Have a Fallback Plan: Take a Lesson from the Boy Scouts and "Be Prepared"

By Telberg, Rick | Journal of Accountancy, September 2003 | Go to article overview

Have a Fallback Plan: Take a Lesson from the Boy Scouts and "Be Prepared"


Telberg, Rick, Journal of Accountancy


EXECUTIVE SUMMARY

* 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 heir.

* 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 practice).

* 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.

After 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 dements, 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--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. …

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