10 questions to ask about your dental practice buy-sell agreement
When practicing as a partner, one key document that must be in place is the buy-sell agreement to set forth the orderly purchase of a partner’s share of the practice if the partner dies, becomes disabled, retires, or leaves the practice prior to retirement. Theodore C. Schumann, CPA, CFP, goes over 10 questions you should ask about your buy-sell agreement.
When practicing as a partner, one key agreement that should be in place is the buy-sell agreement. This agreement sets forth the orderly purchase of a partner’s share of the practice if the partner dies, becomes disabled, retires, or leaves the practice prior to retirement. Here are 10 questions you should ask about your buy-sell agreement:
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1. Is the purchase optional or required in every triggering event?
In the event of a death or disability, you absolutely want to be sure that the purchase is not optional. The only exception to that rule is maybe where two practitioners are both close to retirement. In that case, it may be a better option to put the entire practice up for sale rather than burden a soon-to-be-retired doctor with the purchase of his or her partner’s share. The agreement should spell out in detail what exactly is the procedure to implement the buy-sell agreement.
2. What is the definition of permanent disability?
Permanent disability should be spelled out clearly in your agreement. Typically, we might suggest that if you have been disabled for 12 months and there is no reasonable expectation that you will return anytime soon, you are presumed to be permanently disabled.
3. What is the method of establishing the buy-sell price?
Perhaps one of the most difficult items to include in the buy-sell agreement is the buy-out price. You must consider whether the price will be determined by appraisal or some predetermined formula. The partners will need to agree whether the price is determined by ownership percentage or by percentage of production. You will also want to consider if the price will be different for retirement vs. withdrawal before retirement? Sometimes we see a reduction in the price if one of the partners withdraws without appropriate notice or before a certain number of years have passed.
4. Do the partners want to have a provision for binding arbitration as a mechanism for resolving disputes among the parties? Is there a provision to allow partners to disband the practice, split the equipment and patients and continue the practice in the same area?
When partners have disagreements as to major decisions related to the practice, it usually spells big trouble for their ongoing joint ownership of the business. While every partner thinks it won’t happen to him or her, it is essential to consider what happens if it does. Arbitration is a much less painful and less costly option over going to court. If you are just now considering a partnership with another doctor, you would be very wise to hope for the best, but plan for the worst.
5. Can either party sell a partial interest of their share of the practice?
Generally, you would want to restrict to whom your partner may sell all or part interest in the practice. The last thing you would want is for someone else to pick a business partner for you.
6. How are accounts receivable, debts, and vehicles handled in the buy-out?
Your agreement should be specific as to how accounts receivable and the debts of the practice will be handled at the time of the buyout. Additionally, if you have vehicles that are owned by the practice, the agreement should discuss how these items will be distributed.
7. What notice is required for normal retirement? What notice is required for withdrawal before retirement? Exclusive of disability?
Generally, your agreement should be specific as to the amount of notice that is required for normal retirement or withdrawal from the practice. Depending on where you practice, you may need one to two years to find a replacement for your partner. This time increases if you are planning on the new associate buying in as a partner.
8. What are the payout terms?
In today’s environment, we are seeing more partner buyouts funded by an outside lender. Doing so makes the transaction easier for both parties. If you choose an installment payment, I would advise to have the note from the purchasing partner to be secured by collateral above and beyond the collateral of the practice such as a mortgage on the purchaser’s home. In addition to the collateral, I would further recommend a personal guarantee by the owner and his or her spouse Further, it may be a good idea to do what many banks do and require the principal of the note to be protected by life and disability insurance on the buyer assigned to the seller.
9. What are the restrictive covenant provisions of the selling partner?
Most buy-sell agreements require the partner who has sold his or her interest to sign a reasonable restrictive covenant as a condition of the sale. You will want to weigh your plans carefully before agreeing to the terms of a covenant. You may also wish to negotiate the option to stay employed at the practice after the buy-out.
10. Is the cross purchase agreement funded with life and disability insurance?
Most agreements call for life insurance policies on the lives of each partner to be used to purchase the interest of a deceased partner. Often, the partners neglect to increase the amount of coverage to allow for the growth in value of the practices. It is a good idea to review this coverage’s every other year. You should also discuss with your estate-planning attorney how the policies should be owned. Another issue to be considered is who pays the cost of the insurance. This is usually only a problem when due to health or age one partner’s policy is significantly more expensive than the other. In that case, I believe it makes sense for both partners to share the total cost of both policies equally.
Theodore C. Schumann, CPA, CFP, is the CEO of The DBS Companies. The DBS Companies is a full-service financial services firm providing accounting, tax, financial and estate planning, practice transitions, practice management, and leadership coaching for dentists. Ted has been helping dentists reach their financial and personal goals for more than 30 years.