The dental attorneys at Nardone Limited in Columbus, Ohio often assist dental clients with partnership formations. As discussed broadly in our previous article entitled Laying the Legal Foundation for a Successful Dental Practice Partnership, two of the most important legal documents to have in place when forming a dental practice partnership include a partnership agreement and a buy-sell agreement. We provided a description of each document, and discussed, generally, the importance of having those agreements in place at the outset of the partnership. In this article, we dig deeper into the reason that the dental attorneys at Nardone Limited typically recommend entering into a buy-sell agreement.
Unfortunately, life often presents unexpected obstacles, and dentists are not immune to those obstacles. Whether the unexpected event involves a divorce from a spouse, a permanent disability that prevents the doctor from practicing, a personal bankruptcy that puts a doctor’s ownership interest in the practice in the hands of a bankruptcy trustee, or even death, many of these unexpected life events can threaten the continued operation of a dental practice. They can also create animosity between the partners and result in a partnership dispute. A properly drafted buy-sell agreement will address what happens to a doctor’s ownership interest in the event of certain “triggering events” such as those described above, which often reduces potential animosity between the partners and their families, and protects the dental practice’s value and continued operation.
Potential Animosity between Partners
It is not uncommon for partners to find themselves at odds with each other after the occurrence of a triggering event. For instance, say a doctor suffers a permanent disability that prevents the doctor from practicing. Suddenly, the practice’s production is drastically reduced, yet its fixed costs remain the same (e.g., lease or mortgage payments, insurance premiums, property taxes, etc.). The practice is netting less profit, and the disabled doctor, as an owner, is still entitled to a percentage of the net profit that is being generated solely by the other partner. Or, take the common scenario where an older doctor is partnered with a younger doctor, and the older doctor decides to retire several years earlier than expected. The older doctor wants to be bought out by the younger doctor, and the younger doctor feels like he is being left in the lurch. On top of that, the doctors are in disagreement as to the value of the retiring doctor’s interest.
Required Buy-Out; Purchase Price
The above examples are common situations that could ultimately lead to a costly partnership dispute. A buy-sell agreement is intended to resolve these potential disputes up front by generally requiring a buy-out of the partner that is affected by the triggering event. For instance, in the first example above, the disabled doctor would be bought out at a predetermined purchase price, or at a purchase price to be calculated using a predetermined formula. The buy-sell agreement would also define what constitutes a “permanent disability,” so that there is no dispute on that issue either. Likewise, in the second scenario above, the retiring doctor would be bought out at the predetermined price, or using the predetermined formula, and the agreement would specify the permitted retirement age up-front.
A buy-sell agreement should not only specify the purchase price—or include a method for determining the purchase price—but it should also specify the terms of the buy-out. Many times, the purchase price will be paid out over time pursuant to a promissory note from the buyer—which could either be the remaining doctor or the practice, depending on whether the transaction is structured as a buy-out or a redemption. The buy-sell agreement should identify the material terms of the promissory note, including the interest rate and repayment term. In other cases, such as a partner’s death or permanent disability, the purchase price may be paid from insurance proceeds. That is, many buy-sell agreements will require the partners or the practice to obtain a life or disability policy naming each partner as the insured, and either the practice or the other partner as the beneficiary. This will ensure that the necessary funds are available to buy-out the deceased or disabled doctor’s interest immediately, which is not only a good thing for the affected partner and his or her family, but also for the practice and the remaining partner. These are just a few of the purchase terms that need to be considered when preparing a buy-sell agreement.
Contact Nardone Limited
The experienced dental attorneys at Nardone Limited routinely prepare buy-sell agreements for partners in a dental practice. Nardone Limited, a Columbus, Ohio law firm, provides specialized dental practice representation across the state of Ohio and the United States. The dental attorneys at Nardone Limited specialize in representing dentists in such diverse areas as: (i) dental practice business succession planning; (ii) dental practice purchases and sales; (iii) dental board matters; (iv) real estate matters, including lease agreements and commercial real estate purchases; and (v) employment related matters of all kinds. If you would like more information regarding buy-sell agreements, contact Nardone Limited.