Selling or Purchasing a California Medical Practice, Part One (4)
The purchase price of a practice is determined by a valuation of the practice. To determine the value of a practice, a competent and knowledgeable healthcare attorney will obtain a qualified valuation from an accredited appraisal firm. Before signing a letter of intent for a transaction, the healthcare attorney will request an initial valuation of the practice.
Every valuation is based on several assumptions that relate to factors such as expected revenue growth, growth or decrease in costs, the interest rate to be applied to the practice, and several other factors. Negotiation of these assumptions between the parties must meet two thresholds: (1) the price set forth through valuation; and (2) the price the practice will accept.
Counsel for each party must be informed of the need to assure that the price is consistent with the valuation and this understanding only comes from experience in dealing with healthcare transactions. If the valuation through a reasonable good faith arms length discussion of assumptions does not support payment of the practice, then healthcare counsel for the parties will know not to disregard the valuation to "shop" for a higher valuation.
Hospitals and surgery centers have the same issues that impact their valuation. The factors that are common to these entities include: reimbursement for specialties that practice significantly at the facility; reliance upon few or many physicians; strength of managed care payors in the area; the stability of the medical staff; and the cost structure of the operations (e.g., whether there is a union or the facility has been overbuilt).
For dialysis facilities, the valuation is based on the group affiliated with the facility. For example, if the nephrology group is very strong and has a solid market presence, then the purchase price (valuation) is higher. Also, where the facility is in a certificate of need state and it is hard to develop a competitive system then the valuation will be higher.
Other issues affecting the transaction purchase price are tax and accounting issues, covenants against competition, representations and warranties, due diligence and other practical issues. The experienced healthcare attorney will provide protections to their client by conducting due diligence in the form of reviewing all contracts and agreements to make sure they are enforceable, assuring that the relationships comply with the specific healthcare laws, interviews with the officers and employees of the seller to check compliance with the regulatory and legal statutes, ensure all corporate formalities are being observed, ensure that quality assurance and credentialing procedures are followed, ensure licensure and accreditations are in order, ascertain restrictions on the transfer of corporate shares, review any potential litigation, employment and employee policies, determine whether any relationships violate the Anti-Kickback Law, the Stark Act, and other statutes and regulations and ensure all tax filings with the IRS are in order. There are many other factors that the experienced healthcare attorney will do on behalf of their client. Attorney Kolah at Kolah Law, P.C. has that experience.