PART 3 OF 4: Valuation and Funding

Setting the price of a departing interest and paying for it.

Two questions determine whether a buy-sell works in practice: how a departing owner's interest is valued, and how the buyout is funded. An agreement that specifies a buyout but leaves these unresolved can fail exactly when it is needed. This part addresses valuation and funding.

Choosing a valuation method

The agreement should specify how a departing interest is valued, rather than leaving it to be negotiated during a crisis. Common approaches include a formula, a set price updated periodically, or an independent appraisal at the time of departure. Each has tradeoffs between predictability and accuracy, and the chosen method should suit the practice.

The importance of a clear method

Valuation disputes are among the most common and most bitter buy-sell conflicts. A clear, agreed method, applied consistently, prevents a departing owner and the remaining owners from fighting over what the interest is worth at the worst possible moment. Clarity matters as much as the specific method chosen.

Funding the buyout

An agreed price means little if the practice cannot pay it. Buy-sells address funding in several ways:

• Life insurance to fund a buyout on an owner's death.
• Disability insurance for a disability-triggered buyout.
• Payment over time through a promissory note where a lump sum is not feasible.
• Reserves or financing arranged in advance.

Matching funding to the trigger

Different triggers call for different funding. A death buyout is well suited to life insurance; a retirement may be funded over time; a removal for cause may carry extended payment terms. Aligning the funding mechanism with each triggering event ensures the buyout can actually be paid when the event occurs.

Keeping valuation and funding aligned

Valuation and funding must stay in sync. If the agreed value rises over time but the funding, such as an insurance policy, does not keep pace, the practice can face a shortfall. Periodic review of both together keeps the agreement able to deliver what it promises.

How West Coast Health Law Can Help!

We help practices choose valuation methods and funding mechanisms for their buy-sell agreements, so a departing owner's interest can be valued fairly and actually paid.

West Coast Health Law offers a FREE consultation which you may schedule by clicking the button on our website.

This article is provided for general informational purposes only and does not constitute legal advice or create an attorney-client relationship. Laws change and every transaction is different; consult a qualified attorney about your specific situation.