To determine if a PCA could play an important role for you or your firm there are four simple questions to ask yourself:
- Does my spouse, staff or immediate heirs know what to do with my practice if I die, become seriously ill or disabled?
- What position will my clients find themselves in if I die or become disabled?
- What will happen to the value of the asset I have spent years building if I die or become disabled, temporarily or permanently?
- How many more tax seasons do I wish to continue servicing my clients on a full-time basis?
The answers to those questions will determine if you should continue your reading of this module on Practice Continuation Agreements. Question #4 has significant importance as it will differentiate between creating a PCA and the strategy of looking more toward a succession strategy. There are considerable and very important differences between the two. Below we have highlighted the benefits of a well-written and solid practice continuation agreement.
A PCA can:
- Help prevent the value of your practice from completely dissipating
- Provide a degree of financial and emotional benefit to your family
- Help fulfill your professional responsibility to your clients
- Provide a period certain income continuity program if you are disabled or die
- Validate the value of your years of sweat equity and sacrifice
- Reduce potential liability from certain forms of litigation against you or your estate
- Supply back-up/support during short-term disability, partial disability, or illness to keep the practice intact
- Establish a pre-determined valuation metric for permanent disability or death
- Reduce the daunting task placed on loved ones or heirs of trying to “do the right thing” during their time of emotional distress
- Provide a degree of value protection of a large financial and/or retirement asset.
Who Needs A Practice Continuation Agreement (PCA)? Every firm without an immediate internal solution to protect the firm in the event the owner or owners die or become incapacitated.
We cannot emphasize enough the need to evaluate the strategic differences between a succession plan and practice continuation agreement. If we had to offer a general rule-of-thumb, it would be that if you are 7 years or more from reducing your time commitment to your firm, perhaps you should give more focus to the PCA. If you are six years or less it may be more beneficial to consider a strategic succession plan such as a Two-Stage Deal (see below).
For more information:
- Who Would Run your Firm? Journal of Accountancy, c2011
- A Two-Stage Solution to Succession Procrastination by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013