Practice continuation agreements for sole practitioners.

• Author: Caplan, Robert M.

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TAX PRACTITIONERS DO THEIR BEST TO plan for every contingency. They make capital decisions to avoid the possibility that something in the system may break down during tax season. However, what if that breakdown applies to them and their own ability to perform? Too few sole practitioners have a plan in place to address a situation in which they may become unable to operate the practice due to disability or death.

Many clients would look elsewhere if their phone calls and e-mails were not answered for several weeks during tax season. Would practitioners' spouses or assistants be able to keep the office running during a busy season without them?

Protecting the Practice

By one estimate, in the event of a sole practitioner's sudden death where there is no practice continuation arrangement in operation, 20% of clients will leave within one week and another 21% will be gone by the end of the second week. Within a month, all but 20% of a firm's clients will likely be lost to another tax professional (Gray, "Succession Planning," Catalyst 22 (May-June 2009)).

A practice continuation agreement can help mitigate these losses and maintain a tax practice's integrity in case of the practitioner's disability or death. Such an agreement is a written contract between a sole practitioner and an acquiring CPA firm, which may be a larger firm. Who will take over the sole practitioner's practice is the threshold question.

Generally a professional practice is built based upon relationships between the practitioner and his or her clients. Will a larger firm be able to provide the personal touch on which the sole practitioner has built the practice? On the other hand, will another sole practitioner be able to absorb the additional work of the disabled or deceased sole practitioner? Perhaps a small firm set up to absorb additional work in situations like this can take on additional clients while still providing the personal service clients require. How well will other stakeholders (e.g., employees, vendors, family members, etc.) work with the potential successor? The sole practitioner should develop a list of possible successor firms or practitioners and then carefully evaluate who is best qualified to take over the practice, because a practice continuation agreement will work out well only if there is a successful transition of the practice.

An effective practice continuation agreement contains strategies to deal with temporary and long-term...