There are basically two types of succession plans. one addresses the transfer of the practice at a time of the owner's choosing. The second addresses a transfer in the event of death or disability of the owner -- a disaster.

We encounter many practice owners who do not know when they will transfer the practice. It is often an uncomfortable subject and easily put off. A disaster plan is a necessity and something that can't be put off since we never know when disaster will strike. Often there are a number of people, in addition to the owner, who have an interest in the continuity of a professional practice, including the clients, employees and heirs. Disaster affects a single-owner practice more severely than a multiple-owner practice.

What happens to a single-owner or the small professional practice if the owner dies or becomes disabled? Who will take over? How will the transition process be handled?

Consider the following:

• Is there a key employee or co-owner who could buy the practice, and do plans exist that would allow the key employee or other non-owner professional to continue the practice?

• Can the surviving spouse operate the practice until the right buyer is found?

Without a concrete plan in place, would the operations of the firm cease immediately, leaving clients, employees and the owner's remaining family with no direction or succession plan?

• Is there a plan in place to transfer client files to a successor firm or firms in the event that a sale of the entire practice cannot be arranged?

A solid plan will provide departing owners with a market and a fair price for an asset that is probably their most valuable and one that might otherwise be difficult to sell. At the same time, it would permit key employees or remaining owners to prevent an unqualified individual or surviving spouse from acquiring an interest in the practice. This would also minimize business disruptions resulting from disagreements among surviving owners, key employees and family members. A carefully crafted succession plan will also provide assurances to clients, employees, suppliers and creditors that the business will remain strong through an owner's untimely death or transition.



A small-practice succession plan is far too important to leave to chance. Specific considerations are crucial in attempts to protect a smooth transition of the business:

Practice valuation -- cash is king. There are a number of ways to value a professional practice. In the past, general economic growth, growth in the marketplace, new market opportunities, and inflation often provided cover for high valuations. Those days are over. In our view, value must be justified by cash flow. This is not a new concept, just one that has become more important. Put simply, the buyer must be able to pay for the purchase price out of the cash flow of the practice, whether financed by the seller or a lender. The cash flow used for valuation purposes must be based on historical results, modified for expenses that the buyer is expected to incur (or not incur). Part of the value of the practice will be determined by the continuity of existing clients.

If something happens to a practice owner, cash flow may very well stop, resulting in a practice with very little value. Some consultants recommend that the practice owner enter into a practice continuation agreement with a larger practice. Three things that are important to clients are relationship, location and fees. Transferring a practice to a larger firm most likely will result in the loss of all three. On the other hand, transferring the practice to a key employee, assisted by per diem professionals, can retain all three. If ownership by a key employee is not a viable long-term solution, the practice may be operated by a key employee until a buyer is found. Maintaining a relationship, location and fee structure is likely to retain much of the value of a practice. This can only be accomplished if a plan to do so is developed in advance.

Liquidity options in the lending market. Many professionals, whether buyers or sellers, think that cash flow lending for small practices is not only difficult now but also for the foreseeable future. Not true. Buying or selling a practice may be something a professional does once in their career, and there is liquidity in the lending market through loan programs that can provide financing for up to 70 percent of value for CPA practices, with flexible options, terms and combination loans, as well as practice debt consolidation and commercial real estate financing. A 10-year fixed term for the acquisition note is a realistic assumption for bank financing.

For CPA practices, seller financing is often required as part of the transaction. We suggest a term of no more than five years for a seller note. In addition, most professionals think that obtaining financing can be a painful process that takes weeks or even months to obtain. However, the truth is that there are lenders who can finance an acquisition quickly and effectively based on an updated cash flow business valuation. This framework will allow a smooth transition of the practice for both the buyer and the seller.

Once the professional or their heirs know the financial valuation of the practice, they can set a fair market price and maximize the price for which the practice is sold.

Comprehensive risk management tools in order to plan for contingencies. In order to protect the value of the practice, cash flow and smooth transitions, buy-sell insurance and key-person insurance are common risk management tools used by professional practices. When the professional leaves the practice unexpectedly, whether by death or disability, the business can come to a halt unless they have the right components in place to ensure that the practice will continue. If there are multiple owners, buy/sell insurance provides the funds for surviving owners to purchase the shares of a deceased owner, usually from the deceased's estate as directed by a clear agreement.

Other strategies should also exist in order to keep the practice intact, particularly during key person succession. Whether the practice is owned by a sole practitioner or additional owners, each key person in the practice plays a unique role that directly affects the bottom line. Key person insurance can take several forms, but most commonly it is a life insurance policy or, up until recently, a key person disability insurance plan on the lives of the owners or key employees, with the practice as the beneficiary.



Integrated planning, implemented while the owner is actively working in the practice, is also a very important risk management tool. Common mistakes made by sole practitioners and small firms revolve around their financial and estate plans, while ignoring the importance of their business succession planning.

The larger picture includes developing a retirement and estate planning strategy with the objective of minimizing the eroding effects of taxes wherever possible, while incorporating the sale of the practice in this process long before considering retirement. Recent estate and pension reform tax law changes have affected the nature of qualified plans and retirement distribution strategies, as well as the overall estate and succession planning processes. It is important to analyze and evaluate existing integrated plans, to confirm or redefine retirement estimates.

First, each professional should implement a system that will allow them to determine sufficiency of retirement income to age 100, taking into consideration all assets and income streams. Next, they should identify any potential estate tax and income tax liability on all assets. Consideration should also be given to the impact of the sale of the practice on the overall retirement and estate plan, and on current asset allocation and distribution strategies. Also, how will these assets be protected throughout retirement? Is the existing life and long-term care insurance in place? Is it the right kind, for the right reason? How long will it last and are the premiums too high? Monitor, update and modify your plans as often as necessary.

As the sole professional or small-practice owner gets closer to selling their business, the dreams of what they can attain from the sale come closer and closer to realization. Once the professional has the proper succession plan in place and they know the financial valuation of their practice, they can set a fair market price, maximize the price for which the business is sold and plan on using the income stream to help fund a secure retirement plan.

Regardless of whether or not a professional has a plan in place, it should be reviewed frequently, as their business and life endure many changes throughout their "pre-retirement" life.


Dierdre Collins, MSFS, RFC, and Kevin F. Long, CPA, JD, are principals in the Harbor Strategies Group, which includes Harbor Insurance Strategies, Harbor Succession Strategies and Harbor Wealth Strategies. Contact them at and or (781) 229-2300.

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