Passing on a professional practice

Medical, legal, accounting, dental and similar practices face a specific constraint: in most jurisdictions, ownership is restricted to licensed practitioners.

The ownership restriction

Rules vary by profession and by state, and the general position is that non-licensed persons may not own an interest in a professional practice.

Which has direct consequences for succession.

The practice generally cannot be left to a spouse or children who are not licensed in the profession.

Estates are frequently given a limited period to dispose of an interest held by a deceased practitioner, after which it must be transferred or the entity dissolved.

Which means the family's interest is in the value, not in the practice itself, and realising that value quickly is the practical objective.

What the practice is worth

Frequently less than the practitioner assumes, and highly variable by profession.

Practices with recurring client relationships and transferable systems — accounting, dentistry, some medical specialties — generally have identifiable goodwill value.

Practices where the clients come specifically for the individual, and would not remain with a successor, have much less.

The distinction is sometimes described as practice goodwill versus personal goodwill, and it matters for both valuation and tax.

Personal goodwill may be treated differently in a sale, and allocating value between the two is a matter for professional advice.

The succession routes

Sale to a partner, where the practice has more than one principal.

The partnership or shareholder agreement should govern this, and where it does not the situation is difficult.

Sale to an associate, generally an employed practitioner being brought toward ownership.

The common structure is a period of employment followed by a staged purchase, which allows the clients to transfer relationship by relationship.

Sale to an external practitioner or group, which has become more common as consolidators have entered several professions.

Merger with another practice.

Orderly closure, with clients referred on and files transferred appropriately.

The agreement that matters

A partnership or shareholder agreement dealing with death, disability, retirement and departure.

This should cover valuation, payment terms, restrictions on transfer, and what happens to the deceased partner's estate — including the timeframe within which the interest must be dealt with.

Funding it with life and disability insurance is standard and frequently omitted.

Without such an agreement, the surviving partners may face an obligation they cannot fund, and the estate may hold an interest it cannot legally retain.

Client and patient obligations

The dimension unique to professional practices.

Client files, patient records and ongoing matters carry obligations that survive the practitioner.

Records must be retained for periods set by professional and legal requirements, which continue after a practice closes.

Clients must be notified and given the opportunity to obtain their files or transfer to another practitioner.

Confidentiality obligations continue.

Many professional bodies require practitioners to have arrangements for the orderly handling of matters on death or incapacity, and some require a nominated successor to be identified in advance.

Checking the requirements of the relevant body, and complying with them, is both an obligation and a practical protection for the family.

The tail liability

A specific issue.

Professional liability policies are frequently written on a claims-made basis, meaning they respond to claims made during the policy period rather than to incidents occurring during it.

When a practice closes or a practitioner dies, the policy ends, and claims made afterwards about earlier work may be uncovered.

Extended reporting coverage, commonly called tail coverage, addresses this and must be purchased.

The cost is significant and it should be planned for as part of any exit, and it should be addressed in any partnership agreement.

The contingency arrangement

For sole practitioners in particular.

A written arrangement with another practitioner willing to step in temporarily on death or incapacity — to notify clients, handle urgent matters and secure records.

Many professional bodies encourage or require this, and a reciprocal arrangement between two sole practitioners costs nothing and addresses the situation most likely to cause harm.

General information only, not legal or professional advice. Ownership restrictions and professional obligations vary by jurisdiction and profession — consult your professional body and a qualified attorney.