Let me give you a scenario.
Imagine this, you are a sole practitioner or a practitioner in partnership with others. The size of the firm or number of equity holders doesn’t really matter. You leave the office on a Friday night without a care in the world; life is good.
By Sunday night you are in hospital suffering from a major medical emergency. To add to this, you are in the process of selling your equity in the practice or the practice as a whole. You are a key person who manages many of the more significant clients of the firm, therefore your involvement in the transition post transaction is important. Agreement has been reached around the terms of the deal and all parties are pleased with the proposed outcome, however this is yet to be documented in a signed contract for sale.
So, at this very point in time, it is established that there is no partnership or proprietorship agreement in place, nor does anyone hold an active power of attorney for you.
Not only does the sale of the practice now come under jeopardy because you are unconscious and unable to execute contracts, but no-one is able to step in to represent your interests in this process. So the transaction looks like it could be heading south, costing not only your family the realisation of the wealth within the practice, but also that of your colleagues in the partnership.
Yes, it could be argued that larger firms are able to cope and move forward with such scenarios more effectively for no other reason than they have a greater number of potential candidates to purchase your equity. However, without a power of attorney, who will represent your best interests? We certainly see some partnership or proprietorship agreements address the issue of incapacitated equity holders, however often these parameters don’t kick in until a reasonable period of time has lapsed.
Moreover though, it is astounding the number of firms we see without partnership or proprietorship agreements at all, or where such agreements are ineffective or fail to address such events at all. Most disappointingly is where the agreements are in placed but have failed to be executed and are therefore ineffectual. Importantly, we are not commenting on this from a legal perspective but from a practical point of view.
This is a reality, so whether you are considering the sale of your practice/equity right now or such transactions are well off in the future, please don’t leave your family and yourself vulnerable and unable to realise some form of value from your many years of hard work in practice. Please make sure you have the correct legal documentation in place to protect what is often a significant asset in your family’s overall future and wellbeing.
Rob Knights and Co can hold your documentation safely in case an unforeseen event occurs. Sign up to our Practice Protection plan. We will hold your essential business documentation securely and release it if necessary to your nominated contact.