Recently Adam was asked to write an article for Medical Forum magazine advising on a hypothetical case of partnership dissolution.
All sorts of potential disasters emerge from the woodwork when a marriage-made-in- heaven turns hellish. Insurance and estate planner, Adam Smith, gives his take on a situation in which a business partnership is also part of the equation.
Dr Kathy T. is 44 years-old, her husband is also a doctor. The marriage has broken down irretrievably, there are two young children to consider and it’s complicated by the fact that the parents are partners in a medical practice.
AS: It’s probably best for all concerned to get a formal and watertight grasp of the issues and that, in the above case, means lawyers. Kathy T. should also be paying a visit to an accountant with expertise in legal separation and asset settlement. The latter aspect is vitally important for two reasons: ensuring the children are not adversely affected and to provide a window of opportunity for the viability and enduring value of the business.
If business partners, who also happen to be married, are no longer on the same ‘team’ one party will probably want to exit the practice in a timely manner. The question is how?
First, let’s assume there’s a pre-existing partnership in place. This will make the following considerations comparatively simple to resolve.
If a party wishes to leave the partnership within the terms of an agreed notice period it remains crucial to estimate the potential impact on the value of the business. When a relationship has turned toxic a desire to exit immediately is common, understandably. It’s worth noting that a hurried and early exit may end up by devaluing the business.
How is the practice valued, and when? Most medical practices use a ‘multiple of profit’ model (including ‘Goodwill’) assessed at June 30 on a yearly basis.
Once a business valuation is agreed upon there will need to be some consideration of the applicable terms for an individual exiting the business. For example, 25% paid upfront and the balance paid over a two-year period out of practice cash flow.
Restraint of trade:
If a partner is ‘paid out’ the medical practice may well wish to protect itself from patient/staff poaching and from a practice ‘start up’ in close proximity. The relevant clause should be inserted into any exit agreement.
Normally, a practice owns relevant equipment within the confines of a Service Trust and/or Company Arrangement.
Usually employed in a Service Trust. A timely, well-planned and civil exit will lessen any negative impact on staff morale.
The second case, in which a partnership agreement does not exist, will have to address the above issues. Those, and
any ‘exit procedures’, will be complex and expensive. They may also be toxic, leading to staff retention problems and the dissolution of the business.
Some other points to consider:
Estate Planning: Dr Kathy T. would be looking to ensure that the financial benefits she’s worked so hard for end up with her own children and not with her ex- husband’s future partner and/or children.
Wills: Divorce automatically revokes an existing Will.
Testamentary Trust: Protect children from potential ‘Predators and Creditors’ such as future partners and ex-spouses.
Debt: It may be prudent to resolve any encumbered debt to simplify the children’s nancial position.
Dr Kathy T’s situation underscores the importance of pre-planning the settlement of assets in both a personal and professional sense. More specifically, any medical practice requires formal documentation of partnership expectations and doubly so if marriage complicates an already potentially convoluted scenario.