How can you structure a buyout agreement for a retiring partner?

1 Define the valuation method

The first step in structuring a buyout agreement is to determine how much your share of the practice is worth. There are different methods of valuing a professional practice, such as the income approach, the asset approach, or the market approach. Each method has its advantages and disadvantages, depending on the nature and size of the practice, the industry standards, and the expectations of the parties. You should consult with a valuation expert to help you choose the most appropriate method and calculate your share based on factors such as your revenue, expenses, assets, liabilities, goodwill, and client base.

2 Set the payment terms

The next step is to agree on how and when you will receive the payment for your share. There are different options for structuring the payment, such as a lump sum, an installment plan, an earn-out, or a combination of these. Each option has its implications for the cash flow, the tax liability, and the risk of default of the parties. You should consider your financial needs, your tax situation, and your trust in the future performance of the practice when deciding on the payment terms. You should also include provisions for contingencies, such as death, disability, or dispute, that may affect the payment.

3 Negotiate the non-compete clause

Another important element of a buyout agreement is the non-compete clause, which restricts your ability to engage in a competing business or solicit clients or employees from the practice after your retirement. The purpose of this clause is to protect the goodwill and the client base of the practice and to ensure a smooth transition of ownership. However, this clause also limits your professional opportunities and your income potential after your retirement. Therefore, you should negotiate the scope, duration, and geographic area of the non-compete clause to make sure it is reasonable and enforceable.

4 Review the governance structure

Before you sign the buyout agreement, you should also review the governance structure of the practice and how it will change after your retirement. This includes the roles and responsibilities of the remaining partners, the decision-making process, the profit-sharing formula, and the admission and exit of new partners. You should make sure that the governance structure reflects the current and future needs of the practice and that it aligns with your vision and values. You should also consider how your retirement will affect the culture and the reputation of the practice and how to communicate it to your clients and staff.

5 Seek legal advice

Finally, you should seek legal advice before finalizing the buyout agreement. A buyout agreement is a complex and binding contract that has significant legal and financial implications for you and your partners. You should consult with a lawyer who specializes in professional practice law and who can help you draft, review, and negotiate the agreement. A lawyer can also help you address any issues or disputes that may arise during or after the buyout process and ensure that your rights and interests are protected.

Structuring a buyout agreement for your retirement is a crucial step in planning your exit from your professional practice. By following these steps, you can create a fair and smooth transition that benefits you, your partners, and your practice.