By Stuart Oberman, JD
Oct. 5, 2022
Buying a practice is an enormous endeavor and a huge financial risk. Proper due diligence prior to finalizing the acquisition is critical. The failure to conduct proper due diligence can lead to years of financial ruin and potential liability exposure.
Generally, the due diligence phase should be conducted prior to a Letter of Intent (LOI) being signed by the seller and buyer. In addition, an Asset Purchase Agreement should never be signed before a buyer completes their due diligence.
Prior to an LOI being signed, and definitely before an Asset Purchase Agreement is signed, the following steps and review process should take place:
Advisors a Must
Prior to the commencement of a practice acquisition, a buyer must have advisors in place, including an attorney, CPA and financial advisor. It is absolutely critical that a buyer consistently consult with their advisors during the acquisition process. Some advisors are not qualified or do not specialize in the acquisition of an optometry practice. As such, a buyer must choose their advisors carefully.
If the practice is an asset sale, the buyer must obtain a list of assets that are being acquired by the buyer, along with a list of the assets that the seller is excluding from the sale. A list of the assets being purchased should include equipment, inventory, intellectual property, account receivables, supplies and fixtures. It should be noted that every practice has intellectual property, such as the practice name and logo. In addition, intellectual property also includes trademarks, trade names, copyrighted material, website content, domain names and patents. As noted above, advisors must be well versed in the acquisition process.
Legal Documents Relevant to the Practice
As a buyer, you should review any and all legal documents that may be associated with the acquisition process, including all of the seller’s corporation documents, non-compete agreements, bill of sale, and especially, the Asset Purchase Agreement.
In addition, it is essential that a buyer review all contracts that they may assume after the acquisition takes place, including all internet and marketing service agreements, third-party vendor agreements and all equipment leasing agreements.
Associates in the Practice
If a seller has an associate who is working in practice, a buyer should find out why the associate does not want to purchase the practice. In addition, all associates who are employed by the practice should have an existing employment contract with the seller. The associate’s contract should include non-compete and non-solicitation provisions. The associate who is working in the practice should be prevented from soliciting the patients after the sale, and/or opening a practice in close proximity to the seller’s existing practice. Prior to the acquisition the buyer should determine if the existing associate in the practice will work in the practice after the sale takes place.
Examine Documents & Agreements Critical to Practice Operations
Furthermore, as part of a buyer’s due diligence, the following items should be reviewed carefully:
Employee Manual: The buyer should review the seller’s employee manual to determine if the polices and procedures of the practice are in compliance with state and federal law.
Equipment Leased: When a buyer inspects the existing equipment, the buyer should determine the age of the equipment, whether the equipment is owned or leased by the seller, and determine if the equipment will need to be replaced in the near future.
Other Articles to Explore
Real Estate Lease Agreement: All commercial lease agreements, including all amendments, should be reviewed. The buyer’s attorney should review the existing lease agreements and amendments, and the buyer should also determine when the lease expires, and if the lease contains option periods to extend the lease for a certain period of time.
Intellectual Property: All intellectual property such as logos, trade-names and trademarks should be reviewed prior to the acquisition. After the acquisition takes place, the last thing a buyer wants to receive is a cease and desist letter from an attorney regarding the buyer’s possible copyright or trademark infringement.
Information Regarding Current Employees: The buyer should review the personnel file for all of the employees of the practice, and as well as review the job description and the existing pay structure for every employee. In addition, if the practice has a high rate of turnover, that may be a red flag that problems exist in the practice.
Letter of Intent
As a general role, the LOI is executed after the buyer has completed their due diligence.
The Letter of Intent (LOI) is a critical part of the acquisition process. The LOI should contain the following information: the legal name of the seller and buyer; the purchase price; post-sale performance bounces for the seller (if any); post-sale purchase price reductions (if any); non-compete and non-solicitation provisions as they apply to the seller; a list of assets that will be purchased and excluded; liabilities and debt that will be assumed by the buyer; seller hold-backs; allocation of the purchase price (personal and corporate goodwill, etc.). Before an LOI is signed, each party should have their attorney thoroughly review the LOI. A misstep in the LOI process may be a costly mistake.
Prepare the Asset Purchase Agreement
Once an LOI is signed by the seller and buyer, the next step is preparing the Asset Purchase Agreement, which defines the transaction, and in most cases will mirror a well defined LOI.
The acquisition of a practice can be a thrilling and rewarding experience for the seller and buyer. However, a misstep by the buyer may be financially and emotionally catastrophic. It is imperative that a buyer conduct substantial due diligence prior to signing an LOI and Asset Purchase Agreement to avoid years of potential financial and legal problems.