Buy-Sell Agreements: Critical for Any Practice

Buy-in/buy-out agreements, also often referred to as buy-sell agreements, are the cornerstone in the succession plan of any business. This especially holds true with physician-owned practices because these businesses generally have extensive activity when it comes to partners entering and exiting a practice.

Practices must ensure that buy-sell agreements are as affordable, unbiased and straightforward as possible for all parties involved. Young physicians have difficulty affording expensive buy-ins due to significant debt incurred while at medical school and medical practices have difficulty affording expensive buy-outs due to declining profitability.

Reducing the overall costs associated with these agreements is critical to the longevity of a medical practice. If practices do not currently have affordable and unbiased buy-sell agreements in place, it can affect the overall morale of newer physicians, impede physician recruitment and, ultimately, lead to the decline of the practice.

Structuring a buy-sell agreement that is cost-effective, fair for all the parties involved and protective of the practice can be achieved as long as most or all of the following strategies are incorporated within the plan.

As previously mentioned, many younger physicians have trouble affording an expensive buy-in agreement. Tying the initial capital contribution to the net-asset value (excluding receivables) of the practice will allow the physician to own an interest in the practice while minimizing the physician's initial cash outlay.

With recent declines in reimbursement rates and increases in overhead expenditures, many practices can ill-afford to buy experienced physicians out of their interest in a practice. In situations like this, a practice should require that the purchase and redemption of all interests flow through the practice rather than between individual physicians. This provides the practice with the cash necessary to assist in operations as well as support the funding of a retiring physician's buy-out plan.

Funding the purchase of receivables in a practice through the use of compensation formulas is another attractive option in attaining a cost-efficient buy-sell agreement. Under this strategy, new physician compensation is calculated as a percentage of salaries paid to the experienced physicians within the practice. The new physician’s compensation is gradually increased over a number of years. This allows new physician partners to fund their buy-in with pre-tax dollars as opposed to after-tax dollars.

Deferred compensation arrangements should be structured whenever possible so that buy-outs are paid over time rather than all at once. The cash needed for these arrangements should be directed into funds such as secular or rabbi trusts in an effort to minimize any unfunded buy-outs.

Incorporation of insurance

It is wise for a practice to minimize the financial risk associated with the death or disability of key physician partners. This can be achieved through the practice obtaining life and disability insurance policies on the partners.

These policies help the practice in two ways in the event such a scenario takes place. First, the proceeds from these policies will help fund the cost required to buy-out a deceased physician’s estate. Secondly, the proceeds from these policies will provide some assistance to the practice in terms of additional cash-flow, which may offset any potential loss of revenue while a replacement for the physician can be found.

Key for practices

Buy-sell agreements are key to the future success and longevity of any medical practice. Operating under a discriminatory, unaffordable or outdated buy-in/ buy-out agreement can cause a practice to waste significant time and money.

Furthermore, it can also create bitter and costly battles amongst partners. To limit these potential pitfalls, buy-sell agreements should be reviewed periodically to ensure they are relevant, justifiable, and in line with the overall goals and culture of a particular practice.

John Teixeira, CPA, MST, is a tax manager and Kevin Bickerstaff, CPA is a senior tax specialist with

Sansiveri, Kimball & Co. LLP

. Located in Providence, R.I., Sansiveri, Kimball & Co. LLP, is a leading provider of accounting, tax and consulting services to the medical community. For more information about Sansiveri, Kimball & Co. L.L.P., or the topic discussed in this article, John Teixeira can be reached at

jteixeira@sansiveri.com

.

Sansiveri, Kimball & Co. L.L.P.

is also a proud member of the

National CPA Health Care Advisors Association

. HCAA is a nationwide network of CPA firms devoted to serving the health care industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at

info@hcaa.com

.

The purpose of a buy-sell agreement is to facilitate an orderly purchase or sale of an ownership interest within a practice. A buy-sell agreement is a formal document outlining the specific conditions and formulas by which a new physician may become a partner or an existing partner may depart the practice.Limited initial cash out-layPurchases and redemptions made through the practiceUtilization of compensation formulasMinimization of unfunded buy-outs