Implementing an Owner’s Agreement: A Crucial Step for Medical Practices
In today’s dynamic business environment, planning for both success and challenges is vital – especially for medical practices. While many business owners my consider personal estate planning as essential, an Owner’s Agreement is an often-overlooked tool for safeguarding a practice’s future.
An Owner’s Agreement can frequently be seen as an administrative hurdle, however, it can be used as a strategic asset that protects both the business and its owners. As someone who has worked with hundreds of doctors over the years, I cannot overstate how important an Owner’s Agreement is for the stability and longevity of your practice. Whether you’re part of a large or small practice, having a well-considered Owner’s Agreement can be the key to avoiding disputes and ensuring that everyone involved is clear about their roles and responsibilities in the business.
Why You Need an Owner’s Agreement
An Owner’s Agreement is an agreement between you as an owner, and the operational entity, with steps on how you agree to run the business and another critical issue – what happens when the unexpected occurs?
While not a pleasant thought, it is one every business owner should consider. What if one of your business partners becomes seriously ill and no longer able to work? What if a partner wants to leave or disagrees with the practice’s direction? Without an Owner’s Agreement the lack of clarity can lead to disputes, financial strain and even the collapse of the practice.
For instance, a group of General Practitioners we recently worked with were preparing to sell their practice, thankfully they had prepared an Owner’s Agreement early, so they had already agreed roles, responsibilities and which avoided any potential conflicts during the transaction.
Key Terms of an Owner’s Agreement
To be effective, an Owner’s Agreement should outline key aspects of the operation, including decision-making processes, dispute resolution mechanisms, exit strategies, and the process for handling unforeseen circumstances. Below are some of the most important aspects to consider when drafting this agreement:
1. Understand Your Business Structure
The first step in drafting an Owner’s Agreement is understanding the structure of your business. Most medical practices are structured as a corporation, a trust, or a partnership. The type of agreement needed depends on your practice’s structure.
Company: If your practice operates as a company, you will need a Shareholder’s Agreement. This document governs relationships between shareholders, clarifying ownership percentages, management roles and share transfers.
Trust Structure: If you operate through a trust, it will depend on the type of trust, typically an Equity Holder’s Agreement is required. This agreement may outline profit distribution as well as equity transfer rules.
Partnership Structure: Some practices still operate under a partnership structure, in which case a Partnership Agreement is necessary. This agreement specifies partner roles, dispute resolution mechanisms and dissolution terms.
The structure of your practice will determine the specific type of agreement, so understanding this is critical.
2. Decision-Making and Management
An Owner’s Agreement should clearly outline how decisions will be made within the practice and detail when majority (50%), special (75%) or a unanimous vote of approval is required. This clarity helps to avoid deadlocks and ensures all partners understand their authority.
Smaller decisions might require a simple majority, while significant changes, like selling the practice may demand unanimous approval. Additionally, the agreement should include provisions for resolving deadlocks, which might include dispute resolution mechanisms like mediation.
3. Roles, Responsibilities, and Compensation
Ensuring that roles among partners are allocated clearly is essential. If one partner is primarily responsible for patient care while another manages operations, this should be outlined to ensure accountability and fairness. Compensation should also be addressed to reflect contributions and prevent misunderstandings and/or animosity building up between co-owners. For practices with non-medical owners or investors, the agreement should also clarify their role and any limits to maintain operational harmony.
4. Dispute Resolution
Disputes between partners can be very damaging to a business and to relationships that are important to people. An Owner’s Agreement should include a framework for dispute resolution. This can include:
Mediation: Bringing in a neutral third party to help facilitate discussions.
Tag Along and Drag Along Provisions, which can help avoid disputes.
Exit strategies: Clear terms for what happens if one partner wishes to leave or sell their share.
By including these mechanisms in the Owner’s Agreement, you can reduce disruptions and protect the practice’s reputation.
5. Exit Strategies and Transfers
One of the most critical elements of an Owner’s Agreement is the exit strategy. What happens if a partner wants to sell their equity? How will the value of the practice be determined? Will the other partners have the option to buy the shares first, or will third parties be allowed to come in?
The agreement should include clear provisions on:
Planned Exits: Restrictions on transferring equity to unapproved parties.
Unexpected Exits: Procedures for situations like death, disability, or retirement. For example, if a partner dies, the agreement should specify how the shares will be valued and whether the surviving partners have the option to purchase them.
Having these provisions in place protects the business and ensures that any changes in ownership are handled smoothly and fairly.
Implementation: You Legal’s Five-Step Protect Protocol
To implement an Owner’s Agreement in your practice, You Legal recommends following a simple five-step protocol as follows:
Know Your Entity: Understand the structure of your practice (company, unit trust, or partnership). This will help you determine the type of agreement you need.
Identify the Agreement: Based on your entity, identify the type of Owner’s Agreement required (Shareholder’s Agreement, Unit Holder’s Agreement, Equityholder’s Agreement or Partnership Agreement).
Prepare the Paperwork: Work with a lawyer (we do not recommend working with an accountant unless they also have a law degree and have the correct insurances in place) to draft the necessary documents. This should include clear terms on roles, responsibilities, decision-making, dispute resolution, and exit strategies.
Influence Your Fellow Owners: Engage with your partners to ensure they understand the importance of having an Owner’s Agreement in place. Open communication is key to getting everyone on board.
Review and Finalise: Once the agreement is drafted, review it with your partners and legal advisors to ensure it meets everyone’s needs and protects the practice’s future.
Implementing an Owner’s Agreement is one of the most proactive steps you can take to safeguard your practice’s future. It provides clarity on roles, decision-making, and exit strategies while also protecting against unforeseen events.
By taking the time to draft and implement this agreement, you can avoid unnecessary conflict and ensure that your practice continues to thrive, no matter what the future holds.
For more advice on creating an Owner’s Agreement for your medical practice, don’t hesitate to reach out. At You Legal, we are passionate about helping business owners protect their practices and achieve long-term success.