Medical professionals often form partnerships or group practices to provide quality care while sharing responsibilities and business operations. However, without a Buy-Sell Agreement, a practice can face serious legal and financial risks if a partner unexpectedly leaves, retires, becomes disabled, or passes away.
A Buy-Sell Agreement is a legally binding contract that outlines what happens when an owner wants—or is forced—to exit the practice. It ensures a smooth transition of ownership, prevents disputes, and protects the financial interests of the remaining partners.
For medical professionals, having a well-structured Buy-Sell Agreement is not just a business strategy—it is a necessity for practice stability and long-term success.
1. What Is a Buy-Sell Agreement?
A Buy-Sell Agreement, also known as a buyout agreement, is a legally enforceable contract that governs the transfer of ownership when a partner exits the medical practice.
This agreement protects both the departing owner and the remaining partners by defining:
- How ownership shares will be transferred in cases of death, disability, retirement, or voluntary departure.
- Who can buy the departing partner’s shares (e.g., only existing partners or external buyers).
- The valuation method for determining the fair market price of the ownership interest.
- Payment terms to avoid financial strain on the business.
Without a Buy-Sell Agreement, a medical practice may face disputes, financial instability, and even forced dissolution.
2. Why Medical Professionals Need a Buy-Sell Agreement
A Buy-Sell Agreement is especially important for medical professionals because:
- Medical practices must comply with ownership restrictions (only licensed professionals can own a medical practice).
- Unexpected departures can disrupt patient care and business operations.
- Disagreements over ownership transfers can lead to legal battles and financial loss.
Key reasons why every medical practice should have a Buy-Sell Agreement include:
A. Protecting the Practice from Unexpected Events
- A partner may become disabled, retire, or pass away suddenly.
- Without an agreement, surviving family members could inherit ownership but lack the license to run a medical practice.
- A Buy-Sell Agreement ensures a pre-determined transition plan to keep the business running smoothly.
B. Preventing Ownership Disputes
- Without a Buy-Sell Agreement, disagreements can arise over who gets to buy an exiting partner’s shares.
- The remaining partners may not agree on valuation or buyout terms, leading to costly litigation.
- A properly drafted agreement eliminates uncertainty by setting clear ownership transfer rules.
C. Ensuring Compliance with Medical Practice Laws
- California law prohibits non-physicians from owning medical practices due to Corporate Practice of Medicine (CPOM) restrictions.
- If a physician dies and their shares are inherited by a non-licensed individual, the practice may face legal violations.
- A Buy-Sell Agreement ensures that only licensed professionals can own the practice and prevents regulatory issues.
D. Protecting the Financial Stability of the Practice
- If a partner exits without a structured buyout plan, the practice may struggle to cover the cost of acquiring their shares.
- A Buy-Sell Agreement defines how the buyout will be funded (e.g., through life insurance, installment payments, or business reserves).
- This prevents financial hardship and ensures the practice continues to operate smoothly.
3. Key Elements of a Buy-Sell Agreement
A well-structured Buy-Sell Agreement should include:
A. Triggering Events
The agreement should specify what circumstances require a buyout, such as:
- Death or disability of a partner.
- Retirement or voluntary departure from the practice.
- License suspension or revocation (if a partner loses their medical license).
- Divorce or bankruptcy, which could force the sale of shares.
By defining triggering events, the agreement ensures that ownership transfers are handled fairly and predictably.
B. Ownership Transfer Rules
The agreement should clarify:
- Who can buy the exiting partner’s shares (typically, only existing partners or licensed medical professionals).
- Whether external buyers are allowed or if ownership remains within the existing practice.
- Non-compete clauses to prevent a departing partner from starting a competing practice nearby.
This protects the practice from outside interference and conflicts of interest.
C. Valuation Method
Determining the fair market value of a medical practice is critical to avoid disputes. Common valuation methods include:
- Book Value Method – Based on the company’s assets and liabilities.
- Multiple of Earnings – Uses practice revenue and profitability to determine value.
- Independent Appraisal – A neutral business valuator assesses the fair price.
By setting a clear valuation method, partners avoid disagreements and ensure fair compensation.
D. Payment Terms and Funding
The agreement should define how the buyout will be financed, such as:
- Lump sum payments if the practice has sufficient cash reserves.
- Installment plans to spread the cost over time.
- Life insurance-funded buyouts, where a policy covers a partner’s death to fund the buyout.
This ensures that the practice does not face financial strain when a buyout occurs.
4. Common Mistakes to Avoid When Drafting a Buy-Sell Agreement
Many medical professionals fail to create or update their Buy-Sell Agreements, leading to legal and financial issues. Common mistakes include:
- Not having an agreement in place – Without one, ownership transfers can lead to disputes or forced liquidation.
- Failing to update the agreement – As the practice grows, the valuation and terms should be revised regularly.
- Using vague valuation methods – Unclear pricing formulas can lead to disagreements and litigation.
- Ignoring funding mechanisms – Without a buyout funding plan, the practice may lack the cash to acquire shares.
Avoiding these mistakes ensures long-term stability and protection for all partners.
How We Can Help
At KMSD Law, we specialize in drafting and structuring Buy-Sell Agreements for medical professionals to protect their practices. Our legal team can:
- Draft a legally sound Buy-Sell Agreement tailored to your practice.
- Ensure compliance with California’s Corporate Practice of Medicine laws.
- Establish fair ownership transfer rules and valuation methods.
- Develop financing strategies to secure business stability.
- Review and update existing Buy-Sell Agreements to reflect changes in the practice.
We offer free case consultations to help medical professionals protect their business, ensure compliance, and prevent future legal disputes.
Contact KMSD Law today to safeguard your medical practice with a properly structured Buy-Sell Agreement.