By Adam Cmejla, CFP®
Sept. 18, 2019
Life is unpredictable–for the better and the worse. Just as life presents unexpected opportunities, it can present unexpected challenges like sickness, injury, the need to take time off to help a loved one or the sudden death of the practice owner. Those surprise circumstances sometimes lead to the need to sell your practice earlier than you and your family had planned.
Here is how to create a continuity plan that takes into consideration the possible need to sell your practice earlier than expected. This is especially important if you are in a solo practice.
In a multi-owner, multi-OD practice, it’s often possible for the additional patient load to be absorbed by the remaining ODs. There may still be questions that need to be answered, and contingency planning to be executed, but the practice can survive.
Circumstances can be more grim in a solo practice.
When a catastrophic event happens in a one-owner/one-OD practice, the OD is not able to see patients, and there isn’t a contingency plan in place, a practice can lose a a significant part of its value in a short amount of time. Some estimate 10 percent for every week that it’s “dark,” and by the fourth week, the practice is basically valued at the current market rate of the equipment and inventory in the practice.
These are the steps you should take to create a contingency plan to keep you and your family financially strong, even if an unexpected sale is necessary:
Implement a Buy-Sell Agreement
If you are in a practice with multiple partners, it is best to ensure that you have a properly outlined, clearly defined buy-sell agreement. A buy-sell agreement states who will buy the shares (and in what manner) of the business for any owner that is no longer able to serve in the capacity of a shareholder or owner of the practice. It outlines a valuation method to be used, a timeline during which the transaction should take place, any rights of first refusals and other parameters that are agreed upon by all parties at the genesis of the agreement.
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For solo-owned practices, ODs may want to consider one-way buy-sell agreements. These are agreements made between the sole owner and another entity—possibly another non-affiliated, but local, OD with a similar patient base and practice modality—that would agree to purchase your practice for a predetermined price in the event of your inability to practice due to certain events that would be outlined in the agreement (death, disability, retirement, etc.).
The valuations given in this situation will likely be less than those in partnership/multi-owner locations because of the inherent risk and percentage of patient attrition that may take place in moving from one practice location to another, but a percentage of something is better than 100 percent of nothing.
In addition, it can provide a level of funding and continuity planning to ensure that the team at your location is still employed for the long term (if the buyer keeps your location open) or, worst case, has more of a timeline to plan their next career move if the buyer decides to shut down your location and absorb all patients under their one location. Each situation is different.
So, what are some of the ways you can ensure that you have funding in place?
Have Good Practice-Owner-Specific Disability Insurance
I’m not a licensed insurance agent, so let me be perfectly clear: No one hates paying disability insurance premiums more than yours truly. When my wife’s (who’s also an OD, thus she has an “own occ” policy) and my policy premiums come due, writing those checks is painful.
However, what’s even more painful is the thought and image of what would happen to my business or her income should something happen in our lives that would cause us to be disabled and incapable of earning an income to support our family.
There are two main issues that can arise in disability insurance coverage for the practice owner that should be evaluated. The first is to ensure that their coverage covers their “own occupation”—that is, the policy is specific to pay a benefit if you cannot practice optometry (even if you could do something else). If your policy is an “any occupation” policy, it will not protect your occupation as an optometrist, which means the insurance company could stop paying a benefit if it’s determined that you could perform any job, even if you still couldn’t practice optometry.
The second type of policy to consider is a BOE policy. This is a Business Overhead and Expense policy that will pay the bills of the practice (rent, payroll, A/P, utilities and other fixed expenses). In a practice with multiple providers, the patient load can be shifted thus possibly minimizing the use of this insurance. In a solo OD practice, though, the impact on the loss of the OD’s ability to work starts at the practice and then trickles down to the personal front, making it very important to protect yourself as both a provider to your family and producer in your practice.
Evaluate Buy/Sell Life Insurance Funding
Just as I don’t like paying disability insurance premiums, I also don’t like paying life-insurance premiums. However, proper planning trumps what I feel like doing, and ODs are no exception.
Not only should you have good coverage to ensure that your family is taken care of in the wake of your disability, but you may consider having a policy that provides funding for either existing partners or an outside entity that is named in your one-way buy/sell agreement to purchase your practice from your estate in the case of your death. Because the OD’s estate would likely be in receivership of the practice, it would be in receipt of the death benefits that would be paid by the policy.
For practices with multiple owners, there are two common buy/sell life insurance strategies: cross purchase and entity owned. A cross purchase agreement states that each practice owner will own life insurance on the other owners in the practice. This can get expensive when there are more than two owners.
In an entity purchase (sometimes called a “stock redemption plan”), each owner enters into an agreement with the business to sell their shares back to the business and the business owns policies on each owner. If an owner passes, the proceeds from the life insurance are used to buy their interest from the owner’s estate.
However, there are specific tax planning considerations for the remaining owners as it relates to the current and future value of the newly acquired shares of the business, so each situation needs to be evaluated and planned for individually. Specifically, there are step-up in basis considerations to be evaluated, so it’s important to ensure your team of advisors are helping you plan with all factors being considered.
In my experience working with ODs, this is usually one of the last planning pieces to be put in place, and understandably so: it feels neither urgent nor probable.
However, given the dollar amounts that can be tied to the valuation of one’s practice and how much (as a percentage of overall net worth) ODs are counting on their practice to provide for their own, and their family’s, financial independence, the prudent and responsible action to take is to outline your plans and wishes accordingly. Doing this in harmony with your attorney, CFP® and CPA can take a lot of heavy lifting off your to-do list while ensuring that those you care about most in your life are protected and planned for accordingly.
Adam Cmejla, CFP® is a CERTIFIED FINANCIAL PLANNERTM Practitioner and Founder of Integrated Planning & Wealth Management, LLC, an independent financial planning & investment management firm focused on working with optometrists to help them reach their full potential and achieve clarity and confidence in all aspects of life. For a number of free resources, visit https://integratedpwm.com/ebooks/ and check out the “20/20 Money Podcast” on Apple Podcasts or your favorite podcast platform to get more tips on making educated and informed financial and business decisions.