In this episode, hosts Brad and Michael share the story of a radiologist whose plans to sell his practice were derailed when his business partner sued him. We illustrate the importance of reviewing contracts, ensuring compliance, and resolving potential disputes before going to market. Tune in for practical advice on managing risks, maintaining momentum during legal challenges, and salvaging transactions when unexpected issues arise.
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Transcript
*The below transcript has been edited for readability.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real-world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, with my co-host, Michael Byrd.
Michael: As a business and health care law firm, we meet a lot of interesting people and learn their amazing stories. This season, we’re entering the fancy season of a business, Brad. Our theme this season is Buying and Selling a Business.
Brad: Well, Michael, for those that don’t know, that’s just one of the many seasons. What are the other ones?
Michael: Yes, we have the building season, starting a business; the operating season, running a business; the scaling season, growing a business, and here we are now talking about the buying and selling season.
Brad: Very cool. Now, Michael, we’re entering the December phase of our life right now, which means “Christmas-giving” is coming around people are excited. [00:01:00] So, Michael, can we please do movie talk today?
Michael: Yes.
Brad: Wait, what? I was just like kind of messing around here. I actually didn’t think you would actually say yes. Who are you and what have you done with Michael Byrd? Wait well, what movie do you want to talk about?
Michael: The Netflix documentary, Tiger King.
Brad: Okay. Not sure if this is movie talk, but I like it anyway. Michael also, the year 2020 just called and they want their pop culture reference back. I think the world has had enough of “Tiger King”.
Michael: Yes. It pains me almost to talk about it again, but it is relevant to something I read recently, Brad. For those who don’t know, Tiger King focused on kind of certain Big Cat, AKA Tiger conservationists who kept “zoos” with these big animals, big game animals. I don’t think they would [00:02:00] like me calling it a zoo. The central figure in the kind of original season was Joe Exotic, who is now in prison. And I actually just read recently that he’s also engaged to be married to someone he met in prison.
Brad: Okay. I think that was one season, but did you hear there were like multiple seasons?
Michael: Yeah, apparently there were two more seasons. I didn’t watch either of them and I think the fad had quickly died down by the time those second more quiet seasons came around because I have zero idea what they were about.
Brad: Yeah. I did watch the first season and the main thing, I do remember the utter disasters of the lies of all the people, but I actually don’t even think they focused on the tigers very much at all.
Michael: I know, I know and as a 13-year-old, I only remember certain quotes that would derail us if I shared them with you again.
Brad: [00:03:00] Yes. Let’s stay away from our 13-year-old boy humor. You mentioned an article, though, you read recently. How does this all connect?
Michael: So, do you remember one of the other conservationists, Carol Baskin in Florida, she I think had Big Cat Rescue.
Brad: Yes. And depending on your view, she was either the hero or the anti-hero.
Michael: Yes. The speculation, maybe even legend, was that she killed her husband by feeding him to one of her tigers. Of course she’s denied it vigorously.
Brad: Yes and the original series, which was the only one I watched, I remember Joe Exotic believed that she had killed her husband. I did hear that in 2023, they found her husband, Don Lewis is alive and well in Costa Rica.
Michael: Yeah. I don’t know. I hadn’t heard that, so I’ll have to take your word for that. If I remember correctly, the reason Joe exotic is in prison is because of his altercations with Carol Baskin. [00:04:00] They hated each other, but I don’t remember exactly how it started or why.
Brad: I don’t remember either, except that everyone in the show appeared to be as a legal term, goes batshit crazy. Again, what does this have to do with the story you read?
Michael: Earlier this year the San Antonio Zoo here in Texas ran a Valentine’s promotion, Brad, and it would allow someone to feed an ex to a zoo animal.
Brad: All right. There’s some serious missing context here. Michael, please explain.
Michael: You don’t think that was literal that they could do that?
Brad: I need more context.
Michael: Okay. Yeah. For a donation, people were allowed to name a cockroach, a rat, or a vegetable after your ex, and then that was fed to its animals.
Brad: Were there any customizations allowed?
Michael: What do you mean, Brad?
Brad: I’m curious if they would allow someone, we’ll call him Brett, to cover a vegetable in Mayo [00:05:00] and name it Miguel, and then feed it to an animal.
Michael: That’s just rude, Brad. That’s cruel, actually. I’m sure that they had a strict no condiment rule. They wouldn’t want to ruin the promotion. Seriously, would you partake in the promotion for a scorned ex from your past.
Brad: You know better. As a resident Labrador of the office, I am actually friends with all my exes. How about you?
Michael: Yes, I’m not, I wouldn’t say I’m friends, but I have enough problems to deal with today, and so past problems are not worth that time and effort. I do think I could have fun with a promotion by purchasing a cockroach and maybe naming it Brett and then making Brett go down by the weakest animal in the zoo, like just yeah.
Brad: Okay. I hope all this animal talk has nothing to do with today’s story, so I don’t know if it does, [00:06:00] but let’s just get into it.
Michael: Our main character today is Dr. Joe Exotic. He is a successful radiologist in a suburban town in north Texas.
Brad: Yeah, I feel like we had our character’s named after Tiger King in the past, but I’m too lazy to challenge you on this. Is Dr. Joe an employed physician or does he have his own private practice?
Michael: Well, first I do think that having been doing this as long as we have that we’re going to have to start having repeat characters, so thank you for that grace there. And Brad, that was actually a really great question.
Brad: Thank you, sir.
Michael: Radiology is a field where there are a lot of employed physicians, but Dr. Joe in our case actually still had his own private practice and his private practice is part of the story. We will call it Big Cat Services. Dr. Joe blended his love of tigers and cat scans into his practice name.
Brad: I feel like there’s a huge handcrafted dad joke [00:07:00] just waiting for me to tell, but I don’t want to take away from your story, so continue.
Michael: I realized when I said that, that I may have really tempted you, so I congratulate you on resisting. He also had a diagnostic business that we’ll call Big Cat Diagnostics.
Brad: Okay. Let’s take a little context pause here and talk about the business of radiology for everyone who’s not familiar with the role of radiology services and health care is really multifaceted. It encompasses both the clinical practice and the interpreting medical images and obviously the business of imaging services. So hence ,the perfect combination of professional fees and facility fees coming together generally in one practice. On the professional side, that means your radiologist interprets various types of medical images, x-rays and CTs and MRIs and et cetera. While on the facility side, the model could be that the radiologist is part of a hospital-based radiology department [00:08:00] or independent radiology group, or a teleradiology services or own their own imaging center, so a lot of different ways in which this model could be broken up.
Michael: Yeah. And for those who haven’t experienced this, I mean, if you’ve gotten imaging done before, you go to a facility, you get your imaging, and then you get a call from a doctor telling you what the results are, kind of under the hood what’s happening is when you get the image that’s being billed and you use the word facility fee. And then when the doctor interprets it that’s a professional fee. And so, there’s a lot of synergy to that with Dr. Joe owning both kind of the Big Cat Diagnostics to capture the imaging and then the services to practice medicine to read it. So Brad, Dr. Joe had called us with a really straightforward request. He wanted to get his practice in order to get ready to sell. [00:09:00] He had experienced some pressures to the business due to decreasing reimbursements. Have you ever heard that before? And felt like it was time to sell to private equity.
Brad: Sounds pretty straightforward. Did you start with the practice assessment whiteboard?
Michael: Yes. Good question. I’m going to give a little bit of context for everybody. Oftentimes when we start working with a new client, the first thing we do is what we call a practice assessment whiteboard. And really what we’re trying to figure out is what’s the current state of affairs for the business. We look at the practice through kind of the lens of six big areas. We look at their compliance, is their model set up? Are there any flags of kind of health care compliance issues? We look at their business structure and their contracts. We look at their patient processes, their employee processes and agreements. If they have trademarks, we take a look at those. And then we want to understand their strategy if they’re kind of in that buying [00:10:00] and selling season. And all of this is to help get our arms around what’s going on to assess risk and identify potential areas that we would want to clean up if they’re getting ready to go to market.
Brad: Yeah. And what I love about a practice assessment is allows us to provide the client as to where they are now, where they need to adjust and where they plan to go in the future so that everyone on day one is on the actual same page.
Michael: Yes. And so, going back to your question, we did in fact recommend a practice assessment whiteboard.
Brad: Your vague answer makes me think nothing happened the way you said it.
Michael: No, not initially. Before we could get started, we had a hot issue pop up with this partner.
Brad: I think I missed the memo. You did not mention that he had a partner.
Michael: Oh, I didn’t?
Brad: No.
Michael: Oh, sorry. Yes. Dr. Carol Baskin owned 50% of Big Cat Services, but she was not an owner in Big Cat Diagnostics.[00:11:00].
Brad: That’s an interesting twist there, Michael. So she was an owner of the practice side for where the “services are being rendered,” but not the imaging side. So, was this kind of a, a hot issue?
Michael: Yes. The issue was that Dr. Carol sued Big Cat Diagnostics in a derivative lawsuit.
Brad: Okay, you saying filing a lawsuit does, I believe, qualify as a hot issue, so agree. Second, for those of us who don’t know what you just said, you used this very fancy word called a derivative lawsuit. What is that?
Michael: That actually is a litigation version of a fancy lawsuit. This is a type of a lawsuit where a shareholder, Dr. Carol, brings a lawsuit on behalf of the practice, Big Cat Services, against another business, Big Cat Diagnostics. So remember Dr. Carol was not an owner of Big Cat Diagnostics. [00:12:00] And because she was a partner with Dr. Joe on the services side, she wouldn’t get him to readily agree to go sue an company that he owns, so she had to use this kind of mechanism that’s out there in the law called a derivative lawsuit.
Brad: So what was the lawsuit about then?
Michael: In the simplest form, money.
Brad: Oh, I thought you were going to say big cats.
Michael: No, that would’ve been a logical guess, but no. There was an arrangement between these two entities and Dr. Carol believed that the economics did not align with the discussions that Dr. Carol and Dr. Joe had had in the past. She believed that she was being shorted several hundred thousand dollars.
Brad: Was she being shorted?
Michael: Well, I don’t know. Our heads were spinning initially and we had no idea because we had not done [00:13:00] this whole practice assessment yet. And we thought we were there to get the house in order to go to market, and now we had a dumpster fire lit in the middle of the house that we were trying to figure out which end was up. And so of course it was litigation, so there had to be litigation and counsel involved, and so we had to start working with Dr. Joe’s litigation counsel just to deal with this fire initially.
Brad: You know what, this is actually starting to sound a lot like something that would happen in the show, Tiger King.
Michael: Interesting. We ended up doing kind of more of a practice assessment by fire than an actual whiteboard.
Brad: Alright. I like that one. But how so?
Michael: Well, we were under the pressure of litigation having to solve two immediate problems. The first was figuring out the economics of the relationship. This starts with the review of the contracts that were in place to figure out what was supposed to be happening – at least according to their agreements. [00:14:00] Additionally, we were reviewing emails, financials, other communications to figure out what was actually happening, to figure out if there was a disconnect. And it was a mess to figure out what the partners had even agreed upon. We were simultaneously, while all this was happening, exploring a second and potentially even greater problem – compliance.
Brad: What was the regulatory flag you saw?
Michael: Well, you probably know what I’m about to say. We know that there are patient referrals happening in this arrangement because every patient that needs an imaging test done is going to need a radiologist to read that imaging. So both the imaging itself and the radiology reading are billed insurance, kind of like we talked about earlier, and so that brings up a bunch of potential federal laws. We were trying to figure out if they were going to be able to fit a safe harbor or an exception [00:15:00] to one of these federal laws, or even there’s some state laws that have kind of mirror concepts.
Brad: Man, Michael, you’re getting complicated. All this regulatory talk.
Michael: I know.
Brad: For our poor audience trying to keep up here, generally speaking, there are these two major federal laws, Stark Law and the Anti-Kickback Statute, we’re very critical when you’re doing a physician-owned arrangement, especially when you’re trying to figure out if there’s compliance issues as it relates to it the Stark exceptions. And then there’s something so called Anti-Kickback Safe harbors; this does allow a physician to develop a legal model. And additionally, generally speaking, radiologists have certain other limited expectations, which I won’t go into for this podcast, but I feel like I’m getting ready to take a bar exam with all these factors and just making myself clear – so no cats were involved or harmed in the making of the story.
Michael: I didn’t say that. I don’t know that for sure.
Brad: You didn’t have all that because you didn’t have the practice assessment done yet.
Michael: [00:16:00] Yes, exactly. Well, let’s pause. We got a lot of information we just dumped out there. Let’s go into commercial and on the other side, talk about the issues that arise when a seller wants to leave a business and further unpack this particular story.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto, with my co-host, Michael Byrd. Now Michael, this season we’re really camping out on the buying and selling season. We’ve been talking about Big Cat [00:17:00] Services and Big Cat Diagnostics, really, Dr. Joe Exotic and Dr. Carol Baskins. For those who want to remember, just have us give a quick recap of what has happened.
Michael: Dr. Joe Exotic hired us to help him with selling his businesses. He had Big Cat Services and Big Cat Diagnostics, and almost immediately swerved off the road because we learned about his partner, Dr. Carol Baskins. And about the same time we learned of her existence was when she had filed a derivative lawsuit basically causing Big Cat Services to sue Big Cat Diagnostics. And so chaos ensued. We were trying to figure out which end was up. We started doing kind of the on the fly assessment of the practice. And so, we were looking at the contractual side and identifying some [00:18:00] compliance issues and really just, again, trying to figure out where they stood in the midst of this pending lawsuit in the midst of him wanting to go to market and sell.
Brad: Yeah. And you said that Dr. Joe was already feeling the pressure from the reimbursement side of not getting paid well, and that’s why he was looking to sell. I’m assuming this lawsuit could not have helped with this situation at all.
Michael: You’re right. It put tremendous strain on the situation. Dr. Joe needed to find a solution and so he had kind of two options that he was considering. He went out actually and got a letter of intent from the buyer he’d been talking to, actually unbeknownst to us, and came back presenting us with his present as a potential solution. Or he was thinking about maybe he could just buy out Dr. Carol. And so it was like his two options were sell or buy. [00:19:00] And as a note, Dr. Joe did not talk to his potential buyer about the fact that there was a lawsuit going on at that moment. So, Brad, talk about the pitfalls with trying to sell when your house is not in order, particularly when you have something like a lawsuit, a big fire going on like this situation.
Brad: Yeah. When you have a Letter of Intent or LOI as we say on the streets, it’s signaling that you have a potential acquisition coming up. But if there’s potential or if there’s litigation involved with the seller, several issues can arise – most, by the way, are not good, Michael, especially when the lawsuit is coming from in-house, AKA another partner. This may force the buyer to evaluate the extent of the litigation and potential impact on the business. The buyer might actually seek to adjust the offer price or require contingent payments based on the outcome of the litigation. And of course, an ongoing litigation can [00:20:00] impact the operational stability and collaboration of this future partnership, this setting further assessments of how this could disrupt the actual business as they’re running, which then can impact obviously the actual purchase price of the business.
Michael: Yeah, and as you and I have seen the worst case oftentimes, especially really early on like this, is, the buyer just bails. They run, they see that, and they’re like, I don’t want to touch this with a 10 foot pole. So the other strategy you mentioned by Dr. Joe was trying to reach a buyout of Dr. Carol. Talk Brad about the strategy and the ultimate outcome where a buyout was executed.
Brad: Yeah. This is a true representation of the buying and selling season right now, Michael because we have an outside PE firm, and now we have Dr. Joe wanting to buy out his actual partner in order to implement a strategy to sell. And the premises, [00:21:00] the original call was for you to help Dr. Joe get his house in order. So what was the biggest lesson learned, you can give our audience on this front?
Michael: So the other strategy mentioned by Dr. Joe, Brad, was reaching a buyout of Dr. Carol, and that actually is the path that we started going down. He was walking a tight rope. He was thinking, okay, because we had talked to him about what you just talked about with the Letter of Intent, he’s going to blow his deal up if he goes too far with that, with this out there. And so he’s like, “Okay, well let’s buy her out and then we’ll get ourselves cleaned up and then we can circle back to these buyers.” And so in the context of litigation, we had litigation counsel involved, there was negotiations about the fact there’s this lawsuit and we’re going back and forth dealing with the contractual rights, [00:22:00] dealing with the expectations that Dr. Carol was carrying in the deal. And meanwhile, Dr. Joe is trying to run the business. And by the way, I probably should have mentioned this, Dr. Carol basically took a vacation when the lawsuit was filed and disappeared. Like, we’re talking six weeks.
Brad: So she got fed to the tigers?
Michael: Fair question again, Brad. I don’t know the answer for sure.
Brad: Is this some murder mystery now, Michael?
Michael: Somebody could have been communicating for her had she been fed, but I don’t remember if I heard her voice. But let’s just pretend like she didn’t get fed to the tigers – and that they were trying to… the negotiations were going back and forth, and the problem was that the original contracts that were put in place were not followed to a T. The other problem [00:23:00] was that Dr. Carol, who really was just looking to be made whole in her mind for what she should have been made, was in generally, she was agreeing to the idea of being bought out, but then she was just going to go next door and continue to practice. Well, the problem with that – and by the way, she didn’t have a employment agreement with the non-compete, and so we were having to negotiate all this as part of the buyout. And it became really important to Dr. Joe because he wanted to turn around and sell – and if he had a former partner that was causing issues. And so, a big part of the negotiation was, Dr. Joe’s give was giving on the financial side and coming up with a way to, to meet that, and Dr. Carol was agreeing to a non-compete in conjunction with being bought out.
And then just to make things more complicated because of the lower reimbursements, Dr. Joe was getting [00:24:00] outside financing to be able to write the check that needed to be written to buy out Dr. Carol. And so, he was juggling a ton of balls in the air, and we were negotiating a commitment for him to make a payment, at the same time we were negotiating with the bank to try to agree to loan him the money to do it, and miraculously we pulled it off. He ended up getting a settlement and the litigation counsel and us worked hand in hand kind of on all these different fronts. Dr. Carol agreed to a non-compete, and so she was out of the practice, and so he was successful at that moment in time.
Brad: Yeah. First off, I can see why you thought of “Tiger King”. This does sound like a “Tiger King” legal disaster. So it is a true representation of the buying and selling season. Dr. Joe, in order to implement the strategy, [00:25:00] had to buy someone else out so that he could then sell. And the premise of your original call with Dr. Joe was to get his house in order. What was the biggest lesson learned that you can give our audience today from this story?
Michael: Timing. By the time Dr. Joe reached out to us, just with his, I’m ready to go to market, he already had a massive problem with his house that significantly impacted his ability to execute on a strategy to sell. Had he called us a year earlier, these issues could have been addressed and he likely would not have ended up getting sued by his partner.
Brad: Sounds like the big cats got loose in his business. This goes back to why it’s so important to get your house in order before doing an M&A deal. Practices think they have these small issues, and it starts to fester and it ends up being a deal breaker because they didn’t take care of it. The more proactive approach helps smooth the transaction process, but also it’s the [00:26:00] foundation for successful post-merger integration, especially for these long term deals that they’re trying to be a part of. If there is no order like in today’s story, this sounds like there’s complete chaos. We highly recommend that a practice hit the pause button before going to market and make sure that their house is in order to reduce the risk of liability popping up before you decide to sell.
Michael: Thankfully, one thing we did learn was that compliance was not a huge issue. There was some cleanup that needed to happen mostly because your favorite thing, forming substance, the agreements didn’t line up exactly with what was actually happening, but it wasn’t a fatal issue. It was just a cleanup issue. So it was a relief when we got through that massive litigation issue that the following follow-up cleanup was not another major issue. [00:27:00].
Brad: So I’m assuming Dr. Joe did not go to jail like the real Joe Exotic, what actually really did happen to him?
Michael: Well, you’re right Brad. He is not in jail, and I don’t think that he’s fed any humans to his tiger, including Dr. Carol, but he also has not sold his business yet, his practice. That timing delay unfortunately cooled the market and now the buyer’s still kind of out there, but seems to be slow playing. Dr. Joe’s been working to clean up the arrangement that I just mentioned with his entities, and it is a lot easier now because we just have one owner involved. The pressure of course for him is that now he is the only source of income, and so his time is now being really increased in spending time on treating patients and making overhead. Brad, final thoughts? [00:28:00].
Brad: Yeah, the pressure to take your medical practice to market is a common phenomenon in today’s fast-paced push to go and join these private equity groups. Many practices and health care entrepreneurs feel compelled to sell, like right now they must do it. However, this rush kind of like today’s story, they’re overlooking critical steps ensuring that they’re market ready. And obviously in certain situations, the challenges can be overwhelmingly bad for the practice. The entire reasons why we always recommend that a client not skip this process thoroughly and do their checks is to mitigate these various issues that you kind of raise so you don’t discover it later, and then it derails the entire deal that was in hand. Michael, what are your final thoughts?
Michael: The Tiger King, the show, on the surface was about big cat sanctuaries. The real story was about the dumpster fire lives of the characters. When you’re looking to sell a practice, [00:29:00] you want the story to be about the sale of the business and not end up being about the dumpster fire situations inside the practice.
Brad: Very true, Michael. Well, next Wednesday, we’ll be back to discuss the buying and selling of a practice and about picking the right broker. Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five star rating and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com.
Outro: ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues. [00:30:00]
