Fix ambiguous fair market value (FMV) calculations in your buy/sell agreement

Perhaps the most contentious area of a buy-sell agreement is the method for calculating buy out. One small misstep can lead to an overvaluation, costing the practice more money than it owes. However, if the practice undervalues the buy out, the departing partner may think he or she deserves more money, leading to an expensive and time-consuming legal battle.

Many groups still use a FMV approach, relying on lawyers and third-party appraisers to calculate the price of a buy out. Using FMV calculations gives lawyers and appraisers quite a bit of latitude to argue about what the buy-out price should be. One appraiser may value the practice significantly higher or lower than another, and this ambiguity can cause complications when a partner leaves.

Practices that opt to calculate a buyout using FMV should include language in the buy-sell agreement stipulating who can conduct the appraisals. You need to make sure that whoever does the valuation has demonstrated experience in valuations of physician practices.

In most instances I advise against using FMV in a practice that uses a productivity-based compensation formula, even if stipulations about the appraisals are included in the agreement. A FMV appraisal values the practice as a whole, overlooking the individual productivity and contributions of individual physicians. Thus, even if it isn’t time for an annual review, if you’re practice has recently revamped its compensation formula to emphasize productivity, it may be time to also revisit the buy-sell agreement.

About the Author

Reed Tinsley CPA

This article is written by Reed Tinsley, a Houston, TX-based CPA with over 30 years of experience advising physicians and medical practices across Texas and the United States. Reed holds certifications as a Certified Valuation Analyst (CVA), Certified Healthcare Business Consultant (CHBC), and Certified Financial Planner (CFP), specializing exclusively in the healthcare sector. He is a published author, nationally recognized speaker, and trusted advisor to physicians on accounting & tax, practice management, and financial planning. Schedule a Free Consultation.