While there are some things you can control, there are many more that you cannot. The real issue is not what you can control or not, but how you react to these type of disasters, and how well your firm carries out its âcontingency planâ� (if it has one). The difference may mean the firmâs survival (and retention of its asset value).
It is assumed, but not always the case, that larger firms (six or more owners) can withstand the loss of any one partner. However, partners from these larger firms can still learn from this article, since many of the ideas can relate to other types of contingency planning matters (e.g., fire or natural disasters).
We all like to believe that death or permanent disability is not a near-term possibility, but we also know that these types of events are unpredictable and can happen to any one of us at any time. Contingency planning deals with how we would respond to one of these events. How adequately prepared are you to deal with situations such as the following if they were to happen to your firm?
The firm's managing partner, who has been the driving force behind the success of a four-partner firm, is tragically killed in an automobile accident. He was the firm's primary rainmaker and also the relationship partner with many of the firm's major clients. One of these clients has already called wanting to know how his company can continue to be serviced without that partner.
A sole proprietor has a five-person staff. The sole proprietor's spouse suddenly develops a serious respiratory condition that requires her to quickly move to a dry-air climate (which would be in a distant state). The sole proprietor needs to move with his spouse, but none of the five staff people are willing or capable of taking over the practice.
A long-term, successful partner in a multi-partner firm is having personal problems that are affecting his performance at the firm and potentially exposing the firm to major liability issues. The other partners want to give this person time to reform, but after six months, the issues are only becoming more severe.
A TRUE STORY
A sole proprietor in his late 50s was operating for over 20 years with two part-time staff, neither of whom were candidates to take over (or buy) his practice. He had no succession or contingency plan and no practice continuation agreement, but was in "good health," anticipating many years before any planned retirement. Suddenly, in mid-June, he began having some cognitive problems, so he went to his doctor. He was diagnosed with a terrible terminal illness and was given two months to live. He deteriorated rapidly and died in August. His spouse and attorney tried desperately to salvage his practice. The best they could do was to sell it to a nearby two-partner firm on a retention basis. In the end, the spouse ended up with the equivalent of about 40 percent of the practice value and significant legal bills.
UNDERSTANDING THE RISKS
Risks fall into two broad categories - sudden (immediate and a surprise), and longer-term (which result from a deteriorating/evolving situation). The sudden risks occur due to an unpredictable event resulting in an immediate need to "replace" a lost person or respond immediately to some event. This includes a sudden death or disability event (e.g., due to an accident or a stroke). A longer-term event occurs based on a deteriorating situation, which may or may not have been known about. This includes an alcohol/drug problem, marriage break-up, a serious family health issue (such as the illness of a spouse or child), or psychological trauma.
BUILDING A PLAN
The process of developing an effective contingency plan can be broken down into five key areas:
Identify your needs. While you won't be able to have a contingency plan for every potential disaster, you need to identify for your firm the highest vulnerability - people, technology, clients, quality, etc.
Make an impact assessment. Next, if such a disaster were to occur, what is the likely impact on the firm, clients, employees and owners?
Select suitable measures and controls. What specific preparedness steps should the firm implement now?
Develop recovery strategies. What will it take to recover from the disaster and what will be your firm's strategy? Recovery strategies enable operations to be rapidly normalized in the event of disruption. Strategies should be based on the data gathered in the impact assessment, in order to ensure that they are appropriate to the organization's core requirements. They should also take into account the full range of possible incidents and disruptions. The plan should specify teams and individuals and the areas for which they are responsible in an emergency situation. The people involved must understand their roles and the expectations that these roles place upon them, and they must be fully prepared to implement their responsibilities at short notice when required.
Build the plan. Finally, start putting the pieces together.
DEVELOPING THE PLAN
A common failing when developing a contingency plan is to look for a one-size-fits-all solution. Starting out with a clear examination of the specific requirements of your firm helps to make sure the plan you develop is the one you actually need.
The following are specific components of a plan:
Practice continuation agreement. While a practice continuation agreement is usually suggested for sole practitioners, it is also very applicable for two- and three-owner firms. This is a contract that provides for the assumption of a practice by another CPA firm (under a predetermined plan for payment based on value) in the event of permanent disability or death of an owner. So, in a crisis, the practice is taken over by another CPA firm under a predetermined plan that is designed to quickly secure the client base and ensure that service is maintained.
If you are a sole proprietor, this is a must. If yours is a two-to-three partner firm that could face significant risk if one key partner is lost, this should also be a definite part of your plan.
The American Institute of CPAs and state societies have strongly recommended these agreements, especially for sole proprietors, and yet in our experience a very small number (probably not even 5 percent) of these firms have a formal signed agreement in place. In our opinion, it is generally a better idea to formalize such an agreement with at least a slightly larger firm, since such a firm is more likely to have the people available to quickly step in during an emergency. A classic mistake is for two sole proprietors, both up to their eyeballs in work, to establish a formal (or informal) agreement with each other. Unfortunately, in a sudden crisis, the other firm's owner is usually incapable of covering the crisis firm's clients.
Promotion of existing people (e.g., managers). A plan should be written to describe how this would work (in regard to clients, staff and operations). The roles and responsibilities should possibly be discussed in advance with the staff candidates who would assume the key roles. This plan should then be reviewed with the entire staff. This should provide a level of comfort to all the members of the firm, since they would now know that the firm will not fall apart in the event of a crisis, and, therefore, their jobs will not be at risk.
Hiring of backup person(s). If a firm does not presently have the key people in place, it has several planning options. There are two that involve hiring. The first is to currently try to hire one or more people who might be more appropriate "backup owner" candidates. Since the current recruiting market has improved considerably in the past 12 months, the supply of possible candidates has grown in many parts of the country. The second hiring plan approach would be to draft a written "what-if" hiring plan that would include a write-up of ads to place, and headhunters to contact immediately in an emergency.
Cross-training of firm responsibilities. It is always a good plan to have people cross-trained to assume responsibilities of any key person. For example, if one partner handles the internal banking and chief financial officer roles, another partner should be fully familiar with what the first partner does. A specific plan should be drafted that shows the backup persons' names for each important function. The cross-training should then be implemented as time permits.
Initiating second-partner assignments to all major clients. A list of all the firm's A and B clients should be prepared. A second partner's or senior staff person's name should be listed for each client. Over time, each second person should be given the opportunity to meet each of the clients that they are "assigned." Each client should also be told that the assigned person is the backup person on their account (and is familiar with them and their business). Developing a second-person relationship with clients is very beneficial to the firm (and clients) and important for general long-term succession planning of the practice.
Notification plans. The owners/partners should draft all letters, etc. (to clients, referral sources, and staff) that could be used in a tragic situation. These should be placed in the plan file.
Partnership/shareholder agreements. All multi-partner firms need to have a written partnership or shareholder agreement that clearly outlines what happens (i.e., not just how the financial issues are to be resolved) in case of short- or long-term disability, termination from the firm, death, retirement, etc. Ideally, death and disability should not only be covered in the agreement, but adequate insurance should be obtained to cover the practice value of each owner.
Contingency plans are unfortunately like wills or diets. You plan to start it tomorrow, but it continues to be deferred. We can only recommend that you start building your contingency plan now. Once it is completed, share it with your staff so that they will know what to do if it needs to be implemented.
For two detailed case studies, see the version of this story posted on AccountingToday.com.
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