Buying and Selling an HME Company
A valid concern of XYZ is whether ABC’s documentation and billing procedures can withstand a third party payor audit and whether they are sufficient to allow XYZ to safely continue billing after closing. If XYZ has concerns about ABC’s documentation and billing procedures, then XYZ may reduce its offering price in order to compensate for the concerns, delay the purchase or refuse to close on the purchase altogether. By having the audit performed, ABC can clear up many of XYZ’s anticipated concerns in advance. ABC needs to verify that it:
• Has an active Medicare supplier number for each of its locations
• Is accredited for each of its locations
• Has a surety bond for each of its locations
If ABC is a qualified provider to one or more state Medicaid programs, then it needs to verify that it has the requisite active Medicaid provider numbers. ABC needs to examine its relationship with each individual who is involved in marketing on behalf of ABC. With a narrow exception, which is hard to meet, ABC’s marketing reps must be bona fide full- or part-time employees, not independent contractors.
ABC needs to verify that it is not paying any remuneration to any referral source in exchange for referrals and/or arranging for referrals. Additionally, ABC needs to be able to assure XYZ that the referral sources are loyal to ABC because of the excellent service that ABC has given over the years to its customers; that the referral sources’ loyalty is not limited to Smith; and that, in all likelihood, the referral sources will continue to refer to ABC once it is sold to XYZ. ABC needs to verify that it has the appropriate documentation in the patients’ files. ABC needs to verify that it has all requisite licenses, permits, registrations and certificates to conduct its business.
Preferably, before negotiating with XYZ, ABC needs to resolve any ongoing audits, reviews or investigations by a PSC, CMS, DOJ, OIG, IRS or any other type of agency or entity. Preferably, before negotiating with XYZ, ABC needs to make a concerted effort to resolve any ongoing litigation. ABC needs to verify that its customers are satisfied with the services they receive from ABC. In short, XYZ will attempt to reduce the purchase price if it concludes that there are uncertainties that might affect the value of ABC subsequent to closing.
QUESTION: Procedurally, what steps do ABC and XYZ take to bring all of this to closing?
ANSWER: ABC and XYZ will execute a mutual nondisclosure agreement. This will allow ABC to forward financial and other confidential data to XYZ so that XYZ can make a preliminary determination as to whether it wishes to follow through with the acquisition. Assuming that XYZ wishes to proceed, then the parties will sign a non-binding letter of intent (LOI). The LOI will need to be as detailed as possible and contain as many of the actual terms as possible that the parties believe will be included in the Stock Purchase Agreement (SPA). Between the time that the parties execute the LOI and the SPA, XYZ will conduct due diligence. This will entail a number of steps, including the following:
• Reviewing patient files
• Reviewing correspondence and other documents with MACs, CMS, PSCs, state Medicaid programs and other government agencies
• Reviewing results of past third party payor audits
• Interviewing ABC’s employees
Assuming that XYZ is satisfied with its due diligence, then the parties will sign the SPA and will close. XYZ will likely pay about 75 percent of the purchase price at closing and pay the other 25 percent within six to 12 months after closing. XYZ will have the right to offset against the “back-end” portion of the purchase price in the event that ABC breaches the “reps and warranties” contained in the SPA.
Prior to closing, XYZ will ascertain which of the ABC employees XYZ wants to retain after closing. A condition of closing should be that the designated employees sign employment agreements with XYZ that include reasonable noncompete and nondisclosure provisions.
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