Preparing Your Firm for Your Death or Disability

BY EDWARD MENDLOWITZ, CPA, WITHUM

Many CPAs who practice in a partnership have a buy-sell agreement in the event they die prematurely or become unexpectedly disabled. Since sole practitioners cannot have such an arrangement, they should have a practice continuation agreement (PCA). Too many practitioners die without any arrangements, leaving their families bewildered and unable to find appropriate assistance with disposing of the deceased’s practice or finding someone to service the clients until the “temporary” disability is cleared up. They want an instant solution, which would easily have existed if the practitioner had a PCA. Here is how it works.

A PCA is an agreement by a practitioner with someone who would acquire their practice upon their death or would service their clients until they recover from a temporary disability, with the price and payment terms agreed to. It has no effect under any other circumstances and does not restrict the practitioner from doing anything they want with their practice. It does not create a partnership or in any other way encumber the way the practice is run. Any arrangements to dispose of your practice, retire or semi-retire can be made and it would supersede or vitiate the PCA.

Finding a PCA Partner

Choose a firm three to four times larger than your practice so that it can absorb your practice without too much difficulty. A smaller practice might not be able to handle the load, while a much larger practice might not have staff who would maintain the proper interest level for your clients.

Select someone you know. Understand how they practice, the type of clients they have and how well they relate to their clients.

How to Prepare

Prior to approaching a prospective PCA partner, prepare the following:

• A brief fact sheet about your practice

• A list of your clients with contact people, the type of services you provide and the timing, the fee arrangement, your passwords, how to gain access to your clients’ files and how backup is maintained

• A list of your employees, length of service, capabilities, salaries and bonus arrangements

• Information about your websites and software

These listings would not be provided to anyone, except for the fact sheet, until the event of your death or disability. Since this information will become outdated, it should be updated periodically. Put it in a secure location, and let your spouse or other family member know when and how to access it.

Payment Structure

There are many ways to structure payment under a PCA. A common arrangement is to use a percentage of annual collections for a fixed period, such as 20 percent of collections for five years. There should be no guarantees and no down payments. If a client is lost, there would be no payment. If a fee is increased, the payment would be based on that. Payment for work on clients during a disability would be 20 percent of collections.

Consequences of Not Having a PCA

Not convinced yet? Consider these consequences of not having a PCA in place:

• A legacy of dissipating value

• Wasted time by your widow, widower or family representative

• Unnecessary legal expenses

• Possible unnecessary valuation costs

• Possible failure of heirs to agree, causing divisiveness and altercation

• Abandoned clients

• Inability for any buyer to properly understand your client service and fee arrangements and locate passwords, contracts, policies and leases

Death is inevitable. Disability is not. Both can occur unexpectedly, without warning or expectations. The few hours spent planning and executing a PCA need only be done once and then hopefully never used. Such an agreement assures an orderly, smooth transition that will provide substantial benefits to your practice.

Edward Mendlowitz, CPA, is emeritus partner at Withum. He is a member of the NJCPA and can be reached at emendlowitz@withum.com.