Guest post – By the Treloar & Heisel team, our insurance partner

Planning for unexpected events like death or disability isn’t something anyone enjoys. Yet, for practice owners, especially those with business partners, preparing for these possibilities is important.

Without proper planning, the impact of a business partner’s death or disability could cause serious disruption to the practice. One way to safeguard against this is by implementing a buy/sell agreement. Here’s what practice owners should know about these agreements.

What Is a Buy/Sell Agreement?

A buy/sell agreement sets out the steps to be taken if a practice partner dies or becomes disabled. However, the agreement itself is only the legal framework. To be effective, it must be funded with life and/or disability insurance.

• Life insurance: Covers the agreement in the event of a partner’s death.
• Disability insurance: Funds the agreement if a partner is disabled and unable to continue working.

Why Do You Need a Buy/Sell Agreement?

The death or disability of a partner can be emotionally overwhelming for everyone involved—partners, families, and the practice itself. A buy/sell agreement eases financial strain, providing stability in a challenging time.

Establishing this agreement when all partners are alive and healthy ensures clarity for the future. Both life and disability insurance policies are taken out for each partner, with all terms agreed upon in advance. This provides peace of mind, knowing that any difficult questions have been settled before something happens and it is needed at that moment.

Benefits of a Buy/Sell Agreement

A buy/sell agreement addresses several critical issues for practice owners, including:

• Defining what happens if a partner dies or becomes disabled
• Establishing how practice value will be determined in advance, so there are no disagreements later
• Addressing financial issues that may arise (like eliminating the need for the surviving partner to secure a bank loan, especially if the practice is losing the production of a practicing dentist)
• Ensuring business continuity, so the practice can continue operating smoothly
• Preventing conflicts between surviving partners and family members by having a clear, pre-funded plan

Funding the Agreement with Life Insurance

Scenario One: A Partner Passes Away

When a practice partner dies, it’s vital to have a plan in place for what happens to their share of the business. The surviving partner may not want to work with the deceased partner’s heirs, and state laws may complicate the issue further. A buy/sell agreement clarifies these scenarios in advance, avoiding future confusion.

Partners agree on the practice’s valuation while they are both alive. Each partner then takes out life insurance, with the other partner or the business listed as the beneficiary. If one partner dies, the insurance payout funds the purchase of their share of the business. This allows the surviving partner to maintain control and continue operating the practice without financial disruption.

Funding the Agreement with Disability Insurance

Scenario Two: A Partner Becomes Disabled

Disability presents a more complex situation. A disabled partner may wish to return to work, even if it’s not feasible. A buy/sell agreement with disability insurance sets out clear terms for a buyout in these cases.

Typically, disability insurance requires the partner to be unable to work for a minimum period, often 12 months, before benefits are payable. The buy/sell agreement will outline the process for buying out the disabled partner’s share, funded by the disability policy. This avoids potential conflicts and allows the business to continue operating smoothly.

Protect Your Practice with a Buy/Sell Agreement

A buy/sell agreement is a crucial tool for any practice with multiple owners. It ensures that in the event of a partner’s death or disability, the practice can continue running without disruption. By funding the agreement with life and disability insurance, you can avoid conflicts and protect the future of your business.

Life & Disability Insurance To Protect Your Practice

If you are a partner in a dental, medical, or veterinary practice that doesn’t have a buy/sell agreement in place, now is the time to create one. Waiting until the death or disability of a partner can lead to further hardship and stress in an already difficult situation.

Our insurance partner, Treloar & Heisel, provides life, disability, business, and malpractice insurance to doctors. Find insurance that meets the unique needs of doctors here. Protect your family, your partner, and your practice today.