Hello everyone, we're going to give it about a minute or two as some folks still continue to join the webinar and then we will get started. All right, as we have some folks who will be still trickling in, let's go ahead and kick things off today. We thank you for joining us on the webinar, Maximizing Value and Protecting Physicians in Strategic Partnerships. We're very happy to have EBG here with us today, who are experts in this topic. And joining us presenting from EBG, we have Anjana Patel, who is a healthcare transaction attorney, as well as Glenn Previs, who is a healthcare transaction attorney. And for the folks in attendance today, as usual, if you've attended a MedAxiom webinar before, you are going to be muted and your camera will be off, but you can still submit questions for our presenters. And so in the Q&A option at the bottom of your screen, you can see highlighted in green, you can click on that and submit questions. We will leave time for questions at the end of the webinar. There's also a chat function that will, it will contain the slides for the PowerPoint. So if you check on that chat box, you should see a link to be able to get the presentation that they're sharing with us today. And so with that, I'm excited to hand it over to Anjana. Thank you, Max. Welcome, everybody, to the webinar. We wanted to start off with some information on recent physician transactions over the last nine years. So this slide depicts what's been going on over the last nine years. And as you can see, there's been a lot of activity, especially in 2021, which is really an unusual year in terms of physician transactions. It's a massive uptick from prior years, and that trend has somewhat continued. It came down a little bit in 2022, largely in part because of macro economic conditions, you know, rising interest rates, labor shortages, inflation. That kind of put a little bit of a damper on activity. But 2023, we're seeing the trend is picking up. And if you speak to most of the experts in this space, they'll tell you that we expect the third and fourth quarters and into 2025 deal volume to increase substantially. And just so for your education, this is transactions between physician practices and all types of strategic partners. So whether it's hospitals and health systems, private equity, or large national strategic companies, this captures all that data. And the other thing to keep in mind with respect to the slide is that these are only the reported transactions. So there are a lot of transactions that physician practices are engaging in that are not publicly reported. So these numbers are probably much higher than what's shown on this slide. And moving on to the next slide. Thanks, Anjana. So this shows what we politely call developing health care empires. Now, this cuts across all specialties, not just cardiology, but it shows the different type of strategic operators and how big they're getting continued to get in terms of buying up physician practices. And these are just a few examples. So there's a lot of activity in the space. And one of the things we're going to focus on today is the high amount of activity in the cardiology space. But cardiology space nowadays is trending the same way as some of the other specialties. So some of the more macroeconomic factors that we're going to talk about across specialties are definitely applying to cardiology. And so, you know, the easy argument tends to be, OK, why are buyers entering the physician practice market? And that tends to be for a lot of different investment factors. But I think more of the question that Anjana and I get from our clients and what many of you might be asking is, OK, why would a physician practice, why would a medical group continue, consider a possible strategic partnership? And what are the ways to start thinking about? Because it's not a quick process. It's a big, big, big decision to make that many groups take a long time, months, if not years, to even think about and come to a decision to explore the market before they actually start the transaction. So it's not right for every group. Some decide, hey, we want to go that route. We want to do a transaction. But that's not the only right answer. Sometimes the right answer for a group is let's just decide that we want to stay independent, remain independent, continue our course, or let's try a different type of transaction. So this is not a one size fits all. However, if your inkling is to maybe stay the course, remain independent, it behooves you to maybe test the market a little bit just to see, OK, what's available out there? What might work for us? Let's try to eliminate the myths of what we hear. Let's see what's actually real and out there for us and then figure out the pros and cons of, OK, maybe we should do something or maybe we really shouldn't, because that's going to lead to a fully informed decision. You want to make sure you haven't just dismissed the possibility of a transaction outright. We do get the question a lot, which is, OK, we understand there's a lot of activity in the market. If I decide not to do a deal today, does that mean I can never do a deal? I can't give you an answer to that. That's asking me to give you a crystal ball that I don't have and no one has. And that doesn't mean you should definitely do a deal out of panic that you can't do one. All we're saying is we've seen many, many groups in recent years really think through the process carefully without making a rash decision. Yeah. And, you know, you want to think about like, OK, if we want to remain independent, well, what is the definition of independence? And one of the things we come across a lot with our clients is, you know, definition of independence three years ago versus definition of independence now is changing. And it's changing in large part because of some of these key factors on the slide. There's been a lot of market consolidation, which is resulting in larger and larger organizations that have the resources, the capital and the ability to grow and expand much, much faster than some of the independent physician practices out there. The other factor is the changing nature of the health care industry, the uncertainty from reimbursement changes year to year. Physicians are getting paid less and less by Medicare. The regulations are constantly changing and evolving, requiring more and more compliance. And all of that is just expensive to handle if you are an independent practice and you're, you know, in an environment competing with much larger organizations. The other aspect to this is you saw the chart with the outpatient empires. There's just a lot more power players in this space now. You have the payers, obviously. You've got Optum. You've got the pharmacies, CVS, Aetna. You've also got the Amazons that are coming in and gobbling up primary care practices. And these are major referral sources for cardiologists. So it's getting harder and harder to compete. And then there's the shift to value-based payment. You know, that has been slow to come, but that sort of proverbial train has now left the station and is somewhere in the middle. And, you know, it takes a lot of resources to work in this space. And then more and more employers are requiring the shift to value-based care and value-based payment. So, you know, that pressure is also growing on independent practices. And again, capital is needed to compete in this new world. To do value-based care and be engaged in those programs, you need to collect data. You need the sophisticated infrastructure in terms of IT, the right EMR. You need to be able to participate in virtual care programs. So there's just a lot of capital needed in order to function in this environment. And then more and more, the care is migrating to outpatient settings. And lastly, you know, after the pandemic, this is just a new normal, right, with just the macroeconomic factors and now just more and more uncertainty about where the future might go. So these factors we found in the last few years have really shaped our clients in terms of, you know, truly sort of like Glenn said, let's get fully informed. Let's see if a process is worth exploring, because these pressures are not going away. They're here to stay. And I just want to pick up on two of the points you made, Eranjana, when it comes to specifically cardiology. Numbers six and seven, which is ancillary service lines and outpatient migration. Something that I've seen, at least in cardiology, is with a greater focus on OBLs and outpatient surgery centers and both the shift in setting, but also a desire for cardiologists to participate in equity in those and profits in those. Those are expensive capital endeavors that many independent groups really can't do on their own. And that's crossed my desk as one of the major reasons that cardiology groups have looked to partner with somebody who isn't going to fund it 100% for the cardiology groups, but can do some of the funding and can use some of their leverage to help share the funding so that it's a true partnership rather than a group just doing it completely on their own. So what are the potential partners available to you? This slide, we basically took, we concise it down. There's four potential partners. There's hospitals and health systems, the payers and strategic players like the Optums, there's private equity, and then there's mega groups. And what we did was we did pros and cons of each of these. And, you know, when you think about hospitals and health systems, for a lot of physicians, that's sort of like a known quality, right? That's just been sort of the relationships over the last God knows how many years. It's easy to think of partnering with a hospital and a health system because it's a sort of guarantee of the referral network. It's a guarantee of compensation. You know you will have a strong, a partner that's strong in clinical knowledge and capabilities. And there might be that trust, right, because you already may have a relationship with your nearby health system or hospital. On the downside, though, the least, this is the area where the partner with the least amount in terms of financial consideration, because a lot of these hospitals and health systems are nonprofit, so they really can't, for regulatory compliance reasons, and for financial reasons may not be able to outlay a huge sum to pay for your practice. There's also the sort of like lack of ability to have equity ownership in this partnership, which you'll see is available with some of the other options, and that for some physicians makes a difference because having equity in an endeavor or joint venture or partnership is the ability to then monetize that also down the road. And then lastly, there may be a lack of trust. We know in the last several years many cardiology practices have entered into PSAs or employment arrangements with nearby health systems, and I think in the last year or so we're getting calls all the time saying, hey, we're not happy. We're not happy with the leadership of the hospital. We're not happy with the direction of this, you know, partnership. We want to extract ourselves from this arrangement, and we're thinking, you know, we should explore the market and maybe partner with somebody else, maybe private equity. And in the last couple of years we've actually done a few of these deals where we've extracted a cardiology practice from a health system partnership and then sold to private equity. And I want to pick up that last point you made right there, Anjana. So, you know, we, you know, as a group, not necessarily just cardiology, but, you know, including cardiology and across specialties, we've taken groups into health systems, we've taken them back out again. We've taken groups into payers, we've taken them back out. We've taken them into private equity, taken them back out of there too, and we've taken them into med groups and we've taken them back out. So the point is, is that these are not light decisions to be made. Don't get me wrong. And, you know, these are, again, it's not one size fits all. But when you're making a big decision like this, it's not necessarily a forever decision either, although I'm not going to minimize that. Unwinding some of these certainly does take a lot of pain, but it is always possible. That's true. And again, you know what, let's go back to the other slide for a minute. I jumped too fast. Yeah, I just want to give a quick highlights of the other three potential partnerships, you know. So the strategics, you know, here you get the benefit of a large amount of information and infrastructure and, you know, also the opportunity to get attractive financial consideration up front. The downside is, you know, there might be a misalignment. Sometimes we see this, a misalignment culturally. And, you know, a lot of times we just get doctors saying to us, no, I don't want to partner with a payer for a variety of reasons. So that's usually sort of the downside con of this partnership. Private equity, the benefit here is really the financial up front benefit. It's potential for huge cash consideration up front and also the ability to get equity that you can monetize down the road in what we call second by transactions, which we'll talk about a little bit later. So there's a lot of financial upside. The cons of that, you're with a partner that may not have the strong clinical and operational know-how and capabilities. And there is this sort of fear out there that partnering with these quote unquote overzealous profit seeking investor types would really affect a clinician's ability to practice medicine. And nobody wants to be told how to practice medicine. So there is that trust factor that could be a downside with this partnership. Mega groups, I'll just quickly say is just one physician practice joining another, combining to form a mega group. The benefits are you have the inbuilt referral network and you have the clinical strength of the practitioners. The downside is there's very little up front, if any, financial considerations and there may be a lack of sort of direction in large part because sometimes the politics are hard to navigate. Where should the mega group go directionally, strategically? Sometimes hard when you have multiple practitioners with differing opinions. So it's hard to get that cohesiveness sometimes with these mega groups. Okay, Glenn, now we can flip to the other one. So, you know, this slide, you know, talks about private equity as a potential partner. And the reason why I wanted to focus a little bit on private equity is that if you remember that first slide with a number of transactions over the last nine years, a lot of those transactions, maybe 80%, I would say, are with private equity. Private equity is heavily involved in investing in physician practices. They have a ton of what we call dry powder or basically cash sitting around that they can deploy in healthcare investments. And in recent years, they've been investing in every type of physician practice that makes sense for them in terms of a return of investment. So they've invested in ophthalmology, in gastro, in orthopedics, and now also cardiology. And, you know, what does this partnership with private equity look like? Well, just from a high level perspective, they come in, they essentially get a majority or controlling interest in your practice, you remain a minority owner. In exchange, you get cash up front, and you get something called rollover equity, which we'll also talk about, which basically is your ability to get more cash down the road when they sell the entire enterprise a few years down the road. And there's two types. There's a platform investment, which is really basically the private equity's first foray into a particular specialty. And so if you are a platform acquisition, your practice is basically able to set a lot of the terms, and you're able to share in a lot of the growth and really kind of set some of the direction clinically in terms of where this platform is going. As a bolt-on or add-on, these are smaller practices that the platform will acquire along the way, with the goal of making the entire enterprise much bigger in a timeline of anywhere from three to five to seven years. And then that entire platform is sold to another buyer down the road in what we call a second bite transaction. Okay, so as we look upon what exploring, purely exploring a transaction means, this is usually how it would start. So depending upon the structure of your group, either the full partnership or simply the board members start the process. Now, just because you start the process doesn't mean you're automatically end of the process. There are multiple opportunities complete throughout the process to stop and vote and decide if you want to go or not go. If you're a very large group, it tends to make the most sense to have a smaller cadre of the group kind of lead the process, not to the extent of cutting out everybody until the very final end, but just to have a smaller group to be heavily involved and keep everybody else rarely informed with asking questions, making comments at different stop points along the way. Again, that's just easier for a larger group. You don't have to do it that way, but it's easier. So phase one, you start with your market assessments and valuation analysis. So what we do recommend, particularly for larger groups, that you engage a banker from the beginning of the process. And that's not because Anjana and I are shills for bankers or anything like that. The reasons we recommend are as follows. Those folks speak the strategic market lingo. They know what buyers, partners are looking for in the group, the different elements. They've been through the process a million times. They also have regular contacts with different partners they can be very good guides and they can give you as early as possible kind of a realistic thought process on is this gonna help make sense for you or not that's not what lawyers do we do a number of things we'd like to think we do a lot more things than we do but but we also know our role that this is not our role and so it's why we think bankers are useful they also they have the best chance of maximizing your value for your practice go ahead I just wanted yeah to add to that is you know they essentially because of their relationships are going to find the right buyer and they're going to create a market for you so you know the key is to reach to reach out to as many potential partners as possible to create a market for your practice and this is what the banker will do and that's how they create value in some part and right from the beginning in phase one you know they can come in kind of walk the entire group and I do mean the entire group through what a transaction would look like they can you know go over in this case cardiology specific insights in cardiology deals trends past they can do evaluation either them themselves or with evaluation firm of the groups fair market value so you can get an idea of what the market would look at with your group they can go over precedent cardiology group transactions whether it's those that are publicly announced not everything is or even more importantly ones that this particular bank group has done before so they can give you some real-world experience they can give you an idea without actually yet going to market they can giving you an idea you know what potential students are out there to out in this point given their contacts and their experience and they would be doing this in an in-person meeting they would come on-site tour the offices meet with you hand-in-hand and right then in there the group user decides okay this is something we may want to really think about go or nope not a chance never gonna happen no go and let me point out that you know some health systems are starting to behave like strategic requires when we talk about health system transactions we're not always talking about your old-school bare-bones PSA health systems are functioning like strategic acquirers and we certainly have seen many bankers connect physician groups with health systems for very lucrative transactions as if the health system was a p firm in itself so there there's a role for the banker in any type of transaction here then you move on to phase two okay if you decide yes this is something we want to do then you start to really form meetings together do a little bit of internal due diligence one of our big themes here is getting your house in order to some extent your different professionals can help you figure out okay this is what may raise a red flag to a buyer or not and that can be financial that can be legal compliance tax whole different set of things but again the banker is the leader at this part of the process you know they're gonna usually prepare what we would call a confidential information memorandum or it's called sim for short yes sim as if the C is an S so but just try to give you some some of the buzzwords so when you hear the lingo on the street you know what what language we're speaking here and they're gonna help figure out the potential suitors prepare the marketing materials along with the sim and then when they find potential suitors obviously one of the most sensitive things for any group is okay it's a non-disclosure we want to make sure our information is confidential and kept confidential so you'll need a non-disclosure agreement banking firm usually has one that they will hand out and have different suitors execute before they hand them any confidential information and then you've got the first round of bids do we do a go or no go and sometimes it's we don't even like the first round of bids we're pulling ourselves off the market next part we go to suitor discussions and negotiations and we're going to get into more detail on this in a second because we're going to talk a lot about key terms in letters of intent and key terms in definitive agreements and so this is where you get to the letter of intent stage where you narrow the potential suitors narrow them down more and more don't worry the banker is bringing in representatives from the physician group to meet with these people so it's the physicians making the decision not the bankers you negotiate some of the key terms in a letter of intent letters of intent are non-binding with the exception of exclusivity or standstill we're going to talk about that in a minute however they really function as a way to figure out okay are we on the same page with kind of the most important terms and so we can move to the long process of real full due diligence real definitive agreements real heavy negotiations or can we not even get on the same page with some of the key terms here let's let's just call it quits with the suitor and move on to someone else LOIs are key and here again we're gonna have go and no-go stops and then finally I know we're making this sound very trivial at the end but the heaviest part of the process is you picked your suitor you signed a letter of intent your suitors doing full-blown due diligence which is a lot of work talk about that in a minute you're gonna do a little bit of reverse due diligence you got to know who you're getting into bed with here you're gonna negotiate and finalize all the definitive agreements you sign you get approvals you close it's a real quick overview but and let me not minimize it it is a long process several months could be more than a year partially dependent upon the group partially dependent on the market there's no right or wrong timeline here so let's just break things down to the details a little bit more here starting with how much is your practice worth Anjana yeah and you know this is probably one of the first questions the investment banker is going to get from the physicians and we also get this question as well and and it's important to understand right from the beginning phase one of the process how the economics are going to work right so if you're looking at purchase price what is my practice worth what am I going to get when I sell my practice well for most buyers the way they calculate this is they base it on something called EBITDA this is basically net income with interest taxes depreciation amortization added back in and the way to think about this in a very sort of simplistic way is how do you calculate this so the way you calculate it for physician practices you basically take all the earnings and expenses of the owners and you combine it and then what happens is the buyer is going to say okay looking at that number let's say for example it's 50 million dollars that's the combined earnings after expenses of the group's owners so well they call that something it's called earnings before physician compensation or EBPC so basically in our example that's 50 million dollars now a buyer is going to say well you know you guys basically pay yourselves every dollar out so we need to sort of normalize that and see you know what would be sort of a normalized level of compensation and so we're going to reduce that by by something a percentage and that reduction the term that they use is often thrown out there is called a scrape and so you have your 50 million million dollars then the buyer says we're going to apply a scrape to that and scrape you know let's say in this case is 30% so at the end of the day 50 million 30% your EBDA at the end which is what you're essentially selling ends up being 15 million dollars and to that then the buyer will apply a multiple so multiples range from the low end we've seen five to six times on the high end we've seen ten to twelve times it really depends on what the buyer is seeing as a potential the potential value of your practice so let's say in our example we ended up with 15 million dollars of EBDA the buyer says we're going to apply a ten multiple and so that's 15 times 10 it's a hundred and fifty million dollars that would be the purchase price so that's the starting point that the power buyer is going to look at it but that's you know this is without them doing any due diligence this is with them looking at some of the preliminary financial data that you and or the investment banker gave them in phase one or phase two of the transaction process what they're going to do in phase three or more likely in phase four after a letter of intent is signed something called a quality of earnings review so what is this a quality of earnings or QAV is basically it's a comprehensive review of the group's financials and the goal is to assess the accuracy of the historical earnings and the sustainability of those earnings but also to assess the achievability of future earnings and so that's what they're trying to get a grasp of looking at your historic earnings and your potential of future earnings and this we'll talk a little bit more QAV but this is an important first step on the buyer side in their due diligence this financial review the buyer is also going to do a deep dive due diligence review of the rest of the practice so you know operations legal compliance and we can't stress enough how important it is for sellers to be really prepared and proactive with getting their house in order and there's multiple reasons for this number one it helps to maximize value because buyers want to buy quality practices they want clean and compliant practices and they will pay top dollar for that so that's very important the second is you really don't want unpleasant surprises to spring up in you know in the middle of the transaction process you know you've gone into phase for the process phase 4 is intensive time wise expense wise you've got your advisors you've got your lawyers you've got your whole team and in the middle of that the buyer is doing due diligence and comes up with some issues and that can either reduce your purchase price or if it's big enough to spook the buyer they might just say you know what we're walking away from this deal and you really don't want to be in that position in the middle of the transaction process so it's very important to be proactive at the start and get your house in order and then the third reason is if your house is in order and you know there are no issues or issues have been fixed because they've been identified then the whole entire process will be smoother and it'll be quicker and that will affect that timeline that Glenn said you know which could be anywhere from a few months to up to a year so some of them I apologize yeah you know I was just gonna quickly highlight I'm not gonna go through each one of these specifically but from my experience and you know we've been doing this for 20 something years there's certain issues that come up time and time again when you're when the buyer is looking at the due diligence you know monthly exclusion checks in a lot of states these are required by law but we know most of our clients a lot of our clients don't do them monthly and this is something the buyer is going to ask about so and I haven't yet lost a deal on the failure to do that but I have had deals where the buyer was willing to sign but as a closing condition not only did the seller have to do current exclusion checks but they had to look at past employees and contractors for the past six years and run the exclusion checks then and show the buyer proof of all them to get the deal closed which by the way nobody wants to do because employees have left and new one I mean it's just it's a pain right like nobody wants to do that so it's important to get ahead of that corporate compliance I will just say on this that you know buyers will expect some sort of compliance program to be in place to identify issues that there's policies and procedures there's training and education of the workforce there's an anonymous reporting mechanism for issues that identified they're going to want to see some something in place and it's good to get something in place before you go to market same thing with HIPAA they want to make sure you're following HIPAA and then more recently because of just all the cyber security incidents they want to make sure that you have your security you know button down you have cyber insurance in place to take care of any breaches billing and coding a buyer is going to hire a specific expert especially a private equity buyer just to do the billing and coding review and they're going to look at all the billing and coding practices of the group as well as you know things like mid-level practitioners how they do incident to billing and things like that can we pause on that one for one second is this one rears its head all the time you know what I've had groups suffer purchase price reductions had to undergo training because of this I have I've had a couple of deals where frankly there were so many issues uncovered the buyer said we're not willing to proceed with the deal here unless you both change your behavior and we see several months of that and then you can come back to us we can decide if we're willing to move forward with you at that point and the other thing I just want to say here is particularly if in a transaction if your if your compensation post-closing is going to be based on some semblance of collections productivity okay keep that in mind that if you've been up coding and the buyer is still willing to do a deal with you but only if you basically come back to earth with your coding factor that in your mind for what you expect financially you're going to get compensation wise post-closing so that this is a real hot-button one that I actually think I've seen buyers become really difficult on more recent yeah and you know if it's just one-offs that you can fix or correct by returning funds through the intermediary or something like that that's one issue but you know this we're talking about like systemic pervasive practices that have been going ongoing for many many years and it's a cultural thing right if and that's why you know in that one example Glenn that buyer said fix it we'll take a few months and then come back and they want to see did the culture really change in the group right this practice so that's huge I agree employment issues making sure you're complying with all the employment laws your benefit plans are compliant we all we often see with a lot of our physician practices that you know there's technical non-compliance around you know the Affordable Care Act with respect to their health plans or benefit plans because they just didn't realize they had to do some some of these things so it's important to speak to your broker and make sure that you know everything is compliant before you go to market and and two things on employment one thing as you mentioned Angela but the benefit plans I've certainly seen instances where administration of the of the benefit plan was outsourced and it still unfortunately the other thing though unemployment and this particularly applies to smaller practices buyers tend to focus really heavily on employment w-2 versus independent contractors in 1099 and we tend to see sometimes some aggressive use of independent contractors instead that tends to be a very sensitive sore area I've not had a deal die over that but I usually see some enhanced identification responsibilities on a seller if the buyer thinks that they've been aggressive on using 1099 yeah and I think that's because in some states classification is you know it's heavily enforced and there's significant penalties and interest and all that right so okay incentive compensation and you know fraud and abuse compliance I will just kind of talk about them together and basically you want to make sure how you pay your practitioners how they compensated is compliant with the fraud and abuse laws making sure that you know you are not rewarding your referral sources in violation of these laws and you know some of these laws like the Stark law is you know can be tripped up very easily because on a technical issue we recently had a cardiology practice that you know was doing pet MRI CT and the Stark law requires an advanced imaging notice to be sent out to patients and they hadn't done it it's such a technical non-compliance issue but it's technically a violation of the Stark law so just have to be up to speed on all these issues copay waivers don't routinely waive and please please have a policy in place so that you know you don't run afoul of the Medicare rules credit balances these are important we come across this a lot because these are like five dollars ten dollars there's small amounts that you owe back to patients and a lot of practices don't track it and they kind of remain on the books but the problem is that many states have laws that say you have to repay these balances and if you don't you can face significant penalties and interest so while the actual dollar amount of the credit balance might be small the liability exposure can be much much more because of penalties and interest so it's really important that you keep track of these and a buyer is going to want you to fix this before the closing stimulus grants and loans making sure that you're compliant with all the COVID era you know compensation or that you received and then if there is an ambulatory surgery center in as part of your group make sure all these issues are compliant there as well and anything specific to ASC so shifting gears a little bit now we mentioned I mentioned letters and tender LOI is for short it's kind of the document that you next get to to identify key terms and then there's usually it's a signing of the LOI that's going to lead to the buyer conducting the full-on invasive due diligence and hitting on many of the issues and I guess I like to say it is spending a lot of money to really try to get to a transaction usually signing an LOI is kind of the gatekeeper to that so because the LOI while non-binding other than exclusivity informs a lot of the important points for the transaction we're going to spend some time kind of highlighting big issues on what an LOI is supposed to be and what you're going to get on and you're going to sometimes you're going to have short form LOIs or you're going to have long form LOIs there's no right or wrong answer here as well to me it's a little bit of the in the eye of the beholder of the seller which is how much do you want to feel that you've negotiated before you go full-on into full depleted agreements but also how many points are really really so important to you such showstoppers that you need to make sure that you're you know really aligned on a completely before you go diving into a transaction and if that's your group that there's a lot there's a bunch in the long form LOI is for you if that's not your group and you don't want to get bogged down in LOIs the short form is for you but the binding part of this is really twofold number one is because a buyer after the LOI is going to spend a lot of money evaluating the practice, due to due diligence, audits and the like, they wanna make sure that once you've signed an LOI with them, that for a certain specific period of time, you can't go shop the practice to somebody else. Now, how long is that period of time? Varies extensively. I've seen it as little as 45 days. I've seen it as long as 180 days. Frankly, from the seller's end, the only time I see is 180 days because you didn't use a lawyer when you were negotiating the LOI. That is way, way, way, way too long. On average, we see 60 to 90 days. And you shouldn't take that to mean, okay, if I sign this and I sign a 60-day standstill, well, we're gonna be closed within 60 days. It's pretty rare, at least that I've seen it for a transaction to close within the exclusivity of time. So there'll be mechanisms in the LOI for how that exclusivity period can be extended. And from the sell side, we certainly don't want it to be automatic. And as we get into some of the big key terms here, I'm just gonna go right here as we move along time to the 10 major terms that you're gonna dovetail right into LOIs and transaction arraignments. So going back to you, Anjana. Yeah, and we've already talked about purchase price, so I won't dwell on this too much. I just wanna point out two terms that you might see, debt-free and cash-free, and what those mean. Debt-free means the buyer is not taking any of your debt, and cash-free means they're also not taking any of your excess cash. There's sometimes back and forth on what happens to pre-closing AR, but as we'll see, some of that is going to be part of something called networking capital. So we'll talk about that in a few seconds. And the one quick thing I'll say on this before I shift to the next slide is, don't mistake cash-free for necessarily meaning, okay, $0 in the bank account at closing. The buyer may ask that you leave a certain level of cash, a certain specific dollar amount, so that no checks bounce when you close, but you'll get credited for that cash level in the purchase price. So it's still cash-free, but I just wanted to explain what that really means in practice. Yep. There's gonna be two types of escrows. One is something called a breaking capital escrow, and this is basically what the buyer wants is that the seller leave a certain amount of working capital, which is basically current assets, I'm sorry, accounts receivable, and a certain amount that would cover the current liability. So basically enough in the current accounts receivable to keep the lights on. And that's called, just at a high level, the working capital. So they want you to leave that in the business as of the closing so that they don't, as of the first day after closing, have to put an infusion of cash into the business. And so what happens is they'll say, okay, we want you to leave X amount, and then we'll escrow some of the purchase price for 90 days or so. And then if you've left us less, then we'll take the money from that escrow. But if you've left us more, then you'll get the escrow, and we'll also write you a check. And so it's usually like a 60 to 90-day escrow. The other type of escrow is an indemnification escrow, which we can talk about in a little bit when we speak about indemnification. But that one is a much longer time period, usually 18 to 24 months. Anjana pretty much explained exactly what networking capital was. The only thing I'm going to add to that part is the reason for the concept of networking capital is when the buyer does evaluation of the practice and arrives at a certain purchase price, that evaluation is basically a snapshot in time of the practice. Well, on that given day that that snapshot was taken, there was a certain level of working capital in the practice. So if there was no working capital when the buyer buys the practice, to some extent, they've almost overpaid for the practice right then and there in the purchase price. So think about that as for the reason for the concept of working capital, just from a public policy billing, whatever you want to call it. The other thing here is non-competes. There's actually going to be three non-competes. We're talking about the purchase agreement one here, but I'm going to dovetail the other two just so we move along in time. So there's going to be a non-compete in the purchase agreement. Whether it's in the purchase agreement itself or it's some separate covenant agreement, it's one and the same. It's almost always going to be five years from the closing. I mean, it's pretty rare, in my mind at least, to see a deal. It's five years from the closing date having nothing to do with your employment post-closing, having nothing to do with your rollover equity. And the reason is is that this is basically in exchange for them giving you the upfront money, which in some respects is almost an advance for five years of work as well. So that's kind of the five-year concept. The geography is going to vary extensively, and it's also usually quite negotiable. Some of this will depend upon kind of where your market is, where competition really is. For more rural areas, it's going to be usually a wider area. But what's also negotiable is, is it going to be a radii from just one specific office or multiple offices? Is it the current practices offices? Is it the buyer's offices? All over the map, there really isn't a specific standard there. And again, it's going to be as the crow flies. So it's not MapQuest driving directions if anybody still uses MapQuest. It's a pure radius. You will work hard to try to negotiate certain carve-outs from the purchase agreement non-compete. If the employer post-closing terminates you without cause or if you terminate for good reason, which is usually meeting a breach. But oftentimes nowadays, when it comes to the purchase agreement non-compete, because again, that's really in exchange for the upfront money as opposed to employment services post-closing, there's usually very limited, if any, carve-outs for termination triggers. Contrast that with your employment agreement is going to have a non-compete as well. That time period is going to basically apply while you're employed and for a certain amount of time afterwards. Now this is going to vary extensively by state law. State law has gotten much more strict on employment non-competes at this point. Most often we're going to see two years. I rarely see longer. I sometimes see one year. And that's from the end of your employment, having nothing to do with the closing of the transaction. The radius there is typically smaller than the purchase agreement non-compete, but isn't always. That's also going to be dictated by the state you're in, state law, case law, and possible enforceability. The last non-compete, which is usually not very negotiable, but varies, is Anjana mentioned rollover equity early on. So when you get rollover equity, you're going to get it in a specific buyer entity. The governing agreement for that buyer entity usually imposes some restrictive covenant non-compete on members while you hold the rollover equity, and sometimes for some year after that. That though, because if you're in a state where enforcing that type of non-compete on clinical medicine isn't going to be allowed, that tends to more dovetail on ownership in an administrative entity or an entity providing services to a clinical entity, but sometimes crosses the line into being greater than that. That also, again, has nothing to do with closing, nothing to do with your employment, tied to your holding of the rollover equity at that point. Yeah, so I think we can skip this slide, Glenn, because we've talked about the timeline. Let's talk about this post-closing employment agreement. I find that this is a key document for the doctors. They really want to make sure they understand what their life is going to be like after the closing. And so there's certain things that need to be covered. Obviously, the term is usually three to five years, what the compensation is going to be, want to understand, is it going to change? Are there going to be bonuses? Is it going to be different? Very importantly, the physicians want to make sure that their life is not going to change, meaning their professional life. No change to work hours, call coverage, locations. They're all of a sudden not going to be made to go in 50 different places. They're going to have the same vacation. They're going to have the same or better benefits. Malpractice is either the same or it's going to be better. And if there's a tail that has to be bought, who's going to pay for it? You talked about the non-compete, so I'll skip that piece. But the last part of this I do want to highlight is if there's a termination and the trigger for the termination, whether it's for cause, without cause or for good reason, and by whoever does it, the employer or the physician, that could have an impact on this rollover equity because very often continued employment is a condition of keeping that rollover equity. And that's very important to the buyer, to make sure that you're aligned with them going forward. Oh, and back to me, I apologize, I was pausing. So again, mentioning rollover equity, some of the big terms you want to make sure that you're getting are, you should be in the same class of units and the rights of the investor partner. You're not supposed to be at an inferior level in terms of rights when it comes to units especially economic rights, most importantly, not necessarily voting rights. You're not usually going to have much in the way of voting. That's usually going to be reserved to the board that's going to be dominated by the investor, but really it's kind of economic rights. So any per unit consideration they get, you get too. You do want to make sure that the company shouldn't have the right to claw back cash, received by individuals at the end of the day. Is the rollover equity going to invest meaning do you get 20% each year over five years or do you get it all on day one? Or if you leave in year two, do you only get 40% and then the rest of you, you're forfeited? Or does that vary by whether or not you stay employed or whether you're terminated or the reason for termination? These do vary extensively over the map and they're all key issues. I mentioned restrictive covenants related to rollover equity already. So if your employment does end and the entity has the right to buy you out, that's usually an option, not an obligation. Let me be very clear on that. It's not an obligation. So sometimes we get the question, oh, okay, my employment ended, so I'm getting a big check. Not necessarily. And I find that a lot of platforms don't exercise that option. Now, if they don't buy out your rollover equity, that still can be a good thing for you is you may not work there anymore, but you get to be along for the ride. So when they do have that second bite, you still share in it if you're there. If they do buy you out, if they terminated you for cause, for example, because you did something bad, usually there's gonna be a discount or a penalty. Varies extensively because you were a bad leaver at the end of the day. Whereas if they terminated you without cause, most often you'll see full fair market value, the then current fair market value. Similar for death or disability or retirement at the end of the day. But this does vary by platform. Governance rights, again, you're not gonna have a lot of governance input on the MSO board. However, some groups, particularly platform groups, can negotiate the right to have one person serve on the board and have a vote. Others, platform groups and non, can sometimes negotiate somebody to sit there and observe board meetings, even if they have no voting rights. At least they have some idea of what's going on. One important point, though, is usually there will be a clinical governance board separate from the MSO composed of certain physicians with different appointment rights to oversee certain clinical matters. Because again, like Anjana said when it came to the employment agreement, you're supposed to have your life not changing and therefore you should have physicians kind of controlling that life and not necessarily non-clinicians. Yeah, very quickly on indemnification. Because what this really is is a risk allocation mechanism between buyer and seller. And it comes as a sort of who's gonna be responsible for what happened and when it happened. And the idea is if it happened prior to the closing, it's the seller's responsibility. If it happens after the closing, it's on the buyer. And then- Sometimes called your watch, my watch, if you just hear that term. Yeah, and there's ways to negotiate caps on that liability and deductibles on that liability. And so this is something that should be done carefully at the time of negotiating either a long-form LOI, but especially at the purchase price. And then lastly, exclusivity. So you will see this in the LOI and you'll also see in the purchase agreement. The idea is a buyer is not going to want to pull the trigger and hire advisors and spend a lot of time and money and effort unless they know that the seller is not talking to anybody else. So basically they want you to just work with them and once you sign exclusivity, you cannot speak to anybody else. And the key here is to negotiate the right to terminate. And so with that, I'm gonna wrap this up, Max. I don't know if we have any questions in the chat, but we're happy to answer them now. Yeah, thank you so much, Anjana and Glenn. Really appreciate the insights that you offered and the great tips and explanations and really love how you went into that in detail. We do have a couple of questions I'd love to pose to you all and just a reminder to those who are viewing that you can submit questions if you have any through the Q&A function. Click that, it'll open up like a chat. You can type in those questions and we'll certainly try to get to those if we do have time. But to start, and I'll just throw this out to both of you and whoever wants to feel that, please feel free. But you were speaking about some of the variables that can be involved in these decisions. And I was wondering if you could each talk about some of the deals that may be derailed as you were exploring options and why that was the case. Yeah, I could start, Glenn. One of the areas we've seen, and we talked about this, is the part about getting your house in order. Unpleasant surprises in terms of non-compliance with laws or some major practice of billing and coding or something like that came up when the buyer was doing their due diligence. So we've seen, it has to be pretty egregious for the buyer to basically say we're walking away, but I've seen that happen. And the other one I can speak to personally is that we often have groups that have practitioners of different age groups, older sort of founder physicians. We have other folks in their 50s, 60s, and then we have some in their 40s. And there's not always, and this is important, that consensus amongst all of them that they want to engage in a process. So it's really important to make sure that consensus exists before you even think about doing a transaction. But I don't know, Glenn, do you want to add something to that? Yeah, just real quickly. So one deal died because I had a practice that had some bad past actors with sordid histories who were gone out of the practice by the time it came time to do the deal, but they didn't kind of disclose those past issues in due diligence. And when it finally came out late in the game, the buyer just didn't trust them and pulled out of the deal. And related to that point, due diligence is invasive, annoying, tiresome, and miserable. I'm just not gonna sugarcoat it, but you need to err on the side of disclosure because if you don't and they find things out very late in the game, it breaks that trust and may lead to a dead deal. Another one that I had derail essentially was there was a short form LOI because the seller was so eager to just get out of the, and move on to the next phase. And yet when the initial definitive agreements came across and there were some really heavy handed financial terms that they weren't contrary to the LOI, they just weren't negotiated in there. The seller basically said, no, I'm not wasting any more money on this, I'm done. Again, my point earlier, depending upon the seller and what your sensitivities might be, you may prefer a long form LOI for that reason. So I've had each side kill deals before. Yeah, thank you. Appreciate the insights there. And you kind of alluded to some of the factors in this next question, but would be interested to hear a little more on what are some of the biggest, let's say maybe concerns that physicians may have during these deals? I can start Glenn. I think I mentioned it. One of the sort of top priority items for a lot of my clients historically has been what will my life look like if I do this? Like what's really gonna happen? Something must change, right? What's gonna change? I understand I won't be have full autonomy to run my practice the way I did before, but I really don't want to be told how to practice medicine. And so they really are concerned about the terms of that post-close employment arrangement. And they really wanna understand and appreciate how much sort of freedom they're gonna have or continue to have versus how much they'll have to answer to someone else following the closing. It kind of related to that, what falls in the bucket of a physician decision versus what is not a physician decision? One of the ones that keeps coming up a lot and I understand it is EMR system. Many practices are used to the EMR system they have. They like it, they're happy with it. Are they gonna be forced to transition to a new one? Or if not right away, who makes that decision? How disruptive is that going to be? So similar to what Anjana said, it's like, what do I get to decide? Or at least what do you like physicians get to decide versus what do the non-physicians decide and figure out what that's gonna look like. That's kind of the raging thing that always comes up. And I'll tell you that some of these things do vary, again, by deal, by buyer. It's not one size fits all. Yeah, and just to add to that, like I said, you can have groups where there's multi-generational physicians and maybe their founders that don't care much about some of that. Or you have some of the more younger physicians who really care about some of that. So even within a physician practice that's looking to sell, you may have differing viewpoints on what's important, what's not important when it comes to that. And I do wanna say one last thing, Max, before you take over, because I know we're out of time. On this slide, you'll see our email addresses. You can also Google us and find us on our website with our full contact information as well. Because if you have any questions, I know we had to rush through things here and we're gonna not be able to answer any more questions. Please feel free to reach out. We'll answer whatever we can. Absolutely. Yeah, Glenn, thank you for offering that. So to the folks in attendance today, please don't hesitate to reach out to Glenn or Anjana if any questions do come up, or if you need to reach out to any of your contacts at MedAxiom, we're certainly happy to pass those questions along. We thank you all for attending the webinar today. And a big thank you to Anjana and Glenn for presenting and offering this opportunity to learn more about this space. Thank you so much.

physician practice transactions

strategic partnerships

healthcare consolidation

fair market value

EBITDA

due diligence

private equity

letter of intent

post-closing agreements

physician autonomy