If you were unable to be there to run your practice, what would happen to it? Would your family members, co-owners, managers, or employees know what to do, and would they have the guidelines and tools they would need to help the practice survive and thrive?
The main issue in succession planning is to provide adequate funding when ownership of a practice is transferred, so that it is accomplished with minimal difficulty. Life insurance, individual disability insurance, and disability overhead expense insurance are key planning tools. These projects provide the dollars needed to keep a practice running smoothly. They also provide a fair share of the practice’s work involved with minimal conflicts.
Key employees, partners, or even a knowledgeable competitor can be the beneficiaries, assuring they will have the funds to purchase the business entity from the remaining interested parties and continue the business after a retirement or death.
Document your desires
A will for a practice is a comprehensive planning tool that details, in systematic format, the plans of the continuation of an enterprise. It should include a management plan and, if appropriate, the naming of a successor in the will.
An important component to a practice will is a buy-sell agreement. A buy-sell agreement can obligate one party to buy, and the other to sell his interest in the business, following a triggering event such as the owner’s death or disability. It can be purchase (redemption) agreement, a cross-purchase agreement, a hybrid (combination) agreement, or a “wait-and-see” agreement. The client’s planning team should assist him in selecting the structure that will be most effective for the buy-sell agreement.
Back up your plans with insurance
Although a buy-sell agreement can help ensure the practice will remain with the family or business partners in the event of death or disability, there is a need to make sure adequate funds are available to fulfill the commitments of the agreement. Life insurance is a funding vehicle that provides the liquidity need when a qualifying event brings about the sale of an ownership interest. Disability buy-out insurance on an owner also is available to fund the purchase of the business specifically in the event of a disability.