Included in This Chapter:
The number one priority of any practice continuation agreement is the choice of a successor, and one of the principal criteria for a successor is a sound reputation as a competent, ethical, and professional CPA. Equally important is the successor's ability to buy your practice without becoming financially overburdened. The search for a suitable successor may not be easy. It can take time to find a practitioner or firm whose operating philosophy and general management style are compatible with your own. You should remember that the key to benefiting from your practice in the event of disability or death is the successor you choose.
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Where to Look
The best source of candidates is your own circle of well-respected practitioners: people you see regularly at seminars and other professional meetings, or who may have been a part of your own informal support group or expressed an interest in your practice. If you can find no candidates from this source, referrals from attorneys or bankers may help. Your state society executive director, chapter president, or other key members of the profession may also be able to provide assistance.
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Whom to Choose
Just as the candidate seeks to learn as much as possible about your clients, you should be prepared to learn as much as you can about the candidate. If you choose a poorly-qualified CPA or firm, there is a high risk of client dissatisfaction and client loss. A well-qualified successor may not be able to retain all your clients, but he or she should be able to retain most of them for a significant period.
A word of caution: be careful not to choose someone of your own age or near your age as your successor. When the time comes to purchase your practice, someone your own age may not be as active a practitioner or may be facing similarly declining health and decide they do not want to purchase your practice.
The ideal successor is a practitioner or firm you have known for a number of years and with which you have discussed a wide range of practice issues, including personnel-related and engagement-related matters. Personality, professional qualifications, experience, and reputation should all be considered. Your successor's efforts will in large part determine the amount of money that will be realized from your practice. If payment depends on a percentage of future fees, your assessment is especially critical because payments will probably cease if your clients become unhappy and leave for another firm.
An Experienced Practitioner
There are obvious advantages to entering into an agreement with an established practitioner. Someone who already knows the ropes is more likely to be able to retain your clients and make the combined practice a success than someone who is just starting out in the field. Does he or she have the resources and ability to provide proper service to additional clients? Would it make more sense to enter into an agreement with a larger firm with the resources to absorb a surge in client services and operating expenses? Do not hesitate to explore these questions with potential successors.
Your Professional Staff
There may be someone on your professional staff who helped build the practice and has sufficient experience to assume ownership. Entering into an agreement with such an individual has two advantages. Because a professional staff member already knows the practice and its clients and is familiar with its working papers and operating procedures, he or she can be expected to continue the practice with the least disruption; as a result, client retention will be high. Second, he or she may want to continue the practice at the same office and will therefore be willing to purchase your tangible assets.
A possible disadvantage is inexperience. Your professional staff may not have the breadth of experience or financial resources needed to carry on the firm. When this is the case, you might consider entering into a practice continuation agreement with two or more professional staff members who will become co-owners of the practice when the agreement is activated.
Like most CPAs, before beginning your own practice you probably worked for a public accounting firm to gain technical proficiency and familiarity with a typical accounting practice. There are probably no potential purchasers who know you as well as your former employers. Moreover, because they are already familiar with your technical abilities, management skills, and personality traits, former employers may be more likely to bypass these considerations and concentrate immediately on your client base.
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In some parts of the country, there may simply be no market for a practice such as yours. In rural areas, for example, there may be a lack of candidates, or your niche may be so specialized that other CPAs may not have the skills to service your client base. The solution in such a case may be a group practice continuation agreement with area practitioners.
If a practice continuation agreement seems altogether untenable in your situation, you might consider merging with a neighboring practitioner. You could continue to control your established client relationships and, over time, your clients would become accustomed to the merger. In the event of one partner's death, clients would be more likely to stay with the surviving partner. In this arrangement, payments to your beneficiaries would be covered in the partnership agreement. An alternative would be an agreement with a larger firm that wishes to expand into your market.
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What to Look For
The following are some major considerations in the choice of a successor:
- Professional qualifications
- Recent peer review
- Organizational and planning abilities
- Proper monitoring and control of engagements
- Technical proficiency
- Client satisfaction
- Ability to train and develop staff
- Ability to generate fees and knowledge of the value of the services performed
- Ability to bill and collect promptly
- Sense of professional responsibility
- Personal qualifications
- The appearance and presentation of the firm and its personnel
- Leadership within the firm
- Evidence of oral and written communications skills
- Good relations with colleagues and clients
- Gradations of expertise within the firm
- Useful mixture of personalities within the firm
- Growth potential
- Community and professional standing
- The firm's image
- Community leadership of firm principals and staff
- New clients brought in through individual contacts
- Professional participation and leadership accomplishments