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There are lots of areas of financial planning which are important to dentists, but what about business protection?

Experience tells us that failure to adequately protect your business in the event of illness, death or retirement of the Principal could leave your business exposed to unnecessary risks.

Business protection is about planning for this eventuality, to ensure that the right money will be placed in the right hands at the right time.  If no prior agreement is in place, it will be very difficult for the business to continue and it’s important for Associates to establish the answers to the following questions in advance:

If the Principal retires or leaves unexpectedly

• Would the Principal give current Associates the option to buy them out or would the Principal prefer to sell to the highest bidder?
• If the Principal agreed to sell to the Associate, could they raise the required finance?
• Who will maintain the business whilst transfer of ownership is taking place?

Additional considerations if the Principal was to die

• The business would pass directly to the Principal’s family or estate - would they be prepared to keep the business running or would they want to sell as soon as possible?
• As they are unlikely to have an existing relationship with the Associate, will they be more likely to sell to the highest bidder?

What happens to the NHS contract?

• The NHS contract will have been agreed with the Principal (Contractor).
• In each of the instances above, the contract is no longer valid and there are no UDAs to fulfil.
• Would the PCT be prepared to renegotiate with one of the Associates?
• Or would they see this as an opportunity to alter the terms or re-contract in another area with access issues?

What would be the value of the business if the contract was lost?

• If the business could no longer continue as a dental practice, goodwill would be significantly reduced. Although the fixtures and fittings would have a resale value, the business would just be valued as a vacant commercial property.

What happens if it is a Private Practice?

• Whoever takes over the practice must be mindful to the possibility of losing patients who may have a particular loyalty to the dentist who has left.
• The potential for loss may be reduced if an existing Associate who is well known to the patients is able to take over the business.

Fortunately, most of these issues can be avoided with careful planning.

Principal / Associate contract
It’s important for Associates to seek legal advice when setting up a contract and one of the considerations should be what happens to the business on death, illness or retirement of the Principal?

For instance, is it their intention that the Associate takes over the business?  Has this been clearly stated in the contract and if so, what else needs to be considered to allow this to happen? In particular, Associates need to think about what will happen to the NHS contract as discussed above.

Double-option agreements
Transfer of ownership in the event of the death of the Principal can be agreed in advance. A life assurance policy equal to their share of the business is effected on the life of the Principal - adding a double option agreement gives the family of the deceased the option to sell their inherited share of the business to a nominated Associate.

It also gives the Associate the option to buy the share of the business from the deceased’s family. 

This type of option means that each party has to agree if the other party chooses to exercise their option and is often considered as this is generally the most tax-efficient method.

Key-person protection
A key person is someone whose death, critical illness or disability would have a major effect on the future profits of your practice. This can include employees who have no financial stake in the business but play a fundamental role in its success, such as a Practice Manager.

The Principal can plan for this eventuality by taking out key-person protection on named individuals – the policy will pay out an agreed sum which safeguards their business profits during the period it takes to find and train a replacement.

Whilst this situation might not concern Associates, they do need to consider what would happen to their income in the event of the death, critical illness or disability of the Principal. 
As the Principal/Associate relationship is quite different from a traditional employer/employee relationship, it is not technically possible to set up key-person arrangement for an Associate on the life of a Principal

However, it is possible under certain circumstances for the Associate to receive the benefits of a plan on the life of a Principal as long as they can clearly demonstrate that insurable interest exists.  This can only be done on a case by case basis with the insurer who will require sight of the Principal/Associate contract and possibly the accounts of the practice.

Careful planning is required to ensure the correct type of plan is put in place that recognises the arrangement as a business and not a personal expense.

Next steps
Business protection is a complex area and it’s important to seek professional advice to plan for the eventualities outlined in this article. 

	Your local Wesleyan Medical Sickness Financial Consultant deals only with the dental profession and has an in-depth understanding of these issues. They can give advice tailored to suit your individual circumstances so to find out more, please call 0800 980 1887 or complete the contact request form today.

Wesleyan Medical Sickness is a trading name of Wesleyan Financial Services Ltd, which is authorised and regulated by the Financial Services Authority. Wesleyan Financial Services Ltd is wholly owned by Wesleyan Assurance Society. Registered No. 1651212. Head Office: Colmore Circus, Birmingham, B4 6AR. Fax: 0121 200 2971. Telephone calls may be recorded for monitoring and training purposes.