While many firm owners are struggling with the complexities of sales, mergers or internal succession, many have quietly decided that they’re simply going to wind down their practices and turn off the lights for good at some point.
It’s easy to understand the appeal, but what should those practitioners do in regard to clients, insurance, and other firm aspects when they decide it’s closing time? We asked a number of experts.
First things first
When deciding to close one’s practice for good, our experts offer a range of necessary steps.
Terry Putney, CEO at M&A consultancy firm Transition Advisors, believes that the level of control one will have over their closing is key. “I think the most important factor is whether [the owner] is going to manage the process,” he said. “You have to ask, ‘Am I going to manage this process, or am I going to let it happen on its own?’ The firm is going to contract: Your staff and your clients will look at you, and if you’re 75, they’ll say, ‘This isn’t going to go on forever.’ If you’re going to let it happen on its own, you can’t control when people leave or really how it happens.”
“One key thing to consider is that you are not leaving any clients in limbo for work that is uncompleted or about to be due unless you have arranged for someone to assume these tasks,” urged Joel Sinkin, president at Transition Advisors. “The main thing is leaving the clients either in someone’s hands or providing them enough notice to find a replacement. (This is one of the reasons most firms elect to sell or merge their firm, instead of walking away.)”
Consultant Jay Nisberg echoed this need. “When you wind down, you have obligations to so many, but I believe the clients whom you’ve serviced for so long need to be cared for. Who will continue to do their compliance work, offer them ongoing advice, [and] become their most trusted advisor? You need to pass them on to someone you trust and they can trust just as they trusted you. Yes, you must concern yourself with your staff and other issues like WIP and receivables, but the most important factor is how you treat your clients as you wind down and close up shop. It’s your clients that will be your professional legacy; be sure to do the right thing by them and for them.”
Carl Peterson, vice president of small firms at the American Institute of CPAs, feels liability is a big issue to consider — something a lot of professionals “don’t think about at the end,” he said. “Even if you’re retired, you still may face liability out there for work you previously did. Assuming you’re a practitioner that has professional liability insurance — and I’m sure that percentage is pretty high — you need to make sure you’re getting tail insurance, or coverage that extends beyond the period of your policy as a working practitioner.”
Peterson went on to say that the insurance should cover a period of about three to seven years depending on the practice, and that different states will have different limitations, but the last thing a practitioner wants to do is “face risk in your first three years of retirement without coverage of some kind.”
Dot every ‘i,’ cross every ‘t’
While closing the practice and retiring represents the easy part of winding down, unforeseen challenges can arise.
Putney believes that the biggest challenge is “matching up all infrastructure and resources with a practice that’s in ‘contraction’ mode. All of a sudden it’s, ‘My office is too big, there are more clients than I can serve,’” he said. “What we’ve found is that you have practitioners that actually have had staff of five or six people at that point in time. A practice that’s in contraction makes day-to-day management decisions difficult.”
Nisberg stressed the importance of taking stock around the office: “What about your staff? Where will they go? Do you have any obligations on your lease, equipment rentals, [or] software contracts? Are there any pending audits or issues that may become litigious that must be considered?”
Alongside “adequate warning for clients,” Peterson reminds those winding down that they’ll need to inform their state board on the status of their license: “You need to notify your state board if you are no longer active, even if you’re current with your CPE cycle.”
Peterson also brought up the issue of software access and cybersecurity: “Even when you’ve closed up and given all your data to clients, there can be a follow-up question about, ‘How did you get these numbers?’” he said. “Oftentimes, you need to go back to the software to see how you got the data. The final item to consider is data files. A lot of small-firm practitioners aren’t in the cloud, so they have data files on their servers. With concerns about data breaches, you need to ask yourself, ‘Is my home office more secure than my workplace?’ Make sure those data files are not accessible on the Internet [and] don’t have them on a home network.”
Friends for life
Granted that the retiree has known their soon-to-be former clients for years (if not decades), they’ll want to do right by their customers and make sure they’re taken care of.
“Clients need to be very carefully handled,” said Nisberg. “They need to be communicated with every step of the way so they don’t feel abandoned. You need to discuss their desires. Would they like a review of their engagement … help finding a new CPA firm … anything you can do for them to make this transition easier? No client should ever find out you closed up shop by a voice recording … . Communication is the key to a successful transition process.”
“Ideally, a practitioner should prepare a complete package of a client’s info that could be passed along to his or her new CPA,” added Peterson. “If time permits, it makes sense to schedule a one-on-one conversation with clients to go over that package and perhaps give a referral or two for another CPA, based on your knowledge of that client’s financial information and personality. If you’re looking to retire, timing is an important factor — I don’t think December is advisable, but the fall may make sense since it’s close to the end of the year but still gives clients plenty of time to find someone new.”
“A strong succession plan should be thought out,” said Sinkin, “whether this has been accomplished by you having made an arrangement with another firm to be your successor to these clients or furnished your clients more than enough time to find a replacement. These clients have been loyal to you and likely don’t even have a successor on their radar. Making sure they have a reasonable chance to move on, including your availability to give the successor firm an orientation to the files where appropriate, is the right thing to do.”
Putney agreed, saying that the question is whether “you feel you have a responsibility to find a home for [clients], whether or not you get paid anything for it. Once you start the process of trying to find a home for them, things can start getting a little more complicated. But if you feel a responsibility for these clients, then that’s something you need to do.”
A little insurance
Of course, one can’t be too careful with legal matters when shutting down. The last thing a retiree wants is to receive troubling news in the mail after they think they’ve left their business days behind.
Rickard Jorgensen, president and founder of Allendale, N.J.-based insurance broker Jorgensen & Co., advises leaving no stone unturned. “From a risk management perspective, the owner must undertake a sweep of all files to identify any situations that might give rise to a potential claim,” he said. Such situations could include “a client files for bankruptcy or is suffering long-term financial problems; a fee dispute; a subpoena for client records or assistance; a theft of client funds by a trusted staff member (yours or theirs); an error on a tax return or a penalty assessment or IRS audit notice.”
While he noted that “not all situations are a potential claim,” Jorgensen added that it’s “good practice to notify anything that you reasonably believe might give rise to a claim before coverage expires or is cancelled.”
“Concurrent with the termination of coverage, it is important to consider the purchase of an extended reporting period,” he added. “Subject to the statutes of limitation in a particular state, claims may arise up to six years after services are performed and you may be personally responsible. Many insurers offer an extended reporting period, either by paying an additional premium, or free if you are a long-term insured.”
Jorgensen said that the earlier the better when it comes to informing your former clients of your plans to close. “Communication is one of the most effective ways to avoid a misunderstanding and a consequent malpractice lawsuit,” he said. “Early notification of your intentions to close the practice, along with an appropriate succession arrangement/recommendation, is key. Ideally, provide the client with a reassurance that you will participate in the transition process and continue to provide oversight until the new CPA is familiar with the file.”
“The firm should send a clear disengagement letter … to its insureds,” added Ralph Picardi, insurance attorney and risk management consultant to the CPAGold program, managed by Jorgensen & Co. “The firm will want to ensure that all of its clients understand that the relationship is ending as of a defined date, and that thereafter the firm will have no responsibility for servicing the client. The firm can offer to cooperate in the transition, but that cooperation should be expressly limited to responding to requests for access to existing files (the client should be told that its written consent and the successor account’s signed waiver will be needed before file access may be granted).”
One more thing
After all is said and done, one important factor remains: Taking care of yourself.
“One of the greatest challenges practitioners face when winding down their career is the emotional side,” cautioned Sinkin. “Most practitioners choosing this path have invested decades of their life working with and helping their clients. Walking away from this from an emotional standpoint can be very difficult.”
