Smooth Transition to Retirement: Key Steps for Medical/Specialist Practice Owners in Business Succession Planning

In this article we will refer to Business Succession Planning as the planning of the transfer of your (and your business partners’) interest in your business to a successor by retirement, including early transition to retirement.

This article is part of a series developed specifically for Medical/Specialist Practice Owners. See also:

We will not cover Business Succession Planning arising as a result of death or Total Permanent Disability, for further information on this type of succession planning, please refer to our e-guide below for more detail.

Business Succession Planning Guide

Financial certainty and peace of mind for business co-owners in the event of death, disability or serious illness.

There are many benefits for owners to plan for the transition of management and ownership, including:

  1. Survival and growth of the business or its assets — under the current structure or after sale or restructuring,
  2. Cooperation and harmony when the business is family owned,
  3. Potential tax savings,
  4. Maximisation of asset value, and
  5. Ability to retain control while transitioning into retirement.

A Business Succession Plan will be formulated on the personal circumstances and preferences of the business owners, current business structure and current market. Some of the options are:

  1. Adding a business partner to work alongside you, or selling at different intervals to a current business partner, so you gradually lessen your responsibilities and control in the business,
  2. Sell the business to a third party, or
  3. Retain your current structure and wind-down the business when looking at retirement.

This article will focus on the first two (2) options above.

First Steps When Planning for Your Retirement

With either option, the best first steps are to:

  1. Seek advice on the value of your business/share: prior to making any formal offers, it is best to have an idea of what your business/shares/units are worth and how any sale will be treated from a tax perspective; we suggest seeking specialist advice from your Accountant/expert valuer; and
  2. Undertake a legal and financial health check of your business: making your business as desirable as possible to a purchaser will not only make it easier to sell the business/shares/units, but can also increase the value of your asset and ultimately the price you will receive. In our experience, this includes:
    1. reviewing the ownership of tangible assets, and whether any security interests exist over same which can be removed,
    2. confirming that the business holds all appropriate licences and authorities to conduct the business,
    3. reviewing the current lease of the business premises and determining whether a new lease should be negotiated, particularly if the term is due to expire and there are no further options available,
    4. assess any key contracts and the validity and ability for same to be transferred if a sale of business occurs,
    5. documenting any key contracts that are yet to be documented, such as supplier contracts and employment contracts,
    6. determining whether there is any value in the IP associated with the business and whether same is adequately protected,
    7. confirming all financial and accounting documentation is up to date and lodged, and
    8. documenting and implementing adequate policies and procedures.

Adding a Business Partner to a Medical Practice

Adding a business partner to your Medical Practice is a great way to start an early transition to retirement, while maintaining majority control/ownership in the beginning and slowly giving over control/ownership to the succeeding partner at your discretion, or at pre-negotiated intervals. Typically, business owners have a key staff or family member in mind for this role.

Some of the main considerations when adding a business partner are discussed below:

Assessing Current Structure

It can be tempting when thinking about adding a partner to your practice to focus on the future and what you want your future medical practice to look like. However, the first step we recommend considering is to get an understanding of the structure of your practice right now.

You should first analyse the structure that is currently in place because it helps you to determine how, and if, a partner can be easily added to your practice within the existing business structure. For example, if your business is set up in a trust structure, can the new partner purchase additional units?

At this stage of the process, a discussion with your Solicitor and Accountant can be really valuable. A Solicitor and Accountant will be able to help you look at the tax effectiveness unique to your circumstances and the legal protections that different structures can offer your practice.

What the best way forward is, will depend on your individual situation. For example, you might be part of an existing practice that has a number of partners already, and you are looking to bring in someone new into the practice, or sell to the current partners. In this case, the current structure may be sufficient and adding a partner could be a relatively straightforward process. If not, then you may be better off with a change in structure.

Document What is Agreed and How the Relationship will Work

Having well drafted Contracts in place is invaluable to avoid costly and lengthy disputes and make sure all parties are on the same page. The typical Contracts that will be required in this scenario are a Share/Unit Sale Agreement and a Share/Unit Holders Agreement. The Sale Agreement will focus on the agreed terms of the sale and the Share/Unit Holders Agreement will stipulate the terms of the working relationship as well as avenues to deal with disputes, sell additional shares/units and duties and obligations of each party.

The benefits of a Share/Unit Holders Agreement are further discussed in our article, When and Why You Need a Shareholders’ Agreement; and What Should it Cover.

If you do not currently have a Services Agreement in place, it would be a good idea to put this in place prior to bringing on a new partner. This not only documents a likely already established procedure making the sale more desirable, but provides you control over the terms of the agreement.

Selling Your Business

Selling your business is the step you can take if you wish to either have no further involvement in the business or wish to step down into an employee role with no management responsibilities.

There are additional steps that need to be taken for a sale of business, rather than a sale of units/shares, including assignment of key contracts and any lease, the transfer of employees and attending to the transfer/appointment of preferred providers, HICAPS etc. This is because there will be a change in ownership with a sale of business, that will not occur with a sale of share/units as the company/trust will remain the owner of the business.

Documenting the Transaction

Once you have decided to list your business for sale, and throughout the transaction, it is important to have well drafted Contracts in place as required. The typical Contracts that will be required in a sale of business will be:

  1. Sale of Business Contract,
  2. Confidentiality Agreement (to prevent a proposed purchaser from reviewing your business records, deciding not to purchaser and using the information to their own advantage),
  3. Agreements to assign relevant contracts, such as the Lease,
  4. Loan/Security Agreements if you will vendor finance any of the sale, and
  5. Deed of Restraint of Trade (typically required by a purchaser to prevent you from establishing a competing business or enticing away clients of staff post completion).

Some of the primary terms that can/should be included in a Sale of Business Contract and contemplated in the negotiations relating to the sale include:

  1. Purchase price,
  2. Deposit,
  3. Relevant dates, including completion date,
  4. Stock, is this included in the price or will a stock take occur,
  5. Conduct of the business until completion,
  6. Vendor warranties (or promises),
  7. Training to be offered to the purchaser in the pre and post completion period,
  8. Restraints that you will agree to,
  9. Adjustments to the purchase price, for example employee entitlements and pre-paid rent,
  10. What happens on completion,
  11. How the lease on the premises is to be dealt with,
  12. The transfer of employees,
  13. Special requirements relating to the business or industry, for example transfer of license, HICAPS, etc.
  14. Consents or approvals relating to the premises, for example Landlord’s consent,
  15. Key employees to transfer over and sign written employment agreements, and
  16. Key contracts that need to be assigned/novated for business to continue.

Final Word

Whatever way you decide to transition into retirement, we recommend engaging legal and financial experts to assist with undertaking a pre-sale due diligence of the business, establishing a proposed sale price and negotiating and documenting the sale and potential continued involvement in the business. This will ultimately maximise your returns and set you up for an easier transition.

Business Lawyers for Sydney and Newcastle

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The information in this article is not legal advice and is intended to provide commentary and general information only. It should not be relied upon or used as a definitive or complete statement of the relevant law. You should obtain formal legal advice specific to your particular circumstance. Liability limited by a scheme approved under Professional Standards Legislation.

Solicitor Director
Accredited Specialist (Business Law)