A CPA is hospitalized in February. He’s anxious about his practice, but he immediately turns to a group of several other local practitioners with whom he has set up a practice continuation agreement (PCA). Based on their arrangement, the other CPAs parcel out his clients among them, depending on their own areas of expertise and capacity. They handle all his clients and successfully keep his practice going through busy season. Once it is over the CPA, who has recovered from his illness, is able to pick up the practice just as he left it, with no loss of clients.
I heard that story at a small firm roundtable session at the recent AICPA ENGAGE Conference. It stuck with me because I have to admit that when I was running my own six-person practice, I had my doubts about PCAs. I was reluctant to give too much financial and client information to other practitioners or to think about relinquishing control of my own ship. Also, even as the years passed, I was always pretty convinced that I was too young to think about my own death or disability.
A Range of Benefits
I was also apparently not alone. In the most recent PCPS CPA Firm Succession Survey, only 7% of sole practitioners had a PCA, and many small firms don’t have a formal succession plan. Despite my early uncertainties, however, I’ve come to recognize the necessity of a PCA for every small firm.
Your practice is protected in an emergency. No matter how loyal your clients may be, they will seek help elsewhere if you’re unable to provide the services they need, especially in busy season. As the story above shows, a good PCA can ensure your practice is waiting for you after an emergency passes. And if the worst happens, it can also ensure that your heirs receive the full value of the practice and aren’t forced to scramble to sell it at a price that’s below its true value.
You can build a sense of trust with other practitioners. Forming an agreement with a group of fellow practitioners is one way to approach a PCA. I think this is a particularly good option for skeptical practitioners, like I was, since it allows them to get to know each other and to determine that they all share common values and strong client relationships. Including several firms in the arrangement helps minimize the chance that one or two small firms will be overwhelmed when they try to take on another practitioner’s workload, as well.
You can have a “dry run” with a potential future merger partner. Linking up with a larger firm that could be a merger partner down the road is another option for a PCA. According to the PCPS survey, the majority of small firms are planning either to merge into another practice before or when they retire or to sell their clients to another practice. In both situations, having a PCA with a larger practice gives you the chance to see how well you work together, how well your practices match and whether a merger seems workable. Even if there’s never an emergency, it’s a good introduction to a potential partner.
For CPAs seeking a PCA, I would advise:
- Make the most of your connections. Building a network of other practitioners who can be referral or information sources is not just good for business. It’s also the starting point for a group PCA like the one discussed in my example.
- Trust your instincts. Who’s a good candidate for your PCA? When you think about that question, some practitioners probably come to mind immediately based on your dealings with them in the past or their reputation in the community or the profession. That positive impression can be the first step to building a good level of trust with them, which is a critical ingredient in any PCA.
- Update the agreement as needed. Since practices and personnel change, I recommend revisiting a PCA every year to ensure that the financial and any other arrangements reflect all of the participants’ current situations and still satisfy their expectations.
Securing the Future
Setting up an effective PCA can be one of the most important steps that practitioners can take to ensure that their most important asset—their firm—survives a personal crisis. For more information, turn to the wealth of tools in the PCPS Succession Planning Resource Center, including the PCA Practice Survival Toolkit. A PCA can offer you peace of mind now and a critical safety net when you need one.
Carl Peterson, CPA, CGMA is the Association’s Vice President of Small Firm Interests. Have questions for Carl? Contact him directly at firstname.lastname@example.org or 651-252-4618. And mark your calendars for Carl’s next Small Firm Update Webcast, which will be held on September 28 from 2 to 3 ET.