Planning for what will happen when the time comes to exit a medical practice can safeguard the practice and facilitate an easier transition of ownership.
The transfer of ownership can come in many forms. It may be a practice transferring between family members, gradual reduction in ownership as key staff buy-in, or the sale of the medical practice to an unrelated third party. Consideration must also be given to the unwelcome fact that not all medical practice exits are planned, and succession planning can alleviate undue stress in these circumstances.
Commonly, the medical practice value forms a significant portion of the wealth of the owner and a well-designed medical practice succession plan is essential to maximise the medical practice value, manage tax implications and maintain the practice legacy. It is never too early to plan and beginning with the end in mind can help to reduce the burden of practice succession. Nonetheless, considering practice succession at any point is a valuable exercise.
Some key considerations for succession planning include:
- Structure
- Extracting medical practice value
- Tax implications
- Leadership & key staff
- Formal agreements & insurance
Succession planning is most effective when professional advisors are involved to guide the process. This can include an accountant, lawyer and depending on the desired outcome, a practice broker or financial planner.
Often advisors see a medical practices' needs change through its lifecycle. Sometimes, those changing needs mean that a medical practice will require a restructure to continue to operate effectively. The medical practice structure also needs to be considered as part of a succession plan. There is a seemingly vast selection of medical practice structures available, and whilst there is always a preference for simplicity, there needs to be balance between competing demands such as tax implications, asset protection outcomes and flexibility for medical practice succession.
As mentioned, often the practice value forms a significant portion of the wealth of the owner, and understanding the value of the medical practice and how to get that into the hands of the right people is a fundamental part of a succession plan. Extracting the value of the medical practice involves transferring the ownership of the medical practice and realising its value which will have tax implications. Consideration needs to be given to such things as capital gains tax, access to the small business CGT concessions, GST and going concern issues, superannuation and liquidation.
A priority of medical practice succession is choosing who you will transfer the ownership to on your planned or unplanned exit. This could be family, key employees or an unrelated third party. Providing adequate leadership experience and training are among some of the considerations required.
A succession plan should also include critical documents such as a buy/sell agreement and shareholders / unitholders agreements. A buy/sell agreement is a contract that sets out how an owner’s interests in a medical practice will be transferred on exit. A shareholders/unitholder agreement covers the operations of the medical practice including structure, management, and direction of the medical practice. Insurance should also be reviewed in line with these agreements.
If you are ready to start the conversation, contact Cutcher & Neale to start your medical practice succession plan today.
