DISCLAIMER: Today’s Advertiser helped make the production and delivery of this episode possible, for free, to you! But the themes expressed by the guests do not necessarily reflect the views of Inside Reproductive Health, nor of the Advertiser. The Advertiser does not have editorial control over the content of this episode, and the guest’s appearance is not an endorsement of the Advertiser.
Gain expert insights and invaluable advice on navigating the sale of your fertility practice with special emphasis on that crucial document - the Letter of Intent. Richard Groberg, a seasoned financial expert and Jay Stucki, an experienced corporate attorney, share insights from the sell side perspective and zoom in on the details that matter most.
Discover the major points addressed in the Letter of Intent that serves as the foundation for buying or selling a company.
Delve into comprehensive coverage of key elements in the LOI including:
Insurance
Non-competes
Governance
Equity
Evaluation multiples (based on adjusted EBITDA)
Profitability conversion
Acquire valuable knowledge into the process and timeline of finalizing the LOI and next steps to completing the transaction.
Jay Stucki:
Stucki Legal, PLLC
LinkedIn
Richard Groberg:
LinkedIn
Transcript
Jay Stucki 00:00
I think one to start with, they don't understand the 30,000 foot view of how important the loi, or the letter of intent can be. That is the roadmap. And unless you know where you're going, and you've been there, is it hard for generic LOI?
Sponsor 00:18
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Griffin Jones 00:59
Are you serious? Are you serious about buying my fertility practice? We'll find out from the letter of intent. That's the topic that I zoom in with my experts today. Richard Groberg and J. Stucki, Richard, you know, because he's a financial expert who's been on the show multiple times, and he's given plenty of advice on what you need to consider when selling your fertility company. Jay Stucki has also represented fertility companies on both the buy side and the sell side, or at least he's represented companies on both side perhaps fertility was just sell so I didn't get into that specific but today we talk from the sell side perspective. She's a corporate attorney whose careers focused on estate planning, asset protection, real estate transactions acquisitions, in medical and in software for decades. And today with Richard and Jay, I decided to get very specific on the letter of intent. The loi is what they call the roadmap or the foundation for buying or selling and company. They talk about the major points of an LOI, what happens to your malpractice insurance, the noncompetes post closing governance, rollover equity, equity and apparent company working capital like how much cash and accounts receivable you need to leave in the business for how long controlling documents like medical direction assignment of membership interest, joint operating agreements, irrevocable proxies, employment agreements MSA agreements, your valuation multiple based on adjusted EBITDA converting your profitability if it's based on cash, accounting, or cruel accounting, what needs to be talked about in the three to six meetings that happened before signing an LOI? What happens in the very early stages signing your NDA what happens between them and how the letter of intent is finalized? Any one of those subtopics could be its own topic on the show. I'm sure I'll have them back on to discuss because of so many of you are at this stage and you want to get this right. Enjoy this conversation with Richard Groberg and Jay Stucki about constructing your letter of intent. Oh, and I probably have to give you a disclaimer. This is not legal advice. I'm not an attorney, adjacent attorney, but it's not legal advice, simply insights for your informational use only. Mr. Groberg. Richard, Welcome back to Inside Reproductive Health yet again. Mr. Stucki. Jay, welcome to Inside Reproductive Health.
Jay Stucki 00:59
Thank you, glad to be participating today.
Griffin Jones 00:59
Richard, the audience is a little bit familiar with you at this point. You have been on the show a couple of times. And you're also quoted from our journalists when they are doing articles about some of the business dealings happening in the field. Jay, you are a corporate attorney? Are you mostly Is it mostly sell side that you represent? Are you sell side and buy side equally?
Jay Stucki 03:40
No, I wouldn't say equally, probably mostly sell side. But I've been on both sides of the table. So I've got a depth of knowledge level from each perspective. And I've also worked for practice management companies. So I get the physician side, I've had to represent many physicians and getting them out of bad contracts. So I think I kind of bring up a bit of expertise to the layers that most attorneys won't see.
Griffin Jones 04:14
One sub topic that was popular that we covered with Richard was talking about mistakes that Fertility Centers often make when they're selling with regard to accounting, things that are categorized as business expenses that shouldn't be and that impacts their EBITDA. What are some of the common mistakes that you're seeing from a legal perspective when people are going to sell their fertility company?
Jay Stucki 04:38
I think one to start with, they don't understand the 30,000 foot view of how important the LOI or the letter of intent can be. That is the roadmap and unless you know where you're going and you've been there is a bit hard for generic LOI. I you know, I like in the the legal side of things, you know, if you, if you're a couple and you want to get pregnant, you're not going to rely solely on your GP or internal medicine, you're going to want to go to a reproductive endocrinologist, you need that specialty. And it's the same thing in law, you need someone who knows both sides of the table to really hone in, I think Richard could probably give you a couple examples of allies that were vague from the start, because they didn't understand the full process of where this needed to go at the end of the day, how to protect the physicians, and yet make it a deal that works for both the acquiring entity and the seller.
Griffin Jones 05:44
What are a couple of those examples? Richard, do you have any LOIs being too vague from the start?
Richard Groberg 05:52
Yes, I've seen a couple recently that were negotiated by people other than me, when a couple of examples, most of these transactions talk about the fact that the valuation will be a multiple of what's called an adjusted EBITDA, which adds back and subtracts for certain adjustments. But if the language is unclear that that includes converting the sellers profitability from a cash basis accounting to an accrual basis accounting, they can wake up a month or two months down the road. And their adjusted EBITDA is significantly different than what they thought it was. And it can cause problems. The other issue I've seen recently, is where the seller also owns real estate that's used by the practice. And if it's not clarified, that the post closing lease rate will be based on some combination of the current rate and an independent appraisal, then, and that's that final number could affect the EBITDA and the valuation and the purchase price. It can cause problems later on down the road. Jay will talk about other issues in terms of duration of non competes, and the various different non competes. And what happens to rollover equity in the practice or in the corporate group acquiring if a doctor leaves early or is fired for cause. But those kinds of things, especially when Jay and I are working together representing a seller, we work very hard to make sure that the major issues have very clearly negotiated will define so that we don't get down the road and then have problems a month, two months later, when everyone spent a lot of money on accountants and lawyers and other advisers.
Jay Stucki 07:45
And let me just add to that, that, you know, you're you're trying to look at the entire structure, I can't tell you how many LOIs, I've been handed, and it was going to be a stock purchase agreement or an asset purchase agreement. And because of the structure because of rollover and contribution, tax considerations, it ends up getting flipped, and we end up with a completely different structure. So it it's more than just, you know, understanding noncompete or the quality of earnings. It's the LOI really has to look deeper into how the sellers were organized formed tax consequences, how long they've had ownership, short term, capital gains versus long term capital gains, estate planning issues, especially if there's a rollover component.
Griffin Jones 08:38
Why is this those and maybe it'll just enlighten my own ignorance. But to me, that the LOI was simply the the letter that says, you know, we're going to do our due diligence, we're going to explore a deal, but it sounds like more of the terms of the deal need to be established in the loi, where I would have thought, well, you know, if the if the valuation multiple needs to be adjusted in a better based on adjusted EBITDA and that might change, that that would just happen in the deal doesn't necessarily happen. And in the LOI, why does this stuff need to happen in the LOI?
Jay Stucki 09:16
Well, the LOI can't be as detailed as the definitive documents, obviously. And as the saying goes, the devils in the details. And so when you get into negotiations, and you're trying to explain the pros and cons of certain language or certain concepts, it seems to always harken back to well, that's not what we were told when we were being courted. And so it's very helpful that even though the LOI is probably only going to be a few pages long to be able to go back and use that as a tool for refreshing the memory of what was being said during the courting and, and I've watched effect I've used Richard to be able to go back and say, Richard, you were involved in this LOI and negotiating upfront, what was the understanding? And then you get all the parties together. And you walk through, yes, that's what was said, oh, shoot, okay. And just because the buyer said something, it doesn't mean it translated over to the attorneys. So you kind of have to get the attorneys back on track to be in line with what was negotiated under the LOI.
Richard Groberg 10:32
If and if I can amplify that, Griffin. At least in the transactions, I've worked in the sellers, this is a one time thing, they've built their practice, they've operated for a number of years, for various reasons, they're ready to sell it a partner with a PD back group, they vet two or three, or perhaps more potential sellers, they've made a decision, it's like, This is who I'm gonna marry. Because it's not like selling a piece of real estate where you sell and walk away. And when the LOI is signed, both sides start spending a lot of money. It's a time consuming, painful process. And you want to, again, there's a balancing act, if you negotiate every possible thing, you have a 200 page document in the loi, which you can't do, but you want to lock down enough of the major points, some of which are very subtle. I'll give you another example. If one of the buyers has their own malpractice carrier, and everybody has to switch, and they're requiring the seller to have to make the switch and by a tail policy. Well, that affects the economics of the deal. And if one of the sellers is ready for retirement, that could affect the structure. So as much of that, that says very significant could be at least buttoned down enough that when we get down the road, the lawyers could say, hey, Richard, while you were there, what Jay said, what was it that the parties discussed and agreed to? It helps lock in the major points.
Griffin Jones 12:04
Let's talk about those major points. You mentioned malpractice and the potential for needing tail policy. You talked about the valuation multiple and adjusted EBITDA or the potential for converting sellers profitability based on cash basis accounting or accrual based accounting. What are the major points that need to go in to a letter of intent?
Richard Groberg 12:28
I'll give a quick answer. And then Jay will come in too, the noncompetes are very important. post closing governance is important. Not all the groups are the same, and not all the sellers are the same. Some sellers don't need a lot of help from the corporate group, and how much interference there's going to be becomes important issue some need more help. So discussion about governance, to the extent they're getting rollover equity in the practice, what fees the corporate group charges or doesn't charge and how it affects profit participations. To the extent the sellers are getting equity in the parent, how that's viewed and what happens and get what happens if somebody leaves early. How whether working cow working capital is calculated, most of the buyers require the seller to keep enough cash or accounts receivable in the business to cover bills for a period of time. Others allow the seller to keep the accounts receivable wanna J's favorite issues to battle is? Okay, what are the reps and warranties and indemnifications? And what is the seller responsible for post closing but may have occurred? Pre closing? So, Jay, have I missed any major ones?
Jay Stucki 13:47
No, I've just say that there's so many different subsets. So for example, if you're talking about could controlling documents, you're going to have a whole different set of considerations under an employment agreement that you're going to have if there's rollover contribution, and now you become an equity holder in the parent company, versus when restrictions and covenants that you're going to have in the asset purchase or stock purchase agreement. And all of those will carry a whole different slew of requirements. And so it's, you will see some of that addressed as to what the expectations are between the parties in the LOI, but it's not just oh, hey, a traditional non compete because having equity in the parent. And if the parent would say is a limited liability company, you're talking about now coming in as an equity owner, do you have a say, what's your vote? Are you just a financial interest? I'm sure there's going to be power of attorney considerations. So you're going to have contribution tagalong, drag along, right I mean, there's all sorts of things that now come into play is that owner that in the parent, and of course, the parent doesn't want a minority owner controlling. So a lot of times you'll see those levels shake out in the LOI as well.
Richard Groberg 15:14
There are two transactions recently where the seller selected Jay to represent them. And in both cases, there were issues that came up on some of the things that Jay just talked about, where the buyer said, nobody's ever asked for that before. And why is that an issue. And by the time we got done, the buyers were changing their documents to reflect going forward, things that Jay brought up that no one had addressed. And some of the prior sellers were saying, Why didn't I get that and we need to change our documents. So there really is a level of detail and the interaction between purchase agreements, employment agreements, noncompetes equity, the parent, that if you're not watching careful and won't be synced, that can cause problems later on.
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Griffin Jones 16:44
Jay, I was gonna have you define controlling documents at risk of me sounding stupid. That's my job as the podcast host. Hopefully there's at least one other person in the audience that was wondering that, but please define controlling documents for us.
Jay Stucki 17:03
Yeah, absolutely. I mean, first of all, you have to understand the there's the concept of the corporate practice of medicine. And many states have certain laws, summer force, different levels of enforcement. And so everybody kind of approaches buyers, from the corporate side approach things from what if the law changes. So that's kind of always in the backdrop that brings forward management service agreements, because usually there's going to be an management service organization or an MSO involved. You're going to have a medical directors somewhere, sometimes it's the seller, sometimes the management company wants their own medical director. And there's a level of control there. You have different mechanisms, such as succession agreements, assignment of membership interests, the revocable proxies, you can do control through loan agreements, and of course, through your employment agreement. And then there's the whole level of control, if you're going to say, Hey, I'm going to become a member. Now you're talking about, you know, joinder, to an operating agreement, LLC agreements, you know, so those are kind of the core documents, that you have to understand all of them, and know which tool the buyers are going to bring forth. And usually it's a multiple of the tools. For example, I just did a deal where we use irrevocable proxies employment agreements, and an MSA agreement. Another deal that we did back in now, I'm going to say, April, we use an management service agreement, succession agreements, an assignment of membership interests, it all those are all documents that are done on the front end. So for me, it's making sure that the physician understands how they're controlled by these documents. Because when it comes right down to it, right, the physician is responsible for the patient care. And the competing interest or concept here is, how do if I'm a physician, how do I do my job and give the quality of patient care I want if somebody else is controlling the organization, and you get into what is a clinical asset versus a non clinical asset, right, the physician, the Medical Director controls the clinical assets, which is really the patient care patient records. And then you have the non clinical assets which are owned by the company. You get into a situation where it's not a, let's say, a good, a good company, or they have a bad reputation, and I've had to help doctors get out of these situations. They can make your life miserable, right, they're gonna put in there on staff, you just lost somebody that was with you for a long time, but they want their own person there, or they're not going to buy you the equipment that you need or that you feel you need. And so, you know, sure, if you're the doctor, you say, wait a minute, you're affecting my ability to practice. In fact, for those who, whom some of you might already know, this is a big issue in the Northern District of California right now, it's federal court, where the Association of Emergency Medicine anyways, the group brought a lawsuit claiming that all of these controlling ancillary agreements that companies use to effectively control the doctor is being challenged as it is, in fact, the corporate practice of medicine because you've tied the physicians hands. Now, I think there's a delicate balance here that if you have people who understand the industry, such as you know, Richard, myself, then there's, there's a fair trade off being made. To see it another way. If I want to sell my practice, you know, I certainly can't take millions of dollars from my practice, and then expect to still control it and run it and do everything that I want.
Griffin Jones 21:14
Some people still do expect that, whether they realize that that's what their they'll say, they don't expect that, but they're expecting that, you know, when somebody is telling them what supplies they can order after and who what EMR they're going to use and who they can hire. Yeah, that's when they realize it, but when it's happening, they don't seem to, to always realize that,
Jay Stucki 21:37
Right. And my goal is not to try to tell the physician that it's gonna be, you know, this great rosy relationship and the honeymoons gonna go on forever, but rather makes sure that the physician or the sellers, are fully aware of these restrictive covenants of these controlling documents. Because at the end of the day, I assure you, the buyer, the practice management company, is going to control the practice, you know, if you're a physician, you know, gotta do depositions. And the other side always says, you know, almost right out of the gate, okay, Doctor, tell me, you know, what have we done that's affected your ability to treat a patient. And the doctor is not going to sit there and say, Oh, I can't treat my patients, because, of course not, they'd be committing malpractice. So it's, it's really about understanding a balance here, and making sure everybody's aware of what their arrangement is, and what they've negotiated, what they've sold, what they bought, and what their responsibilities are post closing.
Richard Groberg 22:47
And then lawyers like Jay, make sure that the documents accurately reflect what's been agreed to, in addition to the doctors understanding what they're getting into.
Jay Stucki 22:57
Sure. Let me give you an example of that. Thank you, Richard. You have some situations where they want the physicians held accountable for any losses. And my view on that is, if you're going to be held accountable for losses, or it could affect your compensation pool, because most of these agreements have some form of compensation pool, then the physician should have a level of say, in the expenditures under the MSO. If you're not responsible for losses, and it's not going to affect your compensation, then there should be a much less expectation of any say, as it relates to expenditures or how the MSO, you know, allocates costs to the clinic. So you there's that balance, where you really have to read the documents and see how much responsibility versus how much say you have, you know, they play off of each other.
Richard Groberg 23:57
That's a great example where the language in the LOI is important. If a doctor's post closing bonus is based on growth of earnings, then they need more visibility and say, into what's expensive practice. But if their bonus is based on how many retrievals do you do over a threshold, as an example, well, then it's not as important.
Griffin Jones 24:23
Am I correct in understanding Jay that the controlling documents themselves are not going in the LOI? It's simply refers to what controlling documents are going to be negotiated in the deal.
Jay Stucki 24:36
I mean, there's more than likely a reference to the MSA reference to an employment agreement, reference to maybe some of the high level restrictive covenants such as a non compete that you'd expect in the employment agreement. But usually the LOI is not going to get into P back or drag along rights that you would see under say the parent comp any equity ownership? So now it's more of a reference to the MSA and what falls out under the MSA. And I think that's critical where people like Richard come in. Because in the initial stages, the physicians look for someone to be able to say, Hey, can you explain the MSA to me? How does you know? How does the management services organization work? And am I really still going to be able to run my practice? Right? And, and, look, there are situations where the doctor sell their practice, and they run it just as they always did. And there's no or little interference. There's also situations where the doctor say, Oh, hold on, I don't like somebody telling me what to do. And we're going to put a stop to this right now. And the relationship deteriorates. So,
Griffin Jones 25:53
Richard, from your vantage point, does the multiple effect that so in other words, if if someone pays a lower multiple, are they more likely to let the physician Coast then if they pay a higher multiple times, because I'm just thinking if if I pay 15x, for something, I need to make sure that there is something different happening in their operations that or their their marketing that makes more patients come in, and they make more money? Because I need to earn that money back is from your vantage point is there does difference when people buy at a higher lower multiple how involved they are in dictating the operation?
Richard Groberg 26:37
No pun intended, but that that question is pregnant with with the complexity of reasons why multiples are what they are, you know, multiples are typically higher, if there's a strategic reason for the buyer, or there's there's factors that make the practice, you know, the doctors younger, they're in a new building, they're at a high growth curve for multiple years. multiples are also dependent on, you know, working with one group that got an offer from a group that puts much less cash down upfront, and there's much more equity in the parrot, their trade off is okay, we'll pay a higher multiple, not necessarily paying a higher multiple, because we're going to do more to your practice post closing your different styles, Jay and I have worked with sellers who don't need a lot of help leave me alone. And that's okay. They're probably not a good fit for some buyers, but are for others. We've also worked with a couple of practices, businesses in the fertility industry, that were dynamic businesses growing, but reached a point where they absolutely needed management help. And the seller understood that in one case, it worked very well post closing and another case, the seller couldn't adjust to someone telling them what to do. But that didn't necessarily mean there was a higher multiple, because we're going to be more involved with
Griffin Jones 28:04
I want to go into some of these different major points and and try to find out how detailed they have to be in the LOI, let's go back to malpractice for a second does it have to be established in the LOI of if we're going to have a tail policy on the doctor, if the docs gonna be responsible for their tail, but how much of malpractice needs to be established in the LOI?
Richard Groberg 28:29
Well, I think things like that. It's it's the eye of the beholder, whether it's material, my view, if it's material in terms of changing the nature of the practice, or an expense to the seller, or changes the essence of the practice. It should not be a surprise later on down the road. I mean, if, for example, if I've got practice with a seller getting ready to retire soon, and the buyer is requiring the change of malpractice carrier to tail, the doctor retiring pre closing, getting a free tail from their existing policy and not having to buy it so he'll say could save hundreds of 1000s of dollars. So were they a bit upset that they didn't find that out until a month before closing? Yes. But again, it's it's hard to know upfront what's material and whatnot material. But when you've got people like Jay, and hopefully myself, we've done a lot of things. We know the questions to ask so that anything that's likely to be material to the seller buyer is brought to the forefront in the LOI and not oh, by the way, somewhere down the road.
Jay Stucki 29:48
Now, let me add to that that Well, typically when you're talking about the traditional things, non non compete covenants or restrictions on territories Tell coverage, those tend to be pretty well understood and easy to negotiate with, as long as you have that expectation upfront, and you know, that it needs to be dealt with. I would say that, you know, we spend more time on, really the contribution and rollover or time as it relates to the role of the physicians when they become partners, how you bring in an associate physician, who participates in the compensation pool, what say you have an expenses, how the MSO is going to interact? Who's going to be the medical director? Those tend to be the more complicated negotiated issues than your traditional Oh, yeah, there's there's an expected now to compete, you know.
Griffin Jones 30:48
What, what level of detail, are you negotiating those things in the LOI?
Jay Stucki 30:54
Only, from the standpoint that it's a concern for either the buyer or the seller. And I think that's where Richard sits down. And he talks with this sellers and says, Okay, you know, let's talk about the warts. Let's talk about the problems, let's talk about your goals. And once you know, those, it's not that you have to necessarily expose them. But it allows you then to know what to work with, and what's important and what needs to go in the LOI and the you, you know, we're also concerned I know, Richard is, and I am, I don't want to start down a process where I know there's a problem. And then at the end, say, oh, save, by the way, no, you address it upfront. And, again, if you know the war, you know how to address it, and you don't catch anybody off guard. It is developing trust in my negotiations with opposing counsel, that we're all on the same page, we're all trying to get to the same goal. So it's not about hiding the ball. It's about vetting this upfront. And if it's important, as Richard says, we then included in the loi, if it doesn't look like it's important, then we back off. But the LOI is usually a compilation of five, six meetings between the parties through these discussions to make sure that everybody understands if there's an issue, let's get it in the LOI. And then, you know, the standard things, like I said, about the non compete, those tend to just be an expectation that everybody already knows how to deal with.
Richard Groberg 32:32
Yeah, Griffin, people who've never been through this before, the expression I use is you don't know what you don't know about the process. And when you've been through this, as many times as I have, as buyer seller, being sold to a group representing private equity, and now representing sellers, and with Jays experience, if we at least are aware of these issues up fraud, talk about it with the seller, make sure that the major ones are addressed, then we avoid the surprises and problems down the road. When people spend a lot of time and money that could blow up deals, create Hill will delay things, it's just it works better to try to address the major issues up front, having awareness having been through it a bunch of times of what the pitfalls could be.
Jay Stucki 33:24
The other thing too, is that you don't want to be I can't tell you how many times opposing counsel so well, that standard language that we use. And if you don't know that and have the level of experience than the variety of different deals that you've done in the fertility industry, you are in a very difficult position to be able to come back and tell them even though they know, be able to tell them why it's not standard language or why you're gonna reject their standard language. So yeah, you really need that detail, because that's a, I think, a tool that opposing counsel uses often. Oh, that's just standard, though it isn't standard.
Griffin Jones 34:07
I want to come back to standard language. It sounds like for your discovery of how material important these different major points for the LOI are, whether it's malpractice, non competes, post closing governance, rollover equity, equity and parent company working capital and controlling documents. It sounds like that is being discovered in a process which, you said Jay, might be five or six meetings. What does the first of those meetings look like? Actually, let's go prior to the first of those meetings. What needs to happen before the first meeting?
Richard Groberg 34:42
Every representative of seller does it differently. But in my scenarios, by the time the seller is ready to move forward and negotiate to conclusion and LOI, they've shared financial information they've had calls, they've discussed the buyer strategy and philosophy. They discussed what the seller is looking for in a partner to transaction, and then the buyer proffers that LOI, which then starts the negotiating process. That process itself a little bit like a marriage prenup helps define whether they're going to be major issues or not major issues and what the working relationships like. You know, again, if you've got a buyer that is more hands on, they're going to push some issues to make sure it's a good partner, the seller does it at the appropriate time, Jay gets involved to make sure that the non-lawyers aren't missing any things and significance. Again, by the time an LOI is ready for signature, as Jay said, besides all the pre LOI processes, there's 3, 4, 5, 6 meetings and discussions and back and forth. That gets hopefully gets everybody comfortable that yes, this is this is a good mutual relationship. And, and we've got enough documented that hopefully, the lawyers won't screw it up.
Jay Stucki 36:11
Now, but there's also an initial kind of, you eyeball a situation, are the sellers really ready to sell? I mean, that's a big question. And a lot of times, it's no guys, you need to get this in order, get this corrected. Or if you sell now, you're going to run into this kind of tax issue. So maybe you want to wait or maybe we get you a high enough multiple, that it's, it's worth that tax issue trade off.
Griffin Jones 36:39
So these 3, 4, 5, 6 meetings are we talking about? These are meetings that happen after we've decided, hey, there's probably a fit here where we're going to move towards proffering an LOI, or these are these meetings are just anything that happens before the LOI is proffered.
Richard Groberg 37:00
The way I was defining it. There's a bunch of meetings, discussions, probably at least one person before the buyer says, I really want to buy you, I'm going to send you an LOI. They have an understanding of what the seller is looking for. When that LOI comes in there then are a series of calls, Zoom meetings, team meetings, discussions, that hopefully gets to a mutually acceptable ready to sign LOI.
Griffin Jones 37:31
So before we're even at that point of saying, Yeah, we're we're ready to receive an LOI from you. We're ready to proffer you, an LOI there, you that's when you're looking at financial information, talking about the buyers strategy and philosophy. That's that's when that stuff's generally happening. Richard, even before you decide that, yeah, we're, we're ready to move to LOI?
Richard Groberg 37:58
Yes. And every buyer is different in terms of the level of due diligence they do. All of them will visit in person and make sure there's good chemistry that want to see the facilities. They'll look at financial data, operating data, pregnancy statistics, valuate, the lab try to understand the nature of the doctors who's leaving, who's staying who were the driving forces. I mean, it's a big decision for the buyer. It's not just buying for the sake of buying, and who cares what the practice looks like, people want to look good.
Jay Stucki 38:31
But I mean, you have ownership of the lab, that's a possibility comes into play as well. But the what Richard just covered, but keep in mind, there's a nondisclosure agreement in place. That's the first step.
Griffin Jones 38:47
So the the NDA happens prior to the financial statements being,
Jay Stucki 38:52
Right out of the chute so that you can exchange information and not have to worry about any improper disclosures.
Griffin Jones 39:00
Okay, so that kind of starts you down the road of the, of where you might be going towards the LOI and Richard, is do sellers ask for buyers financial information as well like, show me Integra Med, how, how overleveraged Are you? Are people doing that? Can they do that?
Richard Groberg 39:21
Yeah, so that's that's an interesting dance. Typically, the buyer will make a presentation and share some financial information about the practices they have and their revenue and their their earnings. Pitch, typically, not until post LOI if the sellers are taking equity in the parent, where they give detailed financial information. Because if I'm the seller, and I'm taking 20 or 30% of my proceeds and stock and the parent, I clearly have to understand the economics of the parent. You know, what's their valuation, what are their earnings, what's their corporate overhead? What are the What are the limitations on just the CEO paying huge salaries? They're not being profitability? How much debt do they have? So, but that level of detail invariably happens post LOI somewhere down the road. Now pre LOI, but especially post Integra Med, all the sellers want to understand, hey, if I'm getting stock in you, I want to understand your story and what your plans are, and what's my stock, going to be worth someday
Jay Stucki 40:30
well, not only what the stock is going to be worse, but is there even a market to sell it, you have yet to remember, these are most likely privately held companies with some kind of VC backing. And it's not like you can just turn around and say, Hey, I'm going to sell my shares to anybody, you're going to have very harsh restrictions on your ability to sell those shares. And that's where we get into the estate planning component, right? If these, if this is a long time hold, or a long time play, I think that a seller needs to the ability to be able to put their equity into some kind of estate plan, you know, trust for their children, whatever, because it's not, like there's a quick turn, we're going to sell my 20%, you know, next year.
Richard Groberg 41:20
Jay does a lot of work with the sellers on that, because the reality is, to the extent they're rolling into the parent, yeah, they're deferring their taxes on that part of the sale proceeds. But they're, they're minority equity in a private company, that hopefully someday, somewhere in the future, will sell to another private equity firm or another one of the roll up groups or maybe go public. And if they go public, you're probably going to be restricted and not get to sell anyway. So people have to understand they're going to take that stock, and they're going to stick it in the drawer somewhere and hope, in the state or trust, and hope that someday, they merge it to somebody else or sell to somebody else.
Griffin Jones 42:03
So we've signed our NDA, we've looked at each other's financial information, we've assessed some culture vet, we maybe have done a visit and well, hopefully we've done a visit by that point. And we have done some a little bit of due diligence enough to say that we want to move forward with an LOI. What is that? Maybe? And maybe there's three meetings after that. Maybe there's six meetings after that. But what is the first or the earliest meetings typically look like?
Richard Groberg 42:31
Post LOI?
Griffin Jones 42:32
No, this is pre LOI, but after, after some of that earliest due diligence has been done. So it's after we we've looked at the buyers philosophy, we've heard their pitch, we've, they've seen our financials, we've determined there's a fit, we want to move forward, then when we start to build and negotiate the LOI, what does that first meeting typically look like?
Richard Groberg 42:55
They sent in an LOI typically, either to me or to the sellers and me. And often it's to me first so I could push back on things that I know from the seller's perspective, date to be modified changed, are going to be acceptable, I try to keep the sellers free of getting sucked into what I call the transaction vortex as much as possible. And at the appropriate point, we may have to get back on the phone with the sellers and buyers to discuss sort of issues that can't seem to get resolved. Sometimes it's not necessary. Sometimes it is,
Jay Stucki 43:34
The LOI is a negotiated document between the partners. It's not as if they send it over and say take it or leave it.
Griffin Jones 43:41
And so those we talked a little bit about though, is that often you're not in the, you're not having the buyer, or excuse me, the seller, look at the LOI until you've had a chance to take a look at it yourself. Why keep them out of the transactional vortex?
Richard Groberg 44:05
Well, sometimes they are they do get a copy. Sometimes they don't do my job and other sellers, representatives job is to represent them know what the sellers want, don't want and try, you know, they're seeing patients all day long. They've got their lives. And so to the extent I know what they're going to accept or not accept, I never make decisions without their input, nor does Jay. But my job is to go back to this buyer. And I've never had an LOI that was like, oh, this is perfect, we're accepting it. To go back and say, can you please explain this or we need to tweak this or you've got something from a prior document you forgot to take out or we've got these issues to discuss. It's always with the direction of my sellers, Jay is the same way but what I don't want to do and part of my job is to keep the sellers from getting so caught up in that process, that it distracts them from their, their business, distracts them from patient care and taking care of their staff. And then, I mean, most of my calls with my sellers are very early in the morning or the evening, or weekends, because they're busy with patient care and, and their staff.
Jay Stucki 45:24
Well, and the physicians want to stay busy with their patient care, because they're, you know, the the multiple is going to be used, you don't want that last month to drop off, because I assure you, they are going to make sure that their calculation is a rolling, usually a rolling 12 months. And they're going to take that up to the very last minute, any data they can have. So if there's a drop off at the end, because the physicians taken away from patient care, that's a drop off in revenues, that's going to affect the, what's used in calculating the multiple.
Richard Groberg 46:03
I've seen lots of transactions, Griffin, where sellers in lots of different industries didn't have a lawyer or an advisor working with them. And they got so caught up in the in the business of the transaction that their practice suffered, there started to be staff issues in affected their business, sometimes in hostile negotiations, that's a tactic. And then it affects the ultimate purchase price. Because the buyer comes in and says, hey, the last three months, your business has deteriorated 20%, it's not worth as much.
Griffin Jones 46:43
So you're talking about part of part of it is convenience, part of it is so that the physician is able to remain productive, but is there also a component of it so that they don't get too invested early on it. So if they start to invest so much of their time they start to be in every meeting, if they that they start to become too invested into the sale, and that gives the buyer more leverage. Is that is that it play at all?
Jay Stucki 47:09
I would say no, just from the standpoint that, you know, if if I don't think this is a deal that can be done at the end, I would have be upfront with the physician from the get go. And, you know, good advisors not going to get you to the point of an LOI if he doesn't believe that it's a good fit. And that's not only from the Richard perspective as a consultant, but from the attorney perspective. The last thing we want
Richard Groberg 47:36
That continues all the way through to the closing
Jay Stucki 47:40
Right, the last thing you want is, you know, legal, your client telling their attorney, you know, what, what the heck did you get me into? And so, you know, I love it at the end of the day, when my clients come back to me and say, Jay, not only did you do a great job, but you benefited all the other physicians are in the group, because you saw things that they didn't it that the MSO recognize, they need to adjust that now benefits the hall. Boy, we wish they could pay your bill. But great job. And that's the goal. That's that satisfaction, what I look for at the end of the day, but that's in the forefront of my mind from the get go.
Richard Groberg 48:21
Yeah, Griffin from from an analogous situation an RE, who runs his practice has people in the practice who do their jobs better than they can that that facilitate or leverage their ability to holistically run the practice. When it comes to these transactions, with the hundreds of hours that Jay and other lawyers invest that I work on. They're trusting the experts to do what they need to do on behalf of the sellers. And but to make sure they never get surprised. You know, Jay Jay, invest hundreds of hours going back and forth with the lawyers. And it's his job to make sure that he knows what the seller will and won't do. And when there were major issues, explain it and make sure the seller knows what they're getting into on all these subtle, subjective issues. But if the seller had to do all that in his or herself, first of all, they might not have the expertise to do it, even if they think they do, but their practice would suffer.
Griffin Jones 49:23
Jay, it might be unethical to enter into an LOI with more than one buyer. Is it illegal?
Jay Stucki 49:31
No. But typically, you're, you will not see an LOI that doesn't have an exclusivity clause. In other words, nobody wants to, you know, it's very expensive, very time consuming. I mean, you're talking about hundreds of 1000s of dollars on any significant transaction. And nobody wants to say hey, what do you mean? I'm one of three horses in the race. Right? So that's where the importance of the upfront work. comes in to make sure that that's the horse, you want to hitch your wagon to, to make sure. And of course, if you're the buyer, you want the exclusivity because you're not going to go down the road and have the carpet pulled out from under you at the last minute.
Griffin Jones 50:14
From your vantage point, having done a number of these deals, what percentage would you say of LOIs do not result in a deal between that buyer and seller?
Jay Stucki 50:24
I think it depends on the industry. In the fertility industry, I've never had one not go through. But I think that's because I try to team up with people like Richard, who we set the table before, hey, we know what we're getting into. And we're not trying to take somebody down the path of an unknown. And let's hope for the best. Like I said earlier, if I don't think I can get this deal closed, I'm going to tell you that upfront, when I get an LOI that's already been signed, as opposed to draft or, yeah, I study it very closely. I'll call Richard, I'll call the client. And I'll good drill down and go through the questions to make sure that I understand what was behind it. And there are representations that I've declined. So, you know, to the extent maybe that LOI didn't go through, yeah, that's a real possibility. But I wasn't involved at that point, because I never took the assign.
Griffin Jones 51:23
So that wasn't necessarily my understanding. You know, I wasn't in the RMA, New Jersey, Shady Grove deal that didn't happen, what it was, what was it seven years ago, or something like that. But there was almost certainly an LOI in place there. And I don't have specific details I'm inferring a lot. But something didn't happen there. So my understanding was that it was more common. Jay, it seems like it's it's not so common for, for parties once once the LOI is in place for for them not to do the deal
Jay Stucki 51:53
I'm sure there's a lot of LOIs that collapse I, I represent a different group of entities in a different industry that run into the same issues of licensing corporate practice of medicine type analogy. And yeah, there's LOIs there that collapse all the time. So I'm sure they're out there. What I'm trying to distinguish is that, you know, if you can separate the wheat from the chaff, you can pick and choose. And I've been fortunate that I'm able to pick and choose those deals that I believe are workable that will produce that I'm not wasting my clients time. And so I maybe I can't really answer your question globally. But from the standpoint of those deals that I I'm selected for, and that I want to participate in, in the fertility industry, I'm batting nearly 100%.
Griffin Jones 52:51
So we've negotiated the LOI at this point what needs to happen before it's finalized. So, you know, Richard has torn it apart, Jay has torn it apart. Now are all the parties brought back in to review the document together? Are you reviewing it with the seller separately? And then buyer's counsel is reviewing with them separately? How, what how is the how is the LOI finalized before everybody signs it?
Richard Groberg 53:17
Well, I'm in the negotiations go back and forth. And both parties at some point, reach a point where they go, okay, there are no more open issues. And then everyone gets final changes or reviews that make sure that everything that was supposed to be changed, got changed the way it should, and then everybody signs.
Griffin Jones 53:34
Do you all review that together, though? You know, in the same Zoom meeting, or the same boardroom, or that can just happen, as each line
Richard Groberg 53:42
Modern technology, DocuSign, or whatever your poison is.
Jay Stucki 53:46
And let me tell you, there's also an underlying thing that we look for, in these back and forth meetings on the LOI, and that's the sense of cooperation, is everybody looking for the same goal? Because inevitably, there's going to be some clarification that's going to come up under the LOI that needs to be vetted when you get into the due diligence and the definitive documents. And if you don't have that sense of cooperation when you're negotiating the LOI, that's kind of a red flag from the start.
Griffin Jones 54:21
I'm glad we zoomed in on the topic of LOI so today we could have gone a lot broader but I like as I have experts on more frequently to dig deeper in particular topics. And we spent an entire episode talking about the letter of intent, which I think is really useful for folks. And it also gives me about 90 different ideas for follow up episodes that we could have you each back on because any one of those major points for LOI could be its own episode topic, but I will let each of you conclude, what does our audience need to know about letters of intent before they sign one to sell their practice?
Jay Stucki 55:02
I think you have to be upfront with your counsel or your advisor as to what your real goals are, you've got to drop your guard, you know, if you are really wanting to retire sooner than later, that's absolutely critical if you have health issues, and you know, you kind of kept it kind of behind the scenes or private, you need to disclose that. And so, you know, with attorneys, you get attorney client privilege that attaches right away with advisors, they have their own separate agreements. But it really is important to understand the client, and what their goals are, what their concerns are, what the warts are. And if I have that upfront, I can get you a good LOI. Absolutely. And it may not be with the the buyer that you wanted. But take the fertility industry, you know, there's four or five, companies always looking for a good acquisition. And so you're able to shop and see who might be the best bet.
Richard Groberg 56:09
And I think some my perspective, Griffin, like I've said before, it's not the final document, but there should be enough specificity detail based on the buyer and sellers goals, that it's an important governing framework. So all the work that has to be done after, and it needs to be taken very seriously, it's a lot like getting engaged. People are going to spend a lot of time and money soon as that document's signed. And you don't want surprises down the road. You don't want major problems down the road. And as Jay said, hopefully by the time that LOI is fully negotiated, the parties have a good working relationship. There's still going to be issues, there's still going to be some battles fought, hopefully between the lawyers, but it's an important stepping stone to the rest of what will happen. And I'm still seeing problems in some deals that haven't closed yet, because the LOI was unclear on some things.
Griffin Jones 57:13
Jay Stuki, Richard Groberg. Thank you both very much for coming on to the inside reproductive health podcast.
Jay Stucki 57:19
Glad to be here.
Richard Groberg 57:21
Thank you, Griffin. Appreciate what you're doing to the industry.
Sponsor 57:24
This episode was brought to you by bundle, you may be able to receive a free list of financially qualified IVF patients across the US and Canada. Email Courtney cbarrett@bundlfertility.com. That's cbarrett@bundlfertility.com. Today's advertiser helped make the production and delivery of this episode possible for free to you. But the themes expressed by the guests do not necessarily reflect the views of inside reproductive health. Nor of the advertiser, the advertiser does not have editorial control over the content of this episode. And the guests appearance is not an endorsement of the advertiser. You've been listening to the inside reproductive health podcast with Griffin Jones. If you are ready to take action to make sure that your practice thrives beyond the revolutionary changes that are happening in our field and in society. Visit fertilitybridge.com To begin the first piece of the fertility marketing system, the goal and competitive diagnostic. Thank you for listening to Inside Reproductive Health.