| A PRACTICE CONTINUATION PLAN
ENSURES that in the event of death or
disability, a CPA’s practice will go on and its value
will not evaporate. |
TYPICALLY, SUCH AN AGREEMENT
PROVIDES for four basic elements: The
mechanism for a smooth and quick transfer of the
practice, an agreed-on price or valuation method for
the practice, an escape clause for both parties and an
attorney’s review and discussion with the spouse or
THERE ARE THREE TYPES OF
practice continuation agreements: The
one-to-one agreement (usually a buy/sell agreement
written to cover the practitioner’s death or
disability and undertaken with a firm that can absorb
the firm’s work), the group agreement (several CPAs
may act as successors to each other’s firm, and
clients are given the choice of several surviving
firms to choose from) and the state society plan
(local associations or MAP committees assist the
spouse or heir(s) in finding a buyer for the
THE CPA MUST ASSEMBLE A COMPLETE
SET of operating documents, which should
list types of services offered, key employees,
location of accounting records, bank account
information and contracts and lease agreements; a
client list, including key contacts, services provided
and important deadlines; procedures used to monitor
work in progress, so the standby firm can easily
determine the status of uncompleted work; location of
workpapers; description of filing system; and a
complete guide to office procedures.
ONCE THE SOLE PRACTITIONER HAS
ANALYZED the practice, he or she can begin
to develop a realistic valuation for the business. No
discussions with a potential alliance partner should
begin without this step.
THE MOST DIFFICULT FACET OF
VALUING a practice is determining what each
client represents in terms of a future revenue stream.
Eads says to link buyout terms to client retention. If
the client decamps, the buyer reduces payments.
|RICK TELBERG is editor
at large and director of online content for the AICPA
and his views, as expressed in this article, do not
necessarily reflect the views of the Institute. Official
positions are determined through certain specific
committee procedures, due process and deliberation.
fter breaking away from larger regional firms,
CPAs Sharyn Maggio of Shrewsbury, New Jersey, and Michelle
Gallagher of Lansing, Michigan, took the plunge and started an
independent practice in the past year. Brand-new to the world
of sole practitioner—and with the heady tasks of getting and
serving clients, opening and staffing an office and developing
long-term growth strategies—neither has considered the
possibility of untimely death or disability. But some veteran
practitioners and practice management advisers say it’s not
too early for Maggio and Gallagher each to develop a plan to
keep their businesses viable if a setback prevents them from
working for an extended period. This article describes the
practice continuation plan, its key elements, how it helps a
sole practitioner and his or her dependents and clients and
how to take the first steps in implementing a plan.
ALLY AND CONQUER
Although Maggio and
Gallagher have wills, estate plans and life and disability
insurance, neither has a practice continuation plan for her
business. “I’ve thought about doing one,” says Gallagher. “But
I haven’t had a chance to.” Maggio also sees the merits, yet
says she’s too busy taking care of clients. But a practice
continuation plan may be the most important insurance policy a
sole practitioner can have. It ensures that in the event of
death or disability, a CPA’s practice will go on and that its
economic value to heirs will not evaporate.
|The heart of such a plan
is a strategic alliance, spelled out in a contract,
between the sole practitioner and another firm. Under
such an agreement, the second party is ready to
operate and/or buy the practice at the request of the
practitioner or his or her heir or designee. Sometimes
it’s as simple as the buy/sell agreements any CPA
would recommend to a similarly situated client, but
experts say it’s an essential part of any firm’s—or
single owner’s—planning for life’s uncertainties.
Considering the large numbers of CPAs approaching
senior citizenship, San Francisco CPA Jerry Sample
says practice succession is “one of the most serious
issues facing our profession.” || |
Unpleasant Surprises Happen
CPAs are seven times more likely
to suffer a long-term disability than
death, and the value of a practice can
leak away in as little as one to three
Source: Jerry Sample, CPA, San
Yet “too many practitioners don’t have a
practice continuation agreement,” says John Eads, the author
of the seminal text Practice Continuation Agreements,
published by the AICPA in 1992 and still in print (see “
Suggested Reading ”). Eads, who is
now a partner at Smith Jackson Boyer & Bovard in Dallas,
says such CPAs “think they’re bulletproof.”
agreements are a staple—or should be—of any multipartner firm,
notes Bob Gallagher, CPA, a Pittsburgh practice management
consultant. “A sole practitioner can and should have the same
governance and succession documents that a five-partner firm
has.” Wilmette, Illinois-based practice management consultant
Marc Rosenberg, CPA, says many CPAs allow “irrational fears
and anxieties” to prevent them from organizing a needed
alliance. In fact, he says, developing one is “not a big
Ron Stewart, CPA, from Monroe, Louisiana, has
long been an “evangelist” for practice continuation
agreements. Stewart had one in place with a nearby CPA firm,
Heard McElroy and Vestal, for 10 years, partly to provide for
untimely death or disability but also because it broadened the
range of services he could offer clients. “As time passed, we
talked more and more about a formal affiliation,” he says.
Finally, facing what he called “upheavals in technology and
client needs,” he decided to trigger the plan a couple of
years ago, in effect merging to share the workload. “It just
seemed like the right thing to do,” he says. Now, at age 59,
he is a partner at Heard McElroy and Vestal. “It’s the
greatest thing that ever happened,” he says.
HOW AND WHAT
A well-thought-out practice continuation plan can
provide a sole practitioner with a mechanism to expediently
transfer his or her practice; the framework to eventually
merge or sell the practice (offering a turnkey retirement
plan); additional expertise and specialty services not
otherwise available in a single-owner firm; in the event of
death, the smooth sale of the practice and full value to the
practitioner’s heirs; in the event of temporary or long-term
disability, uninterrupted service to clients at a
predetermined fee; assurance to clients that a trusted
provider will continue to handle their affairs; and, not least
of all, peace of mind to the sole practitioner, who, though he
or she may own the firm alone, doesn’t need to feel
The typical practice continuation
agreement provides for four basic elements:
The smooth and quick transfer of the practice.
An agreed-on price or valuation method for
buying/selling the practice.
An escape clause for both parties.
An attorney’s review and discussion with the
spouse or heir(s).
There are three fundamental types
of practice continuation agreements:
The one-to-one agreement.
The group agreement.
The state society plan.
T he one-to-one
agreement usually takes the form of a buy/sell agreement
written to cover the CPA’s death or disability. A sole
practitioner generally undertakes this with a firm that is
large enough to absorb the smaller one’s work without being
overwhelmed. A variation involving two practices of equal size
is a cross-purchase agreement, in which two practitioners
agree to purchase each other’s practice if an untimely event
occurs. Under group agreements, several CPAs may act as
successors to each other’s firms, and clients are given the
choice of several surviving firms to choose from. Under the
state society plan, local associations or MAP committees
assist the spouse or heir(s) in finding a buyer for the
ASSEMBLE DOCUMENTS FOR REVIEW
The overall practice continuation plan begins with the
sole practitioner’s compiling a complete set of practice
operating documents. He or she needs to create a comprehensive
client-list profile, too. The CPA must be able to express a
thorough understanding of the business of the practice. His or
her objective is to use this understanding to induce a
suitable allied practice to act as successor. According to the
Guide to Managing an Accounting Practice (see “ Suggested Reading ”), a complete set
of operating documents may include
A profile of the proprietorship, including types
of services offered, names of key employees, location of
accounting records, bank account information and location of
contracts and lease agreements.
A client list, including key contacts, services
provided and important deadlines.
Procedures used to monitor work in progress, so
the standby firm can easily determine the status of
Guide to using the firm’s computers.
Location of workpapers.
Description of filing system.
Office procedures for handling the receipt and
return of client information.
Billing schedules and collection policies.
Procedures for identifying and paying accounts
Location of personnel files.
ANALYZE THE PRACTICE
The sole practitioner should begin his or her business
analysis with an evaluation of several criteria, according to
Eads’ Practice Continuation Agreements, including
Reputation. How good is your reputation
for client service and technical expertise? How visible is it
in the community? What are your distinguishing
Specialties. What are they? Will the
successor need the same specialties?
Rates and write-downs. How do they compare
in the market? How do they compare with those of the potential
Profitability. What has been the
practice’s gross, net and salary for the past five years?
Location. Is the local economy sound? Is
the market highly competitive? What are lease terms of the
office space? How do the terms compare with the market
Staff. How’s morale? How well do staff
members relate to clients? Are employees likely to remain with
the practice through a transition? Are noncompete agreements
Once the CPA has analyzed the strategic
business components of the practice, it is time to compile the
nitty-gritty details of the client list.
INVENTORY THE CLIENTS
A complete inventory of client profiles is essential for
properly negotiating a fair value for a practice. Eads
recommends that the CPA compile, in columnar schedule form,
the following data on each client:
Name, affiliates and subsidiaries.
Description of business.
Names and ages of principals and their equity
Corporate structure and vulnerability to loss of
Period of time as client.
How client was obtained.
Type and frequency of services rendered.
Function and number of employees needed to
adequately handle the account.
Description of client’s accounting and management
Average fees paid in the past three to five years
for regular and special services.
Number of company and personal tax returns
prepared for principals and others.
Potential for a fee increase.
Direct costs of servicing the client.
Adequacy of client workpapers and records.
Method of setting fees.
Unusual service problems.
Staff problems with client, if there are any.
Once the sole practitioner has properly analyzed
the practice, he or she can begin to develop a
realistic valuation for the business. No discussions
with a potential alliance partner should begin without
this step. Of course, the value encompassed by the
information in the firm’s complete balance sheets and
income statements always is essential. But the most
difficult facet of the valuation is determining what
each client represents in terms of a future income
stream. In addition, valuation methods are varied and
sometimes subjective. An impartial, qualified valuator
can be helpful.
A bout valuing the sole
practitioner’s intangible book of business—that is,
the control and retention of the client list—Eads
recommends basing the buyer’s payments on the
collection of future revenues from clients.
“Structure a payment method on each client that
makes both parties a winner,” Eads says. For
example, “If I buy your practice and retain all of
the clients under my control, then over the
agreed-payment period, I will have paid you 100% of
the value assigned. But if a client goes away in the
first year, I owe you no more payments” for that
client. Each payment is client-specific, and no
other client is allocated any part of the payment.
“This is what I call a win-win situation for both
parties and it is extremely fair,” Eads says. “No
party pays more or no party receives more than the
retained clients’ value.”
value to a client list has always been a difficult
problem for CPA practices. “In the more than 100
deaths of CPAs that I have handled,” Eads says, my
guideline has been that “the practice is worth no
less than normalized cash collected on clients for
the 12 months previous to death.” Eads defines
normalized as continuing, or ongoing, and subtracts
nonrecurring business such as filing a form 706 for
Tips to Organize a Continuation Plan
Source: Practice Continuation
Agreements by John A. Eads, CPA. Issued by
the Management of an Accounting Practice
Committee, AICPA, 1992.
PEACE OF MIND
The ultimate goal of the practice continuation plan is
to identify, approach and partner with a suitable firm. But
where should a sole practitioner search? CPAs active in their
profession and their communities come in contact with
potential partners on a regular basis. Bankers and attorneys
can be a source of referrals, and CPA societies and
professional associations can be a good source for partners.
Eads advises sole practitioners to begin developing
strategic relationships with like-minded colleagues through
their community groups, professional associations and state
CPA societies. For example, the California state society has
been considering a proposal to create a pool of firms willing
to participate in practice continuation agreements, as sellers
or buyers. Most practitioners look for a colleague they have
known and trusted for years. They also may consider their own
staff and former employees or employers. Sometimes an ideal
candidate is right under their nose.
T he process of
considering a practice continuation plan, developing it and,
finally, executing it is marked at every phase with hard
questions for the sole practitioner. They are, to be sure,
questions of life and death. But properly handled, the
practice-continuation-planning process can sharpen the CPA’s
business, help him or her grapple with difficult estate issues
and prepare for the best instead of the worst.
Reading ||e-MAP: Management
of an Accounting Practice Handbook, AICPA. www.cpa2biz.com . |
Management of an Accounting Practice Handbook,
vols. 1, 2 and 3, AICPA, 2003. www.cpa2biz.com .
|Practice Continuation Agreements: A
Practice Survival Kit by John A. Eads, AICPA,
Guide to Managing an Accounting Practice,
Practitioners Publishing Co., April 2002. www.ppcnet.com .