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We all know how important it is to have an emergency continuity plan in place should the unthinkable occur (you know, that dreaded “hit by a bus” scenario). Statistics show that the value of a practice diminishes dramatically when a financial advisor suddenly passes away or becomes disabled. This article will examine a popular option that exists for sole proprietors, the Practice Continuity Agreement (or PCA), that can provide a way to insure against sudden, unforeseen calamities.

For advisory firms with only one significant owner, a Practice Continuity Agreement is the equivalent of a buy-sell agreement. A PCA would, in the event of a principal’s incapacity or death, provide for another advisor or advisory firm to step in and run the company during the period of incapacity, or, in the event of death, conduct an orderly sale, or possibly acquire the practice. A continuity agreement would provide for a means of determining the fair market value of your business and in certain instances, provide the funds necessary to carry the purchase.

The important difference between a buy-sell agreement and a continuity agreement is that in the first instance, the sale is to an insider who is involved in the business on a daily basis. In the latter instance, the sale or continuation services are provided by an outside advisor who may, at the time of the event, have limited day-to-day working knowledge of the client base he or she is going to take over.

A PCA is an agreement between two firms stating that, in the event that you are disabled or die, the other firm will take over the practice either permanently or temporarily. Particularly in the event of short-term disability, where you may be unable to return to the practice immediately, a PCA can act as an effective back-up plan or temporary bridge. Some PCAs are bilateral in that both firms commit to the other to be the successor. Some are unilateral, usually where only one of the firms is realistically capable of becoming the successor. The terms of the PCA usually contain at least:

  • A definition of the circumstances that will trigger the succession
  • The successor’s obligations (usually this covers managing client relationships and providing ongoing client services)
  • The terms of the acquisition if the successor is expected to buy the practice
  • Provide a formula for determining the fair market value of the business
  • Establish the compensation to the continuity provider during the period of disability
  • Provisions for appropriate non-competition and non-solicitation protections for both the affected practice and the buyer/continuity provider
  • Indemnification and hold harmless protections for an incoming, unprepared buyer
  • Also, the agreement sometimes allows for support without succession, meaning that the firms agree to client cross-referrals or support during staff shortages

As with any type of succession planning, it is a good idea for you to inform your clients that you are implementing such a strategy. The circumstances under which such an agreement will actually be executed are always difficult, so having well-informed and supportive clients is essential. This is a chance to show your clients what planning for the future of the business actually looks like.

Because of the external factor in this arrangement, it’s important to regularly keep your continuity provider up-to-date. Calendar an annual meeting to discuss the plan and the steps needed to successfully implement it… and make sure it still makes sense; practices evolve and change during their lifecycle, and the provider of continuity services in the early years of a practice may not be a good fit in the middle to later years. Additionally, a PCA should not be used as a succession plan in the traditional sense. There are much more effective methods to use when you ultimately create an exit strategy for retirement; however, PCAs, when structured correctly, are an effective solution for the need of sudden practice succession.

Read Part 2 - Emergency Succession and the Practice Continuity Agreement

More articles related to: Succession Planning

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Disclaimer

The above article is meant for information purposes only and is not intended in any way to provide legal or other advice for any specific situation.  Readers always should consult their own tax, accounting and legal advisors before taking any action related to the above article or subject matter.

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