In my work with my state CPA society, I’ve seen plenty of examples of practitioners who waited too long to plan for succession, which is unfortunate because there are many positive solutions open to CPAs who want to ensure their firm’s viability if they are unable to run it themselves. If you’re a sole owner or in a small firm and have postponed thinking about your firm’s future, you’re not alone. The 2012 PCPS Succession Survey
found that fewer than 10% of sole proprietors have practice continuation agreements, a document that establishes who will take over or keep the practice running in case of a practitioner’s unexpected illness or death. Preparation for the future wasn’t much better in multi-owner firms, where just 14% of those with one to two full-time equivalents (FTEs) had a written and approved succession plan, along with only 25% of firms with three to seven FTEs. Having a plan is only half the battle, of course, and 19% of those who have one they say they have done little to implement it.
In California, I volunteer with a team of CPAs who are called in to help when a practitioner becomes ill and needs help with transition. Our worst case scenario involved a CPA who reached out to us for help when he fell ill and ultimately passed away one week later. To make matters that much worse, this all took place in January. The members of our local state society chapter jumped in to help, taking on the firm’s individual returns, payroll and sales tax returns. This kept the practice up and running through the busy season, but its long-term prospects would have been dim if one of the CPAs in the group hadn’t decided to purchase the practice from the surviving spouse.
In every case that I’ve been involved with, the CPA had told their spouse or another family member to contact the state society if anything happened to them. While those CPAs’ fellow state society members have tried to uphold that trust, their families and their clients would have been much better served if they had created a practice continuation agreement long before disaster struck.
Doing What Works
A practice continuation agreement.
There are a few different ways that these arrangements can work. In some cases, CPAs find several successors who will each take over a portion of the practice in case of a practitioner’s unexpected death or disability. This is a good choice when many small practitioners are involved, since it would be difficult for one or even perhaps two small firms to absorb another entire practice. Another option is to make an agreement with a larger firm that would be able to take on a smaller practice. CPAs should also consider cross coverage arrangements in which practitioners commit to maintaining each other’s practice during an illness.
In all cases, it’s wise to ensure that the other firms involved have the proper capacity and the necessary expertise to serve clients, as well as a similar approach to client service. If they do not, clients may jump ship, leaving either a much smaller practice for the CPA when he or she recovers from a disability or a diminished payment to his or her family, since client retention is so often a key element in buyout terms. Also, it’s important to document passwords, alarm codes, access details for email and online accounts, billing and collection procedures and client acceptance and firing criteria, because they will all be critical assets for those who will try to run the firm when the firm owner(s) are not around.
A strategic plan
. Based on my experience, I would also recommend that firms of any size create a strategic plan, preferably with a five-year horizon, but a three-year intermediate benchmark is also acceptable. That may mean taking some time to concentrate on the firm’s strengths and weaknesses and its optimal future path. It may be a good idea to share the plan with other trusted business colleagues to gain perspective. At best, the plan should include a mission statement and strategic goals as well as the tactics you will use to achieve those goals and a realistic exit strategy. It’s a good idea to revisit the plan annually, but most important, it just needs to be done. The CPA(s) who will manage your firm in case of your death, disability, or serious illness will be on much firmer ground if there is a strategic plan as well as established policies and procedures that can be easily followed as they scramble to keep the firm up and running successfully. This will also give your family and clients peace of mind during such a traumatic transition.
Take the Time Now
In all your planning, start out with a solid picture of your firm, including:
- Revenue by source, categorized by amount and percentage of practice.
- Expenses by source, categorized by amount and percentage of revenues.
- Billing rates and how they compare to others in your market.
Use the PCPS/TSCPA National MAP Survey to review other key performance indicators that might be important in your practice and to benchmark your results against those of other firms like your own. Also, be sure to reference the PCPS Practice Continuation Agreement Template (Chapter 7 of the PCPS Succession Planning Resource Center) and other information and tools in the PCPS Strategy and Planning webpages.
A failure to plan could mean a plan for failure, which is why a practice continuation agreement is critical for any sole practitioner and small firm owners. Good strategic planning can also help those who take over to understand your practice quickly when time is of the essence.
Rusty Roy, CPA, is a shareholder of Roy & O’Connor CPAs, Inc., a six-person firm in Paso Robles, California.