Mergers and Acquisitions: Putting a Price on Reputation
Thomas GreesonThe concept of personal goodwill in the mergers and acquisitions of imaging centers occupies a decidedly intangible realm. John P. Holman, JD, an attorney in the Falls Church, Virginia, office of law firm Reed Smith LLP, has seen negotiations play out largely over the goodwill issue, with patience and persistence sometimes winning. Holman recalls negotiations for groups that owned profitable imaging centers where significant value was added by negotiating a price far in excess of just the fair market values of the tangible assets and receivables. Even better results have been obtained where the buyer was convinced that a large portion of the extra value was attributable to the personal goodwill of the owner physicians. Eye of the Beholder What is value? Simply put, Holman says, value is what you can get somebody to pay you. A large part of the value of an imaging center is typically attributable to goodwill, particularly if the key radiologists will continue to practice there and if restrictive covenants keep the sellers from competing with the imaging center. Thomas W. Greeson, JD, also an attorney in the Falls Church office of Reed Smith, was formerly general counsel to the ACR®. He notes, “Value will be further enhanced if the radiologists have continuing management and professional-services agreements with the purchaser and therefore continue to provide services that add value.” Hospitals often buy imaging centers because they see the value of having key radiologists continue to work there after the purchase. Not wanting to lose crucial intellectual capital, they typically require the selling radiologists to sign noncompete agreements. Greeson says that many professional corporations have entered into noncompete agreements with their shareholder physicians; while this makes good business sense in protecting the entity’s assets, it can lead to tax problems at the time of sale. Greeson explains that following the sale of an imaging center to a hospital, such long-term ancillary-services contracts with no-termination (except for cause) clauses are common. Call Your Tax Lawyer First, the basics: Use caution in using a C corporation as the investor in an imaging center. “An imaging center should be organized as an LLC, an LLP, or an S corporation because LLCs and S corporations are pass-through entities and are generally not subject to corporate-level tax,” Holman advises. He notes that income from either the operation or the sale of a business owned by these types of entities is not subject to two levels of taxation. “Money from the sale of the business can be paid out to the shareholders without being taxed at the C corporation level,” he says. Many radiology groups organized as professional corporations, perhaps many years ago, can incur costly tax consequences when they sell their imaging centers. Holman and Greeson know that the earlier improper structuring of an ownership entity might lead to adverse tax results at the time of sale. The challenge comes when it’s a C corporation selling the business. In that situation, gain associated with goodwill is owned by the C corporation and can be taxed at the corporate level, as ordinary income, before anything is ever distributed to shareholders. Then, it is taxed again to the shareholders when they receive their distributions from the sale. Holman explains that groups want to have agreements in place to clip their employee physicians’ wings, so that they cannot compete with the group. While this protects the group, it puts the IRS in a position where it can argue that the goodwill belongs to the professional corporation, not to the individual physicians. Holman and Greeson work with groups (both at the time of their formation and in advance of sales negotiations) to mitigate tax exposure. Techniques include forming new entities as LLCs, PLLCs, and PLLPs; converting existing C corporations to S corporations; and eliminating or restricting C corporation noncompete agreements. Continuing Trend As reimbursement rates are reduced, more physicians are selling their imaging centers or are migrating into relationships with hospitals—a move that many would not have contemplated a decade ago. Holman and Greeson consult on hospital joint ventures with radiology groups where radiologists and hospitals enter into partnership or LLC co-ownership arrangements. “There can be a lot of pushing and shoving in the negotiations to determine who gets paid what (and the terms of the agreements). There is negotiation on what rates will be charged, which services will be provided, and who will do the billing and management,” Holman says. “It’s all up for negotiation.” Greeson observes, “We are seeing various types of arrangements with hospitals, including not only sales, but also joint ventures and professional-services agreements for in-hospital interpretations and for outpatient services. I believe a lot more hospitals will seek to enter into relationships with physicians, and this is a trend that is not going to stop any time soon.” Greg Thompson is a contributing writer for