Estate Planning for Practice Owners: The Importance of a Buy-Sell Agreement
The importance of estate planning for doctors who have ownership in a practice, whether solo or group, cannot be overstated. As a business owner, the complexities associated with the disposal of an interest in a medical practice encompass far more than just who receives the proceeds. Think about the assets your business owns; it might include property, equipment, and/or receivables. Who would buy your interest? Does your executor, presumably your spouse, know the real value of your business?
A buy-sell agreement seeks to eliminate the hurdles associated with a business transition upon the death or disability of an owner. The agreement answers the questions of who would buy your interest and the real value of your business. An experienced business attorney who specializes in drafting buy-sell agreements is often recommended because a transition can create a ripple affecting multiple areas, such as employment agreements, state property laws and rules related to malpractice and professional liability. It can sometimes be easier for a surgical group with many owners to decide how the remaining interest is divided, but what about a solo practitioner? One idea is to have a buy-sell agreement with a comparable, neighboring practice.
The “how much” of a buy-sell agreement pertains to the valuation of the business. As with most instances of death and disability, the occurrence comes as unexpected. The ill-prepared often face issues of liquidity when facing a buyout and scramble to pull together the funds to keep the business whole. An alternate approach is to pre-fund the buy-sell agreement with an insurance policy. This ensures that funds are available to the beneficiaries and mitigates financial disruption to the business.
In addition, your business attorney should work in conjunction with your estate planning attorney as the two areas are intertwined. Those in private practice may also own an interest in an imaging or surgical center or real estate that is owned and utilized by the group. The beneficiaries of the owner’s interests more often than not are not involved in the business and cannot legally continue operations past a certain point without having the state government mandated medical qualifications. It is imperative your estate attorney is aware of all the assets you own and the ownership structure of each to ensure your estate plan is comprehensive and fluid.
Whether you are a solo practitioner or a member of a group practice, you need the right plans to protect your business interests and your beneficiaries. Your team of professional advisors, including a business attorney, estate planning attorney, financial planner and accountant, should work together to ensure all your provisions are neatly aligned. While an estate plan clearly lays out your wishes and protects your family, having a buy-sell agreement secures the legacy of your practice.