If your medical practice is considering joining a larger group or hospital, it’s important to ask: what if the new relationship doesn’t work out? In some situations, an unwind agreement can provide a path back to independence.
For strategic, competitive, operational, and many other reasons, a medical group may decide to sell its practice and become part of a larger medical group or a hospital.
While everyone has best hopes for a successful integration of the practice, there could be unforeseen events or circumstances that make the joinder less than optimal, particularly if the parties involved were fierce competitors or have a previous adverse business history. If these concerns exist, the medical practice may want to consider a separate agreement allowing them to unwind the transaction and return things to the way they were if the new relationship does not work out.
In its simplest terms, an unwind agreement gives one or both parties to a transaction the option to unwind the transaction and return everything to the prior status quo. Due to its nuanced and complex nature, it is best to discuss the concept of an unwind agreement early in the negotiation process for the sale of the practice.
An unwind agreement will set forth in detail the processes and procedures by which the parties will separate. This would include the return of the purchased assets, such as medical records, medical equipment, intellectual property, trade names, etc., from the acquiring party to the unwinding party. The assets are typically repurchased at an amount or formula specified in the unwind agreement.
In addition to repurchasing assets, the unwind agreement may require the return of employees to the unwinding party, accompanied by the termination of their employment with the acquiring party and release from any applicable restrictive covenants. Specified contracts and leases would also be assigned back to the unwinding party. The unwind agreement could require forfeiture of some assets and/or payment of certain costs if the option is exercised.
The time frame in which to exercise an unwind option is not indefinite. The unwind agreement will set a time limit by which the option can be exercised (typically one or two years after the transaction’s closing date). If not timely exercised, the option then automatically expires, and the arrangement can no longer be unwound.
While the option is in force, the selling party will need to keep its corporate structure in place in order to effectuate the unwinding process and receive the returning assets, employees, and agreements if the option were to be exercised.
The transition of patients back to the practice after the unwinding can also be difficult and time-consuming, as well as confusing for the patients. Strong and clear communication with patients in preparation for and following the unwinding is important.
An unwind agreement is not appropriate for every transaction. After investing significant amounts of money and resources in the transaction, the acquiring party may be adamantly opposed to the selling party’s having any option to undo it. Further, the ability to return to the status quo may prevent the parties from fully integrating and committing to the new relationship, thereby creating a self-fulfilling need to unwind.
Some preliminary considerations for the potential exercise of an unwind option include:
- How legitimate and likely are the concerns that the new relationship will not work out?
- Is the practice prepared to undertake the time and expense that would be involved in returning to the status quo if the unwind option is exercised?
- How will the practice fund the repurchase of its assets?
- How will the practice fund the cost of its operations during initial months after the unwind while its revenue cycle recommences?
- How likely are patients to follow the physicians back to their former practice?
The unwind agreement will be tailored to the specific needs of the parties involved. When appropriate, it can be a useful tool for one or both parties to mitigate the risk that a new relationship might not be as successful as expected.
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