The One Contract Your Practice Must Have

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Buy-Sell Agreement

The One Contract Your Practice Must Have
Though the odds of a premature death of a practice partner are not high, the same cannot be said about a life changing disability. Because both of these risks can have such devastating effects on the finances of the practice and the future income of the remaining healthy partners, we find it troubling that so few Doctors properly address this risk.
A medical practice is a business. As such, it is created for the purpose of generating financial benefit for its owners. Practice CEOs are supposed to take calculated risks and manage these risks to maximize long-term after-tax income. There is no excuse for them to completely ignore the potentially devastating risk of disability or death of physician-partners. Are you the de facto CEO of your practice? If so, how are you protecting against these risks?
Most states prevent non-Doctors from owning professional medical practices. This is certainly true in California. California Business and Professions Code Section 2052 provides that “any person who practices or attempts to practice, or who advertises or holds himself or herself out as practicing… [medicine] without having at the time of so doing a valid, unrevoked, or unsuspended certificate…is guilty of a public offense, punishable by a fine, by imprisonment in the state prison, by imprisonment in a county jail not exceeding one year, or by both the fine and either imprisonment.”
Additionally, California Business and Professions Code Section 2400 provides that “corporations and other artificial legal entities shall have no professional rights, privileges, or powers.” The policy expressed in Business and Professions Code section 2400 against the corporate practice of medicine is intended to prevent unlicensed persons from interfering with, or influencing, the physician’s professional judgment.
This means that, as compared to a regular business owner, a Doctor building a medical practice is not generally building wealth for his or her family. If you want to ensure that you do build wealth for the family through your practice and actually turn your practice into a “wealth building engine” for your family, you must draft, fully-execute, and fund a Buy-Sell agreement.
In this chapter, we will discuss the reasons why a premature death or disability of a partner is such a big risk and what the financial repercussions are of failing to address this issue. We will then discuss the “medicine” for such an ailment—the Buy-Sell Agreement. We also address the importance, and method, of funding the agreement and how to work with the right team of advisors. With all of this knowledge, you should be motivated and prepared to address this important issue in your practice.

Always Expect The Unexpected
As owners of a professional practice, Doctors can spend 10 hours per day, six or seven days per week getting their practices to the point where the practice provides a measure of security for their families. We know, because we have been there ourselves. Nonetheless, those who ignore one fundamental legal contract jeopardize all of their hard work. This very important legal contract is the Buy-Sell agreement. This is an agreement that all owners sign, agreeing how the practice will be valued at the time of one partner’s death or disability, and how the purchase of the shares will be paid.
Without a Buy-Sell agreement, partners and remaining families have no guidelines as to how a practice will deal with an early death or the disability of a physician-owner. At a time when the family is grieving or caring for a disabled family member and possibly struggling to pay their bills, they will look to the remaining partners’ practice to help them in their time of need. At the same time, the remaining partners may be struggling to get by without the services of a valuable partner. The last thing either of these two groups need is a struggle over money. In too many cases, the absence of a Buy-Sell agreement at the time of death or disability can cause bankruptcies for the families of all of the partners. More

Creating Your Practice’s $1 Million Retirement Buyout

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Retirement Buy Out

Creating Your Practice’s $1 Million Retirement Buyout
One of the most common complaints we hear from Doctors is that they are frustrated that their decades of hard work are not building anything of concrete financial value. In other words, Doctors are frustrated that their practice will not be “worth anything” when they retire. As a result, they cannot “sell it” and enjoy a lucrative exit from the practice of medicine the way other business owners can with their non-medical businesses.
It is certainly true that the days of an outside practice management firm coming in and purchasing a Doctor’s practice for millions of dollars are long gone. On the other hand, there are a number of tactics a Doctor can employ to create a $1 million “buy-out fund.” We are not talking about the funded Buy-Sell arrangement that applies to unforeseen circumstances such as a disability or premature death of a partner. The buy-out funds we will discuss here are mechanisms to exit a practice at the Doctor’s chosen retirement time and take over $1 million out at that point. Of course, this would also be in addition to whatever the Doctor has in qualified retirement plans and other personal assets.

Buyout Funding Options
As you will see below, each of these tools require periodic funding over time. With the compound growth over an entire career, a Doctor can create significant retirement buy-out funds over 10, 20, or 30 years. A nice bonus is that the funds can grow on a tax-deferred or tax-free basis in most of these arrangements. With all of these tools, Doctors have two potential ways of funding them:
A. Solo Practice Model
Here, the Doctor in question simply takes advantage of one or more of the tools below and funds them from the practice. This approach is certainly better than not funding them at all, thanks to the asset protection and potential tax benefits that many of these tools afford. These options force the Doctor to build the buy-out fund with dollars that might otherwise be spent on personal consumption. Therefore, any and all of these tools can be used in the one-Doctor model.

B. Group Practice Model
In this model, in addition to the potential tax, asset protection, and forced savings benefits, Doctors enjoy another crucial benefit described earlier on in the book. They get to use other people’s money (OPM) to achieve a long-term goal. OPM is involved here because each of these tools can be Leveraged in a way that older Doctors of the practice require the younger Doctors (partners or not) to contribute into these vehicles. While the contributions go partly to their own buy-out fund, part of it could also fund the buy-out of older Doctors. When these younger Doctors become more senior, they too will benefit from this arrangement and the funding by younger Doctors at that time. This “pyramid” model is common in professional firms outside medicine, such as consulting or law firms.

Buyout Funding Toolspost 18
As you will see below, all of the major buyout funding tools are arrangements that we have already described earlier in this Lesson. Let’s examine each of them again briefly and review how they apply to the goal of creating a buyout retirement fund.
1. LLC Lease Back
A valuable piece of equipment or the practice’s office can be transferred to an LLC and then leased back to the practice entity. As explained before, this provides asset protection for the practice (vis-à-vis claims from the property or equipment), the property/ equipment (from claims against the practice), and for the Doctors (from both).
The LLC lease back works as a buyout funding tool through the rent paid by the practice to the LLC. Each month the practice will pay tax-deductible rent to the LLC. In the solo practice model, the Doctor could utilize a gifting program for the LLC interests and, over time, get the benefit of lower tax bracket “borrowing” of children or grandchildren. Proceeds remain inside the LLC, asset protected at a (+2) level. They can be managed by professionals in a tax-favored way and build up over time to create a buyout fund. More