1. What & Why?

2. presented to……. Illinois CPA Society presented by……. Lon M. GoforthR. Peter Fontaine, Esq Vice PresidentFounder Prosperitas Advisors LLCNewGate Law, LLC

3. The Commercial…… The principals of Prosperitas Advisors LLC and NewGate Law have acted as consultants and lawyers for the combination of CPA firms resulting in combined gross billings in the hundreds of millions of dollars. Our clients range from those firms listed on the AccountingToday Top 100 as well as sole practitioners with annual gross billings of a couple hundred thousand. It is this broad-based expertise and experience that enables us to have a full comprehension of and properly provide M&A consulting and legal advice addressing all nuances of acquisition, merger or succession of tax and accounting firms. IMPORTANT NOTE: Though the above may demonstrate our expertise please note this is ultimately “About You”, your firm, your staff and your clients, your goals and your legacy. NOTE: Prosperitas Advisors LLC is an affiliate of Cendrowski Corporate Advisors LLC

4. What Are Your Answers To These Questions? Do my heirs or staff know exactly what to do with my practice if I die, become seriously ill or are disabled? What position will my clients find themselves in if I die or become disabled? What will happen to the value of the asset I have spent years building if I die or become disabled, temporarily or permanently? Is this how I want my legacy to end?

5. What is PCA Agreement between the owner of an accounting practice and a 3 rd party The 3 rd party assumes or arranges for the operation of the accounting practice in the event of temporary or permanent disability, or death of the owner May include a purchase option or obligation to sell

6. Why a Practice Continuation Agreement (PCA)? Protects the value of your practice from dissipating Provides financial benefit & emotional relief to your family Helps fulfill your professional responsibility (and avoid liability) to your clients – temporarily or permanently Provides a period of income continuity if disabled Establishes a pre-determined valuation metric Provides employment continuation for staff

7. Who Needs A Practice Continuation Agreement (PCA) ? Every firm without an immediate internal solution to protect the firm in the event the owner or owners die or become incapacitated Largely “micro firms” – 1 t0 3 owners.

8. How, Who & What of a PCA Step 1: Identify & rank PCA options One-to-One Group Reciprocating Two-Phase Deal State Society assistance (if available) Larger firms with PCA service offering Consultants

9. How, Who & What of a PCA (continued) Step 2: Establish a Practice Profile High level financial information (e.g. revenue, income, hours billed, etc. Client type & services Staff overview Liabilities & obligations (e.g. leases, vendor contracts, employment contracts, etc.)

10. How, Who & What of a PCA (continued) Step 3: Identify and Approach Suitable Firms/Partners Continuity—Does the potential PCA partner firm have: Similar fee structures Practice philosophies Geographic proximity A ppearance & brand PCA Longevity—If some or all of the successor firm’s partners are nearing retirement, they may not be available when you need them. Chemistry—If you’re not comfortable having lunch with this person don’t expect your clients to be comfortable doing business with them. Excess capacity—Does the successor firm have the resources necessary to replace you in either the short term or the long term?

11. How, Who & What of a PCA (continued) Step 4: Negotiate the agreement or arrangement Have experienced counsel or an M&A accounting industry professional draft the agreement Discuss with all parties (spouse, staff, successor/partner) Communicate in writing the responsibilities of all involved

12. How, Who & What of a PCA Step 5: Create a the practice procedure plan Location of accounting records, bank account information, and location of contracts and lease agreements. Client list including key contacts, services required and important deadlines. Disclosure of procedures for WIP enabling the determination of work not yet completed Technology guide to using the firm’s computers Location of workpapers and client records. Description of the filing system. Office procedures for handling client information including the receipt and return thereof. Billing schedules and collection policies. Procedures for identifying and paying accounts payable. Location of personnel and related files.

13. How, Who & What of a PCA (continued) Step 6: Check in with the firm annually to make sure it is still willing and able to carry out its obligations

14. Let’s discuss those options…… Sole practitioner 2 partner firm 3 partner firm 4+ partner firm

15. PCA Success Recipe Be Realistic ! PCA is a distressed situation at best & it’s likely the practice will sustain loss—financial, client, reputation, time, retention and referral network You are most likely unavailable to perform any meaningful transition or service If you don’t make the financial component of the PCA attractive, why would anyone agree to do it?!

16. What makes a PCA attractive? Most likely deal structure: A straight collections Most likely will be less than market value of a similar practice in a non-distressed sale Other variables impacting the valuation: Tax consequences Down payment Treatment of A/R and WIP Other assets & liabilities, either acquired or required, to be included Furniture, fixtures, equipment Leases and location Staff joining the new firm or not joining Participation in Future Growth Fee increases from prior services Fee increases for new services Fee increases for referrals A override on the sale of your practice to a PCA partner who is acting as a guardian of the practice until it can be sold to someone else

17. Compensation For Your PCA Partner While They Are Minding The Store In the event of your disability, death or illness the PCA partner should receive: A significant percentage of the profit A significant percentage of the collections Financial remuneration based on a percentage of the normal billing rates for the PCA partner’s staff s/he may have to utilize to meet the needs of your firm's clients If they do not get an appropriate reward, they will not be there when you need them !

18. Main Terms to Negotiate and Include In Your PCA A clear definition of the circumstances which trigger the activation of the PCA and any other components contained therein. Successor’s obligations, which is usually managing client relationships and providing ongoing client services. The compensation to be paid to the PCA “partner” firm if the support is temporary. The terms of the acquisition if the PCA firm is expected to buy the practice (including but not limited to WIP, A/R, growth of billings, retention) Is it a “put” or a “call?” Retention of clients & staff Rights to dispose of clients or practices

19. PCA Common Sense and Acknowledgements PCA is not a replacement for a succession plan ! (In many cases a succession plan may be much more appropriate than a PCA.) This is a living agreement that needs to be completely reviewed semi- annually or annually. Regularly updating PCA Partners is critical to successful results A good deal is a fair deal for both parties Distressed situation – financial & other terms will reflect it.

20. PCA or 2-Phase Succession Deal? PCA Best if 7 years or more from transition Base financial protection No value enhancement opportunity No synergy value propositions Client retention probability is weak Transition difficulties are significant Must update PCA at least annually Most often receive a discounted practice valuation 2-Phase Deal Best if 6 years or less from transition Best financial protection Value enhancement opportunity Good synergy value propositions Solid client retention probability Transition is often less cumbersome One time -- One agreement Most often receive a par or premium practice valuation

21. What is a 2-Phase Deal? For the succession-minded practitioner(s): Phase 1: Imbed the practice into a successor firm’s infrastructure while maintaining autonomy and independence Retain similar income Reduce or eliminate administrative responsibilities/receive back-office support Avoid late-phase costly investments in infrastructure and/or staff Allow time and energy for practice value enhancement strategies

22. What is a 2-Phase Deal? (continued) Keep responsibility for the client relationship and service Provides the opportunity for a better practice multiple Set the Phase to generate different income streams in both Phase 1 & Phase 2 Reduce the financial impact of client attrition or economic downturn Reciprocate the trust and confidence your clients have placed in you Control the transition of your time, practice and client relationships Provide “practice value assurance” for future transition Phase Two: Reduce time commitment and begin to receive practice or purchase payments

23. For more information Please visit our respective web sites for resources including free reports, whitepapers and case studies. Lon Goforth Prosperitas Advisors LLC 855-238-0913 lg@prosperitasadvisors.com www.prosperitasadvisors.com R. Peter Fontaine NewGate Law LLC (312) 626-2791 pfontaine@newgatelaw.com www.newgatelaw.com