it’s a favor, so treat it like one.
by marc rosenberg
cpa firm mergers: your complete guide
a practice continuation agreement (pca) is a written contract between a sole practitioner and another firm for the latter to take over the solo’s practice, either permanently or temporarily, in the event of a sudden, unexpected event that prevents the solo from working, most commonly a health issue.
more on mergers: how to merge sole practitioners | merging in smaller: what to ask | 18 concerns about merging in smaller firms | 12 reasons to merge in a smaller firm
logically, it would make total sense for every one of the 30,000 sole practitioners in the u.s. to have a pca in place. after all, the solo has no other partners to take her place and in the vast majority of cases, the solo’s staff doesn’t have the skill level or the certifications needed to run the practice in the absence of the owner.
but very few sole practitioners have a pca with another firm, and very few firms have pcas with smaller firms.
why do we see so few pcas?
what may seem like a simple, logical, win-win arrangement between two firms is in fact, very complicated. in some ways, a pca is more difficult to negotiate than a merger.
a life insurance policy is a boilerplate document you sign, pay the premiums for and tuck away in your file cabinet, knowing that it never has to be looked at except in the unfortunate event that it is invoked, at which time it can be instantly and effortlessly implemented.
there is a tendency by some to see a pca in a similar light. but it is a totally different animal.
here are several factors that cause pca to be so rare:
1. the effort to negotiate and agree on pca terms is at least equal to the effort and complication of buying or selling a firm. key provisions such as the following have to be negotiated:
- sale price
- payment terms
- down payment
- purchase of other assets
- who has responsibility for the smaller firm’s office lease?
2. an argument can be made that a pca is more difficult to negotiate than a regular merger, due to the following:
- in the case of a temporary disablement, how will the profit on the smaller firm’s practice be split between buyer and seller?
- if the solo can only come back part time, how will that work?
- what happens if clients don’t stay?
- what happens if staff don’t stay?
- if the goal is for the larger firm to seamlessly step in for the smaller firm if needed, the only rational way to do this is for the smaller firm to have an “of counsel”-type relationship with the larger firm. the two firms don’t need to reside in the same office (though this would make sense), but the smaller firm should use the same software as the larger firm, follow the same client report formatting, workpaper style, quality control procedures and processes. the smaller firm’s personnel should regularly attend training sessions of the larger firm.
- files, office keys, computer passwords, client names, phone numbers, email addresses and other items should be organized so that, in the event that the pca is invoked, the larger firm knows where all these things are located.
in general, solos need to understand that a buyer agreeing to a pca is doing them a favor. therefore, the solo needs to be very accommodating to the buyer during the process of negotiating terms.