Using Your Insurance: Buy-Sell Do’s & Don’ts

Jim Biesterfelt, Vice President of Group Special Accounts

Great-West Life & Annuity Insurance Company

“Every dental practice with two or more owners should have a buy-sell agreement, even when the dentists are members of the same family,” says Brandon Collier, JD, a principal at Collier, Sarner & Associates, Inc, a national dental legal and consulting firm based in Cleveland. Drafted by an attorney, a legally binding buy-sell agreement stipulates that if an owner leaves the practice because of death, disability, retirement, or another triggering event, the remaining owner(s) will buy out that owner or the owner’s estate. Central to the agreement is to establish a purchase price or the method to be used to determine the value of the ownership share at the time of purchase.

Tips for Success

Collier recently shared some “Do’s” and “Don’ts” of buy-sell agreements.

• Don’t ignore difficult issues. Before getting immersed in the details of a buy-sell agreement, think through the larger issues that might arise. For example, what happens if a partner decides to leave for a reason other than death, disability, or retirement? “Get difficult issues on the table up front when they can be resolved amicably,” Collier says. “Then, put your oral agreements in writing because even people of good faith often remember conversations differently years later.”
• Do address tax implications. Consult with tax and legal advisors to structure the buy-sell agreement so that it takes full advantage of capital gains tax treatment on the sale of a departing owner’s shares and goodwill value.
• Don’t always use a symmetrical agreement. If equal partners draft a buy-sell agreement, then the payout and other terms can be the same. However, consider an asymmetrical agreement if a senior dentist is bringing a junior dentist into the practice as a partner. “If Junior leaves the practice first—for whatever reason—the buy-sell agreement should not obligate Senior to buy out Junior for anything other than Junior’s ownership shares and a token amount in exchange for Junior’s covenant not to compete,” Collier recommends. “The rationale for this approach is simple: By elevating Junior from associate to partner, Senior raises Junior’s pay, which provides the financial wherewithal for the buy-in. In essence, Senior is giving a portion of the practice to Junior and should not have to buy back what he gave away in the first place. Plus, the goal of the buy-sell agreement—to have a successor in place when Senior leaves the practice—was not met because Junior departed first.”
• Do consider the role of insurance. The money to carry out a buy-sell agreement can come from the dentists’ cash flow, a bank loan, or life and disability insurance on the owners. With disability insurance, for example, benefits can provide funds to help buy out the disabled dentist’s share of the practice. “An inexpensive option to consider is business overhead expense insurance,” Collier says. This type of disability coverage helps defray a practice’s overhead expenses for up to 2 years while the disabled dentist recovers or makes plans to leave the practice. Although business overhead expense policies are not designed specifically for funding buyouts, the benefits received through an approved claim can be used however the practice deems fit. When shopping for insurance, Collier suggests checking with the American Dental Association. “They negotiate group rates that will probably be lower than a dentist can get elsewhere,” he says.

A Final Tip

“Revisit the buy-sell agreement every 5 to 7 years, and more often than that if the practice or tax laws change,” Collier says. “Keep the agreement up to date so it continues to meet the goals of the owners.”

Editor’s note: This article does not constitute legal, tax, or financial advice. Please seek professional input as appropriate to your situation.

Great-West Life underwrites and administers the ADA Insurance Plans and is the exclusive provider of ADA-sponsored life and disability insurance to ADA members and their families. For more information, call 888-463-4545 or go to www.insurance.ada.org.

About the Author

Jim Biesterfelt
Vice President of Group Special Accounts
Great-West Life & Annuity Insurance Company
Greenwood Village, Colorado