Nailing down the terms of a practice sale

September 1, 2006

I plan to recruit an associate who would buy my practice when I retire in a few years. I'd like to start cutting back my work schedule as soon as he's comfortable. When we draft the buy-sell agreement, what provisions should I include to protect my interests?

Q: I plan to recruit an associate who would buy my practice when I retire in a few years. I'd like to start cutting back my work schedule as soon as he's comfortable. When we draft the buy-sell agreement, what provisions should I include to protect my interests?

A: The agreement should obligate the new associate to buy your practice. If you want to retire on schedule, you won't have time to locate another candidate if this one changes his mind in a year or two. Also, after a few years of slowing down-and lower income-you could find yourself in a less desirable financial position if the sale doesn't work out.

So to protect yourself, here are some provisions you should include in your agreement:

Establish the purchase price now or else establish the formula you'll use to calculate the price at the time of sale.

Include a significant penalty should your buyer back out.

Require him to purchase a letter of credit from the bank-enough to cover the penalty if he leaves or a good portion of the purchase price if he stays. It will cost one to two percentage points a year, but you'll be able to collect your money directly from the bank. He should pay the annual fee on the letter of credit.

Have him purchase disability buyout insurance as well as a life insurance policy that names you as beneficiary. If he dies or becomes disabled, you'll need the payouts in order to retire on schedule.

State how long you can continue as a part-time employee after the sale, should you decide to stay on for a while. The agreement should confirm that you'll have workspace and access to the office, even if the owner moves the practice to a new location.