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While Buy-Sell Agreements are incredibly valuable tools for any small business to have, they are particularly important for professional corporations. The best time to have a Buy-Sell Agreement drafted for your California professional corporation is in the beginning, after the corporation is formed and often before the corporation begins doing business. Not only is this usually a time when all the owners are on the same page with where they want the business to go, they are also often in the best position to amicably determine how an owner’s interest should be purchased by other owners or the company upon the occurrence of a “triggering event”.
Triggering Events for California Professional Corporations
A triggering event is an event that would trigger the Buy-Sell Agreement to dictate how the business and ownership is affected in the event of the following scenarios:
- Unexpected death or disability of an owner
- Divorce proceedings of an owner
- Individual bankruptcy proceedings of an owner
- And retirement of an owner
For many California professional corporations, other events could also be triggering events, such as:
- One owner leaving the practice to go out on their own
- Bringing on additional owners
- Loss of professional license by an owner
California professional corporations often have these additional considerations due to required professional licensing and board certifications, particularly within the medical/healthcare field. While many people forming a professional corporation often start from the idea of a long-term, death-do-us-part business relationship, that may not always be the case. Whether your goals for your California professional corporation lean more toward a long-term practice looking to protect owners against events in the first list, or you envision your professional practice as more of a launch pad for future career moves or practice expansion events in the second list, a Buy-Sell Agreement can be essential to covering your bases and protecting the best interests of your business. A good San Diego corporate lawyer can help.
San Diego Personalized Buy-Sell Agreements
A Buy-Sell Agreement for your California professional corporation should be custom-drafted to meet the specific needs of your business. This can also include spelling out the rights, responsibilities and expectations of the owners with respect to how the professional practice operates day-to-day. Like a traditional shareholder agreement, a Buy-Sell can also address with these issues:
- Owner Voting
- Profit/loss distributions
- Employee and hiring procedures
- Voluntary triggering events for dissolution/buyout
- Involuntary triggering events such as the “four Ds” (death, disability, divorce, deadlock) and more
- Expected termination/dissolution date
- Modification procedures
- And more
As noted above, beyond these traditional issues, a Buy-Sell Agreement for a California professional corporation places heavy emphasis on policies and mechanisms for monetizing the practice and on the buy-out procedure/valuation process. If the goal is to sell the practice quickly to the highest bidder, then, necessarily, there needs to be a careful, detailed and easily calculated pay-out formula that avoids litigation. Expensive and time-consuming litigation is a major impediment to “cashing-out.”
If the goal is to create a “launching pad” for the participants, then the Buy-Sell Agreement can include making explicit allowances for beyond-the-practice business activities. The participants may want plenty of “space” to build their own personal brands and to begin building their next career vehicle. At the same time, the Buy-Sell Agreement should provide for valuation adjustments if some participants are focusing on the practice. Consult your experienced San Diego corporate attorney to decide what provisions are best for your business and whether you wish to include specific language for your personal situation.
California Professional Corporation- Medical Practice Example
These efforts are not necessarily in conflict and can be mutually beneficial. Take a physician practice, as an example. Maybe one of the doctors involved — let’s call her Dr. Maria — wants to become an on-air, on-line, or other media personality. In her efforts to build her own personal brand, Dr. Maria mentions and highlights her involvement in her professional practice. This is good for the practice since it serves to strengthen the professional practice’s brand and marketability. This helps the practice grow, helps revenues, helps the marketability and value of the practice when sold, etc. Thus, it is not automatic that personal brand-building should reduce a partner’s share of the “cash-out,” but these are decisions to be made by the professionals forming the practice.
On the other hand, maybe one of Dr. Maria’s colleagues, Dr. Joseph, who is also a physician in the same practice, is ready to retire. A Buy-Sell Agreement will provide for what happens to Dr. Joseph’s patients- notifying them of his retirement, their option to remain as patients and see other doctors at the practice, or move to another physician; the Buy-Sell Agreement will also determine what happens to Dr. Joseph’s ownership interest and how the other owners or the company will buy his interest, or possibly dissolve the whole practice- depending on the desire of the owners.
Call San Diego Corporate Law Today
If you need legal advice relating to setting up your professional corporation, call experienced business attorney Michael Leonard, Esq., of San Diego Corporate Law. Whether you want a Buy-Sell agreement or a more traditional shareholders/founders agreement, Mr. Leonard has the skills and experience to prepare whatever agreement your professional practice needs. Mr. Leonard has been named a “Rising Star” for 2015, 2016 and 2017 by SuperLawyers.com. Call Mr. Leonard at (858) 483-9200 or contact him via email.