Definition
Representations and Warranties are a series of promises you, as the seller, make in the sale agreement about the condition of your practice. Think of it as a formal declaration that specific facts are true—from the accuracy of your financial statements to your compliance with healthcare laws. If a statement is later found to be false, the buyer can seek financial compensation from you for any resulting damages.
Why This Matters to Healthcare Providers
For medical practices, these promises go far beyond typical business matters. You will be asked to formally guarantee your practice’s compliance with complex regulations like the Stark Law, the Anti-Kickback Statute, and HIPAA. A mistake or an undiscovered issue in these areas can create significant liability for you long after the sale closes.
Example in Healthcare M&A
Scenario: Dr. Evans is selling her multi-physician dermatology practice to a private equity-backed group. In the sale agreement, she represents that the practice has no history of any known, unaddressed HIPAA violations. The buyer relies on this statement to finalize the purchase price.
Application: Eight months after the sale, a federal audit reveals that an office manager had been improperly accessing and sharing patient records for over a year. Evidence shows that Dr. Evans was informed of the issue but failed to take corrective action or report the breach. This means her representation in the sale agreement was false.
Outcome: The buyer is now facing government fines and the cost of patient notification programs. Because Dr. Evans breached her warranty, the buyer can file a claim against the funds held in the indemnification escrow to cover these exact costs, directly reducing the final proceeds Dr. Evans receives from the sale.
Related Terms
- Indemnification – This is the buyer’s protection mechanism. It’s the process they use to get paid back by you if one of your representations or warranties proves to be untrue.
- Due Diligence – This is the buyer’s investigation to verify that your representations are accurate. They will ask for documents and evidence to support the promises you make.
- Stark Law – A frequent subject of a specific representation you must make, confirming that none of your physician compensation or referral arrangements violate this strict liability law.
Preparing properly for buyer due diligence can prevent unexpected issues. Request a Due Diligence Preparation Session →
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Frequently Asked Questions
What are Representations and Warranties in the context of selling a medical practice?
Representations and Warranties are promises made by the seller in the sale agreement about the condition of their medical practice. These are formal declarations asserting that specific facts, such as the accuracy of financial statements and compliance with healthcare laws, are true. If any representation is later found to be false, the buyer can seek financial compensation for resulting damages.
Why are Representations and Warranties especially important for healthcare providers when selling their practice?
For healthcare providers, these promises extend beyond typical business matters to include guarantees about compliance with complex healthcare regulations like the Stark Law, Anti-Kickback Statute, and HIPAA. Mistakes or undiscovered issues related to these regulations can result in significant liability for the seller long after the sale has closed.
What can happen if a representation related to HIPAA compliance is found to be false after the sale of a medical practice?
If a representation related to HIPAA compliance is false, the buyer may face penalties such as government fines and the cost of patient notification programs. The buyer can file a claim against the indemnification escrow funds held from the seller to cover these costs, which will reduce the final proceeds the seller receives from the sale.
What is Indemnification and how does it protect the buyer in a medical practice sale?
Indemnification is a protection mechanism for the buyer, allowing them to be reimbursed by the seller if any of the seller’s representations or warranties prove to be untrue. It typically involves holding funds in an escrow account that the buyer can claim against if breaches occur, covering costs or damages incurred.
How does Due Diligence relate to Representations and Warranties in healthcare M&A transactions?
Due Diligence is the buyer’s investigation process to verify that the seller’s representations and warranties are accurate. During due diligence, the buyer requests documents and evidence to support the promises made by the seller about the condition and compliance of the medical practice.