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Why Your Solo Practice Needs a Succession Plan

Apr 10th 2018
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If you’re a solo practitioner, ask yourself what would happen if you were suddenly disabled, got hit by the proverbial bus, or just decided you were done.

Who would take care of your clients? Who would know the passwords and logins so they could access your files and make sure all those filing deadlines are met? Here’s a story of how it can go wrong if there’s no plan in place:

One of my neighbors had a successful airplane repair business, then his accountant passed away. I gave him my business card for the CPA firm I had just started working at, 25 miles away in Albuquerque. He never contacted my firm, so I figured he had chosen a cheaper local option.

Fast forward a decade or so, and my neighbor passed away. It was then that his widow discovered he hadn’t filed a tax return since his accountant died.

Now she had a huge and expensive mess to deal with, and was furious at her husband’s irresponsibility. Of course, he was the one who chose not to file tax returns for ten years, but it got me wondering if there was anything solo practitioners ought to be doing so that their clients are taken care of in case of death or disability.

Having a PCA in Place

Maybe if another local accountant had contacted him and offered to help him file taxes for the year his long-time accountant died, he would have kept his tax filing up to date. Apparently, we’re great at telling our clients they need to create a succession plan, but not so good at that for our own businesses, as confirmed by a 2016 survey by the Private Companies Practice Section (PCPS) of the AICPA.

According to the survey, only seven percent of sole practitioner CPAs had a practice continuation agreement (PCA) in place. A PCA is a contract that ensures that in case of death or disability, another practice or another individual will assume responsibility for that firm.

Of the seven percent in the survey who reported that they had a PCA in place, only 30 percent responded that “I am comfortable that it provides me with the protection I need, and I visit it periodically with my takeover firm or firms to ensure it will be effective if it is needed.”

Like a will, a PCA needs periodic updates and revisions to make sure it still meets the needs of the practitioner. A PCA may include the provision of immediate coverage for clients, payments to the disabled accountant or his or her heirs, and a plan for selling the firm to a successor.

PCAs are not the same as succession plans, but are more like an insurance plan to make sure the interests of your clients and your family are protected in case of an emergency.

Here in the US, CPAs are governed by their state boards of accountancy, which may (or may not) have rules or restrictions regarding PCAs. This may explain why so few solo practitioners have them.

A Plan Could Depend on Location

Here in New Mexico, the statutes governing public accounting make no mention of PCAs or any kind of succession plan for CPAs. Around the world, however, the situation is different.

For example, the Association of Chartered Certified Accountants (ACCA) “requires all practitioners and regulated firms to make arrangements so that the professional needs of their clients will be dealt with if the practitioner dies or becomes incapacitated through illness. It is mandatory that a written agreement be made, and this may be inspected by ACCA.”

A CPA in Canada from one of my Facebook groups told me that her provincial association requires CPAs to declare their successor on an annual basis, and provide contact information to the association. Setting up a plan is then up to the practitioners. In her case, “I have left details with my hubby should something happen to me, he needs to contact my person. My person knows where to find master passwords, has had a tour around my ‘systems’ and where they are documented, etc. Their job is to make sure clients get their documents back, deadlines are met in the immediate future.”

Ask an Attorney

I tapped one of my CPA-attorney friends whose practice focuses on estate planning and business law, to see if she had any good ideas. She told me that when they first come to see her to create an estate plan, nearly all of her solo financial planner clients have successors while most of her solo accountant clients have not yet designated one.

She also told me that the New Mexico State Bar encourages attorneys to develop a successor plan and many solo firms have reciprocal agreements with other solo firms. In 2014, the NM State Bar produced a handbook on succession planning for attorneys.

An important piece of the plan, she told me, is “the predecessor’s phone number. This is a lifeline, a key, for someone to get their documents.” She recommended that if successors do not monitor the line themselves, they at least keep the predecessor’s phone number connected to a phone message with instructions on how to contact the successor.

A difference between law firms and accounting firms is that the clients of a law firm may use that firm’s services once and never again, or perhaps intermittently over a lifetime. In contrast, clients of an accountant use that firm’s services every year, or even continuously.

So, there’s the potential of a lot more work for a successor accounting firm to absorb. If this happens during busy season, you better hope for a lot of extensions.

Don’t Put Off Planning

If you don’t have any kind of succession plan, as a solo practitioner, it’s prudent to start thinking about one now, even if you only hung up your shingle this year. Without a PCA, my attorney friend warned that the value of a practice will quickly dwindle to zero, as the clients drift away to find a new accountant.

This loss of value means that the puny proceeds from selling your practice could be a devastating blow to your family. And no, the executor of your estate won’t be too interested in helping your clients find a new accountant.

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