Developing a confidential information memorandum, approaching potential acquirers, and signing non-disclosure agreements

In our previous months’ articles on Selling Your Practice, we discussed why so many physicians are selling their practices. Once you have made the decision to sell, we counseled you to continue to run and grow your practice, to prepare early, and to assemble a team of experts. We also suggested you begin to educate yourself on the process and to learn the difference between the two most common types of transactions—a capital sale and an asset sale. We covered the need to complete an objective analysis of your practice, and to develop a financial pro forma. The need to prepare for negotiation by understanding what you want from a sale of your practice was also discussed, as was the need to understand the true value of your practice. Last month, we turn our focus toward identifying potential buyers and performing your own initial due diligence on them before putting your practice up for sale. This month we’ll discuss the development of a confidential information memorandum (CIM), approaching potential buyers, and signing non-disclosure agreements.

Developing a Confidential Information Memorandum

Prior to approaching potential acquirers, the next step in the process is to consolidate all of the analysis and information completed in your prior steps into a confidential information memorandum (CIM), sometimes referred to as an offering memorandum. The confidential information memorandum is nothing more than a marketing document used to approach potential acquirers to inform them of the opportunity. Central to the confidential information memorandum is the story you want to tell about your practice and its position in the marketplace. Each section of the confidential information memorandum should help to support the practice’s overall story.

The confidential information memorandum will include a description of your practice, its market and patient base, competitive landscape and your practice’s position in it, your providers and their backgrounds, key members of your practice team, your practice’s strengths, and it will outline your potential practice opportunities. It should also identify the key weaknesses of your practice. Again, it’s important to control the story. So be prepared to help explain and minimize the weaknesses by identifying potential remedies, demonstrating “one-time” explanations, and counterbalancing opportunities. The confidential information memorandum will also include the pro forma that you previously developed, an outline of your expectations from a sale of your practice, and an outline of the sales process going forward.

Often, the confidential information memorandum has an executive summary, followed by supporting detail. The executive summary is often used to make an initial approach toward potential acquirers and to “tease” them. Only after the potential acquirer expresses an initial interest and signs a non-disclosure agreement will the full confidential information memorandum be provided.

Approaching Potential Acquirers

Most sellers want the sales process to remain confidential, and they do not want the fact they are for sale to be made public. As a result, it’s often best to have your assembled team of experts approach the market confidentially on your behalf. To protect your identity, a code name is often given to you and your practice and used in the initial outreach and executive summary to help protect your identity. Your expert team will approach the prequalified list of potential buyers you identified in the previous step.

As a reminder, potential buyers are either financial buyers or strategic buyers. Strategic buyers are the most likely acquirers of your practice, and they will often value your practice more than financial buyers. Strategic buyers will include other physician practices in your specialty, multispecialty clinics that operate in your market, a list of referring physicians to your practice, local hospitals in your market, physician groups in nearby markets that may be interested in entering your market, suppliers and health insurance companies who have entered your market or specialty, venture capital/private equity firms who have already entered your market space, etc.

Once your team of experts has made contact with your list of potential buyers, shared the executive summary, and gauged positive interest in your practice, they will ask the potential buyers to sign a non-disclosure agreement.

Signing a Non-Disclosure Agreement

A non-disclosure agreement is a legal contract between parties to not disclose information by the parties. The confidential relationship created by the non-disclosure agreement usually protects the identity of the parties, and any information disclosed in the ensuing process. Often the non-disclosure agreements are mutual. This means the non-disclosure agreement protects the confidentiality of all parties to the agreement.

A non-disclosure agreement usually has multiple sections to the agreement that identify the parties to the agreement, define the items that are deemed to be confidential, items excluded from the confidentiality agreement, the terms of the agreement, the state law and jurisdiction governing the agreement, etc.

Once the non-disclosure agreement is signed, the comprehensive confidential information memorandum is shared with the potential buyer. At this stage, more substantive conversations can be and are often held with the knowledge that all information that is shared will be held in confidence. There are often a series of structured conversations that allow the buyer and seller to get to know each other further, learn more about each other’s goals, and get a better sense of the cultural fit. As the conversations progress, a more casual meeting over dinner is often arranged. It’s important to remember the priorities you set for the sale of your practice. Often maximizing sale price is not the top priority, but ensuring the right fit is the top priority. It is during this stage of the sale process that the seller can often determine the buyer with the best fit.

After all of the weeks and months of preparation, you are finally at a point to solicit offers for your practice and negotiate the material terms of its sale. Next month, we will discuss the letter of intent process, and how to negotiate terms for the sale of your practice.