The Buy-Sell Agreement: Why Your Practice Needs One
It’s easier and cheaper to plan for trouble than it is to get out of trouble. That’s the basic premise. Your practice needs a buy-sell agreement, or a shareholder’s or partner’s agreement, because even with the most cordial, efficient and effective partner relationship, issues are bound to arise that can derail the practice. Having and implementing a well-thought out, comprehensive buy-sell agreement can go along way to avoiding these issues in the first place and to resolving these issues if and when they come up.
As doctors, you’d ideally prefer to focus on the patients and the business of operating the practice. Starting or expanding practices with other doctors can be a good way to pool resources, take in more patients, and divide responsibilities. In doing so, it is important that you trust your partner(s) and feel comfortable going into business with them. But it is equally important to enter into these partner or shareholder relationships wisely. And although your relationship may be in excellent condition going in, events, circumstance and minds can change and you need to be prepared to be able to handle key issues like deadlock, retirement and transfer of ownership. The buy-sell agreement is the place to do so.
Consider the case of the two-doctor practice with 50/50 ownership. If both doctors have equal votes, and both want different things, then that is a problem. As such, if you do not have an agreement that contemplates and addresses what will happen if the doctors can’t agree on core items, if one doctor wants to sell, and other important issues, then you may be headed towards expensive and time-consuming negotiations or, even worse, litigation. Don’t let that happen to your practice.
A properly researched, planned and drafted buy-sell agreement can address and include any number of eventualities, scenarios and events. A good place to start is by discussing expectations and intentions with your current or planned practice partners. How do they envision this practice developing? Will there be others? Do they want to bring in other doctors? Start separate, unaffiliated practices? Should a doctor be able to sell to whomever he or she wants? Etc. Because of the many different possible answers to these and other questions, this process should not be rushed. Take the time to plan and implement the agreement properly. And don’t forget to consult your attorney.
Here is a list of certain issues that you should considering incorporating into your buy-sell agreement:
- Lifetime Transfer Restrictions.If one doctor wants to sell his or her ownership interest, the other may want a right of first refusal or option to purchase that interest first. Including this protects the initial expectations of the parties that they would be doing business together and protects the remaining doctors from unknown third parties coming into the practice.
- Death or Disability. What do you want to happen upon the death or disability of a doctor-owner? Consider giving the remaining doctors the right to buy-out the ownership interest of the deceased or disabled doctor.
- Employment, Salary and Non-Compete Terms.While a separate employment agreement may be useful and beneficial for each doctor-owner, including certain terms in the buy-sell agreement may also be a good idea. For instance, voting requirements for approving salary raises or salaries over a certain amount or uniform non-compete agreements for all doctor-owners.
- Life Insurance and Keyman Insurance.Adding terms regarding the practice taking out life and keyman insurance on each doctor is a must. Proceeds can go to paying the purchase price of a selling, deceased or disabled doctor if one of the buy-sell events occurs. This brings up another important point: don’t forget to implement your buy-sell agreement! It is one thing to include life insurance terms in your agreement, but if the practice never purchases the insurance then the provisions don’t count for much. After you’ve signed the agreement, make sure you implement it!
- Other Transfer Restrictions.The occurrence of certain events should be deemed an involuntary transfer and should trigger the right of the remaining doctors to buy out the affected doctor. These include bankruptcy, adverse court judgment, receivership, and domestic proceedings.
- Valuation. Include a mechanism for valuing the company when the need arises.
- Include dispute resolution mechanisms for when a deadlock arises. Examples include mediation, arbitration, third party votes, and, if all else fails, a shotgun buyout provision that states that either party can make an offer to sell his or her ownership interest or purchase that of the other doctor(s) and if agreement can’t be reached, the practice will be dissolved. That is a drastic measure, but still something to be considered.
- Administration of the Practice. Certain terms and agreements about how the practice will be operated should be included. This includes certain actions that require a certain percentage approval (e.g. unanimous), such as adding other owners, taking on debt, incurring expenses over a certain dollar threshold, etc.