Art of Accounting: Advising clients who lack a buy-sell agreement

Sole practitioners should get a practice continuation agreement. I explained why in last week's column. I also suggested that you could apply that same advice to clients who are sole owners and offered to provide a free kit to readers. Included in that kit was information about advising clients on obtaining or updating their buy-sell agreements. Today I want to talk about getting a buy-sell agreement if you do not have one.

Every problem mentioned last week will be duplicated if there is no buy-sell agreement except that the practice would continue and there would not be as widespread fall off of clients as would be with a single owner practice.

However, there would be additional problems if there is no buy-sell, including contention between the survivor and the deceased's family, making the survivor an "enemy" of his or her partner's family.

A holdup would be valuing the practice and setting workable terms. Every practice has a value, but whatever it is, that value does not exist in the business. It would have to be paid with either nonbusiness funds or paid over time from revenues generated from the practice.

Obtaining a valuation would be costly, probably would involve attorney representation and would prolong any resolution exacerbating all of the negatives.

Once a value is agreed upon, the payment terms become an argumentative issue. The survivor would want a long-term and the family a short period. Both sides would be right in what they want, but from a practical aspect it would create a burden on the survivor.

Disagreements over the valuation and terms could be easily avoided with a buy-sell agreement that provides the value or an objective formula to determine the value and specific payment terms, i.e., the period, frequency of payments, interest, guarantees and collateral.

Buy-sell agreements cover situations in addition to death or disability such as retirement, loss of a license to practice, personal bankruptcy, conviction of a felony, a desire to leave the practice, mental health issues, or a prolonged illness.

Buy-sell agreements provide some calm during an upsetting period. Getting it done will also provide some certainty of choices should things in the partnership start to unravel, or life changes arise. A payment price and terms remove a large area of disagreement and contention from the relationship.

Buy-sell agreements are important. They are, in effect, a will for the business. Get together with your partners and come up with a number with terms that you would not mind paying and that feels reasonable for your family to receive. Keep in mind your family might not be the seller, but you would be the buyer. 

If your concern is to provide for your family from the proceeds from a sale, try to come up with other ways to provide for your family including life insurance.

Download my free kit with checklists and a drop-dead buy-sell arrangement by clicking this link. 

Get it done for yourself, your family and your partners. You can use this kit as a guide to provide consulting services to clients who do not have buy-sell agreements. This is low-hanging fruit to perform a great advisory service for your clients while generating added revenue for your practice.

Do not hesitate to contact me at emendlowitz@withum.com with your practice management questions or about engagements you might not be able to perform.