June 27, 2025 • 50 mins
Jason Ruchaber, Founder and Managing Partner, RootPartners, and Daniel Mohan, Shareholder, Polsinelli, discuss how to avoid some of the common pitfalls they see in health care transactions and what can be done throughout the deal process to ensure a successful transaction. They cover the legal and transactional pitfalls that occur during the planning/pre-marketing phase, the marketing phase through Letter of Intent, and the formal diligence phase and closing. Sponsored by RootPartners.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_00 (00:00):
This episode of AHLA Speaking of Health Law is
sponsored by Root Partners.
For more information, visitroot-partners.com.
SPEAKER_01 (00:17):
Hi, I'm Jason Rutkaber, the founder and
managing partner of RootPartners.
We're a healthcare-focusedtransaction advisory firm
serving healthcare organizationsand physicians nationwide.
And I'm excited for this podcasttoday.
I'm joined by a friend andcolleague, Dan Mohan from Pulse
and Ellie.
And we're going to be talkingabout how to avoid some of the
common pitfalls we see inhealthcare transactions, and
(00:40):
hopefully give the listeningaudience some pro tips on how
they might be more likely tohave a successful outcome in
their transaction.
Dan, if you wouldn't mind, maybegive a real quick introduction
of yourself and your practice,and then we can dive into our
topic.
SPEAKER_02 (00:56):
Will do.
Thanks, Jason.
As Jason mentioned, my name isDan Mohan.
I'm a shareholder with anational law firm in Paul
Cinelli, working out of theAtlanta office.
I've been practicing law forover 35 years, and much of that
time has been working in thehealthcare industry,
representing healthcareproviders with a particular
(01:16):
emphasis on M&A transactions,joint venture and affiliation
type of transactions.
So I'm happy to be here with youtoday and discuss this very
timely and relevant topic.
SPEAKER_01 (01:30):
Great.
Well, thanks so much forjoining.
I can attest having worked withDan in real deals that he's a
great advisor and provides a lotof insight into these deals.
And I'm excited to talk aboutthis topic.
You know, Dan, we were both downin Austin at the Advising
Providers Conference put on byHLA.
And, you know, we grabbed lunchand we were talking about kind
(01:54):
of the overall experience thatwe had had over maybe the last,
couple of quarters where M&Aactivity had been really quite
heavy for several years.
And we started to notice in bothof our practices that deals were
just getting a little tougher toget across the finish line.
And I think there's a lot ofreasons for that, not the least
(02:17):
of which are a new presidentialadministration, some of the
economic headwinds that we'veseen, interest rates, inflation,
other things.
But I think deals are justgetting more scrutiny.
Buyers are becoming a little bitmore selective in terms of what
they're targeting.
And when we do get intotransactions, it takes a little
(02:37):
bit more handholding to getthose deals across the finish
line.
And so when we were talking,that's kind of the genesis of
the idea for this particularpodcast is providing some ideas
from our own personalexperiences working with
physicians and other healthcaretransactions on how we can
(02:57):
better navigate that or someideas that people entertaining
the idea of a transaction mightbe able to think through to
avoid those common pitfalls andhave a better success or a
better chance at success ingetting that deal across the
finish line.
Maybe before we dive directlyinto the topics of pitfalls,
(03:21):
Dan, is there anything thatbroadly speaking you've seen?
I assume that what I justmentioned to you is consistent
with what we talked about inAustin and on other occasions,
but any other developmentsdevelopments from your
perspective as an attorney thatyou've been seeing recently that
have obfuscated the path to asuccessful deal or other
(03:42):
challenges you're seeing?
SPEAKER_02 (03:43):
Well, I think consistent with what you
mentioned, Jason, deals arestill getting done.
There's no question about that.
But I think the buyers aregetting a lot more discerning,
perhaps, in terms of the dealsthat they're moving forward and
taking to close.
And as you mentioned, some ofthe business factors associated
with that.
(04:04):
And what I've found is that it'seasier for a potential buyer to
walk away from a deal if thetransaction has a little more
hair on it.
Whereas in a very robusttransactional environment,
without some of the factors thatyou've mentioned, putting some
(04:25):
down pressure on deals.
When there's a lot of money andthe interest rates are cheap and
there's a lot of competitionamongst buyers for sellers,
buyers, in my experience, are alittle more willing to deal with
potential issues or hair on atransaction than they would be
in this environment.
And so that's kind of what I'mseeing where deals don't close.
(04:48):
It's where it's due to...
legal or financial issues thatcome up, business issues in
connection with the potentialseller, that kind of made it
easier for a buyer to walk away,whereas as we said, there's
still deals getting done.
But those are the sellers thatare pretty pristine in terms of
(05:11):
any legal issues that they maybring to the table in a sale
transaction and certainly aremuch stronger financially in
terms of their businessoperations.
SPEAKER_01 (05:22):
Yeah, yeah.
I mean, we're seeing the samethings.
And I think, and we'll breakthis down into kind of some
different phases of thetransaction.
But one of the other things thatI've seen is there's, Fewer
unsolicited deals, I would say.
Those still exist, right?
But dollars chasing deals, asopposed to the efforts on our
(05:43):
part as a sell-side banker,really trying to market a deal
and get in front of people sothey can take a good look at it
and evaluate it from theirinvestment thesis and investment
criteria.
Those unsolicited deals arefewer in my experience.
And I do think that changes thedynamic of how physicians or
(06:04):
other healthcare organizationsengage with buyers.
Because those unsolicited deals,you've got a targeted
transaction.
Obviously, they're coming inwith some idea of what they want
to do.
And maybe it's a little biteasier to get those across the
finish line when there's aproactive buyer in the space, as
opposed to the marketing effortsthat we're undertaking now to
present the valuation model andproposition and investment
(06:28):
thesis to prospective buyers.
Do you see that as well in yourpractice?
SPEAKER_02 (06:34):
Yeah, I would certainly agree with that.
And I think that's kind ofconsistent with what we've
talked about.
I think the unsolicited buyerswere something several years ago
when we were managing andclosing a pretty large volume of
transactions, particularly inthe physician group space.
It's really much more prevalentthan it is now.
(06:55):
And I think, again, I just thinkthat's part of the theme of
buyers being a lot more carefuland discerning in groups that
they're targeting foracquisition.
And that's probably, you know,part and parcel with the nature
of the kind of the change thatwe've seen in the identity of
the buyers.
Right.
I think that's kind ofconsistent with private equity
(07:16):
backed MSOs kind of taking thelead in terms of certainly in
the physician group acquisitionspace.
We're still doing some hospitaldeals, but the volume isn't
nearly what it was several yearsago.
And private equity hasdefinitely taken the lead.
But they've got, you know,they're very, very careful about
(07:37):
the financial and the legal duediligence that they do.
And we said in this market,they're even more careful and
less willing to take on risk.
Sure.
SPEAKER_01 (07:47):
Yeah, but, you know, and that is certainly my
experience, but there is stillplenty of dry powder out there.
There are still private equitybacked platforms that are
actively pursuing deals andmaking unsolicited bids on
things.
So we don't want to be all doomand gloom here.
There's still plenty ofopportunity in the space, but
certainly I think.
(08:10):
preparing for a deal is moreimportant than ever.
And that's probably a good segueinto our topic for today, which
is avoiding some of thosepitfalls and thinking about some
of the things that you can dothroughout the deal process to
make sure that you're puttingthe best foot forward, that
you're prepared for the process,and you're prepared for kind of
(08:34):
the expectations buyers aregoing to have and getting those
things in order before you startthat process.
So I think the best way, atleast in my mind, to think about
this, and obviously I'll bespeaking to this topic from the
perspective of investment bankerand evaluation services advisor,
and you'll be providing yourlegal lens to that conversation.
(08:57):
I think there's some overlapthere in terms of how those
terms work together.
But when I think about a deal,um broadly speaking i think of
it in kind of three phases thefirst being kind of the the
planning or pre-marketing phasegetting ready to take a practice
(09:17):
to market and all the effortsthat are associated with that
then you have the marketingphase through loi that's getting
interested buyers uh familiarwith the deal understanding
various bids and then hopefullymoving towards the formal
(09:37):
diligence phase and workingtowards close in that final and
third phase of the business uhtransaction now in in As it
relates to the legal andeconomic piece, I think
oftentimes our roles are onopposite ends of that spectrum
in terms of our heavy lifts,where we spend more time on the
upfront phase, getting partiesready for a deal, going through
(09:59):
all the economic and financialdiligence, preparing the
information memorandum andtaking it to market.
And then once we get into theLOI phase, we tend to see much
heavier involvement from legaladvisors as you negotiate deal
terms and go through all of thelitany of documents that need to
be repaired there.
But I think, frankly, there'sopportunities for folks to
(10:23):
engage with both their financialadvisor and their legal advisor
at all phases of the diligenceand sale process.
And I'd like to work throughsome of the things that we've
seen and discuss those pro tips,like I said earlier, to
navigating a process and puttingyour best foot forward.
So, Dan, I'll start by giving itover to you.
(10:45):
I mentioned, broadly speaking,that our involvement tends to be
more heavily weighted towardsthe front end of the deal where,
in my experience, the attorney'sinvolvement is more heavily
weighted towards the back end ofthe deal.
But I think that might be amistake for buyers.
And I'd like to get yourthoughts in terms of your
involvement and what you mightdo if afforded the opportunity
(11:06):
to help get a practice ready fora deal from a legal perspective
to make sure that they're reallyready for game time, if you
will.
Do you have any thoughts onthat?
SPEAKER_02 (11:16):
Yeah, I do.
I assumed you did.
You know, I think the, wecounsel, well, let me back up
for a second.
When deals go awry, they willtypically, go awry due to some
significant legal issue that thebuyer discovers during the
(11:41):
course of buyer's due diligence.
Less frequently, there can besome sort of corporate legal
issue.
And so You know, what we try toconvince clients that are
setting out on a potential saletransaction to do is to allow us
(12:02):
to do some limited seller duediligence prior to embarking on
the sale process.
And it's not, you know, the fullscale diligence that a buyer
would do, but it's a scaled backprocess.
focused on just trying toidentify significant legal
issues that could prove to be ahang up during the sale
(12:26):
transaction.
And we try to do that because,you know, in our experience,
it's always better for us tofind out about these and to fix
them, if they're fixable, beforeyou get, you know, 75% down the
road on a sale transaction.
You've spent all that time,energy, and money invested in a
transaction, and then you hit apotential roadblock well into
(12:49):
the deal.
Worst case scenario, that couldscuttle the deal.
Best case scenario, it's goingto affect your valuation, how
much the buyer is willing topay, and it's going to affect
things like indemnification.
So So we routinely counselclients to allow us to do that
(13:10):
sort of high level legal andcorporate diligence.
And again, hopefully it comesback clean and we're off and
running.
But if it doesn't, we identifysome things and it gives us a
chance to fix them before we getinto a sale transaction.
The worst situation to be in asa seller in this sort of
(13:33):
situation is for, the buyer'sattorneys through their
diligence to bring thesesignificant legal issues to your
attention.
That's just, you just don't wantto be in that position.
SPEAKER_01 (13:43):
Yeah.
I mean, I couldn't agree more.
It's so important thatparticularly unsolicited bids,
obviously you kind of get rushedinto a deal.
Sometimes you don't have therunway that you might otherwise.
But if you're an organizationthinking about doing a
transaction, getting somefoundation built that will help
you navigate that process isextremely important.
(14:04):
And we always recommend thatthere's some preliminary legal
diligence done in anytransaction to make sure there
aren't any skeletons in thecloset, anything that needs to
be addressed beforehand, becauseyou're absolutely right.
Best case scenario, it impactsvaluation.
And obviously, sellers aretrying to get the highest value
for, for in that sale event,which may be a one, one time
(14:26):
deal or once in a lifetime typedeal.
So you want to maximize yourvalue, but worst case scenario,
you find something that derailsthe deal altogether and you
start over, you have to delayentering into some sort of a
sale process for a period oftime.
And again, that could result inmarket timing that's suboptimal
as well.
So, you know, we, we, obviouslydo the same thing, right?
(14:47):
When we're given the opportunityand we don't always have a long
runway, but I think the numberone thing that you can do in
addition to having your legalhouse in order is getting your
financial house in order, right?
You need to kind of know whatyour business is doing
economically and develop some ofthat business acumen, not only
so that it can be conveyed to apotential buyer, right?
You want to have some thoughtsaround what your future looks
(15:12):
like, what your valueproposition is, but some of the
blocking and tackling is reallyimportant too, right?
I mean, I see particularly inthe lower middle market where
maybe you don't have the levelof sophistication in terms of
administrative oversight, toolsthat might be helpful to
generating reports.
Many of these practices justdon't have the ability to report
(15:34):
thoroughly on their financials,right?
They may have multiple differentsystems that have been used over
a period of time.
So they're trying to amalgamate,you know, a change over in
software.
They may, this is particularlychallenging with EHR changes,
right?
If you switch EHR billingservices providers and getting
some of that data out of yoursystem, when you have multiple
(15:56):
systems in your recent history,really, really, really tough.
And I want to emphasize toeverybody listening, preparing a
data room and getting yourfinancial diligence ready to go
to market is a really big lift.
It's no easy task, even withprofessional advisors assisting
you.
I think that's one of the thingsthat might take sellers back a
(16:20):
little bit is they just don'trealize how much information
needs to be provided.
And not only once it's provided,but Oftentimes we need to go
through a process of scrubbingthat, understanding things that
are non-recurring, being able todevelop explanations and
normalization adjustments tothose items.
And certainly if it's reallymessy, we want to bring in, in
an ideal world, a CPA to do, ata minimum, reviewed financials,
(16:44):
ideally an audit if thetransaction size justifies the
expense.
As a valuation service provider,we think doing a preliminary
evaluation is really importantas well to make sure you have
expectations around valueproposition and valuation done.
And again, there's going to be alot of legal documents that are
going to need to be prepared andpopulated in that data room
(17:04):
eventually.
So going through that processearly on and getting as much of
that done as possible is reallycritical.
in my perspective in getting adeal done.
SPEAKER_02 (17:14):
That's just kind of part and parcel of trying to
maximize your opportunity for asmooth and efficient transaction
going
SPEAKER_01 (17:24):
on.
Yeah, absolutely.
SPEAKER_02 (17:26):
Let me ask you a quick question on the
valuations.
We routinely encourage ourclients, physician clients in
particular, to obviously engageclients valuation and investment
bank financial advisors to helpthem through the process.
One issue that always comes upon the financial side is whether
(17:47):
they should go ahead andcommission a fair market value
appraisal of their practice.
And we often, we will routinelyrecommend that.
A lot of our clients arereluctant to spend the money,
but in my mind, it's kind oflike we've talked about on the
legal side.
(18:08):
I kind of, I, view this asputting yourself to be in a
position to go on offense, orare you gonna play defense?
And on the financial side, myclients oftentimes come back
with me with, well, the buyer'sgonna provide us with their
appraisal, fair market valueappraisal, and why don't we just
react to that?
(18:28):
And my response is always, Iwould prefer not to react to
something that somebody else hasprepared representing the buyer.
I'd rather us know going in whatwe think your practice is worth
based on a good solid fairmarket value appraisal and kind
of take the offense in thatpiece of it as well.
SPEAKER_01 (18:47):
Yeah.
I mean, I think the broaderpoint of setting realistic
expectations, not only in termsof valuation, but other elements
of the deal as well, you know,duration to close, those sorts
of things.
Getting proper expectations issuper important to having a
successful deal.
We always do valuation work whenwe're getting a client ready for
(19:10):
a transaction to help set thoseexpectations.
And it is important to note thata buyer is going to do their own
financial due diligence, right?
And they may come up with adifferent valuation for that
business.
But some of that may be due tothe deal terms or how they're
going to structure compensationor other elements of the
(19:30):
transaction.
But starting from a solidfoundation of knowing your
starting point, right?
That's really helpful to sellersknowing what their valuation is.
And you know, it's not uncommonfor physicians who have heard
that, you know, doctor XYZ downthe road sold the practice for,
you know, millions of dollars.
They don't understand any of thedeal terms.
(19:51):
They don't understand thecompensation model, the buyer
type.
And so expectations that areunrealistic can lead to a poorly
executed deal.
And in many cases result to, youknow, acrimony in the process
because the doctors just don'tunderstand why the valuation is
coming in so low from the otherside or why their value isn't
isn't higher.
(20:11):
So getting that valuation doneis really important.
I will also say it doesn't needto be kind of a formal valuation
that we might do for, you know,like a hospital buyer.
They're going to want to havetheir own compliance-focused
valuation to meet the fairmarket value standard.
And that's going to becommissioned whether we do a
valuation or not.
They're going to hire somebodyto do that work.
(20:33):
But I do think having some ofthe valuation done early on with
the correct fair market valuestandard, somebody who's
familiar with how valuationshould be done in a healthcare
space, sets a proper baselinefor understanding where the
other side comes in.
And Yeah, I think doing thevaluation is super important.
(20:55):
It doesn't have to be a supercostly thing.
process but it will highlightother issues right other issues
that come up in the diligencefor evaluation are going to be
similar to the diligence itemsthat will come up in formal
diligence in terms of run rateanalysis normalizing earnings
looking at balance sheet itemsall those sorts of things that a
(21:15):
buyer is going to want to seethe valuation firm is going to
want to see as well and sogetting ready for that and going
through that process really putsuh the best foot forward in my
opinion yeah yeah You know, Imentioned a hospital buyer
versus PE buyer.
And maybe there's a third buyergroup for a lot of these
organizations, which is otherphysician practices.
(21:38):
In some cases, we're not alreadyPE backed.
From an economic standpoint,there's a lot of differences in
terms of how to navigate aprocess with those different
types of buyers.
From a legal standpoint, do yousee any significant differences
in how you approach transactionswith those different buyer
groups as you're preparing aclient for a deal?
(22:00):
I mean, again, we can get intothe formal diligence phase in a
little bit, but do you see anymajor differences there from a
legal perspective on what aclient should expect?
SPEAKER_02 (22:10):
Well, yeah, absolutely.
I mean, they're justfundamentally different
transactions, right?
You know, there is some...
There's more scrutiny,obviously, on the PE deals now,
particularly from a healthcareregulatory standpoint.
But historically, because theprivate equity buyer is not an
(22:33):
entity that the physicians wouldrefer patients to post-closing,
they're not bound by a lot ofthe regulatory constraints that
a hospital buyer is bound by.
So you're likely to, thevaluation is different what we
see typically on a hospital buyside is just basically an asset
(22:57):
value.
There's an inverse relationship,right, between the compensation
and the amount that a hospitalcan pay for a physician group.
So physicians are either goingto have to accept a higher
purchase price, but much lowercompensation arrangement going
forward, forward after sale oraccept a lower purchase price,
(23:21):
usually just based on some assetvalue of their business, but
that will allow them toparticipate on a full
compensation plan going forward.
So they're just very, and ofcourse the consideration is
different on the private equityside, consideration often
includes rollover equity.
The numbers are just bigger, butyou know, to the extent that
(23:44):
their purchase price is tied upin some percentage of rollover
equity, then there's certainlyrisk associated with that
because, you know, you've gotrisk as to whether that equity
is going to grow in value overtime and how long and the
strings that are attached to youbeing able to exercise any sort
(24:06):
of sale rights or otherwiserealize some cash on that equity
in the future.
SPEAKER_01 (24:11):
Yeah.
And I don't think that a lot ofphysician sellers fully
understand the differences inthose models.
Right.
And that goes back to my pointabout, you know, hearing that
the doctor down the street gotsome sort of, you know,
liquidity event for theirpractice and the expectation
being that.
all sales are going to behomogenous in terms of how the
(24:31):
deal economics and purchaseprice works.
But that is certainly not thecase, right?
And you made a point that isjust so critical, particularly
in physician practice deals,which is the post-acquisition
compensation model for ahospital buyer and a private
equity buyer is vastlydifferent, right?
And so helping doctorsunderstand how those different
(24:52):
models work and working throughthe economics there in terms of
the compensation, private equityoffice, oftentimes with a scrape
or a reduction in compensationto justify the purchasable
earnings.
But those are very different,right?
And I think that maybe leads toone of my next and perhaps last
(25:14):
points that I think is reallyimportant in the pre-sale phase
or leading up to the marketingphase.
And that is working with thedoctors to get goal alignment
and understanding what yourtarget buyer is, right?
Because that can mean a lot ofdifferent things for different
(25:34):
physicians, right?
In my experience, doctors thatare obviously nearing retirement
or further on in their careerthey prefer the liquidity event,
right?
They would want the scrape ofthe income and the big cash
infusion or cash payout at thefront end.
Whereas younger doctors may bemore concerned about the
long-term earnings of thebusiness, that rollover equity
(25:57):
piece, how that's gonna growover time.
And those differences inexpectations can lead to
internal strife regarding thepursuit of the ideal buyer.
And that's just aroundeconomics, right?
And then you also have theconcern around culture, right?
A hospital buyer is gonna have avery different culture than a
PE-backed buyer.
(26:17):
And so working through some ofthose internal differences of
expectations regarding yourtargeted buyer, the optimal work
culture, the compensation model,all of those things need to be
worked out early on in theprocess because you get into a
full negotiation and you haveindividuals within your group
that don't agree on what theywant to accomplish, it can
(26:40):
really put a lot of strain onthe deal.
And I've experienced firsthandwhere deals have fallen apart
because of this exact reason.
SPEAKER_02 (26:49):
Yeah, no, I couldn't agree more.
I had a deal fall apart.
a year and a half or so ago onthat very issue.
Fortunately, you know, for ourclient, the doctor group, it
was, it's something that theyidentified relatively early on.
And so they didn't get too far,you know, they didn't even get
to an LOI stage in that dealbefore
SPEAKER_03 (27:09):
the
SPEAKER_02 (27:10):
doctors sat around a table and kind of talked it out
and realized that the youngerpartners just were not
interested in selling out to aprivate equity backed group.
But, you know, that's, In mymind, that's relatively rare for
it to happen that early.
And that was an unsolicitedbuyer.
So they had not engaged somebodylike yourself who kind of went
(27:34):
through the pre-deal process ofgetting everybody around the
table and talking through thoseissues.
I have had deals fall apart wellinto the deal, but long past the
LOI stage when we're negotiatingtransaction documents before the
doctors finally got sat around atable and had that discussion.
So again, it's far better tomake sure everybody's long-term
(27:55):
goals are aligned andeverybody's on board with the
sale process before they getdeeply into the process itself.
SPEAKER_01 (28:03):
Yeah.
And you know, again, theunsolicited deals are a little
bit of a shotgun through thedeal process.
But even, you know, a plannedsale, sometimes those can feel
rushed as well.
And I would encourage anybodythinking about a deal to think
about it as early as possible,to start working on some of
these things that we've talkedabout early on, maybe even two
(28:27):
and three years sometimes.
If you know that you're going tohave a series of retirements or
you are planning for some sortof an exit or you see some
market dynamics that mightsuggest it is wise to consider
affiliation or acquisition,merger, starting to plan for
that well in advance, I think isreally good advice and something
(28:47):
that we don't see very often,but that could really avoid
falling into some of these trapsthat we've talked about during
the foundational planning phaseand make sure that, again,
you've got your accounting housein order, you've got any
regulatory issues well in thepast before you get to the deal,
you've got goal alignment aroundthe physician partner group and
you understand kind of whoyou're looking to target as a
(29:09):
buyer and how you'd like thatdeal to play out.
So I would encourage anybodylistening, work early.
Early is definitely better, evenif it is a scaled back
superficial process.
SPEAKER_02 (29:25):
Yeah, I would certainly agree.
SPEAKER_01 (29:27):
All right.
Well, once we get through allthat and we go into the
marketing phase, Obviously, atthat point in time, you are
moving forward with the dealprocess.
We get most heavily involved inmarketing the business at that
point in time and trying to findbuyers.
And this is a hard period oftime, I think, for a lot of
(29:51):
physicians because it's the It'sthe waiting.
It's the time where you have tokind of trust the process and
rely on your advisors to bringin potential buyers and help you
understand the terms.
And again, we have a lot ofinvolvement in that phase.
And I'll talk about a couple ofthe things that we'd like to see
(30:13):
and help our clients avoid.
Before I dive into that, do youget involved much in that
process, Dan, or are there anythings that you would recommend
to providers as they enter thatmarketing phase?
SPEAKER_02 (30:28):
No, we're involved very little in that.
Hopefully, again, we've had achance to do some presale
diligence and kind of look atthe corporate documents, make
sure all the corporate hygieneis clean and fixed any issues
there.
But, you know, once...
Once we're into the marketingphase, that's really very light
(30:49):
in terms of the legal servicesthat are required until we get
to LOI.
We'll discuss the legal piece ofthat once we get to the LOI
stage.
SPEAKER_01 (30:57):
Well, I definitely want to make sure we have time
for that because I know there'sa lot there that you'll want to
talk about.
I think from my perspective inthe marketing phase, maybe the
biggest pitfall to avoid foranyone listening is Inserting
yourself into that marketingprocess.
As a seller, it's really, reallyhard not to want to be involved.
(31:20):
It's your baby, it's yourbusiness, it's your life, it's
the culmination of your years ofexperience, and you really want
to be involved in that process.
But it can really be detrimentalto a deal because you don't
necessarily know whatinformation you should be
disclosing at that point.
(31:41):
Again, anything that you say canand will be used against you in
this deal, particularly if youdisclose information that is
perhaps not conveyed in anappropriate way.
It may dissuade buyers or lessentheir interest in your business.
And it certainly can underminethe sales process The interest
(32:04):
we're trying to generate for thedeal, trying to solicit and
create some competition, if youwill, for the deal.
If you're having sidebars as anowner because you know one of
the potential buyers or you'vehad a relationship in the past,
it can really undermine theprocess and frankly will likely
result in less money on thetable at the end of the day.
(32:28):
I guess without spending toomuch time on the marketing
phase, that's the big pitfallthat I see in my practice is let
us do our job.
We're there to represent you.
It's in both of our intereststhat we find you the right buyer
and optimize your purchaseeconomics, both in terms of comp
and purchase consideration.
(32:49):
So leaning on us a little bit tomake sure that we navigate that
for you is really, reallyimportant.
And I know it's hard, but if youcan stomach holding back some of
those words, I think it canreally help you in the long-term
getting to the deal phase andformal diligence.
All right, well, let's talkabout once that LOI comes in and
(33:12):
you've moved to formaldiligence, again, hopefully a
lot of our work in terms ofputting the value proposition,
understanding the dealeconomics, getting the financial
house in order has already beendone, or materially done.
We still have work to do.
But I think this is really when,Dan, you and your team steps in
(33:36):
and provides just an enormousamount of value to the
transaction.
What are some of the pitfallsthat you'd like to talk about
that can derail a deal in thisfinal, most important phase of
the transaction?
SPEAKER_02 (33:48):
Well, I think the first thing to mention is
getting to the LOI stage.
You know, you're correct.
You've been through yourmarketing process.
Let's assume that you've run aprocess, identified a potential
buyer who's won the beautycontest.
(34:08):
And so now we've got the stagewhere we're negotiating the LOI.
Frankly, obviously, from ourstandpoint as lawyers, we would
like to be heavily involved andneed to be heavily involved in
negotiation of the LOI.
Unfortunately, that doesn'talways happen.
And I think the message therefor...
(34:29):
or clients who are in a saleposition is that they sort of
view it as a non-binding letterof intent, which it is, but what
they don't oftentimes understandis that the terms, the major
deal terms that are ultimatelyreflected in that LOI are terms
on which the transactiondocuments will be based.
(34:50):
And so it's not a situationwhere it's a non-binding letter
of intent and the seller isgoing to be in a position to
effectively renegotiate a lot ofthose terms.
Because from the buyer'sstandpoint, the reason they're
spending the time negotiatingthe letter of intent, albeit
non-binding, is to reflect themajor terms of the transaction,
(35:14):
which again will be reflected inmore detail in the transaction
documents.
So please get your attorneysinvolved to help negotiate the
letter of intent.
SPEAKER_01 (35:26):
Yeah, absolutely.
I certainly agree with that.
And I think for sellers thatdon't often deal with sale
transactions and particularlylegal documents and terminology,
it can be a foreign land forthem to navigate.
And having a well-versed legaladvisor to help them navigate
(35:48):
those docs, super, superimportant.
What are some of the otherthings that you would advise
clients during this phase?
I mean, clearly you're goingthrough transaction structure,
consideration, indemnities,escrow, all sorts of terms.
What are a couple of other bigpitfalls that you would
(36:09):
highlight for doctors looking todo deals in this phase of the
process from a legalperspective?
SPEAKER_02 (36:16):
Well, this kind of, from a legal perspective, I
think transaction structure is abig issue.
And this is something wherelegal and the financial advisory
consulting industry overlap.
You know, there's certainly tax,obviously tax issues associated
with any sort of a saletransaction.
(36:38):
So what we're trying to do isstructure the transaction in a
way to minimize the taxconsequences to our client.
But the transaction structureoftentimes will be driven as
much by the identity of thebuyer as it is by the by the tax
consequences of the transaction.
(36:59):
And so there can be tax-freetype of reorganization that we
can do, but it's just a matterof sitting down and kind of
identifying more tax-efficientways to structure a transaction
and the buyer's willingness tohelp facilitate that through a
(37:20):
transaction structure.
And one other issue thatoftentimes comes up, which,
again, you'd like to identify asearly on as possible, but
candidly, typically would notcome up until you're well into a
process, is how anyconsideration is going to be
split or distributed amongst thepartners and partners.
(37:42):
That can be particularly acuteif a physician group has
ancillary services such assurgery centers that are
involved in the deal.
Oftentimes, some of the olderdocs who have been around and
the founding physicians may havean opinion that they built this
and spent a lot of time buildingthe enterprise, and maybe they
(38:04):
should be entitled to a largersplit of the compensation or the
consideration.
than the younger ones.
And so that's certainly an issuethat could derail a transaction
well into the process.
SPEAKER_01 (38:20):
Yeah, we've seen that a couple of times.
I mean, I think the most acuteexample of that is when you have
a large group that's on aproductivity-based comp model
and they're all takingcompensation that eliminates any
costs remaining profit duringthe normal course of business,
but you have really highproducers and you have doctors
(38:41):
that are further down theproductivity list.
And maybe they all have equalownerships, ownership
percentages in the business,right?
But if you're doing a privateequity deal and you're taking a
20% haircut and that's thepurchasable income, right?
Well, those top producers arelike, well, wait a minute, I'm
taking a bigger haircut in mycomp than you are just from an
absolute dollar amount.
(39:02):
And oftentimes that translatesinto different dollars going to
those top producers and theupfront purchase price than the
others, even though their equityvalues may be similar and that
can be difficult to navigate.
And oftentimes I don't thinkphysicians understand those
mechanics and, um, uh, can getbunched up on that.
And certainly you don't want,you know, any sort of, uh, you
(39:23):
know, minority shareholder suitsfor people who disagree with the
deal once that happens.
Although I have seen those, um,but, um, Yeah, that's a tricky
one to navigate and certainlysomething you want to address
well in advance.
SPEAKER_02 (39:37):
Yeah, and to your point, I certainly see that a
lot on a surgery center side,right?
The fact that there are bigproducers and if it's structured
properly, they're getting theirdistributions right.
pro rata in accordance withtheir ownership percentages.
But if you've got a big saleliquidation of that, then some
(39:57):
of those big producers may havean expectation that they should
receive a greater share of theearnings.
And, you know, you couldpossibly work that out from a
legal standpoint, but culturallythat's, that's could be a heavy
lift depending on the dynamicsof that group.
SPEAKER_01 (40:11):
Yeah.
And I, you know, hopefully it'snot lost on the listening
audience here, but the, thefactors that pertain to
professional earnings, practicesversus ancillary technical
businesses like surgery centers,right?
They're going to be somewhatdifferent in terms of how those
economics work and that issuebetween value proposition,
equity, productivity.
(40:32):
They might be different in anancillary setting than in the
professional setting.
And again, when it'sprofessional practice and your
group owns it and you're sharingin distributions and profits and
the group practice model, it mayultimately be be different in
the transaction and, and workingthrough that early on to make
sure everybody is aware of, ofthat and aligned around how
(40:53):
those economics are going towork is critical to getting a
deal done.
Yeah.
SPEAKER_02 (40:58):
Yeah.
And then I think we touched onthis earlier, but the biggest
issues that would typically comeup in this, at this stage would
be regulatory issues that wehaven't had a chance to identify
pre-sale that the bar, thebuyers have.
has identified during their duediligence.
Um, you know, that's anythingfrom any kickback statute
(41:18):
issues, Stark.
I mean, Stark is the true, um,statute that is, that is a trap
for the unwary.
I mean, we had a deal recentlythat didn't fall apart on this
particular issue, but just inthe diligence, the, the buyer's
council identified the fact thatthe the selling physician group
had not been providing a noticeof alternative providers in
(41:42):
connection with a provision ofdiagnostic imaging services to
its patients, which is aviolation of an applicable Stark
statute.
And that, under Stark, arguablyall of the income from the
designated health servicesassociated with that imaging
(42:03):
service line should have beenreturned.
repaid.
And then there's also, you know,fines and penalties associated
with that.
So there's a way to remedy thatissue.
And we had negotiated withbuyers council to file a
self-disclosure on that issue.
But again, that's something thatyou would prefer not to have
because it's something thatcould have a material
significant financial impact.
(42:25):
In that case, it didn't blow thedeal, but we were going to have
to file a, agreed to file aself-disclosure, but our group
wasn't going to control thatself-disclosure.
The buyer was going to controlthat self-disclosure, including
the settlement of thatself-disclosure.
And then, of course, there werespecial indemnities and offsets
against purchase price withrespect to ultimately any
(42:46):
payment that was made to thegovernment.
So those are the sorts ofissues, again, you just would
prefer not for them to come upand be brought to your attention
by buyer and buyer's counsel.
SPEAKER_01 (42:57):
Yep, absolutely.
Well, obviously there's a lot ofstuff that comes up during this
phase.
There's a lot of minutia thatneeds to be negotiated,
documented, formalized, and thatcan be tough.
I think from our vantage point,one of the pitfalls we'd like to
see sellers avoid is spendingdollars chasing dimes.
(43:21):
And what I mean by that is youjust can't negotiate every
single economic or deal point to100% in your favor, right?
You need to be willing tocompromise on a few things, work
towards the economic outcomethat is great on the whole.
(43:42):
And more often, and again,different personalities on
different physicians in terms ofwhat's important to them.
And sometimes something that'sreally important doesn't really
have a whole lot of economicimpact, but you get hung up on
those things.
And it just leads to dealfatigue.
And I've seen deals fall apartover just exhaustion over, you
know, relitigating orrenegotiating minor deal points,
(44:05):
you want to get the big ones,right.
But I think having a willingnessto compromise on things that are
less important to the dealeconomics or the overall
partnership model that you havegoing forward.
I think that's something thatsellers need to keep in mind as
well.
And I know that you cancertainly help them navigate
that as their attorney.
And I would certainly recommendthat they be mindful of that as
they negotiate the economicpieces as well.
SPEAKER_02 (44:29):
Yeah, no question.
Deal fatigue is a real thing.
SPEAKER_01 (44:33):
Yeah, it is.
Particularly in some of thesetrickier deals that are getting
heavy scrutiny, right?
You're 12 months into a processthat you somehow expected to be
wrapped up in three months,people started getting a little
bit, a little bit exhausted formultiple reasons.
But then any, we're getting kindof close to our time here.
(44:55):
Any final thoughts that you haveon this last phase or, or even
broadly that you would say tothe listening audience in terms
of pitfalls to avoid?
SPEAKER_02 (45:07):
Well, I think again, again, We talked about the
interaction of all these variouspieces of a transaction kind of
fitting seamlessly together.
You know, one thing thatoftentimes comes up is issues
with the doctors.
You're so focused on thetransaction and the deal terms.
(45:29):
There's less focus oftentimes onsort of the terms of their
employment going forward,post-closing.
And You know, as you'dmentioned, I think earlier,
Jason, on the PE side, theprivate equity group is going to
demand that the physician grouptake a scrape on the
(45:50):
post-closing compensation.
Their compensation will be lowerthan what they're historically
used to, and that's the way thePE group makes sense.
Yeah.
(46:24):
It's often, I think, tooimportant, and this is more in
your bailiwick, but it'simportant once you get to where
you're some pretty solid numbersto model out the consideration
and model out what post-closingcompensation might look like so
the docs get a big picture onthe whole financial package.
(46:45):
Because I think a lot of timesyou'll get a purchase price
that's a It seems to be a prettybig, acceptable number.
But by the time you break itdown into components of cash
consideration versus rolloverequity, and then you make some
allowances for whatever taximpact that deal is going to
(47:06):
have, the net number might notbe what the doctors were
expecting.
And so you need to kind ofmanage those expectations and
that information as well.
SPEAKER_01 (47:17):
Yeah, I mean, we see that as one of our primary jobs
in this phase is helping tounderstand the, you know,
interpret how this ultimatelyimpacts total consideration in
these different buckets on anafter-tax basis so they can
fully understand, you know,where the trade-offs are and
what is in their best interest.
(47:37):
Because if they get toolaser-focused on a single
number, they may miss some ofthe important component parts
downstream.
And so we'll model out all thosescenarios and help the physician
understand that, make surethey're well-versed on how those
different components playtogether.
But that is a great, greatpoint.
SPEAKER_02 (47:55):
And I think the last point kind of to that is on the
private equity side of things,well, the hospital groups, any
buyer will require generally afive-year commitment on the
employment with some prettysignificant non-compete and
other restrictive covenants.
(48:15):
On the private equity side, thedoctors will need to understand
that if that employmentterminates for some reason other
than very specific and narrowlycrafted termination rights,
under most circumstances, ifthat agreements terminates
before the end of five years,there's gonna be some clawback
(48:36):
of consideration.
And it may just be, they loseall of the, or some significant
proportion of the rolloverequity, But, you know, if the
buyer is very aggressive, theymay want to pull back some of
the cash that was distributed aswell.
So, again, it's just part of thedoctors being fully informed of
all the ramifications of whattheir post-closing commitment
(48:59):
will be to the buyer.
SPEAKER_01 (49:02):
Yeah, I think the issue of that duration of time
is particularly important if youdo have docs in the group that
are looking towards a– Acomplete exit, right?
When you're ready to hang upyour coat, that's not the time
to do a deal.
And it can certainly change thedeal economics and change the
perspectives on the transaction.
(49:23):
So hopefully you've gone througha process early on, as we talked
about, to understand the dealeconomics and partner goal
alignment and expected outcomesearly on so that everybody
understands how that will playout, because it can certainly
derail a deal if you wait untilthis phase of the process.
to work through some of thoseitems.
SPEAKER_03 (49:42):
Yeah.
SPEAKER_01 (49:43):
Awesome.
Well, Dan, thank you so much.
This has been a greatconversation.
Thank you to everyone who'stuned in to listen to this
podcast.
Really enjoyed it and I hope youfound it useful as well.
Thank you to AHLA for giving usthis opportunity to talk about
some common pitfalls that we seein healthcare transactions.
(50:05):
Thank you so much.
SPEAKER_02 (50:06):
Thanks, Jason.
Take care.
SPEAKER_00 (50:13):
If you enjoyed this episode, be sure to subscribe to
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(50:33):
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For more information, visitroot-partners.com.
SPEAKER_01 (00:17):
Hi, I'm Jason Rutkaber, the founder and
managing partner of RootPartners.
We're a healthcare-focusedtransaction advisory firm
serving healthcare organizationsand physicians nationwide.
And I'm excited for this podcasttoday.
I'm joined by a friend andcolleague, Dan Mohan from Pulse
and Ellie.
And we're going to be talkingabout how to avoid some of the
common pitfalls we see inhealthcare transactions, and
(00:40):
hopefully give the listeningaudience some pro tips on how
they might be more likely tohave a successful outcome in
their transaction.
Dan, if you wouldn't mind, maybegive a real quick introduction
of yourself and your practice,and then we can dive into our
topic.
SPEAKER_02 (00:56):
Will do.
Thanks, Jason.
As Jason mentioned, my name isDan Mohan.
I'm a shareholder with anational law firm in Paul
Cinelli, working out of theAtlanta office.
I've been practicing law forover 35 years, and much of that
time has been working in thehealthcare industry,
representing healthcareproviders with a particular
(01:16):
emphasis on M&A transactions,joint venture and affiliation
type of transactions.
So I'm happy to be here with youtoday and discuss this very
timely and relevant topic.
SPEAKER_01 (01:30):
Great.
Well, thanks so much forjoining.
I can attest having worked withDan in real deals that he's a
great advisor and provides a lotof insight into these deals.
And I'm excited to talk aboutthis topic.
You know, Dan, we were both downin Austin at the Advising
Providers Conference put on byHLA.
And, you know, we grabbed lunchand we were talking about kind
(01:54):
of the overall experience thatwe had had over maybe the last,
couple of quarters where M&Aactivity had been really quite
heavy for several years.
And we started to notice in bothof our practices that deals were
just getting a little tougher toget across the finish line.
And I think there's a lot ofreasons for that, not the least
(02:17):
of which are a new presidentialadministration, some of the
economic headwinds that we'veseen, interest rates, inflation,
other things.
But I think deals are justgetting more scrutiny.
Buyers are becoming a little bitmore selective in terms of what
they're targeting.
And when we do get intotransactions, it takes a little
(02:37):
bit more handholding to getthose deals across the finish
line.
And so when we were talking,that's kind of the genesis of
the idea for this particularpodcast is providing some ideas
from our own personalexperiences working with
physicians and other healthcaretransactions on how we can
(02:57):
better navigate that or someideas that people entertaining
the idea of a transaction mightbe able to think through to
avoid those common pitfalls andhave a better success or a
better chance at success ingetting that deal across the
finish line.
Maybe before we dive directlyinto the topics of pitfalls,
(03:21):
Dan, is there anything thatbroadly speaking you've seen?
I assume that what I justmentioned to you is consistent
with what we talked about inAustin and on other occasions,
but any other developmentsdevelopments from your
perspective as an attorney thatyou've been seeing recently that
have obfuscated the path to asuccessful deal or other
(03:42):
challenges you're seeing?
SPEAKER_02 (03:43):
Well, I think consistent with what you
mentioned, Jason, deals arestill getting done.
There's no question about that.
But I think the buyers aregetting a lot more discerning,
perhaps, in terms of the dealsthat they're moving forward and
taking to close.
And as you mentioned, some ofthe business factors associated
with that.
(04:04):
And what I've found is that it'seasier for a potential buyer to
walk away from a deal if thetransaction has a little more
hair on it.
Whereas in a very robusttransactional environment,
without some of the factors thatyou've mentioned, putting some
(04:25):
down pressure on deals.
When there's a lot of money andthe interest rates are cheap and
there's a lot of competitionamongst buyers for sellers,
buyers, in my experience, are alittle more willing to deal with
potential issues or hair on atransaction than they would be
in this environment.
And so that's kind of what I'mseeing where deals don't close.
(04:48):
It's where it's due to...
legal or financial issues thatcome up, business issues in
connection with the potentialseller, that kind of made it
easier for a buyer to walk away,whereas as we said, there's
still deals getting done.
But those are the sellers thatare pretty pristine in terms of
(05:11):
any legal issues that they maybring to the table in a sale
transaction and certainly aremuch stronger financially in
terms of their businessoperations.
SPEAKER_01 (05:22):
Yeah, yeah.
I mean, we're seeing the samethings.
And I think, and we'll breakthis down into kind of some
different phases of thetransaction.
But one of the other things thatI've seen is there's, Fewer
unsolicited deals, I would say.
Those still exist, right?
But dollars chasing deals, asopposed to the efforts on our
(05:43):
part as a sell-side banker,really trying to market a deal
and get in front of people sothey can take a good look at it
and evaluate it from theirinvestment thesis and investment
criteria.
Those unsolicited deals arefewer in my experience.
And I do think that changes thedynamic of how physicians or
(06:04):
other healthcare organizationsengage with buyers.
Because those unsolicited deals,you've got a targeted
transaction.
Obviously, they're coming inwith some idea of what they want
to do.
And maybe it's a little biteasier to get those across the
finish line when there's aproactive buyer in the space, as
opposed to the marketing effortsthat we're undertaking now to
present the valuation model andproposition and investment
(06:28):
thesis to prospective buyers.
Do you see that as well in yourpractice?
SPEAKER_02 (06:34):
Yeah, I would certainly agree with that.
And I think that's kind ofconsistent with what we've
talked about.
I think the unsolicited buyerswere something several years ago
when we were managing andclosing a pretty large volume of
transactions, particularly inthe physician group space.
It's really much more prevalentthan it is now.
(06:55):
And I think, again, I just thinkthat's part of the theme of
buyers being a lot more carefuland discerning in groups that
they're targeting foracquisition.
And that's probably, you know,part and parcel with the nature
of the kind of the change thatwe've seen in the identity of
the buyers.
Right.
I think that's kind ofconsistent with private equity
(07:16):
backed MSOs kind of taking thelead in terms of certainly in
the physician group acquisitionspace.
We're still doing some hospitaldeals, but the volume isn't
nearly what it was several yearsago.
And private equity hasdefinitely taken the lead.
But they've got, you know,they're very, very careful about
(07:37):
the financial and the legal duediligence that they do.
And we said in this market,they're even more careful and
less willing to take on risk.
Sure.
SPEAKER_01 (07:47):
Yeah, but, you know, and that is certainly my
experience, but there is stillplenty of dry powder out there.
There are still private equitybacked platforms that are
actively pursuing deals andmaking unsolicited bids on
things.
So we don't want to be all doomand gloom here.
There's still plenty ofopportunity in the space, but
certainly I think.
(08:10):
preparing for a deal is moreimportant than ever.
And that's probably a good segueinto our topic for today, which
is avoiding some of thosepitfalls and thinking about some
of the things that you can dothroughout the deal process to
make sure that you're puttingthe best foot forward, that
you're prepared for the process,and you're prepared for kind of
(08:34):
the expectations buyers aregoing to have and getting those
things in order before you startthat process.
So I think the best way, atleast in my mind, to think about
this, and obviously I'll bespeaking to this topic from the
perspective of investment bankerand evaluation services advisor,
and you'll be providing yourlegal lens to that conversation.
(08:57):
I think there's some overlapthere in terms of how those
terms work together.
But when I think about a deal,um broadly speaking i think of
it in kind of three phases thefirst being kind of the the
planning or pre-marketing phasegetting ready to take a practice
(09:17):
to market and all the effortsthat are associated with that
then you have the marketingphase through loi that's getting
interested buyers uh familiarwith the deal understanding
various bids and then hopefullymoving towards the formal
(09:37):
diligence phase and workingtowards close in that final and
third phase of the business uhtransaction now in in As it
relates to the legal andeconomic piece, I think
oftentimes our roles are onopposite ends of that spectrum
in terms of our heavy lifts,where we spend more time on the
upfront phase, getting partiesready for a deal, going through
(09:59):
all the economic and financialdiligence, preparing the
information memorandum andtaking it to market.
And then once we get into theLOI phase, we tend to see much
heavier involvement from legaladvisors as you negotiate deal
terms and go through all of thelitany of documents that need to
be repaired there.
But I think, frankly, there'sopportunities for folks to
(10:23):
engage with both their financialadvisor and their legal advisor
at all phases of the diligenceand sale process.
And I'd like to work throughsome of the things that we've
seen and discuss those pro tips,like I said earlier, to
navigating a process and puttingyour best foot forward.
So, Dan, I'll start by giving itover to you.
(10:45):
I mentioned, broadly speaking,that our involvement tends to be
more heavily weighted towardsthe front end of the deal where,
in my experience, the attorney'sinvolvement is more heavily
weighted towards the back end ofthe deal.
But I think that might be amistake for buyers.
And I'd like to get yourthoughts in terms of your
involvement and what you mightdo if afforded the opportunity
(11:06):
to help get a practice ready fora deal from a legal perspective
to make sure that they're reallyready for game time, if you
will.
Do you have any thoughts onthat?
SPEAKER_02 (11:16):
Yeah, I do.
I assumed you did.
You know, I think the, wecounsel, well, let me back up
for a second.
When deals go awry, they willtypically, go awry due to some
significant legal issue that thebuyer discovers during the
(11:41):
course of buyer's due diligence.
Less frequently, there can besome sort of corporate legal
issue.
And so You know, what we try toconvince clients that are
setting out on a potential saletransaction to do is to allow us
(12:02):
to do some limited seller duediligence prior to embarking on
the sale process.
And it's not, you know, the fullscale diligence that a buyer
would do, but it's a scaled backprocess.
focused on just trying toidentify significant legal
issues that could prove to be ahang up during the sale
(12:26):
transaction.
And we try to do that because,you know, in our experience,
it's always better for us tofind out about these and to fix
them, if they're fixable, beforeyou get, you know, 75% down the
road on a sale transaction.
You've spent all that time,energy, and money invested in a
transaction, and then you hit apotential roadblock well into
(12:49):
the deal.
Worst case scenario, that couldscuttle the deal.
Best case scenario, it's goingto affect your valuation, how
much the buyer is willing topay, and it's going to affect
things like indemnification.
So So we routinely counselclients to allow us to do that
(13:10):
sort of high level legal andcorporate diligence.
And again, hopefully it comesback clean and we're off and
running.
But if it doesn't, we identifysome things and it gives us a
chance to fix them before we getinto a sale transaction.
The worst situation to be in asa seller in this sort of
(13:33):
situation is for, the buyer'sattorneys through their
diligence to bring thesesignificant legal issues to your
attention.
That's just, you just don't wantto be in that position.
SPEAKER_01 (13:43):
Yeah.
I mean, I couldn't agree more.
It's so important thatparticularly unsolicited bids,
obviously you kind of get rushedinto a deal.
Sometimes you don't have therunway that you might otherwise.
But if you're an organizationthinking about doing a
transaction, getting somefoundation built that will help
you navigate that process isextremely important.
(14:04):
And we always recommend thatthere's some preliminary legal
diligence done in anytransaction to make sure there
aren't any skeletons in thecloset, anything that needs to
be addressed beforehand, becauseyou're absolutely right.
Best case scenario, it impactsvaluation.
And obviously, sellers aretrying to get the highest value
for, for in that sale event,which may be a one, one time
(14:26):
deal or once in a lifetime typedeal.
So you want to maximize yourvalue, but worst case scenario,
you find something that derailsthe deal altogether and you
start over, you have to delayentering into some sort of a
sale process for a period oftime.
And again, that could result inmarket timing that's suboptimal
as well.
So, you know, we, we, obviouslydo the same thing, right?
(14:47):
When we're given the opportunityand we don't always have a long
runway, but I think the numberone thing that you can do in
addition to having your legalhouse in order is getting your
financial house in order, right?
You need to kind of know whatyour business is doing
economically and develop some ofthat business acumen, not only
so that it can be conveyed to apotential buyer, right?
You want to have some thoughtsaround what your future looks
(15:12):
like, what your valueproposition is, but some of the
blocking and tackling is reallyimportant too, right?
I mean, I see particularly inthe lower middle market where
maybe you don't have the levelof sophistication in terms of
administrative oversight, toolsthat might be helpful to
generating reports.
Many of these practices justdon't have the ability to report
(15:34):
thoroughly on their financials,right?
They may have multiple differentsystems that have been used over
a period of time.
So they're trying to amalgamate,you know, a change over in
software.
They may, this is particularlychallenging with EHR changes,
right?
If you switch EHR billingservices providers and getting
some of that data out of yoursystem, when you have multiple
(15:56):
systems in your recent history,really, really, really tough.
And I want to emphasize toeverybody listening, preparing a
data room and getting yourfinancial diligence ready to go
to market is a really big lift.
It's no easy task, even withprofessional advisors assisting
you.
I think that's one of the thingsthat might take sellers back a
(16:20):
little bit is they just don'trealize how much information
needs to be provided.
And not only once it's provided,but Oftentimes we need to go
through a process of scrubbingthat, understanding things that
are non-recurring, being able todevelop explanations and
normalization adjustments tothose items.
And certainly if it's reallymessy, we want to bring in, in
an ideal world, a CPA to do, ata minimum, reviewed financials,
(16:44):
ideally an audit if thetransaction size justifies the
expense.
As a valuation service provider,we think doing a preliminary
evaluation is really importantas well to make sure you have
expectations around valueproposition and valuation done.
And again, there's going to be alot of legal documents that are
going to need to be prepared andpopulated in that data room
(17:04):
eventually.
So going through that processearly on and getting as much of
that done as possible is reallycritical.
in my perspective in getting adeal done.
SPEAKER_02 (17:14):
That's just kind of part and parcel of trying to
maximize your opportunity for asmooth and efficient transaction
going
SPEAKER_01 (17:24):
on.
Yeah, absolutely.
SPEAKER_02 (17:26):
Let me ask you a quick question on the
valuations.
We routinely encourage ourclients, physician clients in
particular, to obviously engageclients valuation and investment
bank financial advisors to helpthem through the process.
One issue that always comes upon the financial side is whether
(17:47):
they should go ahead andcommission a fair market value
appraisal of their practice.
And we often, we will routinelyrecommend that.
A lot of our clients arereluctant to spend the money,
but in my mind, it's kind oflike we've talked about on the
legal side.
(18:08):
I kind of, I, view this asputting yourself to be in a
position to go on offense, orare you gonna play defense?
And on the financial side, myclients oftentimes come back
with me with, well, the buyer'sgonna provide us with their
appraisal, fair market valueappraisal, and why don't we just
react to that?
(18:28):
And my response is always, Iwould prefer not to react to
something that somebody else hasprepared representing the buyer.
I'd rather us know going in whatwe think your practice is worth
based on a good solid fairmarket value appraisal and kind
of take the offense in thatpiece of it as well.
SPEAKER_01 (18:47):
Yeah.
I mean, I think the broaderpoint of setting realistic
expectations, not only in termsof valuation, but other elements
of the deal as well, you know,duration to close, those sorts
of things.
Getting proper expectations issuper important to having a
successful deal.
We always do valuation work whenwe're getting a client ready for
(19:10):
a transaction to help set thoseexpectations.
And it is important to note thata buyer is going to do their own
financial due diligence, right?
And they may come up with adifferent valuation for that
business.
But some of that may be due tothe deal terms or how they're
going to structure compensationor other elements of the
(19:30):
transaction.
But starting from a solidfoundation of knowing your
starting point, right?
That's really helpful to sellersknowing what their valuation is.
And you know, it's not uncommonfor physicians who have heard
that, you know, doctor XYZ downthe road sold the practice for,
you know, millions of dollars.
They don't understand any of thedeal terms.
(19:51):
They don't understand thecompensation model, the buyer
type.
And so expectations that areunrealistic can lead to a poorly
executed deal.
And in many cases result to, youknow, acrimony in the process
because the doctors just don'tunderstand why the valuation is
coming in so low from the otherside or why their value isn't
isn't higher.
(20:11):
So getting that valuation doneis really important.
I will also say it doesn't needto be kind of a formal valuation
that we might do for, you know,like a hospital buyer.
They're going to want to havetheir own compliance-focused
valuation to meet the fairmarket value standard.
And that's going to becommissioned whether we do a
valuation or not.
They're going to hire somebodyto do that work.
(20:33):
But I do think having some ofthe valuation done early on with
the correct fair market valuestandard, somebody who's
familiar with how valuationshould be done in a healthcare
space, sets a proper baselinefor understanding where the
other side comes in.
And Yeah, I think doing thevaluation is super important.
(20:55):
It doesn't have to be a supercostly thing.
process but it will highlightother issues right other issues
that come up in the diligencefor evaluation are going to be
similar to the diligence itemsthat will come up in formal
diligence in terms of run rateanalysis normalizing earnings
looking at balance sheet itemsall those sorts of things that a
(21:15):
buyer is going to want to seethe valuation firm is going to
want to see as well and sogetting ready for that and going
through that process really putsuh the best foot forward in my
opinion yeah yeah You know, Imentioned a hospital buyer
versus PE buyer.
And maybe there's a third buyergroup for a lot of these
organizations, which is otherphysician practices.
(21:38):
In some cases, we're not alreadyPE backed.
From an economic standpoint,there's a lot of differences in
terms of how to navigate aprocess with those different
types of buyers.
From a legal standpoint, do yousee any significant differences
in how you approach transactionswith those different buyer
groups as you're preparing aclient for a deal?
(22:00):
I mean, again, we can get intothe formal diligence phase in a
little bit, but do you see anymajor differences there from a
legal perspective on what aclient should expect?
SPEAKER_02 (22:10):
Well, yeah, absolutely.
I mean, they're justfundamentally different
transactions, right?
You know, there is some...
There's more scrutiny,obviously, on the PE deals now,
particularly from a healthcareregulatory standpoint.
But historically, because theprivate equity buyer is not an
(22:33):
entity that the physicians wouldrefer patients to post-closing,
they're not bound by a lot ofthe regulatory constraints that
a hospital buyer is bound by.
So you're likely to, thevaluation is different what we
see typically on a hospital buyside is just basically an asset
(22:57):
value.
There's an inverse relationship,right, between the compensation
and the amount that a hospitalcan pay for a physician group.
So physicians are either goingto have to accept a higher
purchase price, but much lowercompensation arrangement going
forward, forward after sale oraccept a lower purchase price,
(23:21):
usually just based on some assetvalue of their business, but
that will allow them toparticipate on a full
compensation plan going forward.
So they're just very, and ofcourse the consideration is
different on the private equityside, consideration often
includes rollover equity.
The numbers are just bigger, butyou know, to the extent that
(23:44):
their purchase price is tied upin some percentage of rollover
equity, then there's certainlyrisk associated with that
because, you know, you've gotrisk as to whether that equity
is going to grow in value overtime and how long and the
strings that are attached to youbeing able to exercise any sort
(24:06):
of sale rights or otherwiserealize some cash on that equity
in the future.
SPEAKER_01 (24:11):
Yeah.
And I don't think that a lot ofphysician sellers fully
understand the differences inthose models.
Right.
And that goes back to my pointabout, you know, hearing that
the doctor down the street gotsome sort of, you know,
liquidity event for theirpractice and the expectation
being that.
all sales are going to behomogenous in terms of how the
(24:31):
deal economics and purchaseprice works.
But that is certainly not thecase, right?
And you made a point that isjust so critical, particularly
in physician practice deals,which is the post-acquisition
compensation model for ahospital buyer and a private
equity buyer is vastlydifferent, right?
And so helping doctorsunderstand how those different
(24:52):
models work and working throughthe economics there in terms of
the compensation, private equityoffice, oftentimes with a scrape
or a reduction in compensationto justify the purchasable
earnings.
But those are very different,right?
And I think that maybe leads toone of my next and perhaps last
(25:14):
points that I think is reallyimportant in the pre-sale phase
or leading up to the marketingphase.
And that is working with thedoctors to get goal alignment
and understanding what yourtarget buyer is, right?
Because that can mean a lot ofdifferent things for different
(25:34):
physicians, right?
In my experience, doctors thatare obviously nearing retirement
or further on in their careerthey prefer the liquidity event,
right?
They would want the scrape ofthe income and the big cash
infusion or cash payout at thefront end.
Whereas younger doctors may bemore concerned about the
long-term earnings of thebusiness, that rollover equity
(25:57):
piece, how that's gonna growover time.
And those differences inexpectations can lead to
internal strife regarding thepursuit of the ideal buyer.
And that's just aroundeconomics, right?
And then you also have theconcern around culture, right?
A hospital buyer is gonna have avery different culture than a
PE-backed buyer.
(26:17):
And so working through some ofthose internal differences of
expectations regarding yourtargeted buyer, the optimal work
culture, the compensation model,all of those things need to be
worked out early on in theprocess because you get into a
full negotiation and you haveindividuals within your group
that don't agree on what theywant to accomplish, it can
(26:40):
really put a lot of strain onthe deal.
And I've experienced firsthandwhere deals have fallen apart
because of this exact reason.
SPEAKER_02 (26:49):
Yeah, no, I couldn't agree more.
I had a deal fall apart.
a year and a half or so ago onthat very issue.
Fortunately, you know, for ourclient, the doctor group, it
was, it's something that theyidentified relatively early on.
And so they didn't get too far,you know, they didn't even get
to an LOI stage in that dealbefore
SPEAKER_03 (27:09):
the
SPEAKER_02 (27:10):
doctors sat around a table and kind of talked it out
and realized that the youngerpartners just were not
interested in selling out to aprivate equity backed group.
But, you know, that's, In mymind, that's relatively rare for
it to happen that early.
And that was an unsolicitedbuyer.
So they had not engaged somebodylike yourself who kind of went
(27:34):
through the pre-deal process ofgetting everybody around the
table and talking through thoseissues.
I have had deals fall apart wellinto the deal, but long past the
LOI stage when we're negotiatingtransaction documents before the
doctors finally got sat around atable and had that discussion.
So again, it's far better tomake sure everybody's long-term
(27:55):
goals are aligned andeverybody's on board with the
sale process before they getdeeply into the process itself.
SPEAKER_01 (28:03):
Yeah.
And you know, again, theunsolicited deals are a little
bit of a shotgun through thedeal process.
But even, you know, a plannedsale, sometimes those can feel
rushed as well.
And I would encourage anybodythinking about a deal to think
about it as early as possible,to start working on some of
these things that we've talkedabout early on, maybe even two
(28:27):
and three years sometimes.
If you know that you're going tohave a series of retirements or
you are planning for some sortof an exit or you see some
market dynamics that mightsuggest it is wise to consider
affiliation or acquisition,merger, starting to plan for
that well in advance, I think isreally good advice and something
(28:47):
that we don't see very often,but that could really avoid
falling into some of these trapsthat we've talked about during
the foundational planning phaseand make sure that, again,
you've got your accounting housein order, you've got any
regulatory issues well in thepast before you get to the deal,
you've got goal alignment aroundthe physician partner group and
you understand kind of whoyou're looking to target as a
(29:09):
buyer and how you'd like thatdeal to play out.
So I would encourage anybodylistening, work early.
Early is definitely better, evenif it is a scaled back
superficial process.
SPEAKER_02 (29:25):
Yeah, I would certainly agree.
SPEAKER_01 (29:27):
All right.
Well, once we get through allthat and we go into the
marketing phase, Obviously, atthat point in time, you are
moving forward with the dealprocess.
We get most heavily involved inmarketing the business at that
point in time and trying to findbuyers.
And this is a hard period oftime, I think, for a lot of
(29:51):
physicians because it's the It'sthe waiting.
It's the time where you have tokind of trust the process and
rely on your advisors to bringin potential buyers and help you
understand the terms.
And again, we have a lot ofinvolvement in that phase.
And I'll talk about a couple ofthe things that we'd like to see
(30:13):
and help our clients avoid.
Before I dive into that, do youget involved much in that
process, Dan, or are there anythings that you would recommend
to providers as they enter thatmarketing phase?
SPEAKER_02 (30:28):
No, we're involved very little in that.
Hopefully, again, we've had achance to do some presale
diligence and kind of look atthe corporate documents, make
sure all the corporate hygieneis clean and fixed any issues
there.
But, you know, once...
Once we're into the marketingphase, that's really very light
(30:49):
in terms of the legal servicesthat are required until we get
to LOI.
We'll discuss the legal piece ofthat once we get to the LOI
stage.
SPEAKER_01 (30:57):
Well, I definitely want to make sure we have time
for that because I know there'sa lot there that you'll want to
talk about.
I think from my perspective inthe marketing phase, maybe the
biggest pitfall to avoid foranyone listening is Inserting
yourself into that marketingprocess.
As a seller, it's really, reallyhard not to want to be involved.
(31:20):
It's your baby, it's yourbusiness, it's your life, it's
the culmination of your years ofexperience, and you really want
to be involved in that process.
But it can really be detrimentalto a deal because you don't
necessarily know whatinformation you should be
disclosing at that point.
(31:41):
Again, anything that you say canand will be used against you in
this deal, particularly if youdisclose information that is
perhaps not conveyed in anappropriate way.
It may dissuade buyers or lessentheir interest in your business.
And it certainly can underminethe sales process The interest
(32:04):
we're trying to generate for thedeal, trying to solicit and
create some competition, if youwill, for the deal.
If you're having sidebars as anowner because you know one of
the potential buyers or you'vehad a relationship in the past,
it can really undermine theprocess and frankly will likely
result in less money on thetable at the end of the day.
(32:28):
I guess without spending toomuch time on the marketing
phase, that's the big pitfallthat I see in my practice is let
us do our job.
We're there to represent you.
It's in both of our intereststhat we find you the right buyer
and optimize your purchaseeconomics, both in terms of comp
and purchase consideration.
(32:49):
So leaning on us a little bit tomake sure that we navigate that
for you is really, reallyimportant.
And I know it's hard, but if youcan stomach holding back some of
those words, I think it canreally help you in the long-term
getting to the deal phase andformal diligence.
All right, well, let's talkabout once that LOI comes in and
(33:12):
you've moved to formaldiligence, again, hopefully a
lot of our work in terms ofputting the value proposition,
understanding the dealeconomics, getting the financial
house in order has already beendone, or materially done.
We still have work to do.
But I think this is really when,Dan, you and your team steps in
(33:36):
and provides just an enormousamount of value to the
transaction.
What are some of the pitfallsthat you'd like to talk about
that can derail a deal in thisfinal, most important phase of
the transaction?
SPEAKER_02 (33:48):
Well, I think the first thing to mention is
getting to the LOI stage.
You know, you're correct.
You've been through yourmarketing process.
Let's assume that you've run aprocess, identified a potential
buyer who's won the beautycontest.
(34:08):
And so now we've got the stagewhere we're negotiating the LOI.
Frankly, obviously, from ourstandpoint as lawyers, we would
like to be heavily involved andneed to be heavily involved in
negotiation of the LOI.
Unfortunately, that doesn'talways happen.
And I think the message therefor...
(34:29):
or clients who are in a saleposition is that they sort of
view it as a non-binding letterof intent, which it is, but what
they don't oftentimes understandis that the terms, the major
deal terms that are ultimatelyreflected in that LOI are terms
on which the transactiondocuments will be based.
(34:50):
And so it's not a situationwhere it's a non-binding letter
of intent and the seller isgoing to be in a position to
effectively renegotiate a lot ofthose terms.
Because from the buyer'sstandpoint, the reason they're
spending the time negotiatingthe letter of intent, albeit
non-binding, is to reflect themajor terms of the transaction,
(35:14):
which again will be reflected inmore detail in the transaction
documents.
So please get your attorneysinvolved to help negotiate the
letter of intent.
SPEAKER_01 (35:26):
Yeah, absolutely.
I certainly agree with that.
And I think for sellers thatdon't often deal with sale
transactions and particularlylegal documents and terminology,
it can be a foreign land forthem to navigate.
And having a well-versed legaladvisor to help them navigate
(35:48):
those docs, super, superimportant.
What are some of the otherthings that you would advise
clients during this phase?
I mean, clearly you're goingthrough transaction structure,
consideration, indemnities,escrow, all sorts of terms.
What are a couple of other bigpitfalls that you would
(36:09):
highlight for doctors looking todo deals in this phase of the
process from a legalperspective?
SPEAKER_02 (36:16):
Well, this kind of, from a legal perspective, I
think transaction structure is abig issue.
And this is something wherelegal and the financial advisory
consulting industry overlap.
You know, there's certainly tax,obviously tax issues associated
with any sort of a saletransaction.
(36:38):
So what we're trying to do isstructure the transaction in a
way to minimize the taxconsequences to our client.
But the transaction structureoftentimes will be driven as
much by the identity of thebuyer as it is by the by the tax
consequences of the transaction.
(36:59):
And so there can be tax-freetype of reorganization that we
can do, but it's just a matterof sitting down and kind of
identifying more tax-efficientways to structure a transaction
and the buyer's willingness tohelp facilitate that through a
(37:20):
transaction structure.
And one other issue thatoftentimes comes up, which,
again, you'd like to identify asearly on as possible, but
candidly, typically would notcome up until you're well into a
process, is how anyconsideration is going to be
split or distributed amongst thepartners and partners.
(37:42):
That can be particularly acuteif a physician group has
ancillary services such assurgery centers that are
involved in the deal.
Oftentimes, some of the olderdocs who have been around and
the founding physicians may havean opinion that they built this
and spent a lot of time buildingthe enterprise, and maybe they
(38:04):
should be entitled to a largersplit of the compensation or the
consideration.
than the younger ones.
And so that's certainly an issuethat could derail a transaction
well into the process.
SPEAKER_01 (38:20):
Yeah, we've seen that a couple of times.
I mean, I think the most acuteexample of that is when you have
a large group that's on aproductivity-based comp model
and they're all takingcompensation that eliminates any
costs remaining profit duringthe normal course of business,
but you have really highproducers and you have doctors
(38:41):
that are further down theproductivity list.
And maybe they all have equalownerships, ownership
percentages in the business,right?
But if you're doing a privateequity deal and you're taking a
20% haircut and that's thepurchasable income, right?
Well, those top producers arelike, well, wait a minute, I'm
taking a bigger haircut in mycomp than you are just from an
absolute dollar amount.
(39:02):
And oftentimes that translatesinto different dollars going to
those top producers and theupfront purchase price than the
others, even though their equityvalues may be similar and that
can be difficult to navigate.
And oftentimes I don't thinkphysicians understand those
mechanics and, um, uh, can getbunched up on that.
And certainly you don't want,you know, any sort of, uh, you
(39:23):
know, minority shareholder suitsfor people who disagree with the
deal once that happens.
Although I have seen those, um,but, um, Yeah, that's a tricky
one to navigate and certainlysomething you want to address
well in advance.
SPEAKER_02 (39:37):
Yeah, and to your point, I certainly see that a
lot on a surgery center side,right?
The fact that there are bigproducers and if it's structured
properly, they're getting theirdistributions right.
pro rata in accordance withtheir ownership percentages.
But if you've got a big saleliquidation of that, then some
(39:57):
of those big producers may havean expectation that they should
receive a greater share of theearnings.
And, you know, you couldpossibly work that out from a
legal standpoint, but culturallythat's, that's could be a heavy
lift depending on the dynamicsof that group.
SPEAKER_01 (40:11):
Yeah.
And I, you know, hopefully it'snot lost on the listening
audience here, but the, thefactors that pertain to
professional earnings, practicesversus ancillary technical
businesses like surgery centers,right?
They're going to be somewhatdifferent in terms of how those
economics work and that issuebetween value proposition,
equity, productivity.
(40:32):
They might be different in anancillary setting than in the
professional setting.
And again, when it'sprofessional practice and your
group owns it and you're sharingin distributions and profits and
the group practice model, it mayultimately be be different in
the transaction and, and workingthrough that early on to make
sure everybody is aware of, ofthat and aligned around how
(40:53):
those economics are going towork is critical to getting a
deal done.
Yeah.
SPEAKER_02 (40:58):
Yeah.
And then I think we touched onthis earlier, but the biggest
issues that would typically comeup in this, at this stage would
be regulatory issues that wehaven't had a chance to identify
pre-sale that the bar, thebuyers have.
has identified during their duediligence.
Um, you know, that's anythingfrom any kickback statute
(41:18):
issues, Stark.
I mean, Stark is the true, um,statute that is, that is a trap
for the unwary.
I mean, we had a deal recentlythat didn't fall apart on this
particular issue, but just inthe diligence, the, the buyer's
council identified the fact thatthe the selling physician group
had not been providing a noticeof alternative providers in
(41:42):
connection with a provision ofdiagnostic imaging services to
its patients, which is aviolation of an applicable Stark
statute.
And that, under Stark, arguablyall of the income from the
designated health servicesassociated with that imaging
(42:03):
service line should have beenreturned.
repaid.
And then there's also, you know,fines and penalties associated
with that.
So there's a way to remedy thatissue.
And we had negotiated withbuyers council to file a
self-disclosure on that issue.
But again, that's something thatyou would prefer not to have
because it's something thatcould have a material
significant financial impact.
(42:25):
In that case, it didn't blow thedeal, but we were going to have
to file a, agreed to file aself-disclosure, but our group
wasn't going to control thatself-disclosure.
The buyer was going to controlthat self-disclosure, including
the settlement of thatself-disclosure.
And then, of course, there werespecial indemnities and offsets
against purchase price withrespect to ultimately any
(42:46):
payment that was made to thegovernment.
So those are the sorts ofissues, again, you just would
prefer not for them to come upand be brought to your attention
by buyer and buyer's counsel.
SPEAKER_01 (42:57):
Yep, absolutely.
Well, obviously there's a lot ofstuff that comes up during this
phase.
There's a lot of minutia thatneeds to be negotiated,
documented, formalized, and thatcan be tough.
I think from our vantage point,one of the pitfalls we'd like to
see sellers avoid is spendingdollars chasing dimes.
(43:21):
And what I mean by that is youjust can't negotiate every
single economic or deal point to100% in your favor, right?
You need to be willing tocompromise on a few things, work
towards the economic outcomethat is great on the whole.
(43:42):
And more often, and again,different personalities on
different physicians in terms ofwhat's important to them.
And sometimes something that'sreally important doesn't really
have a whole lot of economicimpact, but you get hung up on
those things.
And it just leads to dealfatigue.
And I've seen deals fall apartover just exhaustion over, you
know, relitigating orrenegotiating minor deal points,
(44:05):
you want to get the big ones,right.
But I think having a willingnessto compromise on things that are
less important to the dealeconomics or the overall
partnership model that you havegoing forward.
I think that's something thatsellers need to keep in mind as
well.
And I know that you cancertainly help them navigate
that as their attorney.
And I would certainly recommendthat they be mindful of that as
they negotiate the economicpieces as well.
SPEAKER_02 (44:29):
Yeah, no question.
Deal fatigue is a real thing.
SPEAKER_01 (44:33):
Yeah, it is.
Particularly in some of thesetrickier deals that are getting
heavy scrutiny, right?
You're 12 months into a processthat you somehow expected to be
wrapped up in three months,people started getting a little
bit, a little bit exhausted formultiple reasons.
But then any, we're getting kindof close to our time here.
(44:55):
Any final thoughts that you haveon this last phase or, or even
broadly that you would say tothe listening audience in terms
of pitfalls to avoid?
SPEAKER_02 (45:07):
Well, I think again, again, We talked about the
interaction of all these variouspieces of a transaction kind of
fitting seamlessly together.
You know, one thing thatoftentimes comes up is issues
with the doctors.
You're so focused on thetransaction and the deal terms.
(45:29):
There's less focus oftentimes onsort of the terms of their
employment going forward,post-closing.
And You know, as you'dmentioned, I think earlier,
Jason, on the PE side, theprivate equity group is going to
demand that the physician grouptake a scrape on the
(45:50):
post-closing compensation.
Their compensation will be lowerthan what they're historically
used to, and that's the way thePE group makes sense.
Yeah.
(46:24):
It's often, I think, tooimportant, and this is more in
your bailiwick, but it'simportant once you get to where
you're some pretty solid numbersto model out the consideration
and model out what post-closingcompensation might look like so
the docs get a big picture onthe whole financial package.
(46:45):
Because I think a lot of timesyou'll get a purchase price
that's a It seems to be a prettybig, acceptable number.
But by the time you break itdown into components of cash
consideration versus rolloverequity, and then you make some
allowances for whatever taximpact that deal is going to
(47:06):
have, the net number might notbe what the doctors were
expecting.
And so you need to kind ofmanage those expectations and
that information as well.
SPEAKER_01 (47:17):
Yeah, I mean, we see that as one of our primary jobs
in this phase is helping tounderstand the, you know,
interpret how this ultimatelyimpacts total consideration in
these different buckets on anafter-tax basis so they can
fully understand, you know,where the trade-offs are and
what is in their best interest.
(47:37):
Because if they get toolaser-focused on a single
number, they may miss some ofthe important component parts
downstream.
And so we'll model out all thosescenarios and help the physician
understand that, make surethey're well-versed on how those
different components playtogether.
But that is a great, greatpoint.
SPEAKER_02 (47:55):
And I think the last point kind of to that is on the
private equity side of things,well, the hospital groups, any
buyer will require generally afive-year commitment on the
employment with some prettysignificant non-compete and
other restrictive covenants.
(48:15):
On the private equity side, thedoctors will need to understand
that if that employmentterminates for some reason other
than very specific and narrowlycrafted termination rights,
under most circumstances, ifthat agreements terminates
before the end of five years,there's gonna be some clawback
(48:36):
of consideration.
And it may just be, they loseall of the, or some significant
proportion of the rolloverequity, But, you know, if the
buyer is very aggressive, theymay want to pull back some of
the cash that was distributed aswell.
So, again, it's just part of thedoctors being fully informed of
all the ramifications of whattheir post-closing commitment
(48:59):
will be to the buyer.
SPEAKER_01 (49:02):
Yeah, I think the issue of that duration of time
is particularly important if youdo have docs in the group that
are looking towards a– Acomplete exit, right?
When you're ready to hang upyour coat, that's not the time
to do a deal.
And it can certainly change thedeal economics and change the
perspectives on the transaction.
(49:23):
So hopefully you've gone througha process early on, as we talked
about, to understand the dealeconomics and partner goal
alignment and expected outcomesearly on so that everybody
understands how that will playout, because it can certainly
derail a deal if you wait untilthis phase of the process.
to work through some of thoseitems.
SPEAKER_03 (49:42):
Yeah.
SPEAKER_01 (49:43):
Awesome.
Well, Dan, thank you so much.
This has been a greatconversation.
Thank you to everyone who'stuned in to listen to this
podcast.
Really enjoyed it and I hope youfound it useful as well.
Thank you to AHLA for giving usthis opportunity to talk about
some common pitfalls that we seein healthcare transactions.
(50:05):
Thank you so much.
SPEAKER_02 (50:06):
Thanks, Jason.
Take care.
SPEAKER_00 (50:13):
If you enjoyed this episode, be sure to subscribe to
AHLA's Speaking of Health Lawwherever you get your podcasts.
For more information about AHLAand the educational resources
available to the health lawcommunity, visit
AmericanHealthLaw.org.
And stay updated on breakinghealthcare industry news from
the major media outlets withAHLA's Health Law Daily Podcast,
(50:33):
exclusively for AHLA Premiummembers.
To subscribe and add thisprivate podcast feed to your
podcast app, go toAmericanHealthLaw.org slash
Daily Podcast.
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