With smart planning, including an effective practice continuation agreement, you can protect yourself, your family, and your practice.

What Is a Practice Continuation Agreement? The key to creating an effective practice continuation agreement is a well thought out, all- encompassing legal agreement with a compatible individual CPA or firm that is capable of honoring the agreement.

A practice continuation agreement involves either the actual purchase of the practice or an agreement to assist in the maintenance and sale of the practice upon death or permanent disability of the practitioner. It also may include provisions for assisting the practitioner during a time of temporary disability.

Why Have a Practice Continuation Agreement? Because state laws generally prohibit non-CPA ownership of CPA firms, it is essential that the practitioner have available a CPA who can lend his or her name and support to the practice in case of death or disability. The only marketable value any practice has is the current client list and ongoing business. If extended illness or death occurs, the practitioner cannot provide needed services to his or her clients. Initially, clients will be very sympathetic to the situation, but soon, statutory requirements and financial information required for management decision-making will force clients to obtain services elsewhere.

With Whom Should a Practice Continuation Agreement Be Established? In order to establish a viable practice continuation agreement, the practitioner should choose a compatible firm capable of handling his or her existing practice during times of disability or death. This will enable the replacement CPA to meet the needs of the practitioner's clientele until a permanent solution can be found.

A fellow CPA might experience difficulty in handling the practitioner's practice if called upon during a peak period, such as tax season. One possible solution to this problem is to develop a coalition with two or more CPAs who will support participating members in times of trouble.

Each member of the group should have a primary agreement with one other specific member so responsibility is precisely assigned and accepted. This will ensure control in selecting the takeover practitioner.

Other feasible choices for a practitioner include a CPA who has a part- time practice but full-time availability or another practitioner with excess staff capacity. Obviously, the practice agreement must be with an individual or firm that has compatible skills and knowledge. Otherwise, the replacement or successor firm would not be able to provide the types of service previously provided. If the firm fails to perform competently, clients will seek assistance elsewhere and the value of the practice will decline.

Where Should the Participating Firm Be Located? It is imperative that practices with primarily "location-based" clientele choose a takeover firm that is located nearby. Individual tax clients often are location oriented. This is particularly true of large cities because clients tend to seek professional assistance within a close geographical area. In small cities, loyalty often is stronger, and clients may be more willing to drive across town.

If the majority of client contact is through the mail or on-site office visits, then the location of the participating firm is not an important deciding factor.

When Should a Practice Continuation Agreement Be Established? Because illness, death or disability are unplanned events, a sole practitioner should prepare immediately for such circumstances by creating a practice continuation agreement. However, a practice continuation agreement takes a great deal of thought and discussion with the other party. Because a poorly written agreement or a badly chosen participating firm will defeat the purpose of having a continuation agreement, practitioners should address the issue carefully.

How Should a Practice Continuation Agreement Be Developed? The practitioner must determine if his or her practice can really be handled by others. If the practice is truly unique or if supporting documents and procedures are sketchy or nonexistent, changes to the practitioners mode of operating must be made. Otherwise, there is little value in a practice continuation agreement. Inadequate notes or poorly documented processes may require a greater commitment to improvement, on the part of the practitioner in the future, to enable a practice continuation or transfer to ever take place.

The practitioner first should determine how he or she feels about the concept of someone else taking over his or her clientele and whether or not he or she is willing to commit to the project. If the practitioner is committed, then he or she should examine the practice and determine what skills, knowledge and level of expertise would be required for someone to support or absorb the practice. Also, the practitioner should make a list of services currently provided to help pinpoint these factors.

The size of a practice may dictate the minimum size of the firm that must be sought. The larger the practice, the bigger the participating firm may need to be in order to manage, support and purchase the practice.

Choosing the Right Candidate

After these factors are identified, the practitioner should make a list of familiar firms, possible candidates from the CPA firms listed in the yellow pages of the phone book and, if the practitioner is involved in one, likely members from his or her sole/small practitioners roundtable group. If cold calling to firms is an uncomfortable idea, the practitioner may consider placing an advertisement in a trade publication or the local business or general newspaper.

After an interview, the practitioner will be able to determine whether the managing partner or owner of the prospective takeover firm can adequately serve existing clients. If the firm is to support the practice until it is sold, it is essential that clients are satisfied and stay with the practice. If the firm is purchasing the practice, payment arrangements often include a two- to four-year payout schedule that hinges on retaining clients.

All agreements need to have a legal review. It is important for you, the practitioner, to retain a lawyer who will review the agreement from your perspective. Keep the practice continuation agreement flexible, but leave enough strength in it to meet the initial goal of protecting yourself, your family, and your practice.

You should discuss the practice continuation agreement with affected parties, such as spouse, family, and close staff. Also, keep the original copy of the practice continuation agreement in a safe place. Give the spouse and any other necessary parties a copy of the agreement.

A practice continuation agreement can be the smartest money idea a sole practitioner ever implemented. It can beat the profits that even the best marketing ideas generate.

Message: do it, and do it now!

CHECKLIST FOR EVALUATING FIRMS

* Firm name

* Address

* Office telephone and fax numbers

* Managing partner

* Other partners

* Professional staff

* Type of current practice

* Other practice continuation agreements or recent participation in a support or purchase activity

* Pros

* Cons

* Possible financial considerations

* References

* Credit check

Judith E. Dacey, CPA, is president of Dacey & Associates, PA, in Jacksonville, Florida, and Chairman of the FICPA Committee on Sole Practitioners.