United States: Minimize Disputes By Implementing A Buy-Sell Agreement

As your practice continues to grow and takes on more patients, you might consider hiring one or more physicians to help with the extra workload.

If you do, make sure each physician signs a buy-sell agreement if they intend to take an ownership share of your practice. Why? Because it can protect your practice from disgruntled physicians and minimize disputes should they arise.

A Different World

When developing a buy-sell agreement, remember that the world today is much different than it was when you started practicing medicine. Young physicians typically cannot afford to immediately buy into a practice since they carry heavy debt loads when they finish their training.

They will also have multiple practice opportunities, so competition for them will probably be fierce. Moreover, younger doctors may view working at your practice simply as a source of income, not as an investment opportunity or a piece of their retirement portfolio. Because of these differences, you may find issues arising over division of income, asset valuation and retention of control.

The Nitty-Gritty

Drafting the buy-sell agreement starts with defining and appraising the practice's assets. Tangible assets include items such as equipment, supplies and leasehold improvements. The stock price of the practice is usually based on these assets. The new physician pays his or her share either up front or over a few years with interest.

Intangible assets, on the other hand, are composed primarily of accounts receivable. A new physician does not pay for these assets out of his or her pocket, but through a process called "income shifting." That is, the physician's net income is reduced during the first few years with the practice.

For example, a physician might start with a 40% reduction in the first year and 30% in the next, followed by 20% and 10% in the next two years, leaving the buy-in complete. This payment method helps ease the financial burden on the young physician.

A Piece of the Pie

There are many accepted methods for dividing practice income among partners, such as equal allocations and productivity. To preserve harmony, consider using the allocation method, or use the relative productivity method (measured by services personally performed by the physicians) as the basis for apportionment. Some practices use a hybrid of these formulas, such as 50% equally and 50% by productivity.

Other Considerations

There are numerous other contract terms you should consider. For example, terminating a physician "without cause" usually is not a good idea, because it can breed acrimony and lower morale. Furthermore, even "with cause," termination frequently requires either unanimity or a supermajority of the vote.

Senior doctors often wish to retain rights to the practice name, tangible assets and location if there is a mutually agreed practice split-up. It is reasonable to allow these rights to expire after a new physician has been with the practice for a specified time, such as five years.

In addition, a new physician may be asked to sign as a guarantor of existing practice debt that has been personally guaranteed by the partners. That is fair, and so is a provision indemnifying the physician against liability for practice actions that occurred before he or she joined.

Control of the Practice

Practice owners are understandably concerned about the locus of power and control over the practice. The percentage division of stock does not have to be the same as the percentage division of control or the percentage division of profits.

A partnership agreement — separate from the buy-sell agreement — can provide otherwise, according to the wishes of the owners. It is common to subject critical decisions, such as adding partners, or selling or merging the practice, to a supermajority vote.

Nothing to Play Around With

Beyond the points brought up in this blog, there are many laws and legal doctrines that affect the terms of a buy-sell agreement. These include: statutes that govern your practice's form of organization; confidentiality laws; and non-compete and liquidated damages clauses.

Make sure you work with your health care consultant and an attorney to draft an agreement that will not only protect your practice and comply with the law, but also help minimize disputes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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