October 25, 2016
I am a practitioner with one partner and we have been working together for years. We are incorporated as a PC. A colleague of mine recently asked if I have a Buy-Sell Agreement for my practice since he just ended up in a prolonged and expensive litigation when one of his partners left his practice without a Buy-Sell Agreement. Is this really a good thing to have for my practice?
Thanks in advance, Dr. HAnswer:
Happy to report that Jodi Perlman, Esq.
of the firm has answered this one! Here is her response -
Whether you operate as a professional corporation (PC), a professional limited liability company (PLLC), a corporation, or a general partnership, it is extremely prudent for your practice to have a Buy-Sell Agreement, often in the form of an Operating Agreement, a Shareholders Agreement or a Partnership Agreement depending on how your practice is organized. In addition to providing for items such as management, decision-making, maintenance of tax benefits, dispute resolution and funding working capital for the practice, a Buy-Sell Agreement will include terms regarding the transfer of interests in your Company.
A small practice likely does not have interests that are readily transferable in, or valued by, the market, and without a Buy-Sell there are no governing terms as to under what conditions a partner may leave, who can acquire his/her interests, what the value is for those interests, and what are the purchase terms. Accordingly, a Buy-Sell Agreement would include the following important terms:
- Under what conditions can/must a partner sell his interests? For example, death, disability, divorce, bankruptcy/debt, sale of the business, retirement, voluntary departure, or stalemate in an important company decision are often defined as triggering events.
- Who can buy those interests upon a triggering event? Often a Buy-Sell Agreement will require the remaining partners or the Company to purchase a departing partner’s interests. If a voluntary sale, then the remaining partners might have a right of first refusal to match a bona fide offer made by an independent third party.
- What is the value of the interests to be purchased? The value of a business is often determined by various factors and market conditions. The purchase price for a departing partner’s interests could be determined by a trusted accountant, an independent appraisal, a formula based upon earnings, or the book value of the interests at the time of departure. Different triggering events could be tied to different formulas.
- How/When will the purchase price be paid? The Buy-Sell Agreement can ensure that the funds used to pay for the purchased interests are available for the Company while allowing the Company to continue its business as a going concern. For triggering events such as death, disability or departure of a key partner, the Company can carry life, disability or key man insurance to fund a buyout. For other purchases by the Company, the Buy-Sell Agreement can include payment terms allowing for the Company to pay a partial amount in a lump sum and finance the balance of the purchase price over a number of years.
A Buy-Sell Agreement protects the business partners before a dispute occurs and provides a governing document to be followed by the interest holders upon a sale of interests in your Company. It is a complicated legal document and should be entered into with the guidance and knowledge of experience legal and accounting professionals. Too frequently we see parties in need of guiding protocol for a buy out when it is already too late (i.e., acrimonious separation or partner death).
If you can't find or are not sure if you have a buy-sell, its time to re-up. Contact Jodi (JPerlman@kirschenbaumesq.com
; 516 747 6700 x. 326) or Jennifer (Jennifer@Kirschenbaumesq.com
; 516 747 6700 x. 302) should you require any assistance on behalf of your practice.