In Purchasing A Medical Practice: Which Is Better

In Purchasing A Medical Practice: Which Is Better – Buying The Stock Or Buying The Assets?

by Jay B. Silverman, Esq.

The benefit of a stock purchase versus an asset purchase really depends on which side of the transaction you are on, and what you are hoping to achieve in closing the deal.

Generally speaking, a seller of a medical practice will seek to sell his stock. There are a number of benefits to the seller, not the least of which is that the sale of stock will result in the realization of a capital gain, whereas in an asset sale, income may be realized if the purchase price is not properly allocated. The difference in the rate of tax on capital gains versus income is such that a seller could realize a significant economic advantage in the sale of his stock as opposed to his company selling the assets of his practice. This can be counterbalanced in the purchaser’s behalf by negotiating a lower sale price.

An additional benefit to the seller when stock is sold, is that all the liabilities that attach to the stock generally pass with the stock to the new owner. Liabilities can include without limitation, tax liabilities, fraud and abuse claims by the government and insurance carriers, and contractual obligations arising from anything from a loan agreement to a purchase contract. The chief detriment to a purchaser in this regard is that there may be liabilities that only the seller may know about, which even the most comprehensive due diligence may not yield.

The Seller who agrees to enter into an asset purchase, may not have to forgo all the capital gains benefits otherwise afforded him in connection with a stock sale. An appropriate allocation of the purchase price between “hard” assets (i.e. equipment, furnishings) good will, and restrictive covenants may find the seller realizing more beneficial tax treatment than in a straight asset deal. A good accountant should be able to arrive at a beneficial purchase price allocation, but the seller should be advised that any allocation should be grounded in reality so as to pass muster with the Internal Revenue Service.

An asset purchase is generally considered the best option for a purchaser. In an asset purchase, the purchaser is usually shielded from any liabilities that attach to the stock. It is important to bear in mind that in some circumstances certain obligations may not be avoided by merely opting for an asset purchase. The buyer and his counsel need to scrutinize the seller’s material contracts, together with any of the seller’s liabilities for, among other things, unpaid federal, state and local taxes. In some cases, liens of the seller’s creditors may attach to the assets of the seller, which may result in the purchase contract being set aside.

Notwithstanding the foregoing, a purchaser may benefit from a stock purchase. This is because in a stock deal, existing contractual arrangements may transfer with the stock to the new stock holder. Thus, a purchaser of the stock of a medical practice may become a provider under managed care contracts that he might not otherwise have been able to obtain because a particular panel may be closed. If the purchaser had purchased the assets of the same practice, the purchaser would have to apply for all of his provider numbers and wait as many as eighteen months until they are obtained. Of course, with provider numbers comes the potential for liability, so that if the seller had engaged in fraudulent activity prior to the sale, the purchaser may find himself embroiled in an investigation or even litigation involving actions he did not commit.

Of course, the purchaser can always demand an indemnity agreement from the seller in an attempt to protect the purchaser from any unknown liabilities. It is vital for any purchaser to understand that an indemnity is only as good as the person standing behind it. If the Seller is judgment proof, then the indemnity will be worthless, and the purchaser may be left with a big liability and no way to satisfy it.

One way to protect yourself and to make the most educated decisions as to whether to buy the stock or the assets of a practice is to conduct due diligence. This means hiring a lawyer and an accountant who will conduct searches of the public records, examine the seller’s material contracts and analyze the seller’s financial records. Due diligence that is performed properly can save a purchaser from making costly business mistakes.

In choosing to proceed with an asset or stock transaction to buy a physician practice, the purchaser, and the seller need to consider the facts in their particular situation. To protect a purchaser from liability, the preferred method is an asset transaction instead of a stock purchase. Although a purchaser may favor a stock transfer under certain conditions, the seller is the party who most benefits from a stock transaction. Both parties should consult with their attorneys, accountants and financial advisors to analyze their specific situation, conduct due diligence and recommend the best course of action.
 
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Leora F. Ardizzone is a senior associate in the Health Law Department of Ruskin Moscou Faltischek.  She can be reached at (516) 663-6520 or lardizzone@rmfpc.aw-develop.com.

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