Practice Continuation Agreements: Types of Continuation Agreements 


Previous Chapter: Introduction 

Next Chapter: Basic Preparations

Included In This Chapter: 


There are different types of practice continuation agreements, and individual plans can vary considerably. The three basic types are one-on-one agreements, group agreements, and state society plans. As discussed here, the success of any one of these plans rests with your choice of successor.

One-on-One Agreements

Many practitioners enter into one-on-one practice continuation agreements with other sole practitioners, partnerships, or professional corporations in their communities. You may find it advantageous to enter into an agreement with a larger firm, especially if you already have a joint engagement relationship with such a firm.

A one-on-one agreement is usually a buy/sell agreement written to cover death or disability. A variation, commonly used by two sole practitioners, is the cross-purchase agreement, under which each party agrees to purchase the other's practice. A one-on-one agreement also allows for other benefits, such as the mutual carrying of term insurance policies payable to the deceased's estate. This money is used to satisfy cash requirements in payment for the deceased practitioner's practice (such an arrangement assumes the insurability of both parties). Click here to view an example of a one-on-one agreement.

Back to top

Group Agreements

Under group agreements, several CPAs act as successors to each other's firms. When death or disability strikes a member of the group, his or her clients are asked to select a new CPA from among the surviving members. Group agreements typically deal only with the transfer of clients. Payment terms are agreed upon at the outset. It is advisable for the group to appoint a chairperson on a rotating basis; this individual serves as the key client contact in the event of a member's death.

There are some inherent risks with group agreements. For example, there is no one specific buyer identified for all your clients, so your client base may be "cherry picked" by the members of the group and some of your clients may not be purchased. There is also the risk that not everyone in the group will have the requisite background, training, and expertise to be able to handle some of the client base. Additionally, there are potentially increased administrative issues associated with more than one buyer. However, having mentioned all of this, this type of an agreement is better than not having one at all. Click here to view an example of a group agreement.

Back to top

State Society Plans

The third alternative is the plan offered as a service by some state CPA societies to assist the spouse and heirs in the event that a member CPA failed to make his or her own arrangements ahead of time. The state society plan—also called an emergency assistance plan—helps provide for the disposition of the practice. Several states have a formal plan with rules, regulations, procedures, and a governing board. Other states’ plans are more informal.
 
Like other plans, state society plans deal with the transfer of clients and usually take one of two approaches. In the first approach, once the state is notified of a death or disability and receives authorization to act on behalf of the CPA practice, it contacts each client, proposes several other CPA members as possible successors, and asks each client to select one. In the second approach, the state contacts the surviving spouse and provides a list of CPAs interested in buying the practice.

These plans vary from state to state. Some may arrange for the transfer of files or help determine a practice's value. The advantage of most state society plans is that they provide a structured approach for preserving the value of a practice.

The plan is typically administered by a committee of the state society. The committee may act as an arbitrator of any disputes between the parties, help identify possible successors, and provide advice to participants, surviving spouses, and heirs.

State society plans may help match buyers and sellers. In most cases, they provide an approximate value of the practice. Although state plans may not always be able to furnish the surviving spouse with specific candidates, they can suggest methods of choosing potential successors.

It is important to check with your state society to be sure that an active program exists and that the society will exercise its authority promptly. Your spouse, attorney, and successor must also be prepared to act promptly. It can be difficult for a state society to provide effective assistance if it is called on too late.

Back to top

Previous Chapter: Introduction 

Next Chapter: Basic Preparations




A A A


 
© 2017 Association of International Certified Professional Accountants. All rights reserved.