THE FINANCIAL WELLNESS COACH
How to create a viable succession plan and extract value from your practice
Question: I have a medical practice and want to bring in a newly qualified person with the view to him or her purchasing the practice from me when I retire in 10 years’ time. I was told that there are certain structures that we need to put in place in order to do this. Can you please explain what I need to do?
Answer: Many professionals do not appreciate the true value of their practices, and when they retire or pass away the practice ceases to exist. If you set up the right structures ahead of time, you can create a viable succession plan and extract value from your practice. There are, however, a few things that need to be done to create a realistic exit plan:
- Have your practice valued.
- Set in motion a preferred compensation plan.
- Implement a will for your practice.
Have your practice valued
You need to determine the true worth of your practice. This should be done by an independent professional, using objective measures that can stand up to scrutiny and is fair to all parties. This sets the values used in the next steps.
Implement a preferred compensation plan
This is a structure that will keep the new person in your practice and enable him or her to buy out your shares.
I wrote about this structure in an earlier article and can forward you a copy should you need one.
Implement a will for your practice
If you pass away before retirement, it is important that your successor be in a financial position to buy out your share of the practice. To do this, we set up what is called a one-sided buy and sell agreement.
Here your successor enters into an agreement to acquire your share in the practice. This would be funded by a life policy that pays out to your successor with the accompanying requirement to buy your share of the practice.
I would recommend that you talk to a suitably qualified and experienced financial adviser who can structure a realistic and workable plan.
This would have all the necessary terms and conditions to protect all parties. It would also set out timelines and financial outcomes in detail.
A well-constructed exit plan will enable you to extract the full value from your practice, should you pass away or retire. DM168
Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected].
This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.