Partnership Pointers and Pitfalls
PARTNERSHIP Pointers and Pitfalls
What you need to know before you head down the path of bringing a new partner into the practice
By Bill Nolan
Optometrists considering taking on a partner will be faced with several issues that will be foreign to them. In optometry school, education centers around anatomy and pharmacology, not buy/sell agreements, stock purchase agreements, or key man insurance provisions. Here’s a look at some of the major components of taking on a partner.
Under no circumstances should anyone try to put these legally binding agreements together without legal counsel. They are worth their weight in gold to everyone involved.
If you are heading down the path to partnership for the first time, here are some of the basics that will generally apply. If you are taking an associate from an employee to a partnership, you will by definition be selling some ownership interest in the office. It is this transfer of ownership that makes the seller and buyer partners in a legal sense. Depending on the tax and legal structure of the practice, you will either be selling a percentage of your assets (non-corporate) or stock (if the business is a corporation). If the practice is not currently a corporation, use an asset purchase agreement to sell part of the practice to your associate. If the practice is some form of a corporation (like C Corp or a Sub Chapter S), use a stock purchase agreement.
■ STOCK PURCHASE. If your practice is a corporation and has issued stock, then the transfer of ownership to the associate will be by the use of a stock purchase agreement. That agreement will outline the number of shares of stock to be sold, the purchase price for each share, and the method of payment, as well as other issues.
■ ASSET PURCHASE. If your practice is not a corporation, you will most likely use an asset purchase agreement to transfer some percentage of ownership in the assets of the business to your associate. When the transfer of ownership is complete, you have a partner.
CREATING THE AGREEMENT
This brings us to the creation of the partnership agreement or the shareholders agreement.
One of the advantages of being in solo practice is the ability to run your office any way you choose. However, once you take a partner, management of the office will change both culturally and legally.
A partnership or shareholders agreement is the document that partners use to outline how they will run their business together and how they will handle things like future capital contributions to the business, how revenues and expenses will be allocated, how the partners will be paid, and, possible future dissolution.
DISSOLUTION AND EVENTS
Partners sometimes can’t make the arrangement work; therefore, all partnership or shareholders agreements have a section entitled “Dissolution or Withdrawing from the Partnership.” Several key provisions are critical to have if things go wrong, including the common triggering events (see sidebar). Here are some of key issues.
■ DEATH. Though most traumatic, it is the easiest from a legal and partnership standpoint. All good partnership or shareholders agreements should have a key man provision where the partners insure each other’s lives for the value of their ownership interest.
At death, the ownership interest of the deceased partner will usually transfer to his or her estate. If the buy/sell agreement or provision of the partnership or shareholders agreement is structured correctly, the estate will be required to sell the deceased partner’s interest or stock back to the partnership, and the life insurance will provide the cash to repurchase the interest or stock.
There are five triggering events that are considered the most likely to cause dissolution of a partnership or an individual’s interest in a partnership or corporation.
4. Voluntary withdrawal
5. Involuntary withdrawal
Without this provision, it can be difficult to ensure the orderly transfer of ownership. There are several tax provisions necessary to maximize the proceeds of life insurance contracts, so consult a tax professional/attorney when setting up these provisions.
■ DISABILITY. If a partner in a practice becomes temporarily or permanently disabled, it is important that your agreement covers issues such as what constitutes a long-term disability; whether or not long-term disability triggers an automatic buyout of your ownership interest; and the value of your interest should you become disabled.
■ RETIREMENT. This is good to include in the voluntary withdrawal or retirement section of your agreement should one of the partners retire. Many agreements will base a partner’s retirement value on a multiple of their revenue over the last three years. The valuation formula should be reviewed annually.
It is imperative that all legal and accounting issues be correctly addressed by your attorney and accountant. EB
Bill Nolan is a vice president at Williams Group in Lincoln, NE.
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