Generally speaking, when an investor wishes to acquire a business from its holders, the parties will agree on terms in the form of a purchase and sale agreement. The agreement will outline, among other things, the assets being transferred in an asset sale or the stock/membership interest being transferred if the investor is taking the business “turnkey.” In this way, the question of who owns the enterprise, and its assets, after the transaction has closed should be indisputable.
However, in the context of a healthcare practice, many states have laws that restrict the control of a healthcare business, such as physical therapy, to a licensed practitioner. As a result, in some cases, the “common” deal structures will not be possible if the investor taking over the business does not have the required license. As such, the parties must consider other deal structures, including the management services organization model discussed below, in order to effectuate the transaction.
Here, we explore different options of selling your healthcare practice through asset sale, entity transfer, and a hybrid managed service model. Plus, we look at the benefits offered by the managed service model in handling the administrative (and often tedious) side of a healthcare business.
Types of Business Transfers
There are various options for structuring a business transfer. You may transfer the entity itself, sell (transfer) company assets, or enter into a “hybrid” model whereby you sell assets and enter into a management services agreement with the investor’s company. The type of structure you select will depend on a myriad of factors (timeline, taxes, investor preference, seller preference). That being said, for the purposes of this article, we are providing the 30,000-foot view and will discuss each transfer in-depth in a later article (stay tuned).
Here are three common forms of Business Transfer:
#1 Asset Transfer
In an asset sale, you retain legal ownership of the entity itself, while the investor acquires your business’ assets via a separate entity. The assets being sold are both tangible and intangible, such as licenses, furniture, fixtures, and equipment, goodwill, payor contracts, and the client base, among other things. In short: an asset sale does not include the purchase of the business entity itself (i.e., the stock of a corporation or the shares of an LLC); hence the selling party will retain a “business owner” with an active business in the state of operation, which would include retaining responsibility for any non-assumed liabilities (i.e., if the new owner does not want the leased space, then the selling party would remain obligated to the landlord). In this way, the parties have a clear separation of liabilities as they are incurred post-closing.
#2 Entity Transfer
In a transfer of the business entity, an investor will purchase the stock (if a corporation) or the membership interest (if an LLC) of the business, including all assets and liabilities of the entity, save those excluded from the transfer. Meaning, all contractual agreements between the business and third parties, including employment agreements, benefits plans, leases, and the like would remain an obligation of the business and, therefore, transfer to new ownership.
In this transfer, you can also expect the agreement to include a standardized working capital provision, addressing things like treatment of accounts receivable, and other current assets, like expenses paid in advance, lease deposits, and certain assumed liabilities, such as PTO bank, real property leases, and other accounts payable. Cash, in most cases, would be excluded from this provision unless current assets are insufficient to cover current assumed liabilities.
#3 Hybrid Transfer Using Management Services Organization (MSO)
A Management Services Organization is a business that offers management and administrative functions to a healthcare provider, including billing, human resources, and other administrative functions. Think of it as a COO-for-hire: all operations of the business are managed, and run, by the MSO. This model is most often used when the investment group does not have the requisite professional licenses to own the healthcare business outright. As such, the investor may create a “New Co” to (a) purchase non-clinical (i.e., patient records) assets of the business to be held in the MSO; (b) require that the selling party retain ownership of the business and continue to provide treatment under the existing licenses for an agreed-upon period of time, and (c) require that the selling business enters into a long-term contract with the MSO.
In many cases, this model, while seemingly more complicated, also comes with a higher reward as the investor is looking to scale rapidly, increase revenues, improve profitability, and gain market share, as more fully discussed below.
What Is the Structure of Physical Therapy Transactions Using MSO?
An MSO usually centralizes the administrative operations of a healthcare system, thus allowing the owner of a healthcare business to better leverage resources, while focusing on offering quality care to clients.
The operations of an MSO are often structured into three main categories, namely:
- Administrative Services
Strategic administration incorporates billing, bookkeeping, financial statement preparation, IT operations, human resources, and member-focused services. When utilized properly, an MSO managing multiple businesses can realize economies of scale that a single business owner may not be able to obtain on their own.
- Clinical Operation Programs
Clinical operations incorporate day-to-day clinical operations and guidelines required for a smooth running of the daily operations. Under this category, management services organizations may offer home care, patient management, high-risk procedures, specialized treatment, and staff training.
- Decision Support
Decision support programs incorporate workflow management, assessment, handling correspondence, data acquisition, and analytics.
What Are the Benefits of Management Service Organizations?
- Increased Efficiency
A centralized administrative system means higher economies of scale, as well as efficient and standard service delivery across all departments. Through economies of scale, the management organization can increase incentives to add to membership subscriptions.
- Improved Quality
Centralized management will allow a periodic evaluation to enable a prompt application of corrective measures. You will have a primary governance structure to manage important functions while focusing on quality improvement. An MSO can also spot opportunities to improve service delivery.
- Possibility of Network Expansion
If you are thinking of expanding your client base, selling out part of the enterprise can increase your network. Management entities can use predetermined subsidies to entice potential partners. Thus, you can improve on clinical care without burdening the management.
- Peace of Mind
When you want to retire from formal practice, an MSO guarantees peace of mind because you will hand it over to a professional team. A management organization for a healthcare practice mainly consists of professionals who have the skills and expertise to continue with the business operations. As a result, you can hand it over knowing that the business is in safe hands.
Are You Ready for the Hand-Over?
There isn’t a silver bullet for transferring ownership of a health care facility. Provided you follow the proper process, you can sell business assets, transfer equity, or incorporate a management services organization.
A business buyout will give you peace of mind, enable easy expansion of your network, improve your efficiency and service quality.
At Private Practice Transitions, we can assist you through the process. We are business brokers with expertise, tools, and services to help you transfer your business ownership. Please contact us for queries about our services.