fix this practice

Get It in Writing

Don't stake your future on verbal or handshake agreements.

RICHARD S. KATTOUF, O.D., D.O.S.

Q I am employed by an independent O.D. who has been diagnosed with a serious illness. He still sees patients with difficulty. I have practiced with him for almost two years with no contract. He says he will sell me the practice, but we have no written agreement. Where do I start?

Dr. B.L. Higgins via e-mail

A: It's amazing that we continue to use verbal or handshake agreements. Any associate agreement must include:

► Appraisal. Since you've had no appraisal performed, and you're building a practice within the owner's practice, you need to have an evaluation of the business prior to your employment agreement.

► Associate contract. This must spell out your compensation, bonus structure, hours, management duties, continuing education allowance, vacation period, 401k or SEP plans. You must establish a date certain for your buy-in. My advice is to do it now. In case of the owner's death or disability, you must be given first right of refusal to purchase his portion of the practice at a pre-agreed-upon amount. The contract must spell out purchase terms. Your options are work equity, with the owner acting as the banker or buyer acquiring a loan.

I recommend hiring a consultant who has experience in appraisals, associate agreements and buy-sell agreements. (In the example above, I combined the associate agreement and the buy-sell agreement.)

The appraisal must include evaluation of furniture, equipment, sellable inventory of contact lenses, frames, uncut spectacle lenses, goodwill and accounts receivable. The buyer and seller must understand that today's “buyer's market,” the appraisal value and the “sellable” value may differ, not unlike the housing or commercial real estate markets.

If the seller's accountant is savvy, the buyer will purchase stock in the buy-out. This enables the seller to pay a lower capital gains tax. It doesn't affect the tax rate of the buyer. You, the buyer, must also check with an attorney to make sure you're “held harmless” in case the corporation is sued.

“Work equity” is a method to buy into a practice, in which the buyer works several more days than the seller. The income from those additional days, in which the buyer, in essence, works for the seller, goes toward the purchase of the practice. Work equity can be the method of payment for the practice, or it can be combined with stock purchase or large lender payments.

The contract must protect the seller's estate. We often add a clause that states: In the case of death or disability of the owner, the associate must purchase the remainder of the practice at a pre-arranged value. I define this as preventive business management.

This arrangement protects the estate of the seller and assures the buyer that he is purchasing the practice at the original appraisal value. The owner cannot purchase this type of protection from an insurance provider. Such progressive actions exhibit the highest level of love and care for your family.

If any real estate (building) is involved, the buyer is given the first right of refusal to purchase the property.

It the buyer is going to rent from the seller, a lease agreement would be part of a buy-sell document.

The income derived from the sale of the practice as well as the rent should be made part of the seller's investment portfolio.

When the buy-sell process is performed correctly, the end result is fair and equitable to all parties.

At the risk of repeating, the lesson is simple:

Avoid handshake agreements. Avoid verbal agreements. OM