Who Would Run Your Firm?

Practice continuation agreements help plan for the worst.

February 2011
by Joel Sinkin and Ira Rosenbloom/Journal of Accountancy

There comes a time when every sole practitioner or small firm owner needs to consider the consequences of a disruption in leadership of his or her CPA practice. Illness, disability, family obligation or death can be devastating for the CPA’s clients, family and employees. Proper planning, however, can mitigate the consequences.

Several powerful planning options are available. This article addresses practice continuation agreements as a first step for protecting a practice.

Practice Continuation Agreements

A practice continuation agreement is a contract between a practitioner (or firm) and another CPA firm or trusted employee, to take over a practice permanently or temporarily depending on the circumstances.

Practice continuation agreements (PCAs) spell out the terms and conditions for the takeover. The core business elements of a formal PCA include:

  • A definition of the circumstances that will trigger the activation of assistance.
  • The financial terms for the assistance process or the purchase of the practice in the event of the death or permanent disability of the practitioner.
  • Non-compete and restrictive covenant provisions for the period of coverage and subsequent to the coverage relative to clients and staff.
  • Specific professional responsibilities to be performed by the covering party and how a party can terminate the agreement.
  • Billing and collection protocols and procedures to be followed during the coverage period.
  • Record retention and return of record provisions.
  • Definition of permanent disability, temporary disability or leave of absence.
  • Notification of activation of coverage and transfer back of practice.
  • Approved agent to act on behalf of the party requiring coverage.
  • Staff and client retention obligations.

The agreement should spell out not only a permanent replacement but also a temporary replacement. If an owner is expected to miss an extended period, he or she must know that the PCA partner can step in and keep the ship sailing. PCAs are not substitutes for disability or life insurance but are considered supplementary to insurance.

There is no payment to the other firm for setting up a PCA. Typically, for a PCA to work, the temporarily disabled (or deceased) owner should have previously agreed on terms that would make it worth the time for another firm to step in. If the firm that is backing you up is not properly compensated to maintain your firm, this solution may not work well. Compensation to the PCA partner taking on the responsibility of the practice may include pay based on collections received, his or her chargeable hours (frequently at a small discount) or the like. “Sometimes money is not the motivating factor, however, if practitioners are close friends or are part of a local practice continuation group whose motivation is to keep the CPA brand strong in their region,” said Heidi Brundage, a technical manager in the Private Companies Practice Section at the AICPA. Brundage educates firms throughout the country about the importance of a practice continuation agreement.

Practice continuation agreements are rarely established as a reciprocal relationship wherein two parties are each covering the other. A critical criterion for a partner in a PCA firm is that the CPA has the excess capacity to take on the workload of the firm that has suffered a catastrophe. Unless both firms are small firms with substantial excess capacity, it is not typical that the two parties entering a PCA will be able to make it reciprocal.

Turning to an Internal Trusted Employee

Sole owners with CPA staff who opt to turn to a trusted employee or employees to take over the practice will be driven by several factors. The first issue will be familiarity with the clients and the staff. In many cases trusted employees have already serviced the clients and there is some familiarity and, hopefully, confidence as well. Furthermore, they are accustomed to the priorities and preferences of the firm owner so that the possibility of service change and disruption is minimized. The surprise factor is much more contained and the concern about unknowns is dramatically reduced. In the event of a temporary or permanent disability or leave for personal/family reasons, a turnover to an appropriate staff professional can be a practical and expedient choice.

In a small multi-partner firm, when a partner can no longer continue due to death or permanent disability, the option of turning to a trusted employee cuts both ways. The concern about lack of previous experience is mitigated by the continuing involvement of the other owners. The continuing owners may not want the stress of training and monitoring the new potential owner so there may be push-back from the other owners on any type of internal program. As a result, turning to another firm may be the solution if the original firm’s continuing owners don’t have the capacity and/or interest in dealing with the trusted employee in this manner.

This article has been excerpted from the Journal of Accountancy. View the full article here.