A truckload of peaches is a valuable asset, but if left unattended in the hot sun it will quickly waste away to nothing. Like peaches, your accounting practice is a perishable asset that will rapidly lose its value if left without direction due to your sudden death or disability. Often, our biggest asset is our practice, which may also be what we rely on to fund our retirement or provide for our families if something happens to us. Your clients are loyal to you, but when faced with uncertainty, many will act quickly to find someone else to serve as their trusted advisor.
Our firm had a practice continuation agreement with a sole practitioner who died suddenly. We prepared a mailer announcing we would take over the practice and were ready to mail them the morning after the funeral. Out of respect for the deceased, we did not disclose the transition plan until after the service. At the funeral, a client of the deceased CPA mentioned to one of our partners that he had already engaged a new CPA to help him with his company’s IRS audit. He panicked when he heard of his CPA’s death and rushed out to find a replacement. Even though there was a plan in place, the widow of our deceased CPA friend lost the value of that client due to the
panic of uncertainty.
Imagine the losses if there had been no plan in place and the widow waited weeks to find a CPA firm to purchase the practice. There would have been a lot of rotten peaches by the time a path forward could
be negotiated and publicized. At that point, the widow’s leverage to negotiate favorable terms would have vanished. Key employees faced with an uncertain employment future may leave your firm. These problems are not unique to sole practitioners. Your partners may not be willing or able to take on your practice in an emergency. As a business owner, it is
your responsibility to your family, your employees, and your clients to have a transition plan in place.
There are three key elements to your transition plan.
The obvious first element is to have designed a negotiated transition plan. You need to identify who will transition your practice and under what terms. You will be able to negotiate a much better deal while the trigger events are still theoretical than would your heirs after your death. For a sole practitioner, you negotiate the terms of a practice continuation agreement with whomever you identify as the best suited to take over your practice. The best fit may be another sole practitioner with whom you have a reciprocal practice continuation agreement, or it could be a multi-partner practice. If you are a partner in a multi-partner firm, discuss your partners’ willingness to provide you with a transition solution and then decide the details of that solution.
The second element to a successful transition plan is to have it memorialized in writing and signed by all parties. We have found several practitioners who have a verbal understanding with someone but have not yet formalized it in writing. Remember, only a written document will survive in case of your demise. If you are a sole practitioner, then your practice continuation agreement should be written and signed. A partner in a multi-partner practice should have a written operating agreement which covers in detail what happens if a partner retires, is disabled, or dies.
Finally, and perhaps most importantly, you should communicate the relevant parts of your transition plan to all stakeholders in your business. Certainly, your family should know every detail of your plan so they can set it in motion if needed. Your team members should know there is a plan in place and the firm responsible for the transition. Clients, bankers, and other stakeholders should gain confidence in you when you inform them of your written transition plan to protect them in case of disaster.
Please schedule some time this week to begin developing your plan to protect your valuable truckload of peaches.
For more PCPS resources and information, please visit staging.ncacpa.org/succession-planning-tools-resources/.
By Kelly Puryear, CPA.
The PCPS tools shared by NCACPA are solely distributed as a member benefit. NCACPA does not receive financial incentive for promoting these resources.