Dental and Medical Counsel Blog

Selling an optometry practice to a corporate entity is a significant decision that involves various legal, financial, and practical considerations. As the healthcare industry continues to consolidate, many optometrists find themselves contemplating whether to sell their practice to a larger corporate group. This blog will discuss key legal considerations and provide a deeper dive into the financial, regulatory, and strategic aspects of selling an optometry practice.

Valuation and Purchase Price

Before entering negotiations, it's crucial to determine the fair market value of your practice. Engaging a valuation expert can help ensure that the purchase price reflects the true value of your business while also complying with regulatory standards. This step is essential to protect your financial interests and to facilitate a smooth transaction.

In addition to the purchase price, sellers should consider other terms of the sale that can significantly impact the transaction's outcome. These terms include earn-outs, which allow sellers to receive additional compensation based on the practice's performance post-sale, and seller financing, where the seller finances part of the purchase price. Including retention bonuses for staff in the sale agreement can also protect the practice's value and ensure a smooth transition by retaining key employees.

Structuring the Sale

There are generally two ways to structure the sale of a practice: as an asset sale or a stock sale. Each structure has different implications for taxes, liabilities, and the transfer of licenses and contracts. 

Asset Sale: In an asset sale, individual assets of the practice—such as equipment, inventory, patient records, and goodwill—are sold to the buyer. The seller retains ownership of the legal entity and any associated liabilities not specifically included in the sale.

• Pros:
•     - Liability Shield: The seller often avoids transferring unknown liabilities since only the assets are transferred.
•     - Tax Benefits for Buyer: Buyers can depreciate the acquired assets, potentially reducing taxable income
• Cons:
•     - Tax Implications for Seller: The seller may face double taxation if the entity is a C corporation—once at the corporate level on the asset sale and again on distribution to shareholders.
•     - Complex Transition: Transferring each asset individually can complicate the sale process, especially with transferring contracts and licenses.

Stock Sale: In a stock sale, the buyer purchases the seller's ownership interest in the legal entity, acquiring all assets and liabilities.

• Pros:
•     - Simplicity: The transaction is often simpler, as there is no need to retitle assets or assign contracts. The business continues to operate without interruption.
•     - Tax Benefits for Seller: Typically, the proceeds are taxed at capital gains rates, which can be more favorable.
• Cons:
•     - Liability Risk for Buyer: The buyer assumes all liabilities of the entity, including any potential unknown liabilities.
•     - Less Favorable Tax Treatment for Buyer: The buyer generally does not get the immediate tax benefit of asset depreciation.

Navigating State-Specific Regulations

Optometry practices are subject to various state and federal regulations, including those related to patient privacy and healthcare standards. When selling your practice, it's essential to ensure compliance with laws such as the Health Insurance Portability and Accountability Act (HIPAA) for patient records. Additionally, certain states have corporate practice of medicine laws that may restrict or dictate the terms under which a non-physician entity can own a healthcare practice.

• - States with Strict Regulations: Some states, like Texas and New York, have stringent regulations prohibiting non-physician ownership of optometry practices. In these states, selling a practice to a corporate entity may require creative structuring, such as creating a management services organization (MSO) that handles the administrative aspects while leaving clinical decision-making in the hands of licensed professionals.
• - States with Looser Regulations: Other states have more relaxed rules, allowing greater flexibility in corporate ownership. However, even in these states, it’s essential to ensure compliance with all relevant regulations, including those related to patient privacy (HIPAA) and licensure.

Understanding these state-specific regulations is vital for both the seller and the buyer to ensure a smooth and compliant transaction. Engaging local legal counsel who is well-versed in state laws is advisable to navigate these complexities.

Employment Agreements

If you plan to continue working at the practice post-sale, negotiating an employment agreement is critical. These agreements often include non-compete clauses, which can impact where and how you can practice in the future. 

Key Considerations:

•   - Non-Compete Clauses: These clauses prevent the seller from opening a competing practice within a certain geographic area and timeframe. It’s essential to negotiate these terms to be reasonable and not overly restrictive, ensuring the seller can continue their career if the relationship with the new owner ends.
•   - Compensation Structure: Ensure that the compensation package, including salary, bonuses, and benefits, aligns with industry standards and reflects the seller's value.
•  - Termination Clauses: Review the terms under which either party can terminate the agreement, including any severance pay or notice periods.
  

Understanding these key components and being prepared to negotiate can help sellers protect their interests and ensure a positive working relationship post-sale.

Handling Liabilities and Insurance Considerations

Ensure that all liabilities, including malpractice claims, are addressed in the sale agreement. This may involve obtaining **tail insurance coverage** to protect against claims that arise after the sale date. The agreement should clearly outline which party is responsible for existing and future liabilities.

Types of Liabilities:

•   - Existing Liabilities: These include any debts, leases, or pending litigation associated with the practice. Clearly defining which party is responsible for these in the sale agreement is essential.
•   - Future Liabilities: These could arise from actions taken before the sale but discovered afterward, such as malpractice claims. Tail insurance (or extended reporting period insurance) is crucial in these situations to cover claims made after the policy period but related to incidents before the sale.

Transition of Patient Records

The transfer of patient records must comply with HIPAA regulations. This involves obtaining patient consent and ensuring that records are securely transferred to the new owner. Failure to manage this transition properly can lead to legal liabilities and loss of patient trust.

Key Steps:

•   - Obtaining Patient Consent: In some cases, patient consent may be required to transfer records to the new owner. Clear communication about the transition and how it affects their care can help maintain patient trust.
•   - Secure Transfer: Ensure that all records are transferred securely, using encryption and other data protection measures to prevent unauthorized access.
•   - Communication: Inform patients about the change in ownership and how it will affect their care. Providing reassurance that their privacy will be maintained can help minimize patient attrition.

Financial and Tax Implications of Selling an Optometry Practice

Selling an optometry practice has significant financial and tax implications that must be carefully considered to ensure the seller maximizes their return and minimizes their tax liability.

• - Capital Gains Tax: The proceeds from the sale are typically subject to capital gains tax, which can vary depending on how long the seller has owned the practice. Understanding these rates and how they apply to different parts of the sale (e.g., goodwill, equipment) is crucial.
• - Allocation of Purchase Price: The way the purchase price is allocated among assets can affect the tax liability for both the buyer and the seller. For example, allocating more to goodwill may benefit the seller with lower capital gains tax but could result in higher taxes for the buyer.
• - Retirement Planning: Consider how the proceeds from the sale will impact retirement plans. Consulting with a financial advisor can help develop a strategy that aligns with long-term financial goals.

Planning for these financial and tax implications is essential for maximizing the benefits of the sale.

Due Diligence Process in Selling to a Corporate Entity

The due diligence process is a critical step when selling to a corporate entity. It involves a thorough examination of the practice to ensure it meets the buyer's expectations and complies with all legal and financial standards.

What Buyers Look For:

•   - Financial Health: Buyers will closely examine the practice’s financial statements, including profit and loss statements, tax returns, and accounts receivable. Ensuring these documents are accurate and up-to-date is essential.
•   - Regulatory Compliance: Buyers will assess the practice’s compliance with all relevant state and federal regulations, including licensing, patient privacy laws, and employment laws.
•   - Contracts and Agreements: Reviewing existing contracts with employees, suppliers, and third parties helps identify any obligations or potential liabilities that may affect the sale.

Sellers should prepare for this process by organizing all relevant documents and being ready to address any questions or concerns the buyer may have.

Conclusion

Selling your optometry practice to a corporate entity is a complex process that requires careful planning and legal guidance. By understanding the key legal considerations and working with experienced advisors, you can navigate the sale successfully and achieve your desired outcomes. Whether it’s deciding on the best sale structure, ensuring regulatory compliance, negotiating employment agreements, handling liabilities, or preparing for the due diligence process, taking the time to thoroughly prepare and consult with experts will help ensure a smooth and successful transition.

Let Our Optometry Lawyers Guide You Through Selling Your Practice

Selling an optometry practice can be a complex process filled with legal and financial challenges, but you don’t have to navigate it alone. At Dental & Medical Counsel, we specialize in providing expert legal advice and support to optometrists, ensuring that your rights are protected and that every step of the sale is handled smoothly. Contact us today to discuss your practice sale with our experienced optometry attorneys.

Frequently Asked Questions

Q: What are the key legal considerations when selling my optometry practice to a corporate entity?
A: Key legal considerations include determining the fair market value of your practice, deciding on the sale structure (asset sale vs. stock sale), ensuring compliance with state and federal regulations, negotiating employment agreements if you plan to stay on post-sale, handling liabilities and insurance, and managing the transition of patient records.

Q: How do I determine the fair market value of my optometry practice?
A: To determine the fair market value, it is advisable to engage a valuation expert who can assess your practice based on various factors, including financial performance, location, patient base, and equipment. This helps ensure that the purchase price reflects the true value of your business and meets regulatory standards.

Q: What is the difference between an asset sale and a stock sale?
A: In an asset sale, individual assets of the practice, such as equipment and patient records, are sold to the buyer, while the seller retains ownership of the legal entity. In a stock sale, the buyer purchases the seller's ownership interest in the legal entity, acquiring all assets and liabilities. Each structure has different tax implications and affects the transfer of licenses and contracts differently.

Q: What state-specific regulations should I be aware of when selling my practice?
A: State-specific regulations, including corporate practice of medicine laws, can affect how a corporate entity can own an optometry practice. Some states have strict rules that require creative structuring to comply, such as forming a management services organization (MSO). It's essential to consult with local legal counsel to navigate these regulations properly.

Q: Why is it important to negotiate an employment agreement if I continue working post-sale?
A: Negotiating an employment agreement is crucial if you plan to continue working at the practice after the sale. These agreements typically include non-compete clauses, compensation structures, and termination terms, all of which can significantly impact your future career opportunities and financial well-being.

Q: How are liabilities handled when selling my optometry practice?
A: Liabilities, including existing debts and potential future claims, should be clearly outlined in the sale agreement. Sellers may need to obtain tail insurance to cover malpractice claims that arise after the sale date. Clearly defining which party is responsible for each liability helps prevent disputes and ensures a smooth transition.

Q: What steps are involved in the transition of patient records during the sale?
A: The transition of patient records must comply with HIPAA regulations, which involve obtaining patient consent and ensuring secure transfer to the new owner. Proper management of this process is crucial to maintaining patient trust and avoiding legal liabilities.

Q: What are the financial and tax implications of selling my optometry practice?
A: The sale of an optometry practice has significant financial and tax implications, including capital gains tax on the sale proceeds and how the purchase price is allocated among assets. Consulting with a financial advisor can help you plan for these implications and align your strategy with your long-term financial goals.

Q: What is the due diligence process when selling to a corporate entity?
A: The due diligence process involves a thorough examination of the practice’s financial health, regulatory compliance, and contracts. Buyers will review financial statements, tax returns, and compliance records to ensure the practice meets all legal and financial standards. Sellers should be prepared with organized documents and ready to address any questions or concerns.

About the Author

At Dental & Medical Counsel, PC, we understand navigating the legal process can be tricky. We believe every optometrist deserves the best advice and service so optometrists can do what they do best, treat their patients. We make their lives easier by providing expert guidance, so they can focus on their personal and professional aspirations. We are optometry attorneys.

About Ali Oromchian, Esq.

Your Optometry Lawyer

Ali Oromchian, JD, LL.M. is the founding attorney of the Dental & Medical Counsel, PC law firm and is renowned for his expertise in legal matters

In addition to being a optometry lawyer for almost 20 years, Ali is also a renowned speaker, throughout North America, on topics such as practice transitions, employment law, negotiation strategies, estate planning, and more! Ali has helped hundreds of optometrists realize their professional goals and looks forward to aiding you in navigating the legal landscape.