Key terms and definitions for buying or selling a healthcare practice:
When you buy or sell a healthcare business for the first time, you’ll acquire an entirely new vocabulary along the way. There are many key terms and acronyms that come with the territory of Mergers & Acquisition (aka “M&A”...can’t say we didn’t warn you!) Between legalese and financial terms, you’ll basically acquire a new language.
To make it easier, we’ve broken down a list of common terms, acronyms, and documents with which you should be familiar when buying or selling a healthcare practice.
Key Terms and Acronyms in the Mergers & Acquisitions (M&A) Process:
LOI (Letter of Intent): A mostly non-binding document outlining the basic terms and conditions of a potential sale. It serves as a framework for further negotiation and due diligence.
Due Diligence: The process where the buyer thoroughly reviews and assesses the seller’s practice, including financials, legal matters, intellectual property, liabilities, and operational details to ensure the accuracy of the information provided and identify any risks.
Asset Purchase Agreement (APA): A legal agreement specifying the assets being sold and the terms under which they are transferred from the seller to the buyer.
Stock Purchase Agreement (SPA): A contract used when the buyer is purchasing the seller’s shares of stock in the company.
MIPA (Membership Interest Purchase Agreement): Similar to an SPA, but used when the business being sold is a Limited Liability Company (LLC) and the buyer is acquiring “membership interests” rather than stock.
Earnout: A provision in the sale agreement where part of the purchase price is contingent upon the business achieving specific financial goals after the sale.
Indemnification: Provisions where one party agrees to compensate or cover expenses of the other in the event certain claims or liabilities arise.
Representations and Warranties: Promises made by one party to the other about certain material facts. An example may be that a seller represents that all equipment is in good working order.
Escrow: A portion of the purchase price held by a third-party until certain conditions or milestones are met post-closing.
Confidentiality Agreement (aka Non-Disclosure Agreement or NDA): A legal agreement to protect sensitive information shared between the buyer and seller during negotiations.
Transition Services Agreement (TSA): An agreement where the seller provides certain services to the buyer post-closing to ensure a smooth transition of the business operations.
Uniform Commercial Code (UCC) Filings: UCC filings are public records that indicate a creditor’s claim on assets (often equipment or accounts receivable) as collateral for a loan. Reviewing UCC filings is critical to ensure no undisclosed liens exist.
Successor Liability: A legal concept where a buyer inherits liabilities from the seller, including legal claims or judgments. Buyers must structure the deal carefully to avoid inheriting liabilities from the seller, especially in healthcare where regulatory compliance issues could lead to significant legal exposure.
Goodwill: An intangible asset that represents the excess of purchase price over the fair value of the company’s net identifiable assets. It reflects brand value, customer relationships, and reputation, especially important in healthcare businesses with established patient bases.
Clawback Provision: A contractual provision where the buyer can "claw back" part of the purchase price under certain circumstances, such as if the seller’s representations turn out to be false, or if post-acquisition financial performance declines significantly.
Run-Off Insurance (Tail Coverage): Insurance that covers claims made after a business sale, but related to events that occurred before the sale. Especially important in healthcare where malpractice or regulatory claims may arise long after the transaction.
Closing: The final step in the transaction where all agreements are signed, the purchase price is paid, and the ownership of the business officially transfers to the buyer.
Financial Terms to Understand:
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): A financial metric used to evaluate a company’s profitability by excluding certain costs (interest, taxes, depreciation, and amortization) that can vary significantly between companies. EBITDA gives a clearer view of operational performance and is commonly used to determine the company’s valuation during a sale.
Valuation: The process of determining the overall worth of the business, which may be based on several factors, including EBITDA, revenue, and comparable transactions in the industry.
Accounts Receivable (AR): The money owed to the company by its customers for goods or services that have been delivered but not yet paid for. As part of the sale, the treatment of AR—whether it will be included in the transaction or retained by the seller—needs to be clarified.
Net Working Capital (NWC): The difference between a company’s current assets (such as cash, inventory, and accounts receivable) and its current liabilities (such as accounts payable and short-term debt). In M&A transactions, working capital adjustments are often made to ensure that the business has sufficient liquidity to operate post-sale.
Cash Flow: The net amount of cash being transferred into and out of the business. Positive cash flow indicates that the company generates more cash than it spends, which is a critical factor in determining the company’s value.
Revenue vs. Profit:
Revenue: The total income generated by the sale of goods or services.
Profit: The amount of income remaining after all expenses, taxes, and costs are subtracted from revenue. It is important for the seller to differentiate between top-line revenue and bottom-line profit when discussing the sale price.
Debt: Any outstanding loans, lines of credit, or other financial obligations that the company is responsible for. In an M&A transaction, the buyer and seller must agree on how existing debt will be handled (e.g., paid off by the seller or assumed by the buyer).
Liabilities: Financial obligations of the business, including loans, accounts payable, taxes owed, or pending lawsuit settlements.. Liabilities are scrutinized during the due diligence process to assess the financial health of the company.
Assets: Tangible and intangible resources owned by the business that have economic value, such as goodwill, property, equipment, intellectual property, accounts receivable, and cash. The sale often involves transferring some or all of the assets to the buyer.
Gross Margin: The difference between revenue and the cost of goods sold (COGS), divided by revenue, expressed as a percentage. It measures how efficiently the business is producing and selling its goods or services.
Post-Closing Adjustment: A financial adjustment made after the deal closes, often to account for changes in working capital, cash, or debt. These adjustments ensure that the business’s financial position at closing matches what was agreed upon.
Contracts & Documents to Review:
Employment Agreements: These outline the terms and conditions of workers’ employment with the company and may need to be renegotiated or terminated as part of the sale.
Non-Compete and Non-Solicitation Agreements: These restrict the seller from competing with the buyer or soliciting employees/customers of the business after the sale.
Leases: The terms of any property leases should be reviewed, as they may need to be assigned to the buyer or terminated.
Liens: Legal claims or rights against an asset (such as property or equipment) used as collateral to satisfy a debt or obligation. Liens must be cleared or accounted for during the acquisition process.
Intellectual Property (IP) Agreements: Contracts that govern the ownership, use, and licensing of the business’s IP assets, such as patents, trademarks, and copyrights.
Supplier and Vendor Contracts: Key agreements with suppliers or vendors should be reviewed to ensure they can be assigned or continued under the new ownership.
Shareholder or Operating Agreements: Documents governing the ownership and management of the company, which may contain provisions that affect the sale (e.g., first refusal rights).
Work with experienced healthcare M&A attorneys to navigate the sale process.
We support healthcare practice owners and buyers as they navigate the sale process. Our M&A clients span healthcare sectors including dental, optometry, veterinary, behavioral health, medical aesthetics, and more. With hands-on experience as both entrepreneurs and attorneys, our team communicates through each step of the sale process, working toward the best possible outcome for our clients. Reach out to learn more.
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