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There are many legal and financial issues beyond the mechanics of the sale transaction that planners must address with medical practice owners and executives.
There are a variety of issues that should be addressed as part of a complete legal plan when buying or selling a medical practice. Of course, the details of the sale itself must be completed with competent counsel that most typically includes attorneys, brokers, accountants, and bankers, as a bare minimum. We've covered some of these issues in past discussions including issues like why medical practice buyers need to be independently represented and a medical practice "start-up" guide for buying existing practices. These professionals are most typically focused on the details of the transaction itself and not as often on the long-reaching effects and needs of the individuals involved in the transaction, be they buyers or sellers.
For sellers, a new level of liquidity (more cash) may be part of a sale, whether you are selling to a third party or to your partners. I typically have a discussion with clients who are selling any type of business and make them answer some basic questions, the complexity and number of which varies with the profit realized in the sale, but many of these are questions that should be asked whether the seller is netting five figures or eight figures.
• Do you have an estate plan in place? (Believe or not, many of you don't.)
• What is your pre-sale net worth and how much will you make from the sale?
• Given the increase in your net worth and potential estate, are the investment and estate management instructions you have in your current estate plan adequate for your new higher net worth?
• Will the distribution provision still make sense with this additional wealth? (i.e. You may have originally decided to make outright cash distributions to your kids. Would it make more sense to have the trust now distribute income only if it will potentially be larger?)
• If you will have an estate tax exposure as the result of the sale have you examined issues like gifting, potentially purchasing more life insurance and any significant charitable giving intent?
• If your estate is to continue to receive payments from the sale (or any other repeating source) does your estate plan include instructions on this issue including any contracts and security agreements the estate will require to keep getting paid?
• Does your estate plan include any tools that add asset protection and risk management features? (As we have explained before, a basic revocable living trust is a good estate plan but is not asset protection during your life.)
• Does your estate plan adequately protect your estate and heirs from their own future potential creditors, spouses, and liabilities?
Medical practice buyers have personal legal issues to examine as well. Basics include a succession plan or specific instructions and resources for the sale and liquidation of the practice for the benefit of the estate with details on how your family is to be "paid out" if you own a fractional share in a group practice or investment like a passive interest in a surgical center or imaging facility, two classic doctor favorites. If you don't have buy-sell and cross-purchase agreements in place, it's time to act against a significant hole in your estate plan that could make a life-changing difference to your heirs, either good or bad.
We also recommend that you examine how your debt obligations on the purchase of the practice, a building, and other high dollar expenditures on things like equipment will affect your estate and financial plans. Your personal guarantees and collateralization of various other assets will affect your family unless they are planned against by properly titling and potentially insuring against such risks through the use of life insurance adequate to cover any such exposures.
I realize that many of these issues seem inextricably bound in the detail of a practice sale transaction. They are, but making sure that your estate has this information and has adequately delegated authority and provided instructions to those you leave behind is a vital part of your estate plan itself.
We will continue our discussion of personal planning considerations next week, focusing on liability and asset protection issues for both buyers and sellers of medical practices.