Lawyer for Accountants, accountancy
corporations and Accounting Practices
By Matt Dickstein
Article #5 – Shareholder buy-sell
agreements for accountancy corporations
This is Article #5 in my 9-part series on
the basic corporate, business and contract law issues for
accountancy corporations and accounting practices in
California. The articles in this series are:
In this article I explain shareholder
buy-sell agreements for accountants and accountancy
corporations. A buy-sell agreement (also called a
shareholders agreement) protects the corporation from the
accountant / shareholders, specifically their death, loss
of license, disability and dispute.
Freeloaders and Malcontents
An accounting practice needs a buy-sell
agreement because (1) the Accountancy Act requires buy-sell
provisions in the case of an accountant’s death or loss of
license, and (2) the reality of group practice demands a
resolution to common problems, specifically, accountants
(like all of us) bicker, lose interest in the practice, go
away, die, get run over by trucks etc. You need resolution
for all of these scenarios.
Sometimes an accountant gets tired and
stops putting time into the practice. The accountant
becomes a freeloader, and you must cut him or her out of the
compensation structure. Sometimes an accountant is
such a malcontent that you must be rid of him or her.
Or an accountant might die or lose his or her license, in which
case California law requires that you buy-back the
accountant’s shares in the accountancy corporation. In all
these cases and other cases, the practice needs a structure
for the orderly and fair removal of accountants.
If you don't have a good buy-sell
agreement, usually the only way to resolve shareholder
disputes is through the courts; see my article
Dissolution to Resolve Shareholder & Partner Disputes.
The Economic Divorce
Enter the buy-sell agreement. When
changes among the accountants put the practice in danger,
the buy-sell agreement gives a fair resolution. I call this
the economic divorce – if the practice cannot survive a
particular accountant, the buy-sell agreement gets you a
divorce on terms that are fair to everyone.
Accountant buy-sell involves what I call
the 4 D’s– death, disqualification, disability and
Death and Disqualification.
Under the Accountancy Act, if an accountant dies or becomes disqualified (that is,
loses his or her license), the corporation must buy-back the
accountant’s shares. Usually you pay a death buy-back in
one lump-sum using the proceeds of life insurance.
Disability. Similar to
death (except without the finality) if an accountant
becomes disabled, the accountancy corporation can buy-back
his or her shares. The practice can pay a disability
buy-back using a promissory note, or if cash-flow is
sufficient to fund a disability policy, using the proceeds
of disability insurance.
Disputes. Sometimes two
accountants just can’t get along. To deal with this
situation, you use “shotgun” procedures. This means that,
between the two warring accountants, the first offers to
buy out the second, and the second has the choice, either be
bought out or turn around and buy out the first on identical
terms (i.e. I cut, you choose). Either way, a price is
fixed for the buy-out, and one of the warring accountants
leaves the practice group.
The buy-out price is crucial. A high
buy-out price gives the exiting accountant a windfall.
A low buy-out price is unfair and leads to litigation.
The trick is finding a procedure that ensures a fair price –
for example, using a neutral appraisal process to fix a
price. You can also use a formula to
fix the buy-out price.
Wildcard - Personal Guaranties
As a final note, be careful about personal
guaranties. These are the wild cards in an exit structure.
An effective exit structure must fairly compensate and/or
protect accountants for their guaranties.
To learn about non-competition clauses for
accountants, see my next article,
against his or her former practice?
I’ve tried to make buy-sell easy in this
article. But that doesn’t mean you can do it yourself. Get
a competent business attorney to help you.
Call me to schedule a
legal consultation: 510-796-9144