Just Say No to No-Shop Clauses

By: Blayne Rush, MHP,MBA

You want to sell your endoscopy center, ASC, or radiation oncology center for its maximum value. Potential buyers, on the other hand, want to reach an agreement at a lower price, preferably below market value. One of the most effective tools buyers can use to purchase your ambulatory surgery center below market value is a no-shop clause (or no-solicitation or exclusivity clause). Be cautious – such a clause locks you down and prevents you, the doctor owner, from speaking with other potential buyers, i.e. “shopping” the deal.

Once a no-shop clause is signed, the doctor owner of an ASC must negotiate solely and exclusively with that one potential buyer for a set period of time, a condition that could have serious pitfalls. In fact, it prevents you from ever discovering your radiation therapy center’s true market value. Market value, by definition, is the highest and best price a seller can obtain for their ASC in a competitive and open market.

I liken these agreements to dating; one partner sets the rule for the courtship and wants to be able to date around while they require the other partner to make a total commitment. Sounds fair, right? Well, it only works if the committed partner never figures out they could have found someone better.

The majority of potential investors attempt to get doctor owners of ASCs and radiation oncology centers to execute one of these no-shop documents as soon as possible. They will tell you the due diligence process is tedious and expensive to conduct, and therefore they need you to execute the agreement before they even start the process of evaluating whether or not they’re interested in buying your center. Don’t let yourself be pressured.

Each negotiation between ASC buyer and seller will start with a process of requesting and providing detailed information. While it’s true that the process will become time consuming and more expensive for the buyer in the later stages, this is simply not the case in the beginning stages of due diligence. With the advent of technologies such as email, video conferencing, and virtual data rooms, the initial stages of the due diligence process are more time consuming for the seller than the buyer. ASC owners are the ones who have to organize the financials, paperwork and files; buyers will merely give you a list.

In reality, by asking for a no-shop clause early in the process, the buyer’s main goal is to remove the ASC or radiation oncology seller’s number one source of leverage: your alternatives. Multiple competing buyers for your ASC or radiation therapy center will directly translate into an increased sales price. Buyers know this, and that’s why their full-time professional development team is trained to create a situation where they are the best – or only – alternative. They want to negotiate with you without any other interruptions. They want you to sell your center to them for the least possible amount.

Meanwhile, you want them to pay “market value,” but the only way to define what market value is for your specific surgery center or radiation therapy center is to speak with multiple buyers and multiple types of buyers at the same point in time. (Note: market value is not the same as Fair Market Value, which is a legal valuation term with a conceptual buyer and conceptual seller.)

It’s true that you will eventually need to execute a no-shop clause, but I like to see this done at the same time as the binding letter of intent (LOI). You can achieve this postponement without entirely losing their interest. A key to negotiations is to only give something if you get something in return, so when they ask for a no-shop clause, you need to ask for a breakup fee. This will keep their no-shop clause at bay until they are fully committed to buying your center.

Selling your ASC can be a highly exciting process, but don’t handcuff yourself by committing to a buyer – and therefore committing to that buyer’s price – before your center has had a chance to find its value on the full, open market. Investor buyers have the experience and know-how to engineer the process in their favor, but don’t let them rush you into a no-shop clause that limits your opportunities.

 

Disclaimer: This paper is not intended or offered as legal advice. These materials have been prepared for educational and information purposes only. This paper is not legal advice or legal opinions on any specific matters. No person should act or fail to act on any legal matter based on the contents of this paper. This paper was not written by an attorney licensed in your state. Those seeking legal advice or assistance should contact an attorney.

 

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