There are lots of areas of financial planning that are important to GPs, but what about business protection?
Experience tells us that failure to adequately protect your business in the event of illness or the death of a partner or key employee can expose it 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 could be very difficult for the business to continue and it’s important for partners to establish the answers to the following questions in advance:
If a partner or key employee is absent from work through illness or accident:
- Where would the liability to pay for a replacement lie?
- Would the practice have sufficient resources to meet its sick pay obligations?
Additional considerations if a partner was to die:
- In the absence of an alternative agreement, the deceased partner’s share of the business would pass directly to his/her family or estate – would they be prepared to sell to the existing partners and would the existing partners be able to raise the finance?
Whoever joins the practice must be mindful of the possibility of losing patients who have a particular loyalty to the GP who has left or died. The potential for loss may be reduced if an existing GP, familiar to the patients, is able to take over the business.
Fortunately, most of these issues can be avoided with careful planning.
It’s important for partners to seek legal advice when setting up a partnership agreement, and one of the considerations should be what happens to the business on the death, illness or retirement of one of the partners.
For instance, is it the intention that a long-serving employee takes over the partner’s share? Has this been clearly stated in the partnership agreement and, if so, what else needs to be considered to allow this to happen?
Transfer of ownership in the event of the death of a partner can be agreed in advance. In order to provide the surviving partners with the funds to buy the deceased’s share of the business from his or her estate, each partner can effect a life assurance policy equal to their share of the business on their life.
A suitable trust will ensure that the funds go to the right people when needed. Adding a double option agreement gives the family of the deceased the option to sell their inherited share of the business to the remaining partners. It also gives the partners the option to buy the share of the business from the deceased’s family.
This option means that each party has to agree if the other party chooses to exercise their option; it is often utilised as it is generally the most tax-efficient method.
A key person is someone whose death, critical illness or disability would have a major effect on the future profits of your practice, whether this is through lost business or increasing costs associated with hiring a locum. 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 partners can plan for this eventuality by taking out key-person protection on named individuals. The policy will pay out an agreed sum that safeguards business profits or, in the case of a locum policy, pays out a weekly benefit to meet the costs of hiring a locum or the costs incurred by other partners or employees backfilling the role.
In its very simplest form, locum assurance provides a practice with the ability to cover the cost of employing a locum if a partner or salaried GP is unable to work due to sickness or accident.
However, in many practices today it’s not only the work of GPs that needs to be covered, but also key staff such as practice managers and nurse practitioners. In this case, it makes sense to find a policy that provides cover for all staff who play an active role in the provision of services.
The cost of employing a locum varies from region to region, but wherever you live you’ll find it’s an escalating expense. In parts of England you could pay up to £700 per day for locum GP cover.(1)
Given that more than 76% of the claims Wesleyan Medical Sickness paid out to practices in 2009 were for illnesses of more than 60 days, it doesn’t take a financial expert to realise that the cost of providing locum cover on a long-term basis will be a major expense.
Business protection is a complex area and it’s important to seek professional advice to plan for the eventualities outlined in this article.
1. UK survey of GP locum earnings – February 2009.
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.