Succession Planning for Professional Practices

December 11th, 2017

For most business owners, their business is a source not only of income but of personal and professional pride. It may represent, aside from raising a family, the most significant achievement of their lifetime. Given the importance of the business in their life, it is surprising how many people fail to plan for the future of their business after their retirement or death. Careful succession planning greatly increases the likelihood that a business will continue to thrive after the departure of the current owner. Planning ensures a smooth transition and continued excellent service to clients and customers. Succession planning for any business requires careful forethought; succession planning for professional practices is even more complex.

With a commercial business such as a store, there may be numerous employees who have years of experience with the business, its operations, and clientele. Any of these individuals may be in a position to step into the shoes of the current owner if needed. Similarly, a family member may be able to take over the business with minimal training. Succession planning makes the transition much easier, and minimizes the risk of lost business during the change, but it is at least possible that the business could survive the chaos of an unplanned transition.

The Unique Succession Planning Needs of Professionals

By contrast, with a professional practice, particularly a solo practice, failure to plan for succession virtually assures the failure of the practice. The principal asset of professional practices is the training, skill, and licensure of the professionals who own them. If a doctor with her own practice were suddenly to pass away, even the most experienced nurse at the practice would be unable to continue operating the office.

There is no question that the succession planning needs of professional practices, including medical, dental, legal and accounting practices, are unique. They have ongoing relationships with clients and patients, whose needs must, from an ethical standpoint, be considered in the transition. They have specialized staffing requirements, as noted above, and liability concerns. All of this is in addition to the fundamental business operations that require planning. If you are a professional, the sooner and more comprehensively you plan for the future of your practice, the better.

First, consider what you want the future of your practice to be. Will you wind the practice down before you retire? Do you have an adult child or grandchild in the profession to whom you intend to pass it upon your retirement or death? Will you sell the practice to an associate or younger practitioner? The future you envision for your professional practice will dictate your first steps.

Considerations in Professional Practice Succession Planning

As you begin your succession planning, consider ethical requirements. There are likely limitations imposed by law or your professional governing body as to who is permitted to access client or patient records in the event of your absence or death. You may be ethically restricted, for instance, from allowing the executor of your estate to have access to documents from your practice.

You may also be bound by the need to retain records for a given period of time. Confirm with your profession's governing body as to how, and how long, records must be retained. This will impact how you are able to make these records available to a successor who needs to step into your shoes.

Once you have identified a successor, how do you make the transition? You could create a straightforward succession agreement that will specify who is to manage the practice during your temporary or permanent absence. This agreement should address compensation for the successor in the event of your temporary absence, or compensation for your estate if the successor takes over the business in the event of your death or permanent incapacity. Valuing a professional practice is a complex matter that can be approached in different ways. Your estate planning attorney can guide you to a professional who specializes in valuing professional practices.

You may want to reconsider the structure of your professional practice itself. Many professional practices are established as Limited Liability Companies (LLCs). Reconfiguring your entity structure as a manager-managed LLC gives you the option of naming a successor manager. That person is then positioned to step into your professional shoes on a temporary basis if needed, or to transition or sell the practice after your death. Having a successor manager in place will reassure your patients or clients during any transition, as well.

Regardless of how the transition is structured, you will want to create a set of explicit operating instructions to offer your successor practical guidance on everything from which suppliers and service people the practice uses to important passwords and accounts.

Lastly, consider "synching" your personal estate plan to refer to your professional practice succession plan, so that the executor of your estate (or trustee of your trust) will be aware of the succession plan you have put in place. Speak with your estate planning attorney about creating a professional practice succession plan and coordinating it with your existing estate plan.

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