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Buy Sell Agreements for healthcare professionals

Buy Sell Agreements for healthcare professionals

Protecting your practice partnership
As more practices become a grouping of skills, expertise and capital, what are your options to ensure the practice isn’t buried with the deceased shareholder? Would your practice survive if a shareholder/partner passed away suddenly?

One solution to help you in this situation is the buy/sell agreement. A buy/sell agreement is a structured legal contract which gives the remaining shareholders either the right or the option to purchase another shareholder’s shares, in the event of death or permanent disability.

By establishing a clear exit strategy for shareholders upon death or disablement, buy/sell agreements predetermine funding or insurance ensuring the shareholder’s estate receives a fair value for their share of the practice. By implementing a buy/sell agreement ongoing owners can potentially avoid any concerns of the effects of lengthy estate proceedings such as probate, or continuing business involvement by non-participating shareholders such as the surviving spouse.

Any practice that has 2 or more shareholders may benefit by considering incorporating a buy/sell agreement.

However Jason Penna – a Financial Planner for Medfin Australia advises that “Buy/Sell Agreements are not a single solution, there are a number of disadvantages that need to be considered.”

“As buy/sell agreements are established for a possible future event, the value set for each shareholder’s equity needs to be regularly reviewed. The reason for this is to reflect the present value of the business, otherwise without ongoing assessment the buy/sell agreement may not be of true value to any parties.

As with any legal contract, a buy/sell agreement may force the surviving beneficiary to sell the deceased’s shareholding for the agreed value against their will. As the buy/sell agreement is a legally binding contract, surviving shareholders may be able to enforce the terms and conditions described in the agreement. Buy/Sell Agreements can also apply to non-participating shareholders and to partnerships which have no shares on issue” Jason continues.

So how does this work?
Jack, Peter, and Helen run Coughs Dental and Medical Centre. Jack owns 50% of the shares in the company issue, while Peter and Helen each own 25%. Upon Peter’s death, his 25% share is ow owned by his widow Sue. Jack & Helen are in discussions with Sue regarding the purchase of her 25% of the practice.

Scenario 1 – No Buy/Sell Agreement
Agreeing to sell, Sue sets a price for the sale of her 25% shareholding. As this price is reflective of the income generated by the practice when Peter was alive, Jack and Helen are unwilling to pay such a premium.

Sue eventually sells her shares for a price lower than she wanted, but higher than Jack and Helen wished to pay. Jack and Helen are forced to take out a loan to provide funds for the share purchase, and the added pressure of the loan repayments eventually results in the practice being dissolved.

Scenario 2 – Buy/Sell Agreement with Insurance Funding
After Peter’s death, a claim is submitted to the life company and payment is received within 2 months. Jack and Helen exercise their option to take ownership of Sue’s shares, and in exchange she receives the life insurance proceeds.

Jack and Helen both become proportionally larger shareholders in the business with no additional debt. If they wish, they have the option to start looking for a new business partner.

Medfin’s Jason Penna has the following advice for dental practice owners. “Assessing insurance needs is a task that most of us have difficulty making time for. However it is an important issue to consider. Life, business and personal circumstances often change. Risk insurance gives you the security of knowing that your family is supported by a regular source of income. Take the time to ask an expert for advice.”

For further information on risk insurance phone contact your local Medfin Risk Specialist on 1300 361 122.