Understanding A Buy Sell Agreement

A buy sell agreement is a contract between the owners (or the owners and the business entity itself) that establishes rules and restrictions applicable to changes in ownership.

Typically, the buy sell agreement provides that an owner’s interest in the business will be sold at a specified price to the other owner and/or to the business entity itself upon the occurrence of specified events.

Benefits of a buy sell agreement

This agreement prevents unwanted or unqualified persons from becoming members of the ownership group and ensures a ready market for closely held ownership interests.

It also provides liquidity to a deceased owner’s family and assures the remaining owners that they will be able to continue the business without interference from the family of the deceased owner. They also offer estate planning benefits by establishing a value for the practice prior to an owner’s death.

How to determine a purchase price

The common methods that I see for determining the purchase price under a buy sell agreement include:

• Establishing a fixed price in the contract at the stipulated share price
• Using a percentage of book value
• Specifying a formula that adjusts the book value for certain factors, such as accelerated depreciation or deferred liabilities.

Events that trigger a buy sell agreement

Events that trigger a buy sell agreement are specified by the owners in the contract. Generally, these events include death, disability, other reasons for the inability to practice medicine/dentistry, or retirement.

When to establish a buy sell agreement

The best time to establish a buy sell agreement is now. Do it while all the doctor owners are on good terms with one another and before a problem develops.

If you do not have a buy sell agreement or if you have not reviewed your current contract as a group within the last year, I would recommend that you do so.

Review the consequences to you and your practice should an event discussed above occur.

A good time to do this type of review together is during an annual meeting where you invite the attendance of your attorney and accountant. Your attorney should be consulted in formulating the terms of the contract, or prior to changing an existing contract and your accountant will be instrumental in helping you with tax compliance and planning matters.