How to Structure Earn-Out Agreements in Medical Practice Sales

An earn-out agreement is a common strategy used in business acquisitions, especially for medical practices where the future performance can significantly affect valuation. Under an earn-out, the seller receives additional compensation if the practice meets certain financial or operational targets after the sale. While this can be an attractive option, structuring an earn-out correctly requires careful planning and legal expertise—particularly when healthcare regulations are involved.

First, clearly define the performance metrics and timeframes. These metrics might include revenue thresholds, patient retention rates, or profitability margins. Setting realistic and quantifiable targets ensures that both buyer and seller know exactly what needs to be achieved to trigger earn-out payments. An attorney can help you draft these provisions so they’re not only precise but also aligned with applicable laws, such as patient privacy regulations and Florida Board of Medicine guidelines. Ambiguous or overly broad metrics can lead to disputes, so clarity is key.

Next, establish how performance will be measured and verified. In the healthcare industry, tracking revenue can be more complex due to insurance billing cycles, reimbursements, and patient payment patterns. Determine which accounting principles and processes will be used—cash versus accrual, for example—and outline how often performance reviews will take place. A knowledgeable business law attorney can guide you through these technicalities, ensuring the agreement’s terms comply with any relevant healthcare regulations while protecting both parties’ interests.

Finally, remember that legal support is crucial for preventing conflicts and managing risk. Earn-outs often involve ongoing collaboration between the seller and buyer, which can open the door to disagreements if responsibilities or financial reporting standards aren’t clearly laid out. An attorney skilled in healthcare mergers and acquisitions can help negotiate terms, draft robust dispute resolution clauses, and ensure your agreement remains compliant. By investing in the right legal guidance, you can structure an earn-out that benefits both buyer and seller, securing a fair and successful transaction for your medical practice.