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Due Diligence When Acquiring a Medical Corporation/Physician Practice Acquisitions

If you are thinking of buying a San Diego medical corporation/physician practice, it is important to conduct your due diligence to ensure that you are getting what you expect. You will need an experienced San Diego corporate attorney to provide guidance and legal advice. There are almost no circumstances in which a “hand-shake” deal is a good idea. You must have a good purchase agreement drafted by an experienced corporate attorney, even if the deal is among friends or known colleagues.

Part of ensuring a good purchase agreement is covering important issues that must be explored during the due diligence period. Due diligence is a period of time after signing the purchase agreement but before the actual closing/consummation of the purchase. A due diligence period might last a month or several months depending on the complexity of the transaction. Assuming that the purchase is structured as an equity/stock sale as opposed to an asset sale, here are a few of the more important due diligence items.

Details with respect to assets to be transferred

With any sort of merger and/or acquisition, one crucial part of the due diligence is to establish all of the details with respect to any and all assets being sold/transferred. Among the issues are:

  • Ensuring ownership in the selling entity
  • Verifying that the assets are free of liens and/or encumbrances (or getting clearance items like payoff letters if there are UCC attachments)
  • Establishing valuation if the assets are being used as collateral for financing
  • Confirming legal protections if the assets are intellectual property, for example
  • And more

Governance/corporate authority issues

As an equity/stock sale, part of the due diligence will entail ensuring the proper filings and payment of taxes and fees with respect to the corporate entity. Various corporate books and records will need to be examined to ensure compliance with the corporate formalities leading up to the acquisition. For example, were shareholder and board meetings held with regularity and were adequate minutes taken and kept? In addition, proper corporate authority must be determined and exercised to approve and ratify the sale.

Liens, litigation, and/or governmental actions

As noted, with assets, it is important to make sure the assets are free from financial and other legal encumbrances. Pending litigation and threatened actions must be explored, too. Your experienced corporate attorney can provide guidance here. Some litigation or governmental action might be too risky and might require the entire deal to be re-worked or abandoned. Various searches of public and semi-public databases should be undertaken to rule out various risks. These include UCC searches, judgment and tax lien searches, and the like.

Contract review

One large component of any due diligence is contract review. Contracts to be reviewed include those with respect to the physical location, like lease contracts, utilities, and equipment rentals. There are also many potential service, confidentiality, and non-disclosure contracts with medical practice and supply/vendor contracts. With medical providers, careful attention should be paid to contracts with pharmaceutical dealers and representatives. There are a host of anti-kickback and disclosure laws that are now in place.

Employment contracts and company policies

Employment contracts must also be reviewed, or written if the selling medical practitioner is intending to remain with the practice. Along with employee contracts, a review is needed of the company’s policies and procedures to ensure compliance with a variety of state and federal labor laws. Violation of such laws can be the basis for litigation claims.

As can be seen, due diligence is complicated and covered every aspect of the sale. The above items are non-exhaustive.

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard of San Diego Corporate Law. To schedule a consultation, contact Mr. Leonard via email or by calling (858) 483-9200. Mr. Leonard has been named a “Rising Star” four years running by and “Best of the Bar” by the San Diego Business Journal.

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