What Is Liability?
Liability is loosely translated as any kind of legal claims or debts owed by the practice.
The degree to which the buyer of a medical practice takes on the liabilities of a practice depends to a large extent upon what type of sale you are doing--an Entity Sale or an Asset Sale.
(If you aren't sure of the difference between these two types of sales, please read our post on them here.)
Liability In An Entity Sale
Because a corporate entity shields its owner(s) from personal liability, any liabilities are liabilities of the corporation itself, and thus usually transfer over to the new owner in the sale of a medical practice.
In short, the company being bought will need to resolve its claims and debts regardless of who is behind the corporate veil (regardless of who owns it).
Because of this, a buyer who is interested in buying the corporate entity will want to know all liabilities ahead of time.
Buyers may also ask that the sales contract include provisions that all known debts are paid down or paid off before closing.
And because a company may later be sued for actions taken before the entity was sold to a new owner, many potential buyers of a practice will ask that the sales contract include a provision that the seller be responsible for any claims related to any undisclosed or unexpected liabilities that may show up after closing related to issues that started before closing.
If the buyer of a medical practice feels that the valuation (price) of the practice is too high relative to its liabilities, they may use the liabilities as a negotiating tool to lower the valuation of the practice and buy it for less.
(For more on valuation / valuing a medical practice, see our big post on the subject here.)
Liability in an Asset Sale
In the vast majority of cases, liability does not follow an asset.
Further, part of any good sales contract will contain a provision that all assets are in good working order before the sale to the best of the seller’s knowledge.
For example, if you possess an asset, such as a couch in your waiting room, and you sell it, you would not normally be held liable for the injuries or issues created by the couch once it is owned by a new party.
As my wife (an attorney) is fond of saying, anything can be litigated. But, alas, this is considered quite rare.
And when a sole proprietor or company sells its assets (but not the actual company), the new owner is not held responsible for any existing debts or claims related to the practice, except as written into the sales contract.
A Quick Comparison
Asset Sale
-Sell all assets of a medical practice.
-Only choice for sole proprietors.
-Can be done as an individual or as a corporate entity.
-Liability for assets only.
Entity Sale
-Sale of entire corporate entity (S- or C-Corp, LLC, etc.).
-Can only be done entity-to-entity, no sole proprietors.
-Liabilities carry over to new owner unless exceptions are made.
So Which Should I Do? An Entity or Asset Sale?
The key is in how you frame it.
Most savvy sellers organized as a corporate entity will want to sell the corporate entity.
Even if the buyer is able to have some exceptions made in the sales contract to accepting certain liabilities, they are accepting all others.
In an asset sale, it’s kind of the opposite: a buyer can pick and choose which assets they want and which they don’t, likely cherry-picking the most valuable assets and leaving the others behind. They will probably have zero liabilities related to the assets they acquire, and will receive a more favorable tax treatment from an asset sale, getting write off big parts of the sale once it’s over.
Given the points covered above, the bottom line is that a corporate entity with no liabilities will most likely want to sell the whole entity, while a buyer will get more favorable tax treatment and reduced liability if it’s an asset sale.
And if the seller is a sole proprietor, there’s no choice: it will be an asset sale.
The Mandatory Disclaimer
It is important that you consult a CPA and a good attorney before making a final decision on how you transfer the business. The advice we give here is based on our knowledge and experience, but we’re not CPAs or attorneys, and we want you to know that.
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If you’re still wrestling with what kind of sale would be best for your individual situation, we’d be happy to discuss the pros and cons with you. Reach out to us below. The first call is free.
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