By Midwest Legacy Group
Asset management is critical to your financial success as a physician partner. You must protect what you work for and grow your assets’ value. High-net-worth individuals seek this service to manage their portfolios.
So, what does asset management look like for a physician partner? It often involves the following:
Division of Assets
Understanding how the value of your practice will be divided if a partner leaves for any reason is a top priority. A host of circumstances can disrupt a partnership, including death, retirement, business disputes, disability, and divorce. Each of these cases can have a powerful financial impact on your practice.
You must plan in writing how to split the business up and/or issue any payout. A detailed buy-sell agreement is the way to go. It addresses each possible scenario to avoid costly litigation and financial loss in the future.
Events Triggering Buy-Out
Next, consider what events should be covered by the terms of the buy-sell agreement. That is, when should a partner have the right to be bought out? Certainly, death and long-term disability would be included, as well as planned retirement. What else?
Well, what would you do if your partner quits or is fired? What if a partner wants to sell their interest to a third party? Are there rules in place to govern each of these instances? Did you know that often we consider whether the buy-out amount can be reduced in these situations?
Valuing a Partner’s Share
Although everyone may agree that it’s fair to pay a “full” share on death, disability, or retirement, a partner who leaves voluntarily might face some type of penalty, such as valuing their share less generously, if the withdrawal creates a financial burden on the remaining partners.
That’s the beauty of the buy-sell agreement—it provides a method for valuing each share in your practice. It looks at how much each of you will get paid under each specific circumstance. Sometimes valuation is straightforward. Sometimes it is not.
In many medical practices, the equipment and accounts receivable represent a large portion of the assets. These things are easily determined. Practices run into more difficulty when substantial goodwill is at play. This is an earning power apart from the services offered by a select physician. This is what we consider an intangible asset. It’s difficult to value, and there are many techniques and formulas that can be applied here to ultimately determine the buyout amount.
Payment Terms
Once the buyout amount has been determined, the next step is to figure out how the amount should be paid. Are we looking at a cash buyout or setting up a time in which payments can be made? A partnership’s cash flow matters. How can this event be funded?
If death is the reason for the buyout, often insurance money is a feasible approach for a cash option. A partner’s voluntary withdrawal may not yield the funds for a cash option unless the partnership has accumulated a reserve for the payment.
Something else to consider: it’s pretty normal for a payout schedule over time to be tied to accounts receivable. It minimizes the impact on cash flow. If there is a goodwill situation considered in the buyout, the payment may be deferred for several years. This happens unless a suitable insurance policy has been included or a reserve fund has been maintained.
Putting it All Together
In closing, buy-sell agreements are a vital component of every medical partnership. Understanding your rights and subsequent obligations allows you to properly plan for your financial future. Identifying all potential key issues is imperative, and these items need to be discussed and properly documented with your attorney.
Clearly identifying and funding each possible buyout situation and making sure partnership liabilities are properly accounted for are critical in determining each partner’s probable share.
For more information, reach out today: P. 630.541.5958 or E. info@midwestlegacyllc.com
This information is not intended to be used–and cannot be used–to avoid penalties under the Internal Revenue Code.
