Are you a partner in an existing practice but have never seen or discussed a buy-sell agreement with your fellow partners? Let’s say you paid $1,000 to “buy-in” to the practice. That does not mean that a disgruntled partner, let alone their ex-spouse, heirs and/or creditors, will agree to accept $1,000 as the fair market value of their ownership interest. A well-written buy-sell agreement can provide your practice with the certainty and security of knowing, when you find yourself in such a situation, that fair, equitable and binding financial terms have already been negotiated and agreed to.
A buy-sell agreement is nothing more than a contract binding all owners to agree as to how the practice will be valued at the time of a “triggering event” (i.e., death/incapacity, disability, separation and dispute) and how the ownership interest will be purchased. Without such an agreement in place, any one of these events could subject a thriving business to debilitating and uncertain legal proceedings. This agreement should be a critical component of your business.
There are a number of key considerations that should be discussed when structuring an effective buy-sell agreement, including:
- (i) specifying the requisite “triggering events;”
- (ii) stating the appropriate valuation methodology to be applied (which can vary depending how your practice is structured); and
- (iii) ensuring that the transaction does not impose an unreasonable financial burden on the affected parties.
A buy-sell agreement should not be viewed as an isolated transaction. A well-written agreement should embody the values, mission, strategic goals and financial reality of your practice, all of which can change over time. Moreover, given the ever-changing climate of health care reform, Medicare cuts, attacks on service reimbursements and the growth of managed care, it is very possible that a previously-signed buy-sell agreement is out-of-date. Accordingly, even if you have a buy-sell agreement, it should be reviewed from time-to-time to confirm that its terms remain appropriate.
Drafting and/or revising a buy-sell agreement is not something that should be done without the advice of experts — including lawyers and financial advisors — knowledgeable of the facts specific to your practice. With that being said, the cost and expense of putting such an agreement in place is nominal when compared to the potential consequences (financial and otherwise) that could result without one.
Gregory Amend is a Partner with Buckingham, Doolittle & Burroughs, LLC in Cleveland, OH and a member of its Litigation Practice Group. For more information about the law firm, go to www.bdblaw.com, or contact Mr. Amend at firstname.lastname@example.org or 216.615.7324.