OBSERVATIONS ‘06

Q&A OF BLUNDERS, CAUTIONS AND STRATEGEMS IMPACTING THE PRACTICE SALE THROUGHOUT 2006 (PART V) 

by Sam Reader

Compliments of S.G. Reader & Associates, Inc.

 

Q:  How important is it to require a Letter of Good Standing from the seller’s insurance panel?

 

A:  If the insurance panel is a major player and/or contributor to the clinic’s revenue – very important!  In fact, any panel contributing more than 15% revenue may be considered a major player.

 

For example:  Doctor Slick had two beautiful and well built clinics he wanted to sell.  These were no ordinary clinics.  These were high performance chiropractic/rehab/ medical clinics collecting close to seven figures per clinic.  These clinics were well equipped and exceptionally staffed.  Dr. Slick had spent no less than ten years building, calibrating, and tuning these fine machines – almost to the level where he could manage his clinics from afar – even 80% absentee.  He had truly built (what appeared to be) a doctor’s dream practice in a dream location in the Southwest Sunbelt, a high growth community with ideal weather 75% of the year.

 

For several years, Dr. Slick would fly himself from his palatial northwest summer coastal home to both of his clinics – mainly to let his presence be felt, meet with his managers, and pick up his checks!  This was a monthly ritual.  Life could be no better.

 

Dr. Slick felt it was now time to share and sell his dream life to other fortunate doctors.  The interest in his clinics was fast and furious, a stampede-like action from the

 

 

 

 

 

 

 

“who’s who” of the country’s strongest and most sophisticated buyers.  His clinics were priced for the serious players only.  From the many desiring shoppers, two would emerge as winners.

 

Dr. Anxious had run a fairly successful practice for many years, but felt some of the insurance crunch in his own state as well as the aches and pains in his body were motivation to uproot and go for something greener.  Dr. Anxious was an intelligent man – graduating top in his class and, in time,  had become the biggest fish in his community of many chiropractors.  Dr. Anxious was now desperate and wanted to move quickly on his new dream.  Therefore, he would forfeit the lawyer(s) and accountant(s) during the due diligence phase of the acquisition.  He would perform his own due diligence – his own discovery.

 

Dr. Cautious could not have been more opposite of Dr. Anxious.  Dr. Cautious never owned his own clinic.  He worked as an employee for eight years and was ready to take the big leap.  Unlike Dr. Anxious, Dr. Cautious did not graduate top in his class, nor was he the big fish within his community.  In fact, he felt somewhat reverent – almost intimidated – by the monolithic portion of his future dream practice.  Dr. Cautious did not hesitate to hire some of the finest lawyers and accountants to perform due diligence or discovery on the clinic he was purchasing.

 

Dr. Cautious’ team of lawyers, accountants and bankers would take up to eight months to comfortably sign off on due diligence and fund the project.  Dr. Anxious’ team, mainly himself and one banker, would take a third of that time to sign off on due diligence and fund.

 

Although there were a few of the usual and customary bumps along the way for both seller and buyer, the journey was met mostly with excitement, anticipation, and hope  filled dreams of the future.

 

The moment finally arrived.  Both Doctors Anxious and Cautious closed on their dream clinics within a week apart.  Both doctors sighed with relief.  It was no easy chore moving their families, selling and purchasing homes, performing due diligence and funding.

 

Approximately two weeks after Dr. Cautious moved into the clinic as primary doctor, he received an envelope from Dr. Slick.  Within the envelope was a letter to Dr. Slick from one of the major insurance panels dated three weeks prior to the close of sale of this practice – the insurer was withdrawing-cancelling.  In other words, after several months of investigating, the major insurer, representing almost 60% of the revenues for the clinic, found fraudulent billing practices being performed by the staff and endorsed by the doctor.

 

Dr. Cautious was horrified!  How could this be?  After all, he had the best lawyers and accountants money could buy.  He had spent several weeks working and interviewing the staff.  How could he not have picked this up?  Dr. Cautious was dazed.  He called the insurer.  He pleaded his case.  He explained there was new management – new ownership – correct methods!  The insurer was adamant.  Their decision – final.  They would not reinstate the new doctor on the panel.

 

Approximately one week after Dr. Cautious received his devastating news, Dr. Anxious called.  Dr. Anxious had received a visit from the federal authorities.  Apparently, the clinic he purchased had been under investigation for one year.  The major insurer had contacted the FBI and reported their suspicion of fraudulent billing.  Dr. Anxious was devastated!  How could this be?  He was a smart and successful doctor.  Like Dr. Cautious, how could he not pick this up?

 

Although Doctors Anxious and Cautious were so opposite in their approach to due diligence and discovery, there was one common denominator between them.  They had both missed the confirmation and/or validation (status) of the life blood of the clinic – revenue source.  Confirmation and/or validation for revenue source is not absolute on a tax return.

 

A simple request for a Letter of Good Standing from the insurer(s) would have exposed Dr. Slick’s facade dream practice and confirmed and/or validated the clinic’s (true) ongoing revenue source.

 

Epilogue:  Costly litigation.  Strain on clinic, doctor and family.  Help from providence – hope for justice.

 

Be Smart.   Be Strong.   Be Helpful.   Enjoy!