purchases 50% or 49% of the S corporation’s stock immediately
without having paid for it, Dr. Junior would be entitled to 50%
or 49% of the S corporation distributions.
It is essential to have the buy-sell agreement in place at the
time the group practice is formed because any owner can
leave the practice at any time for any reason. Triggering
events include death, disability, retirement as a defined
term (e.g., attaining age 62 and electing to retire, but not
later than age 70), dispute, and termination of employment
for any other reason, including “for cause” as a defined term.
Most triggering events should require mandatory buy-
outs and should be payable in cash in a two-owner practice.
An exception is the business and tax structure of stock
excluding goodwill where the goodwill for a departing
owner is payable over time through deferred or continued
compensation. Another exception is where the owners
are of similar age. For such practices, there is
usually not a mandatory buyout, except for
death or disability. The challenge is to locate
a purchaser or purchasers to buy a sizable
practice. For this reason, I have reconstituted
some similarly aged co-owners as a solo group
of separate practices, allowing each owner to
sell when ready, while still practicing in the
For practices with more than two owners,
Dr. Two does not want to be affected by a
newly admitted owner’s or Dr. Three’s purchase
of Dr. One’s, or Dr. Senior’s, interest. An exception is when
all remaining or surviving owners are required to buy out
Dr. One or Dr. Senior, which is not often the case.
Life insurance should be considered for death. Disability
buyout insurance, on the other hand, is expensive and
difficult to obtain. Disability buyout insurance should not
be confused with disability income replacement or disability overhead insurance. Both life and any disability
buyout insurance should be consistent with the business
and tax structure of the group practice.
Buy-sell agreements should be drafted in accordance
with the business and tax structure for any associate buy-in(s) and future owner buyout(s). In a two-owner practice,
the remaining owner grants the practice as security to the
lender to pay the purchase price. Should outside financing
not be available, which can happen for very large practices,
the buy-sell agreement should provide that the buyout
would be seller financed and the remaining owner would
pay a percentage (e.g., 2%) above the prime rate charged
by the practice entity’s bank on the purchase date.
The purchase price for a buyout should be determined in one of
three ways: by formula, appraisal, or an agreed value. Like the buy-in,
I believe that the pro rata accounts receivable should be excluded,
unless the pro rata debt is included.
The formula method provides for a pro rata increase for practice
growth. If a group practice significantly increases in value, the formula
provides for the departing or retiring owner to share a pro rata percentage of the increased growth. On the other hand, if revenue declines,
the formula accounts for a correspondingly reduced value. The rationale
is that both or all owners contribute to the growth. The key for using
a formula determination of a purchase price is to make it easily quantifiable and understandable.
The appraisal method can work, but the disadvantages are ( 1)
varying appraisal results among appraisers, ( 2) the time it takes to
prepare, and ( 3) the cost. However, if the appraiser is designated by
name and if the specific appraiser is unavailable, an appraiser must
be agreed upon by the owners with a tie-breaking mechanism should
the doctors be unable to agree. Further, the buy-sell agreement should
contain a provision whereby the most recent
appraisal will control until the appraisal is
updated. Unfortunately, small group owners
usually overlook authorizing an updated
While agreed value is definite, it does not
account for future growth or decline of the
practice. This agreed value is often used
where the stock of a professional corporation is appraised at tangible asset value,
In summary, the associate’s performance must warrant the associate’s elevation to ownership, the buy-in must be paid within a
measured period of time without the new owner incurring a pay
reduction, and all, not just some, of the buyout triggering events
must be considered.
WILLIAM P. PRESCOTT, Esq., EMBA, of WHP in Avon,
Ohio, is a practice transition and tax attorney and former
dental equipment and supply representative. For
Mr. Prescott’s publications and course materials, see
PrescottDentalLaw.com. Mr. Prescott may be contacted at
(440) 695-8067 or WPrescott@WickensLaw.com.
Both life and any
be consistent with
the business and
tax structure of the