As an exit strategy, owners of small professional practices often take on younger practitioners as employees or minority equity holders in the hope that these new associates will complement their existing practices and ultimately buy out more senior practitioners. This arrangement can be an ideal means to realize the economic value of a lifetime of building a practice and also ensure a smooth transition for valued clients or patients. In representing the buyer of such a practice, it is important to focus on personnel issues since many long-time practitioners may have been treating staff as “family” and overlooking some of the formalities required of employers.

If the transaction is structured as an equity purchase, the buyer must be diligent in assessing potential liabilities and ensuring that proper indemnities are in place. There should be a careful review of all contracts and hiring letters. The purchase and sale agreement should contain representations as to the disclosure of all agreements, written or oral, with employees, as well as the disclosure of any known pending claims made by employees. An informal wage and hour audit should be conducted to make sure that accurate records have been kept of hours worked and that overtime has been paid unless employees have been properly categorized as exempt. Also, the use of any independent contractors on an ongoing basis should be reviewed. Forms I-9 should be on file for each employee kept separately from personnel files. If there is a written personnel policy, make sure that there are acknowledgements of receipt on file. Check to see if there are accurate records of earned and used paid time off and make sure that there are no oral “side deals.”

Typically, there are one or more problem employees whom the older practitioner does not want to terminate and the buyer does not want to retain. It is key to identify those employees and make sure that provisions are made for the termination of these employees before or at the time of closing. The parties should work together to allocate the cost of any severance packages that may be offered in order to avert liability for both the seller and buyer, and to allocate costs of defense and liability if wrongful termination claims are made. Making sure that there is an Employment Practices Liability Insurance policy in place to cap any such potential liability serves to limit the exposure of both parties in the case of high-risk employee terminations.

In the event of an asset purchase, it is also imperative to immediately institute proper personnel procedures that a prior owner may have neglected. It is important to inform employees of any new conditions of employment when the employees are terminated by the prior employer and hired by the new entity. The transition is a good time to remind employees of the obligation to keep client/patient information confidential. The buyer should make sure that employees are paid for accrued and unused paid time off at the time of closing. If the buyer is going to assume these liabilities, an adjustment should be made to the purchase price. If the transaction is an asset purchase, efforts should be made for continuity of group insurance coverage. If the seller has a 401K or similar benefit plan, the buyer and seller should fully understand the seller’s obligations with respect to the plan.

Frequently, personnel issues are left for the last minute or are neglected causing unexpected problems for the new owner of the practice. Advance planning can ensure a smooth transition and foster good employee morale after the transaction is closed. For more information, please contact a BW attorney.