By Peter Larkin and Thomas Manisero
If you become disabled or die tomorrow, what would happen to your accounting practice? Could your family step in and run the practice? Could your executor sell your practice quickly enough to secure any value for your family? The most likely answer to these questions is “no” if you do not already have a plan in place.
A 2012 survey of CPA solo practitioners suggests that more than 95 percent of “solos” cannot answer “yes” to any of those questions. The survey results are not much better for multi-owner firms. Yet, an accounting firm that loses its leader can lose most of its clients and staff in as few as 30 days. Without a plan, clients will find a new accountant and key employees will find new jobs. A significant disability can be just as disastrous because disability insurance will not service your clients or manage your firm.
A potential solution for many practitioners is a practice continuity agreement (PCA), a written contract with another professional or firm to (a) step in and manage your practice if you are temporarily disabled and/or (b) purchase your practice if you are permanently disabled or pass away.
The person or firm you select to manage your business during a temporary disability may differ from the right person or firm to purchase your practice, so these two aspects of the PCA probably should be considered separately.
Temporary management
Temporary management of your practice focuses on preserving your business, which requires someone to shepherd your practice while you are unable to work. At a minimum, this person must be technically competent, able to manage your clients and your staff, and have the capacity to take on the additional work. If you have a niche practice, you need someone who can serve that niche. If you have very senior staff, possibly one of them can manage the practice, which allows for greater continuity since your staff knows your clients and your business; but you have to be certain your staff has adequate experience. If you look outside of your firm, you need to make sure that the person or firm you choose has the capacity to absorb the additional work, which is extremely important if you have limited staff or do most of the work yourself.
Unless you are able to entrust your practice to an existing employee, you are going to have to pay to have your practice managed. Typical arrangements involve either a percentage of the fees collected during your absence or a rate structure for the time spent managing your practice. Purchasing disability insurance and possibly other insurance coverage will help meet this financial obligation.
A temporary arrangement to preserve your practice needs to include appropriate legal safeguards to help ensure that the CPA you invite into your practice does not treat you unfairly. Nondisclosure and noncompete provisions are standard.
Permanently transferring your clients
The structure of a PCA designed to permanently transfer your clients is very similar to an asset purchase agreement. Payment typically is received over a number of years and frequently is based either on a predetermined value for each client that moves over or on a percentage of fees collected from the new business. Accordingly, many of the same considerations that would go into selling your practice also go into negotiating this type of PCA.
One very notable difference is the fact that neither party to the PCA will know with any certainty when the successor will be called upon to perform. Due to this uncertainty, you will need to focus on how the successor will satisfy his or her financial obligations under the PCA. Parties often build life insurance into the PCA to ensure that the PCA”™s financial obligations can be met. You also will need to plan on meeting at least once a year after the PCA is executed to determine whether modifications are necessary.
Since PCAs often tie payment to the clients that move over or fees received by the successor, you will need to make sure that you have laid the groundwork for a smooth transition. You should tell your clients and staff about the PCA and consider introducing important clients to your successor. Your family, staff and attorney need to be ready to assist in the transition when the time comes. As soon as a transfer of clients is triggered, notification should be sent to the clients so they are the first to know and do not learn about the transition from another source.
Finally, your PCA should be carefully reviewed by an attorney to make sure it fits into your overall business and estate planning and provides the greatest protection to you and your family as well as to your staff and clients.
The authors are attorneys at Wilson Elser Moskowitz Edelman & Dicker L.L.P. Peter Larkin co-chairs the firm”™s national accountants practice. He can be reached at (914) 872-7847 or peter.larkin@wilsonelser.com.
Thomas Manisero provides general counsel services to numerous accounting firms and organizations. He can be reached at 872-7229 or thomas.manisero@wilsonelser.com.
