Shareholder buy-sell agreements for dental corporations
By Matt Dickstein
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In this article I explain shareholder buy-sell agreements for dentists and dental corporations. A buy-sell agreement (also called a shareholders agreement) protects the corporation from the dentist / shareholders, specifically their death, loss of license, disability and dispute.
Freeloaders and Malcontents
A dental practice needs a buy-sell agreement because (1) California law requires buy-sell provisions in the case of a dentist’s death or loss of license, and (2) the reality of group practice demands a resolution to common problems, specifically, dentists (like all of us) bicker, lose interest in the practice, go away, die, get run over by trucks etc. You need resolution for all of these scenarios.
Sometimes a dentist gets tired and stops putting time into the practice. The dentist becomes a freeloader, and you must cut him or her out of the compensation structure. Sometimes a dentist is such a malcontent that you must be rid of him or her. Or a dentist might die or lose his or her license, in which case California law requires that you buy-back the dentist’s shares in the dental corporation. In all these cases and other cases, the practice needs a structure for the orderly and fair removal of dentists.
See my prior article – Compensation structures for group dental practices for a definition of freeloader and malcontent.
If you don’t have a good buy-sell agreement, usually the only way to resolve shareholder disputes is through the courts; see my article Using Involuntary Dissolution to Resolve Shareholder & Partner Disputes.
The Economic Divorce
Enter the buy-sell agreement. When changes among the dentists put the practice in danger, the buy-sell agreement gives a fair resolution. I call this the economic divorce – if the practice cannot survive a particular dentist, the buy-sell agreement gets you a divorce on terms that are fair to everyone.
Dentist buy-sell involves what I call the 4 D’s– death, disqualification, disability and dispute.
Death and Disqualification. Under California law applicable to dental corporations, if a dentist dies or becomes disqualified (that is, loses his or her license), the corporation must buy-back the dentist’s shares. Usually you pay a death buy-back in one lump-sum using the proceeds of life insurance.
Disability. Similar to death (except without the finality) if a dentist becomes disabled, the dental corporation can buy-back his or her shares. The practice can pay a disability buy-back using a promissory note, or if cash-flow is sufficient to fund a disability policy, using the proceeds of disability insurance.
Disputes. Sometimes two dentists just can’t get along. To deal with this situation, you use “shotgun” procedures. This means that, between the two warring dentists, the first offers to buy out the second, and the second has the choice, either be bought out or turn around and buy out the first on identical terms (i.e. I cut, you choose). Either way, a price is fixed for the buy-out, and one of the warring dentists leaves the practice group.
The buy-out price is crucial. A high buy-out price gives the exiting dentist a windfall. A low buy-out price is unfair and leads to litigation. The trick is finding a procedure that ensures a fair price – for example, using a neutral appraisal process to fix a price. A dental practice also can use an accounting formula to fix the buy-out price. Payment terms are almost as important as the price itself, because payment up-front in one lump sum is much better than payment by promissory note over a long period of time.
For more on buy-outs, read Buy-in and buy-out of a dentist to a dental group.
Wildcard – Personal Guaranties
As a final note, be careful about personal guaranties. These are the wild cards in an exit structure. An effective exit structure must fairly compensate and/or protect dentists for their guaranties.
To learn about non-competition clauses for dentists, see my next article, May a dentist compete against his or her former practice? and see, Stealing employees.
I’ve tried to make buy-sell easy in this article. But that doesn’t mean you can do it yourself. Get a competent business attorney to help you.