A Buy-Sell Agreement Can Protect Your Practice and Minimize Disputes

In the wake of health care issues, you might find your practice inundated with new patients. With the extra workload, you might want to hire one or more physicians to help out.

If so, and if these physicians intend to take an ownership share of your practice, make sure each one signs a buy-sell agreement. Reason: It can safeguard your practice from disgruntled doctors and minimize disputes should they arise.

A Different World

When developing a buy-sell agreement, keep in mind that the world today is likely much different than when you started practicing medicine. Young physicians carry heavy debt loads when they finish training, so they typically can't afford to immediately buy into a practice.

They also might have multiple practice opportunities, so competition for them might be fierce. In addition, younger doctors may view working at a practice simply as a source of income, not as an investment opportunity or part of their retirement portfolio the way older doctors do. Because of these differences, you may find issues arising over division of income, asset valuation and retention of control.

The Nitty-Gritty Details

Framing the buy-sell agreement starts with defining and appraising the practice and its assets. Tangible assets include items such as equipment, supplies and leasehold improvements. The stock price of the practice takes into account these assets. The new physician pays his or her share either up front or over a period of years with interest.

Intangible assets, on the other hand, include accounts receivable. A new physician doesn't 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 young physicians.

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 isn't a good idea, because it can breed acrimony and lower morale. Furthermore, even "with cause," termination frequently requires either unanimity or a super majority of the vote.

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

In addition, a new doctor may be asked to sign as a guarantor of existing practice debt that has been personally guaranteed by the partners. That is generally 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 power and control. The percentage division of stock doesn't 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's common to subject critical decisions, such as adding partners or selling the practice, to a supermajority vote.

Beyond the points brought up here, there are many laws, regulations 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, non-compete agreements and liquidated damages clauses. So work with your health care consultant and attorney to draft an agreement that will not only protect your practice and keep it in compliance with various laws, but also help minimize disputes.