Navigating the Purchase or Sale of an Eye Care Practice

The eye care sector has become one of the most active areas in healthcare M&A, driven by an aging demographic, the rise of the medical optometry, and significant private equity interest. For practice owners and buyers alike, this presents substantial opportunity, along with complex legal pitfalls that can derail a transaction.

Buying or selling an optometry or ophthalmology practice is fundamentally different from purchasing a typical small business. These transactions sit at the intersection of corporate law, healthcare regulation, and professional licensure rules. A deal that looks clean on the financials can collapse during diligence when regulatory or structural issues surface.

The Corporate Practice Doctrine

Perhaps the most critical legal consideration in any eye care transaction is compliance with the state’s corporate practice of medicine (CPOM) laws. While the specifics vary by state, the underlying principle is consistent: only licensed professionals can own and control entities that deliver clinical care.

In states with strict CPOM enforcement, non-physician investors, including private equity firms, cannot directly own an ophthalmology or optometry practice. Instead, transactions must be structured through a management services organization (MSO) model, where a non-clinical entity provides administrative services to a physician-owned professional corporation under a management services agreement.

The distinction matters because regulators and courts look beyond form to substance. An MSO arrangement that effectively gives a non-licensed entity control over clinical decisions, hiring of medical staff, or fee-setting can be deemed an impermissible arrangement, risking fines, license discipline, or even voiding of the transaction.

Buyers and sellers should ensure that any MSO structure includes clear delineation of responsibilities. The professional entity retains control over all clinical matters, while the MSO handles billing, HR, IT, marketing, and real estate. Management fees should be structured as fair market value payments for services rendered, not as a percentage of professional revenue as that arrangement could be construed as fee-splitting.

Licensure and Credentialing

Even when the corporate structure is sound, transactions can stall on licensure and payer credentialing issues. In many states, a change in practice ownership triggers a requirement to re-enroll with Medicare, Medicaid, and commercial vision plans such as VSP and EyeMed. This process can take 60 to 90 days or longer if applications are incomplete or if there are discrepancies in ownership documentation.

Sellers often assume that existing contracts will simply transfer to the buyer. In reality, most payer agreements include change-of-control provisions that require consent or full re-credentialing. A practice that closes on a Friday without confirmed payer enrollment may find itself unable to bill on Monday, creating immediate cash flow problems and potential disputes over earnout payments or holdbacks.

Prudent deal planning includes a credentialing timeline built into the closing schedule, with specific covenants requiring the seller to cooperate in transfer applications and the buyer to promptly file all necessary paperwork. Some transactions include escrow holdbacks tied to successful enrollment to align incentives.

Non-Compete Enforceability

Restrictive covenants remain an important component of ophthalmology and optometry practice acquisitions because they protect the goodwill and patient relationships the buyer is purchasing. However, the legal landscape governing non-compete agreements continues to evolve. Increased legislative activity and heightened judicial scrutiny in many states have made broad, one-size-fits-all non-compete provisions increasingly vulnerable to challenge. Even where non-competes remain enforceable, courts generally require restrictions to be reasonable in geographic scope, duration, and the activities prohibited, and to be no broader than necessary to protect the purchaser’s legitimate business interests. As a result, buyers and sellers should carefully tailor restrictive covenants to the specific transaction, limiting them to the practice’s actual service area, an appropriate post-closing period, and activities that directly compete with the acquired practice. Thoughtful drafting not only improves enforceability but also better preserves the value of the transaction. In many transactions, buyers also reinforce these protections by incorporating non-solicitation, non-interference, consulting, employment, or earnout provisions that align the seller’s financial interests with the continued success of the practice while reducing the likelihood of post-closing disputes.

Patient Records and HIPPA Compliance

The transfer of patient records is a routine part of any practice sale, but it carries significant legal obligations under HIPAA and state privacy laws. Sellers must ensure that records are transferred in a compliant manner, with appropriate notices to patients and safeguards to protect confidential information.

In asset deals, the buyer typically becomes the new custodian of records for patients who continue their care with the practice. However, the seller retains obligations for records of patients who do not transition, and both parties must have a clear agreement on who maintains records, for how long, and under what conditions patients can access them.

A common oversight is failing to update Business Associate Agreements (BAAs) with vendors that handle protected health information, such as EMR providers, billing companies, and cloud storage services. If the existing BAAs name the seller’s entity, the buyer may be operating in non-compliance from day one, creating exposure in the event of a breach or audit.

Employment and Staff Retention

While not strictly a “legal” issue in the same sense as CPOM or HIPAA, employment matters frequently create post-closing disputes. Key staff members, especially office managers and senior technicians, often have relationships with patients and referral sources that are critical to the value of the practice. If they leave shortly after closing, the buyer may claim that the seller failed to represent the stability of the workforce or may seek to reduce earnout payments.

Purchase agreements should address this by including representations about the current employment status, compensation, and any existing employment agreements or non-competes. Buyers may also want to require that key staff sign new employment or retention agreements as a closing condition.

For sellers, it’s important to be transparent about any pending employment disputes, workers’ compensation claims, or wage-and-hour issues. These can become the buyer’s problem post-closing if not properly disclosed and allocated in the purchase agreement.

Tax Structure

The choice between an asset sale and an equity sale has significant tax and liability implications for both parties. In an asset sale, the buyer purchases specific assets and assumes specific liabilities, allowing for a step-up in basis for depreciation and amortization. This is generally favorable to buyers but can result in higher tax liability for sellers, who may face double taxation if the practice is held in a C corporation.

In an equity sale, the buyer acquires the seller’s ownership interest in the entity itself, which can be more tax-efficient for sellers but exposes the buyer to all historical liabilities of the practice, including potential malpractice claims, regulatory violations, or employment disputes that may not surface until after closing.

Hybrid structures, such as a stock sale with a tax election under IRC Section 338(h)(10), can sometimes bridge the gap, but they require careful planning and coordination between the parties’ tax advisors. The purchase agreement should explicitly allocate purchase price among assets (goodwill, equipment, patient records, covenants not to compete) in a manner consistent with tax reporting positions.

Diligence

Finally, the quality of legal and financial diligence often determines whether a transaction succeeds. Buyers should conduct thorough reviews of the seller’s corporate documents, payer contracts, employment agreements, malpractice history, and regulatory compliance. Sellers, in turn, should prepare a comprehensive diligence package in advance to avoid surprises that can delay closing or reduce purchase price.

Red flags that commonly emerge during diligence include unresolved board complaints or disciplinary actions against the selling provider, gaps in malpractice coverage or failure to secure tail insurance, leases with unfavorable terms, missing assignment rights, or impending expirations and inaccurate financial statements.

Addressing these issues early through remediation before signing or through specific indemnities and holdbacks in the purchase agreement can prevent post-closing disputes and preserve deal value.

Key Takeaway

Eye care practice transactions offer significant opportunities for both buyers and sellers, but they require careful navigation of a complex legal landscape. Engaging counsel with specific experience in healthcare M&A, understanding the interplay between corporate structure, regulatory compliance, and tax considerations, and planning for credentialing and integration challenges are all essential to a successful outcome.

For practice owners considering a sale, the best time to engage legal counsel is not when an offer arrives, but years in advance, as part of a comprehensive exit planning strategy. For buyers, thorough diligence and a well-structured purchase agreement are the best protections against inheriting problems that can undermine the value of the acquisition.