What Should be Included in a PCA?
Main Terms to Negotiate and Include in Your PCA include:
- A clear definition of the circumstances which trigger the activation of the PCA and any other components contained therein. A clear and concise agreement as to the definitions of short and long-term disability is critically important to incorporate in the agreement. There have been horror stories surrounding this topic and we will share but one circumstance that will help identify the potential problem when disability is not completely defined.
The successor's obligations, which is usually focused on managing client relationships and providing ongoing client services as well as making sure the work is produced. In the agreement make sure those responsibilities are clearly defined.
The compensation to be paid to the PCA "partner" firm if the support is temporary. Specifically identify a very fair and equitable compensation for your partner which should include:
- A practitioner was in a car accident and due to his injuries was unable to perform services for his clients. His PCA partner stepped in per the agreement and provided best efforts under duress as it was at the beginning of the tax season. The injured professional missed the entire tax season and unfortunately did not have another CPA on staff that could review and sign the client's tax returns. He did have some staff that could assemble and prepare tax forms that were not requiring higher level knowledge. That meant the PCA partner almost doubled his workload during tax season and significantly increased the workload of his own staff. After tax season the PCA partner felt the disability and length of time the injured professional was out of the office and required his back-up triggered his right to purchase the practice. The injured professional recovered to the point he felt he could resume the responsibilities of managing and running the CPA firm, once again and of course had no intent to "sell" his practice. It ended up in litigation and was not pretty. Make sure you have a clear, concise and agreed upon definition of disability, short, long and the trigger point for a buy-out.
The terms of the acquisition if the PCA partner firm is expected to buy the practice. These terms should include but are not limited to:
- compensation for utilization of his or her staff if need be
- profit-sharing during the period of service
- hourly rate for the PCA partner
- compensation for unusual service needs of your clients
- compensation for non-billable time if the agreement is based on an hourly rate
- how a referral will be credited during the time your PCA partner has assumed responsibility for your client base
- how a client will be handled that informs you they wish to be serviced by your PCA partner even if you now have back client service responsibility
- How will the buy-out of that client be agreed upon
- Remember, if you don't pay your PCA partner enough to cover you, they may lose motivation to jump in to the degree needed. If they are maintaining your asset while under a temporary disability, that is more important than how much income you make in the short term.
- Discuss an override for your PCA partner in the event they do not wish to purchase your practice but will assist in the transition of the practice to another CPA or CPA firm, assuming you are incapable of handling. This is a very beneficial inclusion in the event of your death as it helps relieve your heirs of the emotional burden of negotiating something they know little about.
- growth of billings
- client retention period (most PCA agreements have lengthy client retention programs since there was a lack of transition by the owner)
- staff retention
- practice payment terms such as payment period and practice multiple
- formulas for value and other financial considerations
- retention of location
- Non-compete and/or non-solicit terms
- Cross indemnifications
- Cash up front in the form of a down-payment or advance if any (post PCA agreements do not have cash upfront)
The above are the most common inclusions in a PCA but please note your firm may be unique and therefore require additional inclusions or considerations. This is a reason we stress the use of an experienced M&A professional or firm when creating your PCA.
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