Have a Partner? Your Buy-Sell Agreement Is Your Exit Plan

If you own your practice with a partner, you already have an exit plan.

It is your buy-sell agreement. The only question is whether it still says what you want.

Here is the short answer. A buy-sell agreement decides what happens to an owner's share when life changes. It names the events that trigger a sale, who buys, how the price is set, and how the buyout gets paid. Your attorney drafts it. Your CPA reviews the tax side. Your plan has to be able to pay for it.

Why it matters more than you think

You likely signed yours when you started together. Then it went in a drawer.

Years pass. Your practice grows. Your families change. Your goals drift apart.

The agreement does not move with you. It waits. Then one day it decides, word for word, what happens next.

That day is rarely a good one. A death. A diagnosis. A hard conversation. It is the worst time to find out the paper says something you never meant.

What sets it off

A good agreement names its triggers clearly. One simple way to group them is the four Ds.

Death. If one of you dies, who buys that share? Is the buyout required, or only an option?

Disability. If one of you cannot practice, when does that count as permanent? Who decides? What happens to pay in the meantime?

Divorce. If a partner divorces, could a former spouse end up with part of your practice? Ask whether yours lets the owners buy that share back.

Departure. Retirement, a move, a falling out, or the loss of a license. Each one needs a clear path.

Then ask one more question. If your partner dies, could your partner's heirs end up owning part of your practice? Your attorney can tell you what your state allows and what your agreement says.

Who buys

There are two common shapes.

In one, the remaining owners buy the departing owner's share.

In the other, your practice entity buys the share back.

Each shape changes who holds the insurance, who pays, and how the tax works for everyone. That is a question for your attorney and your CPA together. Not one or the other.

How the price gets set

This is the part worth reading twice.

Some set a fixed price and promise to update it every year. Then nobody updates it.

Some use a formula written long ago. Your practice may not look like that formula anymore.

Some call for an appraisal when a trigger happens.

The agreement should set the method. It should not guess the value.

A broker or qualified appraiser sets what your practice is worth. Not your partner. Not a rule of thumb. Not this post.

Ask your attorney:

• What pricing method does our agreement use?
• When was the price last updated?
• Who picks the appraiser, and what if we disagree?

How the buyout gets paid

A price is only useful if someone can pay it.

When a partner dies or becomes disabled, the remaining owners may owe a large sum on short notice. Cash on hand may not cover it. So agreements usually name a funding source.

Common sources include:

• Life insurance on each owner.
• Disability buyout insurance.
• A payment plan over time.
• Cash set aside inside your practice.

One detail is easy to miss. Your personal disability coverage replaces your income. It is not the same as disability buyout coverage, which funds the purchase of a share. Ask whether you have both.

Ask your attorney and your insurance professional to check that the policies match the agreement. Same owners. Same triggers. A current price.

Three checks before year-end

You do not need to rewrite anything today. You need to know where you stand.

Is it signed? Find the current, signed version. Not a draft. Not an old copy from the first year.

Is it funded? Match every trigger to a way to pay. Death, disability, divorce, departure.

Does it fit your plan? Your agreement affects your retirement, your estate, and what your family receives. It should line up with all three.

If any answer is "I'm not sure," that is your next step.

I'm married to a dentist, and this is one of the first documents I'd want our family to have read.

Who does what

• Your attorney drafts and updates the agreement.
• Your CPA reviews the tax side of each buyout shape.
• Your insurance professional matches the coverage to the agreement.
• Your plan ties it all to your retirement and your estate.

You and your partner decide what you want. The agreement should say it.

If you want to see whether your agreement, your coverage and your plan line up, that's what the Exploratory Call is for.

Book your 25-minute Exploratory Call

When did you and your partner last read your agreement together?

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This article is for educational purposes only and is not tax, legal, or investment advice. Consult your own qualified professionals about your situation.