The essential financial contract: Early planning, negotiation save headaches later on

Key Points

As owners of a professional practice, doctors can spend 10 to 12 hours per day building their practices to the point where the practice provides a measure of security for their families.

Unfortunately, those who ignore one fundamental legal contract - the buy-sell agreement - could jeopardize all of their hard work.

This agreement establishes how the practice will be valued at the time of one partner's death or disability, and how the purchase of the shares will be paid.

In too many cases, the absence of a Buy-sell agreement at the time of death or disability can cause bankruptcies of the families of all of the partners.

Let's consider some of the questions that doctors should ask themselves:

Buy-sell basics

There are various types of buy-sell agreements, but there are some basics that apply to any type of business.

Buy-sells can be used for corporations ("S" and "C"), partnerships, limited partnerships, limited liability companies ("LLC") and other forms as well.

For these discussions, we will use the words "business owner" generically to mean any type of business owner (i.e., shareholders in a corporation, partners in a partnership, members in an LLC, etc.)

Benefits to all living partners

From the standpoint of a healthy practice owner, the buy-sell agreement can provide the individual partner with an opportunity to negotiate and obtain the fairest or best price for his share of the practice. In the case of retirement or disability, the agreement can be an additional source of funds for each owner.

Benefits to the practice, owners There are various benefits of the buy-sell agreement for both the practice and its remaining owners, when one partner dies or becomes disabled:

First, from the standpoint of the practice and its remaining partners, a properly planned buy-sell agreement will provide for the orderly continuation of the ownership and control of the practice.

This continuation should survive the death, disability, divorce or bankruptcy of any owner, and should provide for a seamless transition in the event any owner wants to retire and sell his or her ownership share.

Second, the buy-sell agreement can prevent unwanted outsiders from becoming owners, and can eliminate the need for negotiation with remaining spouses and children.

Third, the buy-sell agreement is often used in conjunction with life and disability insurance policies to effectively provide liquidity for the practice to purchase the outstanding ownership interests of the disabled or deceased partner.

Surviving family member benefits

The buy-sell agreement benefits the family members of disabled or deceased partners in various ways:

For a deceased or disabled owner's family, the existence of a properly funded buy-sell agreement can assure the family a liquid asset rather than an illiquid minority interest in a privately held practice, that would be extremely difficult, if not practically impossible, to sell.