Buying a Healthcare Business? Top Warning Signs and Concerns: Buy-Sell Agreements
This blog is part two of a multi-part series addressing the top warning signs and concerns when buying and selling a healthcare facility. You can read part one by clicking here.
When owning a licensed healthcare facility, it is vital to have buy-sell agreement executed to address ownership interests in the business. Without a well-crafted buy-sell agreement in place, negative unintended consequences may result. Regardless of whether the facility operates as a corporation, partnership, or limited liability company, the intent of the owners may not be achieved without a formal written agreement. Read more about factors involved in buying and selling healthcare facilities by clicking here.
What is a Buy-Sell Agreement?
Buy-sell agreements are not the same as contracts for the sale or purchase of a business. Nevertheless, buy-sell agreements are legally binding contracts between a business and the owners of a business which clearly stipulates how significant events – such as death, divorce, or separation of a partner from the business will affect management and control. Buy-sell agreements are very common and range widely in complexity.
Effective and Ineffective Buy-Sell Agreements
Often, in business planning, agreements are created solely for the short term. For example, at the early stages of a business, simple contracts may be effective. However, as a business grows, it must update its agreements to match to complexity of the business operations. Creating buy-sell agreements that do not encompass all possibilities, or not updating your buy-sell agreements, will cause ineffectiveness.
Conversely, effective buy-sell agreements are structured with all possibilities considered, and with a long time horizon in mind. An effective buy-sell agreement describes, for example:
- When, why, and how a business may release an owner’s interest in the business – otherwise known as triggering events and the circumstances surrounding such events
- Whether the other owners or the business itself may purchase that interest from a co-owner prior to its sale to an outside party – otherwise known as a right of first refusal
- How to value an owner’s interest in the business, such as book value, appraisal value, etc.
- The rights the remaining owners have in allowing and disallowing the sale of ownership interests in the business to outsiders
The effective buy-sell agreement creates a market for the departing owner’s interest in the business by defining who may purchase such interest and the value of such interest. Leaving these terms open ended may lead to confusion and even litigation. The effective buy-sell agreement considers and balances the interests of the remaining owners and the interests of the departing owner.
The Benefits of Buy-Sell Agreements to Estate Planning
Building a successful healthcare facility takes time, dedication, and determination. Many of our clients devote much of their lives to the success of their business and it is understandable that they would want to pass their success on to their heirs. Buy-sell agreements allow a smooth transition in such circumstances, guaranteeing continuity and control.
Additionally, the complex tax implications upon transfer can be managed with a buy-sell agreement, providing liquidity to the estate. As an example, one option is to fund the buy-sell agreement with an adequate life insurance policy.
Seek Experienced Lawyers to Craft your Buy-Sell Agreement
Our team of legal experts have assisted business owners with the various and complex considerations of buy-sell agreements. We are experienced in working with healthcare facilities and their owners in preparing for future implications involved with a growing business. We will guide you throughout each step of this process and provide comprehensive advice along the way.
Contact the law firm of Howell, Buchan & Strong at 850-877-7776 to set up a FREE no-obligation consultation. Our firm represents physicians, nurses, psychologists, and other licensed professionals statewide.
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