Practice Continuation in the Event of a Death or Disability

A Transition Planning Tool Kit

This is an abridged article published by the author. The original article is longer and contains forms referenced but not included here. The author has prepared a tool kit to assist sole practitioners and smaller partnerships with a method of having their practice sold or continued in the event of an untimely death or disability.

This tool kit has been prepared to assist sole practitioners and smaller partnerships with a method of having their practice sold or continued in the tragic situation of an untimely death or disability.

The forms can be used and filled in as presented in this tool kit and used for negotiation purposes, but it is recommended that legal counsel be consulted prior to executing any agreement.

This is a standby plan in the event more formal plans have not been made and should not be a substitute for a carefully drawn up customized plan. However, in the situation of smaller practices being dissipated or abandoned or sold as a fire sale much less will be realized by the families of the decedent or disabled, and it can provide staff and clients assurance of a smooth continuance and maintenance of the relationship with the firm.

This tool kit has been prepared for illustration purposes and no opinions are made or intended. Nothing in here should be construed as legal or tax advice. Appropriate counsel and guidance should be obtained. All tax treatment should be reviewed as of the date any agreement is executed. It should be periodically reviewed to see if the tax treatment remains applicable and, if not, whether the agreement should be updated.

The following sample agreement addresses a practices’ transfer in event of a sole practitioner’s or a firm’s partners’ sudden death; and the method of servicing clients in the event of a temporary or partial disability or inability to practice, how payment for clients that are sold by the buyer are handled and the situation would be handled should a disabled seller returns to the practice.

It is recommended that you execute a similar agreement with a fellow practitioner to protect your practice, clients, and family wealth or cash flow. While this letter is directed at an accounting practice, it can be adapted for use for your clients that are in a service business or professional practice.

It is recommended that you bring your spouse with you when you sign this agreement and explain to them the importance of quick action. An instructional letter to your spouse of other relative or beneficiary is also illustrated.

Be aware that this tool kit represents the minimum that should be done and provides a method that can provide protection for the practice’s value that can be quite effective under many, but not every, circumstance.

Alternative to Having this Agreement

Dissipating value. Wasted time by widow or widower or your family representative. Distrust of the person you ask to acquire the practice. Lack of decisiveness in making an agreement. Unnecessary legal expenses. Possible unnecessary valuation costs. Possible failure of heirs to agree with potential for divisiveness and altercation. Abandoned clients. Costs of winding down practice, closing office, terminating employees, and deciding what to do with files. Inability for buyer and family to understand client service and fee arrangements and locate passwords, contracts, policies, and leases. And many other problems and time-wasting issues.

Inevitability

Death is inevitable. Disability is not. Both can occur unexpectedly, meaning without warning or expectations. The few hours planning and executing a practice continuation agreement need only be done once; and then hopefully never used. Any arrangements you want to make to dispose of your practice, retire, semi-retire, or can be made and it would supersede or vitiate the agreement. However, if your plan is to work until you drop and then you drop at some point, there can be order and a smooth transition and maximum payment for what remains of your practice. In today’s environment, and for all of the past decades I have been practicing, there are more buyers than sellers, so executing a practice continuation agreement should not be too much of a problem.

Deciding Who to do the Agreement With

I suggest making the agreement with someone you know and who you know about their practice and ethics. I suggest a firm three to four times bigger than your practice. This size should be able to absorb your practice without too much difficulty. A practice your size might not be able to. A practice much larger might not have the staff capable of working on your clients or would not maintain the proper interest level since the bulk of your clients likely would be much smaller than the buyer firm’s clients. Also, the staff’s interest level might not be that great to service your clients properly or in a way that would retain the clients for a prolonged period.

A by-product of interacting with colleagues during the decision process of who to execute the agreement with is that opportunities might arise to work together on certain projects or for cross referrals, or even being invited to attend in firm CPE programs, or office sharing.

However, the goal is to secure the value and transition of your practice should you die prematurely or unexpectedly; and to maintain the practice and provide a cash flow until you are able to return to work. This is important stuff! Do not neglect it.

Buying a Practice from an Estate

The practice continuation agreement is for your estate to be able to sell your practice quickly, smoothly, and easily should you die unexpectedly, or maintain or sell it should you suddenly become disabled. However, the possibility might arise where you are asked to buy the practice of a deceased practitioner who failed or neglected to execute such an agreement. Here are my thoughts.

A topic near the top of the most asked questions I get from practitioners is where they have an opportunity to acquire a practice from the widow of a deceased sole practitioner. I have been through this and know many others that have gone through this, and my response is to pass on it. Note: As skeptical as I seem in expressing my thoughts, I do know of many successful transactions, although their process was not much different than what I describe here.

Some significant reasons I suggest passing on it are that the family of the deceased accountant will always think the practice is worth much more than you offer—no matter what you offer; the longer the negotiating process takes, the lower number of clients will be retained—once a client hears that their accountant, or tax preparer died, they immediately start looking for a new one; very few widows, widowers, or executors will take action without seeking the advice of an attorney—and very few attorneys would offer advice before they received a “valuation” report; there is a strong likelihood the records and client information is in disarray; if there are employees, they have to be interviewed; decisions will need to be made about the premises and whether to assume the lease, even temporarily; the mailing address, software, file backups, telephone numbers, e-mail addresses, and websites need to be transferred, and passwords deciphered; ACH payments, fees from affiliated programs and financial services from referrals or cross practice collaboration need to be determined, and arranged for continuation; and all the talking back and forth and “proving” your ability and credibility will eat up your time, and consume a lot of energy because of the aggravation dealing with the deceased’s family, if you can even identify who is authorized to make the deal.

So, my advice is to pass on the “opportunity.” However, should you want to proceed, I suggest making an offer like the arrangement provided for in the practice continuation agreement. I believe it is fair and would offer the chance of retaining as many clients as possible if done quickly. Make the offer (in writing) and put a deadline on their accepting it, along with the information you will need to review before you will execute the agreement. The sooner you get the information, the better, but make the offer quickly; and do not negotiate. Any negotiation indicates that you did not provide your best offer initially

If it does not happen, so what—you have lost nothing except maybe an opportunity that will cause added stress and unnecessary work integrating what is left into your practice. Also, keep in mind that the deceased is the person that screwed his family by not making any arrangements such as this type of agreement.

By the way, the person I referred to that screwed his family … could be you if you do nothing. Do not be in denial or that stubborn!

If you would like a complete copy of Mr. Mendlowitz’s Practice Continuation in Event of a Death or Disability Toolkit, please e-mail GoodiesFromEd@withum.com.

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Edward Mendlowitz, CPA, PFS, ABV, CFF, is emeritus partner with WithumSmith+Brown, PC, in East Brunswick, New Jersey. He has over 40 years of public accounting experience, is a licensed Certified Public Accountant in the states of New Jersey and New York and is one of Accounting Today’s 100 Most Influential People and is an adjunct professor in the Fairleigh Dickinson University MBA program. The author of 29 books, Mr. Mendlowitz has written hundreds of articles for business and professional journals and newsletters and presented over 350 CPE programs. He writes a twice a week blog at www.withum.com/partners-network-blog.

Mr. Mendlowitz can be contacted at (732) 743-4582 or by e-mail to emendlowitz@withum.com.