One of the interesting statistics I learned during my recent training as a Certified Exit Planning Advisor is that nearly 50% of all business exits are unplanned for, and almost always a result of “The 5 Ds”. Here’s a quick look at what they are and more importantly, what you can do about them.
DEATH- A buy sell agreement pre-funded by term insurance is your best bet here. For solo practice owners with no designated buyer on deck, your practice immediately becomes a non-operating asset. If you do have a potential buyer (like an associate), make sure your buy-sell agreement is in writing with a valuation formula. Solo practice owners can proactively cross-insure buy-sell agreements with other local, non-affiliated ODs.
DISABILITY- Single doctor practices, listen up. If something happens to you, even temporarily, it will at best reduce your cash flow and and at worse, severely hamper the long term value of your practice. Pretty much everyone has a personal disability policy (and if you don’t, go buy one!), but less common is a Business Overhead Expense policy that basically keeps the lights on in the event of disability.
DISAGREEMENT- Disagreement can come in many fashions-- your partner, your bank, your customers, vendors, alliance groups…. A fallout with any of these resulting in legal action can bankrupt a business. Errors and Omissions policies can cover much of this, but your best bet in all these cases is to document, document, document any and everything that can go wrong so that if something does, there’s a binding plan in place for how to address it.
DIVORCE- Unfortunately, you can’t insure against divorce, but newlyweds can execute a pre-nup, or even a post-nuptial agreement stating that the business stays with the owner. It doesn’t mean you wouldn’t owe alimony from the cash flow, but taking ownership off the table in the event of a split is the best approach to handling such a large asset.
DISASTER- This one stumps me the most. Yes, an insurance policy can rebuild your business and repurchase your equipment, but when wildfires in California burn down whole towns or hurricanes wipe out whole cities like New Orleans….. Well, some things are harder to overcome. This is why it’s so critical to build wealth outside your practice. If something happens, you have resources to start over with.
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