By Michael S. Byrd, JD, ByrdAdatto

Disclaimer: As with many client case studies, the names of the people have been changed to protect the attorney-client information. However, the facts and law are real and should be considered accordingly.

In this case study article, we will discuss a real client, Dr. David, who journeyed through the five phases of a merger and acquisition (“M&A”) deal. In the world of health care practice M&A, the story of Dr. David offers a valuable insight into the intricacies of M&A negotiations. Dr. David, a solo ophthalmology practitioner, found himself in a situation reminiscent of David versus Goliath when he was approached by a large private equity-backed group, which we’ll, of course, call “Goliath,” which wanted to purchase his practice. By examining this case, we aim to highlight key takeaways for both buyers and sellers on the importance of early legal involvement, navigating unsolicited offers and negotiations, and maintaining realistic expectations during M&A negotiations.

The case of Dr. David

Dr. David, a pediatric ophthalmologist, had been running his solo practice for more than three decades. Dr. David was not actively seeking to retire or sell his practice. He was, nonetheless, approached by Goliath with an unsolicited offer to purchase his practice. This offer initiated a negotiation that would later prove to challenge both parties.

The letter of intent (LOI)

Unfortunately, by the time Dr. David sought legal counsel to guide him through the deal, he had already signed the letter of intent (LOI) with Goliath. In the context of M&A, LOIs are crucial documents because, even though they are considered or referred to as “non-binding,” they typically contain important binding provisions. Additionally, they outline the key terms and conditions of the proposed transaction, provide a framework for the transaction, and set the tone of the deal.

If M&A legal counsel is engaged early in the process, it helps reduce the risk of unintended consequences. M&A lawyers will review the LOI to ensure that it accurately reflects the parties’ intentions, it is clear and well-defined and it does not contain provisions that could be detrimental to the client’s interests. This review can help prevent misunderstandings and disputes later in the negotiation process. For example, legal counsel can advise clients on the potential legal consequences of the LOI that can occur down the road, which helps in risk assessment. Dr. David learned this lesson the hard way, as his LOI contained several provisions that would shape the future of his deal with Goliath.

Understanding the deal structure

Initially, Dr. David believed that the transaction with Goliath would be structured as a stock sale. He assessed the deal from a capital gains perspective, believing it was aligned with his expectations. However, a critical discovery later emerged—the deal ultimately unfolded as an asset sale. This transition had significant tax implications, costing Dr. David a significant sum in taxes that he had not initially considered. Additionally, since Dr. David had already signed the LOI by the time he discovered this, renegotiating the purchase price of his practice to account for the tax impact would prove to be an uphill battle.

In M&A transactions, the structure of the deal can have substantial financial and tax implications. For example, the tax implications of a deal can affect the overall financial performance and the return on investment for the deal. Consequently, it is crucial for parties to thoroughly review and confirm the deal structure, ensuring it aligns with their objectives and expectations. Dr. David’s experience underscores the importance of understanding a deal’s structure early on, as even a slight change in the structure can lead to substantial financial consequences.

Navigating negotiations

As negotiations began with Goliath, Dr. David encountered significant resistance from Goliath. Dr. David aimed to maintain the status quo in his practice even after the acquisition, and the employment agreement in this deal was a central point of contention. Goliath was initially reluctant to entertain any changes to their standard agreements. They utilized bullying tactics to strong-arm the negotiation process. Despite Goliath’s resistance to alterations, the negotiation process was instrumental in clarifying the terms of the deal and bringing forth the areas where Dr. David was unwavering.

The negotiation process in M&A transactions is an important and difficult challenge in the quest to find alignment between the parties. It is essential for both parties to engage in constructive negotiations that clarify the deal’s terms and to protect their interests. Additionally, M&A negotiations are rarely straightforward, especially when dealing with a reluctant negotiation partner. Dr. David’s case demonstrates the importance of having legal professionals who are experienced in M&A transactions to guide the process and advocate for the client’s interests.

The ability to walk away

Dr. David’s M&A journey continued for several months, with numerous roadblocks and pushbacks from Goliath. The reluctance Dr. David faced from Goliath to accommodate certain key terms and conditions in the deal ultimately led to a pivotal moment in the negotiation process, where Dr. David was faced with the hard conversation of re-evaluating the deal’s worth to him. Dr. David was left with the option of signing an agreement that did not align with his interests or continuing to expend more of his time and resources toward negotiating with a buyer unwilling to accommodate deal-breaking issues. Counseled on this hard conversation, Dr. David decided not to succumb to Goliath’s terms and instead gave instructions to terminate the deal with Goliath. Goliath was seemingly stunned by this outcome. Though the communication was initially met with silence from Goliath following this negotiation breakdown, Goliath eventually revisited the negotiation table about a month later.

This key principle proved notable—the best leverage in a deal is the ability to walk away. Dr. David found himself in a unique position—with no urgent need to sell and a successful practice, he had the luxury of withstanding Goliath’s pressure tactic and to push back on terms that did not align with his interests. Dr. David’s refusal to accept an unfavorable deal demonstrated a form of “sexy indifference,” where the party with the ability to walk away holds a position of strength. This unexpected twist additionally underscores the dynamic nature of M&A negotiations.

The final outcome

When Goliath came back to the negotiation table, it was ready to accommodate some of Dr. David’s deal-breaking requests. Dr. David’s ability to maintain an indifferent attitude eventually forced Goliath to accommodate essential “deal-breaking issues” that Goliath noted it had never agreed to in other deals. After months of negotiations, the two parties finally reached an agreement. Dr. David’s realistic expectations, along with M&A counsel, ultimately helped him achieve a favorable outcome.

Prepare for M&A success

This case study serves as a valuable lesson in navigating M&A negotiations. The legal implications of Dr. David’s journey also shed light on the importance of early legal involvement, understanding the deal structure, and leveraging the ability to walk away. Understanding power in the ability to walk away and staying grounded in realistic expectations can help secure better outcomes in complex negotiations. Dr. David’s story also underscores the fluid nature of M&A negotiations. Parties may revisit negotiations, offering opportunities for adjustments and compromises. Legal counsel should be prepared to adapt to changing circumstances, guide clients through renewed negotiations and ensure that any revised agreements are legally sound and reflect the client’s interests.

These legal insights can guide both buyers and sellers in health care practice mergers and acquisitions, ultimately leading to successful M&A outcomes. In the world of M&A, being legally prepared and well-represented is essential for achieving the best possible deal and safeguarding the interests of all parties involved.

Navigate M&A negotiations with ByrdAdatto

If you find yourself in a situation similar to Dr. David’s, reach out to ByrdAdatto’s experienced team for professional guidance and tailored legal solutions. Remember, seeking legal counsel early in the M&A negotiation process is the key to a successful and favorable deal outcome. ByrdAdatto helps clients navigate the intricacies of M&A negotiations in the health care industry. If you have further questions, contact ByrdAdatto at info@byrdadatto.com.

Michael S. Byrd, JD, is a leading advocate for doctors and dentists throughout the United States. He routinely lectures at continuing medical education seminars on the various business and legal issues that medical professionals face. Outside of health care, Byrd has used these same skills to handle sensitive and complicated business matters for entrepreneurs, business owners, attorneys, CPAs, high-net-worth individuals and public figures. With his background as both a litigator and transactional attorney, Byrd brings a comprehensive perspective to business and health care issues.