Change in Ownership Tips for the Proof of Financial Ability to Operate

When you purchase a healthcare business, such as a home health agency, healthcare clinic or most other healthcare businesses in the State of Florida, there are special rules, related forms and a Proof of Financial Ability to Operate  that must be filed with the Agency for Health Care Administration (AHCA). If you are new to the Proof of Financial Ability to Operate, then click here to view my introductory  videos that explain the Proof of Financial Ability to Operate  for all Applicants.

 According to the AHCA website a change of ownership (CHOW) is  an event in which the licensee sells or otherwise transfers its ownership to a different individual or entity(Applicant) as evidenced by a change in FEIN or TIN, or an event in which fifty-one percent (51%) or more of the ownership, shares, membership, or controlling interest of a licensee is in any manner transferred or otherwise assigned. A common example of such an event would be the sale or purchase in Florida of a healthcare business resulting from the purchase of stock.

This article will cover the accounting aspects of the transaction as it relates to the Proof of Financial Ability to Operate. For any legal advice, you should speak to a healthcare attorney familiar with the laws and regulations in the State of Florida, and especially experienced with a  change of ownership transaction. A change of ownership application, fees, and all other required forms must be received by the agency at least 60 days prior to the date of change of ownership.   One bit of caution, is that  you have an  understanding of the importance and complying with the 60 day rule for changes of ownership mentioned above.  In this regard, you should discuss the transaction's timing,  and the ramifications of  not meeting the 60 day rule  with a Florida Healthcare attorney. They are most qualified in interpreting the Florida statues, rules and regulations for healthcare transactions.

Why is a change of ownership (CHOW)  more complicated than an initial application  for a healthcare license.

The key agreements are the Stock Purchase Agreement for a stock sale  or the Asset Purchase Agreement for the sale of assets and the related closing exhibits. In either case, opening balances of the acquired entity need to be considered and reflected in the Proof of Financial Ability to Operate for both Schedule  5(Balance Sheet) and Schedule 7(Cashflow Statement). It's important that you as the buyer  provide this information to the CPA preparing your Proof of Financial Ability to Operate. The financial information should be the most recently available financial statements, which your attorney will most likely incorporate as an exhibit to your  document package at closing. Another consideration is the accounting and tax treatment of the acquired assets, intangible assets and goodwill. Generally this occurs when a business is sold for more than the fair market value of its tangible assets, the difference in the selling price and the value of the assets being acquired is  goodwill.  Also, assets acquired are valued at more than the book value, which means the purchase agreements, once again  need to be reviewed for these situations.

The following sections will describe how the CHOW affects  the Proof of Financial Ability to Operate. These are important factors for you as the Applicant,  and the accountant or advisor for the Applicant to  consider.

SCHEDULE 1:  ESTIMATED PROVIDER COSTS AND SOURCE OF FUNDS

 On Schedule 1, line 15 "Purchase Price (Change of Ownership Only)" not only requires an amount for the purchase price, but also requires that you send to AHCA the transaction documents that indicate the purchase price of the licensed company being acquired(seller), such as a purchase agreement that outlines the terms of the transaction. If the purchase  has not occurred, the Applicant must provide documentation  indicating the availability of funds to complete the purchase. If the purchase has been completed, then an executed bill of sale should be provided along with documentation of the transfer of funds, such as canceled checks and or electronic funds transfer receipts. For example,  according to the  Health Care Licensing Application Health Care Clinic,  documentation of change of ownership transaction stating effective date and executed by all parties

 SCHEDULE 5:  BALANCE SHEET and SCHEDULE 7:  PROJECTED CASH FLOW STATEMENT

Both of these schedules require an opening balance sheet of the acquired entity, for the reasons mentioned above. The balance sheet for year 1, requires a starting point which would be the first day after the acquisition is consummated. From this starting point, then the monthly  change for month 1 of year 1, can be computed and reflected in month 1 of Schedule 7, the Projected Cash Flow Statement. Without  a starting point, such as the opening balance  sheet, which is technically the closing balance sheet of the seller,  the Proof of Financial Ability to Operate cannot be completed. For these reasons, its important to use a CPA experienced with the preparation of the Proof of Financial Ability to Operate.

If you need help with the preparation or consulting with the  Proof of Financial Ability to Operate, feel free to contact me.