Top considerations for structuring health care mergers and acquisitions

As a new year starts, health care organizations looking to grow or sell their businesses in the upcoming months will need to tackle the key question of which transaction structure is the best fit in light of the competing considerations.

To sort through this question, we will first cover the main types of transaction structures. Then, we will examine the major financial, business and operational considerations that factor into identifying the optimal structure for the contemplated transaction.

Types of transactions

There are three primary means to acquire or sell a business: an asset purchase, a merger or a stock sale (or member substitution in the case of a not-for-profit entity).

Asset purchase: The buyer acquires some or all of the assets of the target entity. In many cases, asset purchase agreements are “cash out” deals that permit the target entity to distribute cash to its owners, and to eventually wind-up operations and dissolve.

Pros: The buyer is able to acquire specific assets and often times assume only selected liabilities.

Merger: Two entities legally combine into a single surviving business that owns the assets, and is responsible for both the pre- and post-transaction liabilities of both entities.

Pros: Because all assets and liabilities of both entities are involved, a merger may be more straightforward to execute.

Stock sale: A stock sale does not involve the direct transfer of assets. Rather, the shares of the target entity are transferred to the buyer.

Pros: Stock purchases can minimize tax consequences, particularly to the target entity’s shareholders, and they often require less documentation and fewer contractual consents.

Member substitution transaction: The buyer normally becomes the sole member of the target entity, with the power to appoint some or all members to the target entity’s board of directors.

Pros: Member substitutions may minimize the number of approvals needed, as well as the need to create asset and liability schedules.

Top considerations for health care mergers and acquisitions

Determining of the most beneficial transaction structure requires a careful analysis of a number of factors, including the risk tolerance of the parties. There is no “one size fits all” model, particularly in health care. The choice of which transaction structure is desirable may be determined based on some or all of the following factors:

The ability to limit exposure for liability for pre-transaction activities of the target entity. In some instances, exposure to pre-transaction liabilities may be mitigated by indemnification provisions or adjustments to the purchase price.

The factors listed above are just a sampling of considerations in structuring a health care transaction. There are obviously other considerations that can affect structure, as can the weighting among these factors from deal to deal depending on the parties’ business objectives. An experienced legal advisor can help you sort through these factors and use your specific goals for the deal to structure the best possible transaction.

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