While the new year presents an opportunity for businesses to look forward and set goals for performance in 2025, former owners of medical practices or other health care-related businesses who sold their enterprises in 2024 should review and inventory post-closing terms, conditions and covenants in their transactions to ensure a smooth exit, free of unwelcome surprises.
This blog outlines a series of common post-closing items that former owners and their advisors should consider as they develop plans and strategies for 2025.
Monitoring Post-Closing Compensation Targets, Reconciliation Timelines and Escrow Releases
Oftentimes, a portion of the purchase price in a sale is contingent on future financial performance of the business sold, or on the productivity of selling owners who remain employees. Owners who sold practices or businesses should refamiliarize themselves with the conditions that need to be satisfied to earn additional compensation, the timing of earned conditional payments and any associated reconciliation procedures. The former owners should also engage their advisors, such as accountants, in this process to address any secondary considerations, such as tax planning, in the event the contingent compensation is earned. Relatedly, selling owners should also be mindful of timeframes and deadlines that govern any post-closing purchase price reconciliations. Purchase price adjustments are commonly tied to items such as “true ups” of working capital or accounts receivable levels at closing. Finally, if any portion of the purchase price is held in escrow (for items such as purchase price adjustments or indemnification liabilities), sellers should calendar the end of the applicable escrow period and familiarize themselves with the process to secure a release of escrowed funds.
Fulfilling Obligations Under Transition Services Agreements
Transition Services Agreements (TSAs) are commonplace in health care transactions and provide that the selling entity will continue to perform certain services to the buying entity until certain items or operations are successfully transitioned from the seller to the purchaser. TSAs commonly cover matters such as billing for medical services under existing payor agreements, payroll and benefits administration, maintaining existing insurance policies and back-office functions. Former owners should remain familiar with the services listed in TSAs and remain informed as to the status of transitioning the services to the buyer to avoid an unnecessarily protracted transition period.
Tracking Indemnification Matters
Sales agreements establish indemnification obligations for both sellers and buyers. Typically, subject to certain carveouts for fundamental representations and warranties and “specific indemnity” items, indemnification obligations are limited in time and subject to certain financial thresholds. For instance, under a common “deductible” structure, an indemnified party cannot pursue indemnification until the indemnified party’s out-of-pocket expenses for otherwise-indemnifiable expenses reach a certain threshold (or “deductible”). For this reason, sellers should monitor a buyer’s calculation of indemnifiable expenses from the date of closing through the end of the applicable indemnification time period. Note, however, that indemnification structures vary in each transaction and are among the most heavily-negotiated provisions in sale agreements. The “deductible” model, while common, is not the exclusive structure for determining when financial obligations accrue for the indemnifying party.
Entity Maintenance Obligations and Timely Dissolution
In asset sales, although selling owners “sell” their business by selling the assets used in the operation of the business, the transaction structure could require the former owner to keep the selling entity in existence (e.g., to fund indemnity obligations). Although the entity may not be operational, the former owner needs to adhere to all corporate or organizational formalities, such as conducting annual meetings, appointing officers and filing annual reports. Owners who sold practices should develop a plan to assure that all necessary requirements are fulfilled throughout the year. In addition, once no post-closing obligations remain, sellers should timely proceed with dissolving non-operational entities. Dissolution allows the selling owners to alleviate themselves of these obligations, as well as other ancillary matters such as annual tax return preparation and/or maintaining bank accounts.
[View source.]
