The Critical Need for Buy/Sell Agreements

by Christopher Music on August 16, 2016 No comments
One of the biggest concerns of a private practice owner is the continuation of his or her practice in the event of some life event that would take that owner out of the practice. This could be death, disability or retirement.  The practice would need to survive one of these events for the benefit of all concerned—the owner’s household, the successor-owner, the clients/patients, the staff and the community. The method used to ensure practice continuation is through a buy/sell agreement.  A buy/sell agreement is a legal arrangement between the practice’s owners/partners and a prospective buyer that outlines what will happen to each person’s respective interests in the practice if one of them dies, becomes disabled or retires. These agreements are needful in any practice, regardless of the number of owners.  They establish who will be obligated to buy and sell, the value (or formula to derive the value) of the business, and payment terms.  They are used to avoid disagreements between family members or partners regarding the value of the business, to minimize disruptions to the business’s operations, to avoid untimely liquidation of the firm’s assets to pay creditors and taxes, and to provide assurances to all involved that the practice will remain strong through a transition event between owners. The buy/sell agreement then must be funded after it has been executed.  If one person is obligated to purchase the other’s interest, then money must be available to purchase said interest.  One way to buy ownership interest is with cash.  Another way is with credit—using one’s ability to borrow to buy out ownership interests.  One of the best methods is through the use of life insurance and disability insurance, since much of the risk is transferred to an insurance company to pay in the event the agreement must be executed. If there are under 3 owners/prospective owners, then a cross-purchase arrangement would be done as each owner would purchase a policy on the others and hold it personally.  If there are more than 3 owners/prospective owners, then an entity-purchase agreement would be made wherein the company would purchase and hold the policies on each of the owners.  Each strategy would have its own legal and tax effects. Your attorney will construct the appropriate buy/sell agreement for your circumstances.  In any event, the agreement should be reviewed annually since there will be changes in business valuation, ownership levels, participation by the owners in the business, etc.  As changes occur, it is important that the level of funding for these agreements is kept current and in alignment.  Destruction of value can occur if the agreement and funding is not kept current and relevant for all involved. Every practice should have a buy/sell agreement.  The one owner-one associate practice would have an agreement between the owner and the associate in the event the associate has to take over operations.  The solo practitioner may create an agreement with perhaps an amicable local competitor, who can assist a surviving spouse dispose of the practice assets for value, for example, rather than seeing any residual value evaporate. Private Practice Millionaires use the buy/sell agreement to create and retain value in private practice

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P. Christopher Music, also known as "The Financial Prosperity Coach", is a 23+ year veteran of the financial planning profession and a TWO-TIME best-selling author and financial prosperity expert. He has been seen on NBC, CBS, ABC and FOX affiliates around the country as well as published in Forbes Magazine, Newsweek, The Wall Street Journal and various healthcare industry publications. He is an international speaker and can be booked for corporate and industry events by visiting www.PChristopherMusic.com