More frequently than ever, I witness stories of small, single-partner CPA shops that suddenly end. Most of them end because the sole partner passed away or became disabled. In many of these cases, clients are left to scramble for a replacement CPA. Along with that, any enterprise value that the sole partner may have had in the enterprise withers away to a fraction of its real value … and sometimes zero.

The bottom line is this: Succession planning is not something that you only do for clients. You must practice what you preach and ensure that your clients have continuity of services and that your beneficiaries receive value for the enterprise value that you’ve created. Single-partner firms need to plan ahead, regardless of your age, for the distinct possibilities of tomorrow.

Based on the reality that tomorrow could be the last day at work for anyone reading this, I’m going to lay out some of the steps that you may want to do now (or after tax season) to protect your professional practice in the event something really bad happens to you.

Who will fill your shoes?

Your first order of business is to line up someone or another firm to act as your successor under the possible scenario that your disability may be temporary — say, less than one year — or permanent.

If you believe your successor lies within your firm, then it is time to have a real discussion about your expectations regarding communications with clients, new or expanded roles for your associates if you’re not coming to work, and compensation plans for those who step up and help preserve the firm and its revenue stream.

Much of this hinges on the anticipated length of your absence. For a month or two, depending on the time of year, this could be immaterial or a huge issue. At the very least, iron out with your staff the protocol for communications. You may consider some formal communication to those clients directly impacted. It is better that they hear bad news about the sole partner from the firm, rather than the rumor mill. If properly notified, I believe clients will rally around the firm, the family and the employees and want to pitch in by remaining loyal clients.

You then need to evaluate current compensation and the fair value of the service your successor may deliver to the firm during your absence commensurate with the increased responsibilities and time commitment. The compensation adjustment is usually related to the longevity of your disability. If you will be out for a month or two during your slow season, that adjustment may be modest and in the form of a performance bonus for the extra load that was absorbed.

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But if you expect to be out for three months starting Feb. 1, or for a much longer period such as a year or more, the compensation adjustment may be very different. For some that are capable, compensation may need to go way up, with some consideration to profit-sharing from the firm’s bottom line during your absence.

Another significant point to consider: If you believe your team can hold the practice together for a year or so without you, then you need to make sure that your financial house is in great order. That means a good cash cushion to support you when you’re not billing hours, both short- and long-term disability insurance, and some life insurance to replace the lost value in the firm should you pass away suddenly.

If it turns out that your disability becomes permanent, then you may need to consider a few other options. The first would be your assessment of the talent remaining as potential partners. If they are partner material, then you may proceed as you may with any other third-party sale. A significant distinction, however, between your incumbent team and selling to another firm may be access to capital. A third-party buyer will generally have capital, whether equity or debt, lined up for acquisitions. With your in-house sale, you may end up having to bank the transaction and structure an earnout paid to you over a period of years.

For those practitioners whose inside team is definitely not capable of filling the partner’s shoes for up to a year, you must find another solution. You would need to find an outside successor, on either a contingent or permanent basis. In theory, this sounds simple. In practice it is definitely not easy.

For temporary disability situations, you would most likely need a firm where you know the partner(s) well. You obviously want someone technically competent, ethical, and respectful of the long-term relationships that you’ve built. Systems compatibility and other operational issues must blend well for this type of arrangement to have a chance of success. Most firms are struggling to serve their own clients efficiently, let alone absorb another partner-level workload being temporarily dumped on them. If you can find a firm to enter into a temporary service agreement, the two big issues will be compensation and client expectations. It is likely that if this temporary service happens in the peak of busy season, for example, your clients should understand the possibility that their personal or business tax returns may be extended.

A more likely scenario, based on what leading firms are willing to do, is to merge with another firm. With your disability on the table, it is likely that there would be language in such a deal whereby your merger partner has the right to buy you out if your disability is deemed permanent.

Sharing the details

If you find a firm to have on standby in case you can’t work for a while, they’ll want to know what they are getting themselves into. Is the client base and service model compatible? Are fees, costs and net profit similar? Are your clients and the demographics of your business what they are looking for as they build their firm? In short, they’ll want to perform full due diligence to accept the role. At the conclusion of their due diligence and quality of earnings analysis, they’ll know whether they want your firm or not. You’ll never find a firm to pinch hit without knowing what it would mean if they became the owner.

To that end, begin assembling the data and documents that a potential suitor would want to see. I would start with a formal business valuation, performed by a third party. This valuation would be important under any possible scenario: your disability, your death, a merger or a sale.

In the valuation process, you’ll need to gather pertinent financial data for the valuation firm. The obvious things are a few years of tax returns for the practice, a client roster for the same period, billings by client and by staff person, net realization … . You know all the metrics to help determine the value of an accounting firm.

But the valuation will also give you some valuable practice management insight. It will expose the strengths of your firm and it will expose your vulnerabilities. The biggest vulnerability in the valuation process is likely to be your lack of a successor! So make sure the evaluator is doing the work with your firm as a going concern, as if you were going to sell it now and stay on as long as deemed necessary to ensure a smooth transition of client service and trust.

After the valuation is complete, you need to start approaching colleagues that you admire and ask them if they’d entertain a conversation about your firm. You may have to kiss a lot of frogs to find the firm that is a good fit and wants to work with you on that basis.

As mentioned earlier, this issue is not top of mind for many practitioners, let alone a younger professional. But don’t let your age deceive you; younger professionals need to have a succession plan also. If you are on the back nine, and within five years of a desired retirement, your time is today. You can’t afford to gamble and see where the chips fall; there is too much riding on your health. You need to practice what you preach, and do this for your clients, your staff, your family, and your own peace of mind.

In fact, after you’ve considered these possibilities for yourself, your mind should begin to wander: How many of your clients are the sole owners of their businesses? How many of them have gone through a full succession analysis? You know that the likely answer to that is none to perhaps a few. I think that this is another service you can deliver to these clients to make them realize how much you care about them.

The Governmental Accounting Standards Board released a study Monday on utilization of GAAP among state and local governments and found all the states are using GAAP, but only about three-quarters of localities.

The study and an accompanying graphical summary found that 100% of states are using GAAP, but only 74% of audited counties studies by GASB are using GAAP and 71% of audited municipalities studied are using GAAP. For the study, GASB used auditor opinion letters of all 50 states, 435 counties, and 890 municipalities included in the 2021 U.S. Census Bureau Census of Governments to determine the financial reporting framework they used.

GASB also studied special districts in the 30 states where it could locate a single statute or administrative code that specifies the financial reporting framework. Financial statements for many of these special districts were difficult to locate, but for the 884 districts whose financial statements could be found, 89% (785) were using GAAP. 

As far as the factors associated with GAAP utilization, GASB found that larger governments (i.e., those with more revenue), those with more debt, and those subject to a single audit are more likely to use GAAP. In contrast, those governments in states with a well-developed alternative financial reporting framework (with supporting manuals and templates) are less likely to use GAAP.

The study will provide a foundation for GASB’s future assessments of GAAP utilization. The identification and categorization of state financial reporting requirements will enable GASB to periodically evaluate whether those changing requirements result from changes in state law. GASB will be able to use its statistical model to predict the likelihood of a single government or groups of governments utilizing GAAP and can update the model for additional factors that may affect GAAP utilization. Its regression model is designed for replicability, allowing for future assessment of GAAP utilization.

“This is particularly important as the rulemaking associated with the Financial Data Transparency Act of 2022 may require an assessment of whether and how a taxonomy can accommodate GAAP, as well as non-GAAP, financial reporting frameworks,” said the report. “Additionally, our results underscore the need for future work concentrated on monitoring changes in state financial reporting requirements and assessments of GAAP utilization among smaller governments for which financial statements are less readily available.”

The Internal Revenue Service is reportedly getting close to an agreement to share information such as taxpayers addresses with the Department of Homeland Security’s Immigration and Customers Enforcement unit upon request.

The information sharing would be more limited than originally proposed and reportedly led to the removal of the IRS’s former chief counsel, William Paul, who had opposed the sharing of confidential taxpayer information, such as Individual Taxpayer Identification Numbers, with ICE authorities. Under the deal, as reported by the Washington Post and The New York Times, ICE would be able to submit names to the IRS which would cross-reference the data against confidential taxpayer databases. Immigration officials would be able to use the tax data to confirm the names and addresses of people who are suspected of being in the U.S. illegally. The IRS would be able to verify whether ICE officials had the correct residential address for immigrants who have been ordered to leave the U.S.

Last Wednesday, a federal district court refused to issue a temporary restraining order that would have barred the IRS from sharing such data with the immigration officials under a complaint filed by two immigrant advocacy groups. Centro de Trabajadores Unidos and Immigrant Solidarity Dupage — represented by Public Citizen Litigation Group, Alan Morrison, and Raise the Floor Alliance — filed suit against the IRS to bar it from unlawfully disclosing individual tax return information to immigration enforcement officials.

“The IRS must disclose the terms of its unprecedented information sharing agreement with ICE,” said Nandan Joshi, an attorney with Public Citizen Litigation Group and lead counsel in the case, in a statement. “Attempts by the Trump administration to gain access to the confidential taxpayer databases to engage in mass removal of workers would violate the tax law that protects the privacy of all taxpayers and undermine the protections promised to every taxpayer who files tax returns with the IRS. Attempting to gain access to personal and confidential taxpayer information crosses a line that Congress put into place after Richard Nixon used tax records to go after his enemies during Watergate. The administration’s desire to speed up their deportation agenda does not justify jettisoning decades of taxpayer protections. If this deal is being negotiated in good faith, the government should not need to keep it secret.”

However, in a separate case another federal judge blocked the Elon Musk-led U.S. DOGE Service on Monday from accessing people’s private data at the Treasury Department, the Education Department, and the Office of Personnel Management, according to the Associated Press. That case involved a coalition of labor unions, led by the United Federation of Teachers. It’s unclear how this ruling might affect the case involving access to taxpayer information such as ITINs and home addresses on file at the IRS and the Treasury.