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This article originally appeared in The Bottom Line.
For lawyers and accountants planning on leaving their practice, preparing for the worst-case scenario, or putting their affairs in order, a practice continuation agreement (PCA) is essential.
“Typically we are talking about people who are transitioning their practice. This agreement spells out what will happen before and after,” said Calvin Carpenter, vice-president of professional services with MNP in Edmonton. The best time to prepare a practice continuation agreement is before you actually need one. It’s about avoiding a crisis, planning for the future, and being realistic. Many professionals do this in a number of ways. The PCA is just one more proven tool they need to make things easier for colleagues and clients if they are no longer practising, either temporarily or permanently.
“It’s no different than a will or a power of attorney. If something goes wrong, who will people go to?” noted Grant Robinson, national director of BDO Canada’s SuccessCare program in Guelph, Ont.
In some cases, PCAs will be used by sole practitioners and independent consultants to have their practice assumed by a colleague or subsumed by a larger firm when the time comes to move on.
Larger firms rely on practice continuation agreements to ensure client service is maintained within the organization, and also as a way to keep the best and the brightest in their employ. Lawyers and accountants looking to take some time off, return to school, or pursue new interests need to ensure someone is able to take over their practice until they return. Firms are happy to oblige.
“This is an opportunity to retain talent,” said John Hughes, managing partner and national leader of growth enterprises in Canada with Deloitte in Toronto. “These agreements can help to build a legacy within the firm.”
That presumes, of course, that the PCA is effective. It’s imperative to ensure there are no information gaps, ambiguous language, or unclear intentions. The starting point is goodwill. Giving up or giving over clients requires a comfort level that clients will receive top-notch service and care. Taking over that responsibility from a stranger or even a colleague requires confidence that you know what is being asked of you and you can deliver.
“There has to be a trust relationship,” said Robinson, an FCPA. This is particularly true, he noted, if the professional plans to return to their practice. “You can’t be concerned the other person or firm will steal your clients.”
For buyers taking over the business on a short-term basis, the future is also disquieting. “The out-
come is uncertain. The person may return to take over their business or it may be sold,” Robinson said.
In the case of an outright sale, the PCA can bring some comfort in the form of a clause restricting practice. “It’s crucial if [the person] doesn’t stay involved they don’t compete. You need a non-compete clause,” said Carpenter, a chartered professional accountant. Such clauses spell out how long the seller is restricted from competing, the geographical boundaries around that restriction, and what happens if the agreement is breached.
The latter can be quite serious, noted Carpenter, who has worked with individuals who have violated the non-compete clause only to see their new business shut down when the buyer received a court injunction.
“This should be taken seriously,” he stressed, “but it can’t be so restrictive the person never works again. It has to be reasonable.”
Non-compete clauses are intended to ensure clients don’t get poached. They’re also intended to ensure staff isn’t either. It’s not uncommon for professionals, after leaving a practice with the best intentions of moving on to new endeavours, to find themselves bored, restless, and looking to return to their former
profession. Employees are often the first to follow them. Noncompetes ensure they can’t.
For PCAs within a firm, the sense of trust may be easier to attain. “It is a partnership,” stressed Hughes, who is also Deloitte’s national leader of Canada’s “best managed companies” program. He noted that Deloitte has 550 partners in this country, but “at the end of the day, we’re one voice.”
That collective sense will infuse the practice continuation agreement. While every practice continuation agreement is unique to the circumstances of the individuals and firms involved, there are key elements that need to be addressed. Some are at a high level and reflect the intent and nature of the sale and the ongoing commitment to client service.
Others are more refined but essential points, including whose signature is on the bank account and who will inform staff.
“List every potential and see if you can come up with an answer,” advised Robinson. “You need to get to the details of what needs to be done.”
Those details, he added, will be specific to the circumstances in place when the PCA is drafted. “The reality is never the same. Time changes the circumstances. Revisit the PCA.” Robinson points out that the details most likely to change can be omitted from the PCA itself. “Keep the PCA general and have background material to provide the detailed insight and explanation.”
One issue that needs to be fully understood by the person or firm taking over the practice, if only temporarily, is the nature of the services the current practitioner provides. On the surface this sounds obvious, but assumptions can be made that later prove to be false.
“Not all accountants are the same; not all lawyers are the same. You have to be aware of what you’re buying,” said Carpenter. “It is important at the same time to get financial information from the last five years to see the profit of the practice.”
According to a Chartered Professional Accountants of Ontario report (Practice Continuation Planning – Your Legacy for Others) up-to-date, readily available information about the practice will expedite negotiations with a potential successor or temporary replacement. Included should be a description of the types of clients by service category and a description of specialty services, if applicable, as well as a list of clients, the length of service and details of comparative fees for at least a three-year period, including recovery rates.
In addition, a fee schedule by major category covering hourly rates, fixed-fee arrangements, retainers, and other financial arrangements should be part of the package, along with information regarding employees, their compensation, roles and responsibilities, length of service, and even emergency contact information.
The background material will be so specific as to include a list of furniture and fixtures, and copies of existing leases for premises and equipment. The PCA provides the framework and cements the obligations, including ethical ones, of both parties. This is particularly true when a partner within a firm is retiring.
“There are small things that can mean a lot, even in transition,” noted Hughes. “They are very important relationships. Continue to support them in their retirement. They can continue to support the firm.”
Deloitte, for example, has an alumni support group for retired partners. “They want to stay tapped in. They want to stay in the game,” Hughes said. “Their knowledge and experience are assets a firm doesn’t want to lose.”
Ultimately, common sense and business savvy will rule the day in a successful practice continuation agreement. “The continuation agreement is about smart people being practical,” said Robinson. “It’s peace of mind for everyone.”
Related Topics:Retirement; Employees
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