Noah Maurer, Elevate Law Group
One of my early legal mentors in Oregon once remarked humorously, “businesses are, in fact, businesses.” This obvious statement underscores the widespread hesitation about where legal work meets a regulated industry. For Oregon attorneys, traditional corporate work requires an evolving vantage point to account for the unique legal needs of licensed professionals.
Let’s start by defining licensed professionals. Businesses lining our corridors of commerce— such as lawyers, accountants, and dentists—provide easy examples. Specialized professionals ranging from OB/GYNs to psilocybin facilitators have varying degrees of application to our discussion. A common characteristic of all these businesses is the requirement for a license and increased scrutiny under state and federal regulations.
There is no one-size-fits-all approach to working with licensed professionals. Each regulated industry features unique statutes, albeit with common themes. For example, licensed professionals must abide by strict regulations governing ownership, referrals, and confidentiality. Rule 5.4 of Oregon’s Rules of Professional Conduct may initially come to mind, which establishes these requirements for entities practicing law. It should be of no surprise that other licensed professionals are bound by analogous requirements. For instance, ORS 679.020 and ORS 673.160(5)(a)(A) state that dentists and accountants must own their respective practice entities.
Despite the differences among these industries, a common challenge for licensed professionals is the restriction on their ability to transfer and encumber their assets. But these businesses (say it with me) are, in fact, businesses. Often, they are local, family-owned enterprises in our backyard. The Oregonians at the core of these entities should be supported in exploring collaborative opportunities. By tackling their corporate work from an informed perspective, legal specialization can support greater business opportunities for our neighbors.
Private equity is increasingly focusing on the fragmentation within professional services and licensed industries, aiming to consolidate these sectors. Veterinary hospitals, for instance, have been early adopters of this trend. Over the past thirty years, the national marketplace has seen major widescale consolidation of veterinary hospitals, with notable examples like Veterinary Centers of America (VCA) and National Veterinary Associates (NVA) acquiring hundreds of veterinary hospitals across the country. The same consolidation is occurring in other industries with more scrutinous licensure compliance. In 2022, 13 percent of all U.S. dentists were affiliated with a dental service organization. With greater profit comes more complex structures and increased pressure on specialized corporate attorneys.
Simple business transactions become exponentially more difficult through the lens of state and federal regulations. Legal work for licensed professionals demands tailored contract drafting to achieve a client’s goal. From the letter of intent all the way to post-closing, licensed professionals have mandatory considerations that a skilled attorney must carefully consider.
Maintaining licensure and compliant ownership
The key aspect to a licensed professional transaction is ensuring ongoing legal compliance and continuity of license. Any corporate action involving equity or asset ownership by an unlicensed party, or an entity controlled by one, raises significant compliance concerns. In the event that two licensed parties are doing a simple ownership transfer (i.e., dentist to dentist), the risk is mitigated. When corporate entities get involved with unlicensed out-of-state ownership, compliance becomes more complex.
Maintaining continued ownership of regulated property should be easily traceable throughout a corporate event. Licensed professionals may see their businesses split down the middle. On one side sits the unregulated assets, such as real property, certain equipment and inventory, management services, and employment of support staff. On the other side, there are licensed services, regulated assets (such as patient records), and inventory requiring licensure (such as prescribed medication). Differentiating these two categories may allow licensed and unlicensed entities to effectively collaborate, without sacrificing continuity of license, under a “service organization” structure.
New entities may be required to allocate assets, licenses, and services away from the prior practice structure. For sellers contemplating joining a service organization structure, the post-transaction day-to-day operation can be daunting. A transaction of this nature can quickly spill across dozens of specialized documents allocating assets, equity, services, options, employment, and real estate. For purchasers, the question of compliance and continuity can be equally challenging.
At the forefront of this discussion is how these structures may differ across organizations, industries, and even states. The acceleration of consolidation in licensed industries demonstrates that private equity is willing to take on this legal burden. Oregon attorneys need to be prepared to scrutinize these arrangements to confirm that they comply with our unique state ownership requirements and provide appropriate protection for all parties involved.
Transfer mechanics and payment terms
A simple representation and warranty surrounding the maintenance of professional licensure may not be enough to guarantee the viable operation of a licensed professional’s business post-closing. Transactions in certain highly regulated industries frequently run into a “black box” conundrum. In this scenario, the purchaser cannot own the assets or equity in question until given approval by the government on an indeterminate timeline. In other words, the parties have no choice but to rely on a third party to conclude their transaction. This necessarily interjects an unknown variable into the heart of closing. To provide guidance in these scenarios, attorneys need to effectively consider whether parties are properly motivated to cooperate in light of this unavoidable ambiguity.
For licensed professionals selling their practice and joining a new structure, payment may not simply be cash in hand at closing. Payment may take the form of equity ownership in newly formed entities and performance-based earnout payments. As a result, parties must be able to clearly move between various roles—employee, employer, shareholder, lender, debtor, and owner—often within a single transaction. Understanding how each of these roles affects the other is necessary for drafting a workable mechanism and proper economic consideration.
As an important reminder, structural arrangements of this nature lean heavily on a well-drafted letter of intent. Without a usable letter of intent, delineating this arrangement becomes much more burdensome. This is where an experienced attorney and broker in licensed professional transactions can work together to establish workable expectations from the initial stages of communication.
Concerns post-closing
Parties to licensed professional transactions are unlikely to simply call it quits and walk away from one another. Regulations govern a host of ongoing conduct, such as the continued use of the seller’s name and likeness, thereby increasing the need for contractual discussion on the transition of the business post-closing. Combined with the need for client continuity, parties frequently negotiate detailed transition assistance plans, short-term employment or contractor arrangements with the seller individually, and mutually assembled client letters.
Beyond a cooperative transition, the seller may consider compelling the purchaser’s cooperation in evidencing the seller’s past legal compliance. When retention of confidential information is held exclusively by the purchaser, the seller may require the ability to access historical records to answers before their licensing authority.
For medical industries, Anti-Kickback and Stark Law compliance looms over shared practice management decisions between newly affiliated parties. Private equity consolidation frequently comes along with linked networks of practices, creating unique ethical questions over how an individual licensed professional fits into a broader network of shared interests. These considerations are particularly open to change at a federal level.
A combination of legal documents is the unavoidable answer to effectively structure the continuing obligations of the parties. Because of the complexity of the considerations listed above, specialized corporate attorneys have become an important fixture for licensed professionals in all their legal work.
Key takeaways
Representing licensed professionals must be approached from a fundamentally distinct perspective than other business in Oregon. Whether at the beginning, middle, or end of a business’ life cycle, unique questions of compliance must be tactfully assessed. For business transactions involving licensed professionals, confident, tailored language must alleviate the regulatory burden faced by clients. As state and federal governments adjust their approaches to the commentary raised in this article, specialized corporate attorneys must be ready to adapt accordingly. ♦