Succession Planning for Medical and Health Businesses: Key Insights
Nobody enjoys thinking about their own death, incapacity or everything that could go wrong when running a medical practice. I remember reviewing an agreement for a friend in health once and saying “What would happen if the worst were to happen?” She said, “I prefer not to think about that!” It’s not a fun thought, but it is an essential one. Fixing a problem when it occurs always costs more in time, energy, and legal expenses, than taking preventative measures. As medical practices, you guide us through our health journey. We want to return the favour by helping guide you through your business journey, with our top message being – prevention is always best approach.
Relevant Trigger events
We thought we’d start by sharing some of the most common trigger events that leave medical practice owners wishing they had contingency plans in place.
• Bankruptcy
• Divorce and separation
• Accident and illness
• Death or incapacity
These events aren’t what we want to spend our happy living years focusing on, so there’s no time like the present just to get prepared. We will explore today some preventative steps and actions that you can take now to protect your practice, your patients, and your loved ones, to spare them the stress, worry and angst of piecing it all together themselves.
Firstly, there are various documents that you should have, or should consider having, in place. This article will explore shareholders or unitholders agreements, buy/sell agreements, a practice contingency planning agreement and briefly, your personal succession planning documents including testamentary trusts and wills and estate planning.
Shareholder’s or Unitholder’s Agreements: when and why do I need one?
If you don’t have one already, the answer to when you would need a shareholder’s or unitholder’s agreement is simply ‘now’. An agreement like this would generally cover the structure, management and direction of your practice.
Some practice owners that we speak to confuse their Unitholder’s Deed or Company Constitution with these documents but they are not the same. A Shareholder’s or Unitholder’s Agreement is a contract between your entity and it’s owners. And you need to work with a lawyer to prepare this document.
Having a water-tight Shareholder’s agreement is like having an insurance policy against the operations of your Practice. When everything is going well it’s not something that is often thought about, but when there has been a turn of events or change in circumstances, documents and agreements like this can make a massive difference to the outcome for the business and the personal relationships involved.
If you don’t already have one, you can purchase a Shareholder or Unitholder Agreement here.
When might I need a Buy/Sell Agreement?
A Buy Sell Agreement is not a business sale agreement and differs from a Shareholder’s Agreement. If your medical practice is structured with more than one owner a Buy Sell Agreement is an important piece of the succession puzzle.
A Buy Sell Agreement will generally facilitate the remaining owners to acquire that interest, as well as to restrict it from being transferred once a ‘trigger’ event has occurred. Common trigger events which we see in well-drafted Buy Sell Agreements for medical practice owners include:
• Death or incapacity;
• Retirement;
• Attempts to sell;
• Termination of employment;
• Bankruptcy;
• Loss of registration.
At the crux of it, it dictates how the owners’ interests will transfer if there is an exit and allows remaining shareholders or partners the option to purchase the interest before an outsider becomes an owner. This can have various benefits such as promoting continuity of the business and management.
This is an insurance backed document, so there needs to be a policy in place before a lawyer can draft a Buy/Sell Agreement.
When might I need a Practice Contingency Planning Agreement?
Separate again to the above documents, is a Practice Contingency Planning Agreement. This Agreement is for sole owners of medical or allied health practices and is enlivened by a ‘trigger’ event which, as above, could be anything from ill health to death. It helps to prepare and plan for the ongoing care and management of the practice if this trigger event occurs, minimising the very impact of it. For example, this is particularly important for psychologists, as they need to comply with their confidentiality and continuity of care obligations. We also have worked with a number of sole owner GPs to prepare a Contingency Planning Agreement.
It is a formal document which outlines protocols, procedures, and responsibilities to be followed if a trigger event occurs (e.g. appoints a nominee, facilitates access to the certain records). You Legal has a Fast Track Solution for this Agreement, which you can find here.
Your practice contingency agreement should be detailed and stored alongside your Will (and any other documents in your estate plan), allowing for minimal disruptions if and/or when a trigger event occurs. That brings us to our last but not least tip for succession planning, is your personal estate planning documents.
Testamentary trusts and Will and Estate Planning
As you likely know already, a Will ensures your assets are distributed according to your wishes. Dying without a will in place is termed dying ‘intestate’ and your assets will be shared and divided in accordance with legislation (not your wishes), which differs in each state and territory. It is important for anyone over the age of 18 who has assets, but particularly for practice owners and clinicians to have one. On top of this, if you operate as a sole trader, this is even more important because you own your practice in your personal capacity and therefore need to protect your interests and it is best to have control over that from the outset.
A testamentary trust may be established as part of the Will. These trusts offer asset protection and tax benefits. They are particularly useful in blended families or for protecting assets from being dissipated by beneficiaries.
Your will should be stored in the same location as your practice contingency plan that we discussed above. This will make it easier for the people nominated by you to identify next steps.
It is important to establish a clear and comprehensive estate plan which extends beyond drafting a simple will. This may also include an enduring power of attorney, which allows you to appoint someone you trust to make decisions on your behalf when you’re unable to do so (i.e. because of incapacity), so in the event of incapacity, they can handle certain matters on your behalf. You may also prepare with your solicitors an advanced care directive which will outline the decisions that you would like to make in relation to future medical treatment and to ensure those decisions are ultimately respected.
Leverage Expertise
These steps provide a structured approach to managing personal and professional risks, ensuring that your healthcare practice and personal assets are protected in various scenarios.
We recommend seeking legal and financial advice and assistance to ensure your estate planning and business agreements are legally sound and reflect best practices. Unfortunately, with some of these documents, minor errors can have large consequences (e.g. could result in the whole document essentially being invalid).
I’ve got my Agreements, now what?
Unfortunately, it doesn’t quite stop there. Your documents should be regularly reviewed and updated to reflect any changes in your personal or professional life. All parties involved should be made aware of their roles (especially when changes occur) and should have access to the current versions of all documents. If that’s all sorted, consider yourself set for success!
Our team has extensive experience in providing advice and insights into best practices for business succession. To discuss how we can help, contact our team here, and we will put you in touch with the best professional for your needs.