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Putting the success in succession planning

By Peter Rohr, PWA

Like many of your colleagues, you probably vividly remember the first patient you saw during your first day on the job at your medical practice. And you may likely remember as if it was yesterday, reflecting on the time and energy you spent making sure you found the perfect location, had the best equipment and hired the best staff.

Equally important to planning for the success of your practice it is critical to plan for the future of your company. Preparing the next generation of qualified individuals to lead your business should not be something you think about as you near retirement from practicing medicine. Instead, conversations should take place from the moment your practice is conceived.

If you have a family that you are considering passing the business on to, you should have a family meeting to establish their interest in continuing the practice you built, rather than assuming they will act as successors. If you decide that family succession planning isn’t for you, consider selling your business to allow your medical practice to prosper and your staff to continue to be employed.

Getting Started

Succession planning is often a complicated process involving numerous legal and tax issues, as well as family relationship matters. Consulting a lawyer, accountant or financial advisor can help you evaluate your options for creating a strong business continuation plan.

A properly drafted succession plan looks at leadership and the transfer of control. It also minimizes the estate and gift tax consequences, which can cripple the ongoing success of the business during the transfer period.

In its most basic form, a succession plan provides a road map for your business and is important when considering or preparing the sale of your practice. Your plan may include:

· Debt retirement schedules.

· Life insurance policies.

· Buy-sell agreements between partners and heirs.

· The division of responsibilities among successors.

· Determination of the value of the business.

Selling Your Practice

Several factors can influence a potential buyer’s decision, including return on investment, the number of years your practice has been in business, national and local economic conditions, and the difficulty of managing the practice. Selling your practice also often comes down to timing. Industry and economic conditions can play a large role in the price you get. If the security industry is in a cyclic low, it may be best to wait for the market conditions to improve.

To make the transaction happen in a reasonable time and on the best terms, you should consider the following duties.

Find a buyer. If you’re selling your practice outright, you have several options for finding the right buyer. Many doctors choose to sell their practice to an existing group of practitioners.

Find a successor. Another successful approach could be to hire a doctor with the intention that he/she will be able to take your place upon your retirement. This may be a family member or a new doctor who can ease into your role over a period of time. In a typical situation, an agreement would be for the doctor to buy a share of the practice after a pre-determined amount of time and slowly transition you out of your role. This type of transition also allows you or the successor to decide whether the opportunity is wrong for either of you, and provides time to find a suitable replacement.

Determine what your practice is worth. This can be the most complicated part of the selling process. It is important to consult an expert to help you determine the worth of your practice by looking at the book value and capitalized earnings.

Establish financing. Your personal financial needs and lifestyle may influence the way you choose to sell or transfer your business. One of the biggest decisions you’ll need to make is whether you are willing to participate in the financing.

The simplest option is cash, which removes any additional financial obligations once the price is agreed upon and you are paid. But you can also look into seller financing, where the buyer pays a portion of the selling price at closing and you agree to provide financing for the balance. Or, you could offer your buyer the option to lease the business with the option to buy it over time. This allows a buyer, who may not have sufficient cash or financing, to participate in the business and earn money to buy it. You remain the owner until the final payment is made.

A financial advisor can help you determine the right steps to evaluate, sell and transfer your practice. They can help you develop a solid network of bankers, lawyers, accountants, CPAs, real estate brokers, or other financial services professionals who can implement the tactics you select.

Like the vast majority of doctors, your practice is likely your retirement nest egg. Your advisors can help you plan the transition of your practice while considering how it impacts your liquidity needs and cash flow.

Achieving financial success can be rewarding for a lifetime. Do not procrastinate consulting with your team of professionals to establish or review your business succession plan. Your long-term financial goals await your attention to this important matter.

Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its Private Wealth Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.

Peter A. Rohr is a Senior Vice President – Investments and Private Wealth Advisor with the Philadelphia Private Banking and Investment Group at Merrill Lynch.

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