DentalEconomics-Buy-Sell-Agreement-Smart-Moves-To-Make by lanyuehua


									  Buy-Sell Agreements
 Here are three smart moves you need to make now
                                                                                                      by Jim Biesterfelt

If you own a dental practice and don’t have a                            dress the specific issues of the owners,” Rickles
buy-sell agreement, getting it in place ASAP                               says. “That’s why most dental practices should
is one of the smartest business moves you                                    avoid generic agreements. My recommen-
can make, according to attorney Stephen                                        dation is to engage the services of compe-
P. Rickles, J.D. “That’s n umber one,” he                                        tent legal counsel who has experience in
says. Number two: Use a professional                                              this area of the law for help in drafting a
appraiser with expertise in dental prac-                                           customized buy-sell agreement.”
tices to value the business. And number
three: Have a plan in place for paying                                               No. 2: Value the practice
the purchase price when death, dis-                                                       Central to a buy-sell agreement
ability, retirement, or another event                                                  is establishing a purchase price or
triggers the buy-sell agreement.                                                        the method to be used to determine
   “Those three moves will go a long                                                    the value of the ownership share at
way toward maximizing the value of                                                      the time of purchase. According to
your practice for both you and your                                                     Rickles, most dental practices are
family,” states Rickles, a nationally                                                   valued based on their assets, rather
recognized estate planning, employ-                                                    than using a stock value. These as-
ee benefits, and tax attorney with                                                     sets include accounts receivable,
the Denver law firm of Berenbaum,                                                     patient records, furniture and equip-
Weinshienk & Eason, P.C.                                                              ment, and “goodwill” value.
                                                                                         “Goodwill value is a subjective
No. 1: Put buy-sell in place                                                        judgment based on the earnings his-
   Drafted by an attorney, a buy-sell                                              tory of the practice and the percentage
agreement is a legally binding document,                                         of those earnings that are assumed will
which stipulates that if an owner leaves the                                    be continued under the new ownership,”
practice because of death, disability, retire-                                Rickles explains. One of his clients, for ex-
ment, or another triggering event, the remain-                              ample, is an orthodontist whose practice was
ing owner(s) will buy out that owner or the owner’s                      valued at $780,000. Of that, $490,000 was attrib-
estate. Without a buy-sell agreement, the partner’s abil-         uted to goodwill.
ity to continue the practice could be jeopardized, and the        A practice in which a departing dentist takes steps to
deceased owner’s family could be left with an illiquid asset   facilitate patient retention typically will generate more
with far less than the hoped-for value.                        goodwill value than a practice that does not get this boost.
   Similarly, a sole practitioner who becomes disabled ab-     In addition, part of practice valuation should include a
sent a buy-sell agreement with a dentist colleague could       contingency plan to adjust the price of the practice based
be forced to sell the practice for a much lower price than     on experience. “The actual goodwill value could be either
planned. And if the sole practitioner dies, the surviving      better or worse after purchase,” Rickles explains. “An attor-
spouse and family could face additional complications. Ac-     ney can help the parties negotiate to protect the purchaser
cording to Rickles, many states, including Colorado, pro-      against the downside if goodwill does not materialize as
hibit a dental practice from being owned by nondentists.
If the surviving spouse or another family member is not a
dentist, the family would be faced with liquidating at “fire           Whether you are a sole
sale” prices. “A buy-sell agreement avoids these problems           proprietor, have one partner
by creating the mechanism to sell a practice in an easier,          or many stockholders, or are
more profitable fashion,” Rickles says.
                                                                    part of a family-run practice,
   Even a dental practice with owners who are members
                                                                      you should have a buy-sell
of the same family should have a buy-sell agreement that
clearly lays out the succession plan so there are no mis-
understandings later. “A good buy-sell agreement will ad-

November 2008 |
                                                  Buy-sell agreements

anticipated, and conversely, enable the seller to participate      the contingencies covered by the buy-sell arrangement. An
in the upside if goodwill is greater than expected.”               attorney and accountant can advise on these matters.
   Because practice valuation is so critical to the success of        In Rickles’ experience, an unexpected death is top-of-
a buy-sell agreement, Rickles recommends hiring a profes-          mind when dentists consider a buy-sell agreement, yet they
sional appraiser with experience in the dental market. Your        often overlook the very real threat of a disability. “Disabil-
attorney can recommend an appraiser, or check the Web              ity insurance is equally important in a buy-sell agreement,
site of the American Dental Association (ADA) for its “Di-         so the owners will have a source of cash to buy out a dis-
rectory of Dental Practice Appraisers and Brokers” at www.         abled partner’s share in the practice,” he says. The ADA also has available a publication, Valuing            What’s the bottom line?
a Practice: A Guide for Dentists, with details of particular          “Whether you are a sole proprietor, have one partner
valuation methods.                                                 or many stockholders, or are part of a family-run practice,
   “Then, don’t forget to update the valuation periodical-         you should have a buy-sell agreement,” Rickles concludes.
ly,” Rickles adds.                                                 “Customize it for your situation and fund it with life and
                                                                   disability insurance to protect the value of the practice you
No. 3: Plan how to pay                                             have worked so hard to build.”
   The money to carry out a buy-sell agreement can come
from the dentist’s cash flow, a bank loan, or life and disabili-      Editor’s note: This article does not constitute legal, tax, or fi-
ty insurance on the owner. Rickles prefers the third option.       nancial advice. Please seek professional input as appropriate to
“In the absence of life and disability insurance, the funding      your situation.
for the purchase is much more difficult,” he says. “With
insurance in place, it’s much easier for the buyer to assume       Jim Biesterfelt is vice president of Group Special Accounts at
ownership without having to worry about the pay-out.”              Great-West Life & Annuity Insurance Company.
   The type of life insurance purchased depends, again, on         Great-West Life underwrites and administers the
the owners’ situation and goals. If the buy-sell agreement         ADA insurance plans and is the exclusive provider
is primarily to protect the owners against an unexpected           of ADA-sponsored life and disability insurance
death prior to retirement, then term life insurance is an          to ADA members and their families. For more
inexpensive option. However, if the owners want life insur-        information, call (866) 607-5330 or go to www.
ance that builds cash value to help buy out a retiring dentist,
then a product such as universal life insurance would be the
appropriate option, albeit more expensive than term.
   “Either way, the insurance amount ideally should cover
the full purchase price of the practice – or even more –
to anticipate the value of the practice growing over time,”
Rickles says. And what if one owner is uninsurable? “In that
case, there could be an installment-sale agreement for the
uninsured dentist’s interest,” he offers.
   In terms of how to own the insurance, either a cross
purchase or a redemption arrangement can be used. With
a cross-purchase, each owner is the applicant, owner, pre-
mium payer, and beneficiary on the policies on the lives of
the other owners. At the death of an owner, the remain-
ing owners are obligated to use the proceeds of the life
insurance to buy the deceased dentist’s share of the practice
from his or her estate.
   With a redemption arrangement, the practice owns,
pays the premiums for, and is the beneficiary of each policy
on the lives of the owners. At the death of one of them, the
practice uses the insurance proceeds to buy the deceased
owner’s share in the practice from the estate.
   “Both approaches have advantages and disadvantages,
so it’s important for the owners to discuss which one feels
most fair to them,” Rickles says. In addition, the owners
should consider the tax implications of each, which vary
depending upon the type of business entity involved and

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