Buy-Sell Agreement Issues

A “buy-sell agreement” can be part of a broader partnership or shareholder agreement, or it can be a stand alone contract. Either way, it describes the parties’ relationship, and more specifically the parties’ agreements among one another for entering or leaving a medical practice, i.e., to buy in or sell out. More specifically, it defines the share or membership classes and quantities available to physician partners, members or shareholders, the respective values of these stakes or interests, and the terms and conditions under which these interests are bought or sold.

Suggested but Not All-Encompassing Factors to Consider

Equity and Fairness. Like any contract, a buy-sell agreement should respect the parties’ interest equitably so one party is not disproportionately favored or disfavored given the facts, circumstances, and what is at stake for the respective parties. For example, does it serve all parties for a younger doctor to buy a minority or less then equal share, or an inferior membership stake or stock class to give a senior doctor or more senior group of doctors more income and control of the business.

Purchase Price. As with any share price, a medical practice share price should be calculated the same way for buyers and sellers, so it reflects the same value to both. Share price should reflect the parties’ agreement as to “fair market value,” i.e., the price at which the shares would change hands between willing buyers and sellers absent compulsion to buy or sell and equal knowledge.

Tangible and Intangible Assets. Fair market value must account for the valuation of tangible assets and intangible assets (goodwill). Our discussion on valuation of medical practice assets is here. Using book value to determine fair market value can understate an asset’s value by looking at cost minus its accumulated depreciation; while useful in other contexts, book value may not be appropriate for buy-sell agreements.

Structuring the Purchase. The buy-sell agreement should describe payment terms, including initial contribution, payment schedule and what rights the purchaser has or does not have until fully bought in. Payment methods can range from reduced compensation over time to full, immediate payment for shares (sometimes this can require a younger partner to borrow the money).

Founding Partner Protections. A senior partner or founder of the medical practice may want to protect from possible expulsion should his or her practice decline, and include provisions to retain voting control or veto powers, and/or terms that allow a senior member or founder to use the name, phone number and office address should the practice dissolve before his or her retirement. Provisions for semi-retirement may be wise, but should contemplate compensation reductions and a buy-out price for such a partner if based on annual compensation and should use the figures based on these transition years or a final year. The period of semi-retirement before full retirement should be agreed and stated.

Planning for Buyouts. The buy-sell agreement must define the buy-out pricing methodology for retirement or other voluntary departure. If the parties agree to use a different valuation for buy-outs than buy-ins, this should be clearly stated together with the different methodology. The buy-sell agreement should include language specifying how much notice a departing partner must give with an inadequate notice penalty.

Buy-out terms should state if a departing partner’s payout is limited to a specific percentage of the group’s annual gross revenue, and if installments are to be made whether interest accrues, and at what rate.

Competition. Our discussion of non-competition agreements for Illinois doctors is here.

Records and Patient Communications. Our discussion concerning departing doctor communications with patients is here.

Dissolution. The buy-sell agreement should anticipate the dissolution of the entity. Our discussion of medical practice valuation in this context is here.

The medical practice attorneys at DiTommaso Lubin have over thirty years of experience defending and prosecuting disputes between physicians over ownership disagreements and non-compete covenants and unpaid wages and wide variety of other business dispute lawsuits arising between physicians in the same medical practice. As reflected, the reviews we have received from our physician clients, we are committed to fighting for our clients’ rights at both the trial and appellate court levels in in arbitration proceedings. We have successfully prosecuted cases for physicians that vindicated that positions and resulted in large six figure judgments or settlements. Conveniently located in Chicago and Elmhurst, Illinois, we have successfully medical practice related cases for our physician clients all over the Chicago area. To schedule a consultation with one of our skilled attorneys, you can contact us online or give us a call at 630-333-0333.