Have you ever considered what would happen to your practice if you or your partner became seriously ill?
If you act as a sole trader you can stop reading now. For those who are in partnership arrangements, whether true partnerships or expense sharers or those who operate through limited companies in multiple ownership, have you considered what would happen in the event that one of you became critically ill or indeed died? If you are the one who is unfortunate enough to be the person who has become ill then in the event of critical illness, you continue to have the worries of owning and running a business and will possibly have suffered a reduction in income. In the event of your death your beneficiaries will find themselves owning a share of a dental practice that they probably do not want or may not be legally entitled to own. If it is your business partner that has suffered, you are in the difficult position of trying to control the business whilst at the same time dealing with the emotional fallout that the event causes.
Sadly it is still the fact that many dental practices operate without a formal partnership agreement in place, but even if one exists it may well need to be amended to cater for these eventualities. What do you need to do?
What to do
The first step is that you need to have in place clauses within your partnership agreement, or in the event of a limited company your memorandum and articles of association, that gives the parties to the agreement options to buy or sell as appropriate in the event that the circumstances should arise. The clauses are known as a double option agreement.
The second step is to arrange life and/or life and critical illness insurance policies so that the surviving party/parties are the beneficiary of the policy proceeds. The level of benefit needs to be broadly commensurate with the value of the business share owned by each individual and it may be necessary to obtain some guidance on the practice value in order to determine this. Clearly, the level of benefit will also need to be kept under periodic review.
In the event that the need arises, the insurance policy would pay out thus giving the survivor the financial resources to complete a purchase transaction, meaning that the ill or deceased parties interests are purchased and they or their estate are left with liquid assets to invest how they choose. The surviving party then has full ownership and can proceed to run the business as they wish.
Unfortunately the number of practices that have adequate arrangements in place is in the minority and even those that do have generally failed to review the arrangement, which given the way in which goodwill values have risen in recent years could be a serious mistake.
We offer a consultancy service designed to ensure that the arrangements are put in place adequately and can work with your existing advisers as necessary. Dental Practice Consultancy Service is not regulated to provide financial advice, we can refer to a sister organisation that can do so if this is appropriate.
For more information visit www.dentalconsultancy.co.uk.
