What are the Unique Contract Risks and Liabilities in a PLLC?
When acquiring a professional practice—whether it’s a law firm, medical practice, or accounting firm—you’re not just buying assets; you’re acquiring client relationships and regulatory compliance burdens. The PLLC structure itself offers a shield, limiting the owners’ personal liability for the debts or contractual breaches of the business entity.
However, this shield has critical limitations in a professional setting:
- Malpractice Claims: PLLC members remain personally liable for their own professional negligence or malpractice. A key risk in acquisition is ensuring the sale agreement addresses how responsibility for pre-closing malpractice claims is handled.
- Contractual Liabilities: Depending on whether the deal is structured as a membership-interest sale or asset purchase, the buyer may step into existing vendor contracts, leases, and employee agreements—typically via assumption and assignment provisions, often requiring third-party consent. Thorough due diligence is necessary to ensure these inherited commitments are favorable and assignable.
What Contractual Elements are Critical in a PLLC Purchase Agreement?
A purchase agreement for a PLLC, such as an Asset Purchase Agreement (APA), is the central document of the transaction. For an agreement to be enforceable in New York, it generally requires an offer, acceptance, and consideration. However, other foundational components are necessary for validity:
- Mutual Assent (Meeting of the Minds): Both parties must agree on all essential terms.
- Capacity and Legality: The parties must have the legal capacity to enter the contract, and the subject matter of the contract must be legal.
In the context of a PLLC acquisition, key elements include:
- Valuation and Earn-Outs: The “consideration” often involves more than a fixed price. It may include “earn-out” provisions, where a portion of the payment is contingent on the acquired practice meeting post-closing revenue or retention targets.
- Due Diligence Period: The contract must clearly define the buyer’s right to thoroughly examine the seller’s books, client files, and contracts for a specified time before being obligated to close the deal.
While these elements are typical, remember that New York law allows exceptions to the consideration requirement in certain contexts (e.g., contracts under seal or some written modifications). Furthermore, contracts can be oral unless they fall under the Statute of Frauds (NY GOL § 5-701), which requires certain agreements (like contracts that cannot be performed within one year, or those involving the sale of real property) to be in writing.
What Specialized Contract Clauses are Essential When Buying a PLLC?
Formal agreements in the acquisition context are dense with language designed to allocate risk. For a PLLC acquisition, you must pay special attention to:
- Representations and Warranties (R&W): These are promises from the seller about the current state of the business (e.g., that financials are accurate, there is no undisclosed litigation, and all professional licenses are in good standing). If an R&W proves false post-closing, the buyer can make a claim.
- Indemnification Clause: This critical clause dictates that the seller must financially compensate the buyer for specific losses, often stemming from a breach of the R&Ws or undisclosed liabilities discovered after closing.
- Non-Compete and Non-Solicit Clauses: These provisions prevent the selling professional from immediately setting up a competing practice within a defined geographic area and time frame, which is essential for protecting the client goodwill being purchased.
You should also look for common boilerplate, such as Choice of Law/Jurisdiction, Severability, and the Integration Clause (stating the document is the entire agreement).
While common terms like “force majeure” (addressing unforeseen circumstances) may be included, keep in mind that the scope of the clause depends heavily on its drafting. The clause may provide protection if drafted properly and the triggering event falls within the language, but its mere presence does not guarantee protection, nor does its absence mean no protection under common law doctrines like frustration of purpose under New York law.
How Can Precise Wording Protect a PLLC During the Acquisition Phase?
Ambiguity is the enemy of a smooth transaction. Precise language is especially vital when detailing the assets being transferred.
- Defining Client Transfer: When acquiring a professional practice, the contract must meticulously define how client relationships are transferred, often requiring the seller to assist in a transition phase.
- Avoiding Ambiguity in Liability: Specify exactly which pre-closing liabilities (like accounts payable) are retained by the seller and which are assumed by the buyer. For example, instead of saying the seller is responsible for “old debts,” specify “Seller is solely responsible for all accounts payable and taxes accrued through the date of closing.”
What Specific Provisions Must a Buyer (or Seller) Include in a PLLC Purchase Agreement?
To safeguard your professional interests in an acquisition, embed provisions tailored to the profession:
- Tail Malpractice Insurance: The buyer should require the seller to secure “tail” malpractice insurance (or “extended reporting period” coverage) to cover claims arising from professional services rendered before the sale date but filed after the sale.
- Transfer of Licenses and Certifications: The agreement must condition closing on confirming required regulatory approvals, professional licenses held by the appropriate individuals, and any necessary governmental or payor approvals for the practice to operate under the post-closing ownership.
How Do I Verify Authority and Ownership When Buying a PLLC?
Before signing any Purchase Agreement, you must confirm that the seller has the legal right to sell the practice. This is a matter of Agency Law and Corporate/LLC Law (e.g., New York Business Corporation Law or LLC Law).
- Review Organizational Documents: As the buyer, review the PLLC’s Articles of Organization and the Operating Agreement. These documents detail the ownership structure and specify who has the authority to approve a sale (e.g., majority or unanimous member consent).
- State Verification: Check the PLLC’s status with the Secretary of State and the State Professional Licensing Board to confirm the entity is in good standing and legally permitted to operate.
What Documents Need Meticulous Review During PLLC Acquisition Due Diligence?
Maintaining thorough records is the backbone of the buyer’s due diligence. During this process, focus on these critical documents:
- Financial Records: Demand an independent Quality of Earnings (QoE) report to verify the true, sustainable cash flow (EBITDA).
- Client Contracts & Retention: Review a sample of client engagement letters, checking for assignment clauses and measuring client concentration. Remember that if the contract is for the sale of goods, the Uniform Commercial Code (UCC) Article 2 will govern many of the terms.
- Malpractice History: Review the PLLC’s claims history and current liability policy.
How Can I Smoothly Transition and Manage Client Contracts Post-Acquisition?
Adopting contract management software to track key acquisition dates is solid operational best practice, freeing up valuable time and resources.
- Tracking Non-Compete/Earn-Outs: Use digital tools to monitor the post-closing obligations, such as the seller’s adherence to the non-compete zone and the milestones for any remaining earn-out payments.
- Renewal Alerts: Set alerts for the expiration of large client contracts or the renewal of essential software licenses used by the practice.
When Should I Review and Update My PLLC’s Post-Acquisition Contracts?
While most contracts are interpreted as of when executed, changes require formal modification (often with additional consideration, unless under the UCC or certain statutes).
- Immediate Operating Agreement Update: The PLLC Operating Agreement must be amended immediately post-closing to reflect the new ownership, management structure, and allocation of duties and profits.
- New Client Engagement Letters: New client engagement letters reflecting the post-closing entity name and ownership should be used for all new clients, and existing clients should be informed of the change, with their consent documented as required.
What Recourse Does a Buyer Have If a Breach Occurs After Closing the PLLC Sale?
When acquisition disputes arise, they are typically governed by the specific terms negotiated in the Purchase Agreement:
- Indemnification Claims: The primary recourse is usually an indemnification claim against the seller for a breach of an R&W. Funds held in escrow are often the source for settling these claims.
- ADR for Specific Clauses: The Purchase Agreement may require Alternative Dispute Resolution (ADR), such as mediation or arbitration. While ADR is often more quickly and privately resolved than going to court, arbitration may involve cost/tradeoffs and must be properly drafted to be binding under New York law (NY CPLR Article 75).
How Should I Prepare to Enforce a Non-Compete or Indemnification Claim?
If legal action becomes necessary, thorough preparation is paramount:
- Statute of Limitations: Be aware that the deadline for filing a contract claim in New York is typically six years (NY CPLR § 213).
- Non-Compete Breach: Gather evidence such as the seller’s new website, business filings, and client communications that demonstrate a violation of the restricted zone or activity defined in the agreement.
- Indemnification Claim: Compile all documentation proving the financial loss was a direct result of the seller’s breached warranty or representation.
When is Specialized Legal Counsel Essential for a PLLC Acquisition?
Consulting a legal advisor is vital for preventing issues. An attorney will ensure your agreement complies with relevant regulations, such as the New York Statute of Frauds (NY GOL § 5-701) requiring certain contracts to be in writing.
- Before the LOI: Consult counsel before drafting or signing the initial Letter of Intent (LOI). An attorney can help structure the deal (asset sale vs. membership interest sale) to best shield the buyer from past liabilities.
- Recognize Implied Contracts: Even if you believe an agreement is “informal,” be aware that New York case law recognizes implied-in-fact contracts, meaning conduct can create binding obligations even without a signed writing.
How Do I Choose Legal Counsel Experienced in PLLC Acquisitions?
Choosing the right counsel involves more than checking for contract dispute experience. You should seek professionals with a strong track record in both Mergers & Acquisitions (M&A) and familiarity with the state’s licensing and regulatory framework for your particular profession. This ensures the deal is not only financially sound but also legally compliant.
If you are considering buying or selling a professional practice, call Fisher Stone, P.C., today at 516-908-9519 for a free consultation.
