As seen in Florida Medical Business

A good succession plan protects practice assets

Q: I am a family physician who is approaching retirement and considering bringing in a partner to eventually take over my medical practice. What is the best way to put a succession plan in place?

A: A succession plan enables a physician to take control of the inevitable. Without one, the tax burdens on a physician's estate when a practice is bequeathed to his/her heirs are significant, and it is extremely difficult to get the maximum value for the practice.

Estate taxes can claim up to 50 percent of a taxable estate, which often forces businesses to liquidate or take on debt, and the value of medical practices after owners die are typically based solely on their accounts receivable and physical assets.

The ideal succession plan for medical practices is to transition ownership to a partner or partners. Typically, the founding partner and majority owner start by meeting with the firm's accountant to determine the value of the business. Afterwards, the partners meet with the accountant to discuss and agree upon the value of the practice and its shares.

The primary factors that the accountant considers in determining the value are its gross annual billings, accounts receivable and assets. Most practices are typically valued from 1 to 1.5 times their yearly revenues.

Once the value is agreed upon, the partners should enter into a buy-sell agreement with the help of a qualified business attorney. Most agreements call for payment of the share of the business owned by the departing partner over a period of time. In addition, funding vehicles such as life insurance, annuities and disability insurance could also help to facilitate these payments and the overall transaction.

Once the buy-sell value is agreed upon, it should be re-evaluated on a yearly basis to update the value of the business and its shares. There are also other factors, including the health and retirement plans of the departing partner that also could necessitate changes to the succession plan and payment schedule.

Donald T. Cohen, CPA, is a founder and director of Newman & Cohen Financial Management, in Boca Raton and Miami, 561-988-8890, www.newman-cohen.com