bonus: key considerations in evaluating a practice continuation agreement.
by ed mendlowitz
202 questions and answers: managing an accounting practice
question: what i should do about merging? i need a specific answer.
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response: i can’t give you an easy answer. i can give you a process to follow that should provide an answer. actually, this works pretty well and i’ve gotten good feedback from many colleagues. i’ve also rethought it many times, and still think this is the way to go about it.
decision-making process for considering a personal long-term strategy
- write out what you really want for yourself and your practice. jot your “ideal” situation – it is your piece of paper – fantasize and put down your wildest dreams, professionally that is.
- look at what you wrote and convert it to a plan for the next two to five years.
- think about starting to implement the plan. take the first step.
- if a merger is part of your plan, then start figuring the type of person you would like to “get in bed with” and then work toward that.
- if a merger is not part of your plan, or not something you really want to do, then drop the idea and work out your practice’s plan that will now have to include moving, expanding, contracting or doing whatever needs to be done. this will probably mean doing some things you will find unpleasant, but most likely you will have no choice in the matter, and might as well get to it. your choice could end up being to pick the least offensive. keep in mind that these are business decisions and try to think dispassionately even though you might be setting your course for the next few years. actually, your future can be somewhat of an exciting blank slate with the starting point where you sit right now. alternatively, it could be an albatross around your neck and drag you down. it’s your choice. excitement and growth, or settlement with discontent. i hate to use a cliché, but when you stop growing you die!
- if there is a concern about what would happen to your practice if there were a premature death, then you should enter into a practice continuation agreement. if you still haven’t done anything, do it.
considerations in pursuing a practice continuation agreement
the big picture, and urgency, is the necessity of getting an agreement that covers death and disability of the co-owners. for that, a payment amount and terms need to be agreed to (understanding that either party could be on either end). to accomplish this you need to arrive at a number that you both think is reasonable. not a number you would sell the business for, value a transfer to a successor or family member, to fund a retirement, or for the myriad reasons stock would be transferred. the purpose of this agreement is to avoid conflicts between the remaining owners and the family of the deceased or disabled owner and to allow the remaining owners a reasonable way to make the payments.
a simple method is for the partners to agree on an amount and terms they would be willing and able to pay and would feel comfortable with their family receiving. a second way is to work with your cpa, attorney or a valuation specialist to assist in the determination of the amount, terms and location of the cash flow payments. keeping in mind the limited purpose of the agreement, this could be done relatively easily. your attorney should prepare the actual buy-sell agreement.
to accomplish this, i do not believe you would need a formal conclusion of value. if the transfer is between relatives, a gift element or a tax-based transaction, you would need a conclusion of value for the fair market value prepared in accordance with irs rulings and requirements … but that is a different situation than i am discussing here. if for some reason the irs challenges the value, you can get a formal valuation then, but it would have no effect on the buy-sell transaction between the parties. you can also add (to the amount paid) that an adjustment would be made if there is a sale to a third party at a greater price within one year after the buy-sell transaction.
i have seen too many situations where an owner died or became permanently disabled and problems arose along with excess costs that could have been avoided if they signed a buy-sell agreement. make your life less complicated and reduce stress and consternation. get it done!
one way to get going is to make a large t on a page and list the “goods” on one side and “bads” on the other.
you need to be clear on what you want and what is good for you. if you are not clear, then you will flounder.