A previous article addressed the importance of a Practice Continuity Agreement (PCA), particularly for firms with just one owner. In this installment, we’ll explore some of the details behind putting a successful agreement into place.
Choose the Right Successor Firm
One of the main challenges to establishing a PCA is finding a firm that is willing to make the commitment to take over your practice with little or no notice. After all, a firm that has agreed to be a continuity partner must have the capacity to handle 200-300 (or more) new clients - and everything that goes along with that - all at once. Critical factors to finding a continuity partner include, but are not limited to:
- Chemistry – If you’re not comfortable having lunch with this person, don’t expect your clients to be comfortable doing business with them.
- Capacity – Does the successor firm have the resources necessary to replace you in both the short and long term?
- Continuity – Does the firm’s fee structure, practice philosophy, location, and appearance mesh with yours? Does the practice offer the same niches, industry expertise, and certifications?
- Longevity – If some or all of the successor firm’s principals are nearing retirement, they may not be available when you need them.
Structure the Deal
A properly structured PCA needs to address the same issues, in the same detail, as a purchase agreement. Make sure your PCA addresses these areas:
- A definition of temporary disability versus permanent disability
- In the event of a temporary disability, when the other is firm required to assume responsibility
- How the firm will be compensated for supplying temporary coverage
- When and how to determine that the disability is permanent
- A mechanism to calculate value
- Upon permanent disability or death, the deal terms for the successor firm (payout period, down payment amount, tax treatment, etc.)
- How the collection of accounts receivable and work in progress is to be handled
- To what extent assets are included in the purchase terms
- Liability issues and indemnification
- Restrictions on competition
- How staff, leases, and other operational matters will be handled
Be Transparent with Your Partner
It is a good idea to regularly provide the successor firm with the information needed to successfully step in and manage the practice.
- A client list that includes: key contacts, services provided, important deadlines, and procedures used to monitor work in progress (so the standby firm can easily determine the status of uncompleted work)
- A complete set of operating documents, including business financials
- An “operating manual” for the business, i.e., a complete guide to office procedures
- Staff information including the duties and responsibilities for each employee, salary info, payroll processing information (from the clients’ perspective, the assistance of your staff during and after the transition phase can make or break the entire process)
- Accounting information (location of accounting records, bank account information, contracts and lease agreements, etc.)
While a PCA should not be used in lieu of life or disability insurance – or a formal succession or retirement plan – it can be a successful means to keep a practice going until you recuperate or a successor is found. What’s more, this agreement can help to ensure that you receive the appropriate compensation for the years of sweat equity you put into building the practice.
