Part 2 - Emergency Succession and the Practice Continuity Agreement

Part one of this article introduced you to the concept of a Practice Continuity Agreement. In this installment, we’ll explore some of the mechanics behind putting a successful agreement into place.

One of the main challenges to establishing a PCA is finding a firm that is willing to make the commitment to take over a practice with little or no notice; and for good reason. First, a firm that has made that commitment must have the capacity to handle 200-300 new clients all at once. Second, a properly structured PCA needs to address the same issues in the same detail as a purchase agreement. This might mean a lot of time spent dealing with a matter that is contingent upon a set of specific (and sometimes unlikely) circumstances. What’s more, many of us find it difficult to address mortality issues and risks that don’t seem at all pressing. Finally, it is extremely important that while your current team may not be the ultimate successors of the firm, they are motivated to remain with the Company during and after a transition period.

If you decide a PCA is for you, you’ll need to explore strategies to ensure the agreement’s success. Here are some pointers.

Choose the right successor firm. Critical factors 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.
• Excess 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. Like any agreement, the right documentation has to be in place. 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. 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 – they 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.

More articles related to: Succession Planning