron Lebow, JD
A business attorney addresses an increasingly common question.
Generally, you can expect to get a purchase price based on a multiple of EBITDA (Earnings before interest, tax, depreciation and amortization). A savvy seller will pursue opportunities to participate in additional upside following sale. Most venture capitalists and private equity investors are buying with the goal of ultimately flipping the business again for a short term gain. They will do this by acquiring additional like businesses, merging them, and selling again. A seller wants to try to, first and foremost, get a good value for her assets, with as much payable up-front. The investor, ideally, will want to keep the physician on board to continue to run the location(s) in which she currently operates, and generate income for the acquirer and their investors through fees payable by the acquired practice to companies affiliated with or owned by the purchaser, such as franchisor entities or management companies now serving the practice and other acquired practices.
The physician seller should ensure that he/she gets paid guaranteed amounts out of revenues off-the-top for any agreement kicking in post-sale before the highly generous self-serving management fees and any franchise fees are paid to such new owner or their affiliated company(ies). Additional stock or ownership options (i.e., the right to buy-in at a preferred price) or grants (free ownership rights or vesting over time) should be sought as part of the acquisition so that the physician seller can participate in the new franchising entity or management company that now serves the practice—whether through dividends if available (sometimes no dividends are ever paid because the acquiring entity is saddled with debt) and, ultimately, through participation in the subsequent sale once the business is flipped again. Be prepared to give up control over nearly everything other than clinical decision making (and, potentially, physician hiring).
Protections need to be in place to ensure participation is guaranteed regardless as to how the ultimate follow-up flip sale is effectuated (e.g., it can be accomplished, for example, through merger or a change in controlling interests rather than a simple sale of assets and agreements). Be further mindful that any subsequent ownership participation should not include the obligation to contribute additional capital and have your ownership interest diluted—this is a common mechanism to push you out by the acquirer subsequently investing a lot of money and automatically reducing your interest. Careful regard needs to be taken to avoid being subjected to restrictive covenants (to the extent enforceable in the applicable jurisdiction) that can lock you in to the relationship indefinitely without the ability to move on.
Qualified legal counsel, practice business advisors and financial advisors need to be in your corner every step of the way. Aggressive sellers can sometimes also negotiate board seats with the acquirer operating entities and/or so-called “medical director” positions for regional participation in revenues. If the seller owns real estate, keeping that asset and entering into leases with the acquirer can serve as additional continuing income.
