Succession planning: Who’s going to catch you if you fall?

Written on Feb 28, 2014

By Robert H. Gray, CPA

No one is indispensable, but to your clients, it’s close. Consider what would happen to your practice if you were unable to work for a period of time, or permanently.

Would your practice continue to operate as usual during your absence, or would it be chaos? In any small business, including an accounting firm, it’s easy to neglect your own affairs when you’re busy tending to your clients’ needs.

According to PCPS’s 2008 Succession Planning Survey, 60% of sole practitioners will have succession planning challenges in the next 3-10 years.

It is in the best interest of your family, your employees and your clients to have some type of practice continuation agreement in place. Every business, especially a sole proprietor of a public accounting firm, needs an agreement that will provide for the orderly transition of the client base in the event of permanent disability, retirement or death, as well as for professional assistance during temporary disability.

Sinking stone
Estimates say that, without a practice continuation agreement, in the week following the death of a sole practitioner, 20% of the clients will leave. Another 21% leave by the end of the second week. By the end of one month, estimates say all but 20% of a firm’s clients will form a new and different professional relationship. That means that all the hard work you put in over the years can disappear in no time at all, leaving nothing for family, employees and, perhaps, some clients.

While it’s difficult to measure what clients would do in the case of a short-term absence, imagine if the absence was between March 1 and April 15? Would anyone know what to do?

“If the owner passes away suddenly without a practice continuation agreement in place, the value of the firm immediately drops to zero,” said Mark Koziel, senior technical manager with AICPA PCPS at the 2008 Annual Meeting and Members Summit. “That leaves nothing to provide for a spouse and family. The estate could also be sued if returns aren’t filed in time due to a lack of a succession plan.”

With a formal plan covering events such as unexpected disability or death, your family will be assured of receiving a fair value for the practice. Your clients will continue to receive timely, quality service from a professional you have personally selected. Your employees will have an opportunity to continue their careers and the partner you select will have a greater chance of retaining your clients since the business transfer will have already been determined.

The time to act is now. It’s not a matter of your age or the size of your business. It’s about doing what’s right for all concerned, including you.

Wakeup call
The importance of a practice continuation agreement hit home with me when a fellow CPA suffered a fatal heart attack. He had talked to me about drawing up a practice continuation agreement, but we never discussed terms or put anything official in writing. True to estimates, 80% of his clients were gone by the end of the month. The value of his practice dropped from $70,000 to $20,000.

That experience motivated me to become a backup for other CPAs. Ten years later, I realized I needed a backup myself. I’ve seen both sides of the coin and I want to help other CPAs navigate the process of establishing an effective practice continuation agreement without the details of everyday practice getting in the way.

Protection against the unexpected
As CPAs, we work hard to build our practices and serve our clients. Often our clients are just as loyal. Everyone knows a CPA, but people are more likely to change spouses than CPAs. An agreement with another CPA gives your clients assurance and comfort, and can provide the same comfort for the practitioner.

A practice continuation agreement actually offers a double safety feature. It not only protects the clients, it also establishes a purchase price ahead of time, thereby protecting the value of the firm. In the case of the unexpected, the last thing anyone wants to deal with is practice valuation, especially if clients are departing.

By capturing all of the details on paper, a practice continuation agreement spares everyone headaches and confusion. The agreement can also cover cases of temporary disability. You never know when you might suddenly be out of the office for several weeks.

Finding a partner
The first step in establishing a practice continuation agreement is finding another CPA or firm who you feel comfortable working with. I met Rion Safier, an owner in CoreFocal, a local multiowner firm, after we worked together on some tax returns. We started talking about it and I realized he not only met a lot of my criteria for a business partner, but we had very compatible business methods.

In looking for a partner, I recommend starting with local networking events. The Ohio Society hosts a variety of programs specifically targeting to sole practitioners.

There are several criteria to keep in mind as you search for a business partner:

  • AGE – if you are retiring in the next five years, you don’t want your partner doing so as well
  • EXPERIENCE AND QUALIFICATIONS – do they have the skills necessary to serve your client base?
  • COMPATIBLE BUSINESS PRACTICE – is there a significant gap in the way you do business, from billing to client relations?
  • TRUST – can you trust this person with the inner workings of your practice?
Once you have identified who you want to continue your practice, the next question is for how much. There are several different models for practice valuation. Perhaps the most popular model is as a percentage of revenue, paid out over time. Be sure to consider fixed assets and equipment, such as buildings, furniture, computers, favorable leases, which are typically considered an add-on value.

Let others know
The next step after the agreement is finalized is informing relevant parties, such as clients, family and key employees. After I signed an agreement with CoreFocal, I sent a notification letter to my clients explaining the benefits to them, such as guaranteed, continuous coverage and service. I also introduced my clients to Rion and other CoreFocal owners, explaining their qualifications and skills. They then accompanied me on some client visits so they could meet face-to-face.

I also recommend preparing letters of instruction to family members and key employees, explaining main details of the agreement and how it will be executed. I also drafted a letter to send to clients in case of either a temporary or permanent disability. Finally, I gave Rion a list of clients and information regarding the last 12 months of collections.

Overcoming obstacles
Few people enjoy considering worst case scenarios that may never happen. It can be daunting to sit down and document the minutia of a practice, especially when facing deadlines. 

Ultimately, planning for the unexpected, regardless of the discomfort, will protect the value of the firm you worked so hard to build. As members of The Ohio Society of CPAs, we have access to a variety of resources to help us succeed.

My partners at CoreFocal and I are passionate about helping other practitioners so they might benefit from our experience. We are happy to share both best practices and advice. Please contact us at

Robert H. Gray, CPA is a sole practitioner in Westlake, Ohio. For more information or assistance in identifying a partner or drafting a practice continuation agreement, contact him at or 440.333.0555.

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