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Only on The Financial Contract Every Practice Must Have

Posted: July 13, 2011

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An owner's disability may jeopardize the continued existence of the business. Similar to a death or retirement that has not been adequately provided for; the loss of a business owner due to total disability can create the following hardships.

  • Impair credit standing and cause forced sale at a distressed price.
  • Necessitate sale to parties not compatible with the interests or philosophies of remaining management.
  • Reduce employee morale because the future of the business may be in doubt.
  • Cause economic hardships to the business if a totally and permanently disabled owner continues as an employee.
  • Create future problems if a totally disabled owner retains a decision-making position.
  • Impose adverse tax consequences.

The need for a coordinated team

Creating a buy-sell arrangement that fits a particular business requires expertise and experience. Expertise in areas of corporate and business law, tax law, insurance products, health care law and valuation are all absolute requirements. Just as important is experience in dealing with different owners and being able to negotiate and draft an agreement that meets the needs of all parties involved.

Too often, doctors make two key mistakes in deciding who should oversee the creation of a buy-sell arrangement. First, they chose their “lawyer friend” to create the strategy and draft the document rather than an expert in the area. Second, they do not have a coordinated team to implement the plan. Ideally, a coordinated buy-sell team would involve an attorney experienced in creating these arrangements and a life or disability insurance professional who has worked on these issues before—especially with first-to-die life insurance.

Plan early

As with any legal or insurance planning, the early bird is richly rewarded. No place is this more true than in buy-sell planning. The reason is not economic, but political. If this planning is done before an owner is close to disability, divorce, retirement or death, then all owners are in the same position relative to each other. That makes the negotiation of a standard deal for all owners a much easier and smoother process. On the other hand, if owners wait until one wants to retire, is very sick, or is about to get divorced, then these negotiations can be acrimonious. To avoid these problems, consider a buy-sell arrangement as soon as possible and begin the process with an experienced advisory team. Physicians and their practice will be much better off for your efforts.

Disclosure: This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein. Pricing ranges are for informational guidelines only and prices for more complex circumstances may exceed these published ranges. For additional information about the OJM Group, including fees and services, send for our disclosure statement as set forth on Form ADV using the contact information herein.