Sole Practitioners and Small Firm Owners: Do You Have a Backup Plan?
Source: Journal of Accountancy
What would happen to your practice if you died or became ill or disabled? In addition to life and disability insurance, one tool that can smooth the transition is a practice continuation agreement (PCA). In this article, authors Joel Sinkin and Ira Rosenbloom outline the key components of a PCA, which is a contract with a trusted employee or, more likely, with another CPA firm, to take over your practice (either permanently or temporarily) under certain circumstances.
An effective agreement should:
- Define the conditions that trigger a takeover,
- Spell out the payment terms (a discounted hourly rate, for example) or, in the event of death or permanent disability, the purchase price,
- Set forth staff and client retention obligations, including noncompete and restrictive covenant provisions,
- Outline the “covering party's” professional responsibilities and procedures for terminating the agreement,
- Establish billing and collection, record retention, and return of records protocols,
- Define “permanent” and “temporary” disability,
- Set forth notification procedures for activating and ending coverage,
- Appoint an agent to act on your behalf with respect to the PCA,
- Spell out staff and client retention obligations.
The article also discusses the relative advantages and disadvantages of contracting with an employee or another firm and provides guidelines for making a PCA arrangement work. When using an external partner, you should look for a firm that has excess capacity and whose culture, fee structure and niches are similar to yours.
For the complete article, read “Who Would Run Your Firm? Practice continuation agreements help plan for the worst.”
From Journal of Accountancy, American Institute of Certified Public Accountants, February 2011, http://www.journalofaccountancy.com/Issues/2011/Feb.