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Succession Planning for Accountants: Preparing to Hand Over the Reins

Fifty-nine percent of firms aren’t prepared for future succession with a documented plan, according to the 2017 IPA National Benchmark Report. It’s a surprising contradiction. Accountants, whose fiduciary duty compels them to act in their clients’ best interests, often fail to appropriately prepare for their own end-of-career needs. ┬á

To some degree, this is understandable. Even if they see it as a priority, too many firms find themselves swept up by the day-to-day grind of business operations to allocate the time and resources necessary for succession planning.

But while delays in succession planning may be unsurprising, the subject isn’t something that can be avoided. According to the second annual NYSSCPAÔÇôRosenberg Survey, more than 65 percent of partners are over age 50. And given that Bill Reeb, CPA/CITP, CGMA, and the CEO of the Succession Institute, suggests that partners retire from ownership positions no later than age 67, a looming crisis faces those firms that fail to undertake proper succession planning.

Planning Ahead for a Successful Exit

We’ll begin by acknowledging that succession planning is an uncomfortable topic. Thinking about stepping aside from the firms they may have spent lifetimes building provokes a host of reactions from CPAs, ranging from sadness, to fear, and even to anger. Understandably, no one likes to acknowledge that they will, at some point, be unable to work, whether due to death, disability or some other cause.

These negative emotions can’t be allowed to interfere with succession planning. Confronting mortality isn’t easy, but it’s necessary for the ongoing health of your firm.

Identifying an Exit Strategy

Start, as they say, the way you mean to finish. If you want to ensure a smooth exit, you must begin the succession planning process early enough to make the necessary arrangements. What exactly this process looks like will vary based on your firm’s structure and situation.

The Single-Owner Firm

The ideal exit, for most single-owner CPAs, looks something like the following: the business is snapped up at a high multiple by a deep-pocketed buyer who commits to providing the same level of care for the firm’s employees and book of business as the owner.

This kind of exit is possible, but it doesn’t happen by accident. It requires significant work over a number of years to make your firm as appealing an acquisition target as possible. The process begins by understanding the different opportunities available to firms, which will suggest the appropriate course to pursue. Possible options include:

  • Takeover by an internal candidate or an external CPA. In this arrangement, a single CPA either moves up the ranks or enters the firm with the intention of replacing the outgoing owner. Though individual buyers may not have the available capital of a larger buyer, financial arrangements may be made for the exiting partner to receive a portion of the firm’s ongoing profits in lieu of upfront payment. Financing may also be available through businesses like Live Oak Bank.
  • A merger or acquisition with another firm. M&A activity is currently high in the accounting space. A recent AICPA Private Companies Practice Section (PCPS) survey reveals that 49 percent of multi-owner firm leaders reported having been in active merger discussions over the past 24 months, compared with 44 percent in 2012.
  • Closure of the firm. Though it’s certainly a less attractive option for CPAs who hope to reap some financial reward from the practices they’ve built, simply closing the doors must be acknowledge as an option. In some cases, closure may make sense if the owner doesn’t need the money associated with a potential sale, or if no exit opportunities appear that the owner believes will adequately support the needs of the firm’s clients.

Don’t forget, of course, that these options are available as the result of a long, thoughtful succession planning process. It is, unfortunately, also possible that firm owners will pass away unexpectedly, making succession a more immediate and practical concern.

Though they haven’t been well-adopted, Practice Continuation Agreements (PCAs) provide some direction in these incidents by identifying another firm that will take over the firm’s clients in the event of the owner’s death or disability. Despite the continuity of care they provide, the Journal of Accountancy reports that “Just 7% of single-owner firms reported having practice continuation agreements with other practices, a number that has changed little from 2012 (6%) and 2008 (9%).”

The Exit of a Single Partner from a Multi-Owner Firm

Transitioning a single partner out of the business may seem like an easier process than moving an entire firm away from a sole owner. In some ways, it is, but it still requires advance planning to ensure a smooth exit.

Start with the following questions:

  • If multiple partners are nearing retirement age, how can retirements be staggered to minimize disruption?
  • Will the exiting partner receive all or part of their payout from the outstanding fees collected from their previous book of business?
  • Do exiting partners have any enforceable contract language dictating their buyout terms?
  • If not, how will the partners’ equity ownership or retirement funds be calculated?
  • Who will assume the exiting partner’s book of business and responsibilities? Will it be another partner, or will an employee be made a new partner?
  • What ongoing role, if any, will the partner have in the firm’s operations upon exiting?

The answers to these and other questions will inform the next steps your firm should take in the succession planning process. For example, if a partner expects to receive compensation from pending invoices upon retirement, implementing a fee financing solution like QuickFee with slower paying clients can help pay out that partner sooner and make it easier for younger partners to buy in.

If there is a lack of clarity regarding partners’ compensation upon exiting, these questions should be answered with the help of legal counsel – preferably long before the outgoing partner expects to be dependent on funds from the firm.

Preparing Internally

Whether a single partner will be leaving or the entire firm is facing acquisition, the same preparatory work must take place internally to ensure a smooth transition.

Codifying Roles and Responsibilities

You can’t successfully transition an owner out of the firm unless you know what exactly they’ve been doing. That’s why one of the most important things you can do is to begin codifying roles and responsibilities well before exits are on the table.

Ask the following questions to begin this process:

  • How is the partner’s time spent? What percentage is allocated to client care, versus operational responsibilities like recruitment, expense processing or payroll filing?
  • Which clients is the partner currently responsible for managing?
  • What responsibilities does the partner carry out on a daily, weekly, monthly or annual basis?
  • Who reports to the partner, and how are these relationships managed?
  • What systems does the partner use to carry out their responsibilities? What resources do they require?

Keep in mind that it isn’t just process-driven responsibilities you should be capturing. The partner likely has years – even decades – of institutional knowledge that must be recorded as well. For example, what expectations do different clients have? What quirks do they have, and how has the partner managed them? What does the partner know about the business that nobody else does?

Once you have this information documented, you can begin planning the necessary replacements. In some cases, the incoming owner or remaining partners may absorb these responsibilities. But if their workloads are already at capacity, you may find it necessary to hire additional talent. When possible, carrying out this recruitment in advance enables the incoming employee to benefit from the partner’s training.

As a note, even if you aren’t actively planning for succession, this exercise is a great one to carry out for all roles at your firm. Life is unpredictable. You never know when a key member of your team will be sidelined by death, disability or any other emergency. Process documentation is critical to ensuring business continuity in any of these cases.

Creating an Appealing Acquisition Target

Imagine that you’re a 68-year-old firm owner who’s unexpectedly struck by a heart attack. You may be forced to step down, but putting your business up for sale at this point effectively means selling it “as-is.” Contrast that with the owner who begins the planning process several years in advance and, consequently, is able to make the firm as attractive as possible to potential buyers, whether solo CPAs or multi-owner firms.

Which of these two owners do you think is likely to come out of the exit process more satisfied with the outcome?

Of course it’s the latter. Having time on your side is part of what makes advance succession planning so valuable. When you prepare ahead of time, you can:

  • Get your firm’s books in order and audited to easily fulfill any due diligence obligations by potential buyers.
  • Drive up the revenue you bring in temporarily to increase the basis of your future sale price.
  • Eliminate past-due accounts receivable to attract new owners who may be wary of taking on excess liability (for example, by adding new fee financing solutions that allow customers to pay over time).
  • Streamline processes and implement technology tools that will make your firm attractive to incoming Millennial owners.
  • Float the idea of a potential sale to multiple parties or business brokers to gauge both interest in your company and the hesitations they have (these may be remedied with sufficient time).

Undertaking these preparations may not just be advantageous. It may be necessary. For many CPAs, partnership equity or the firm itself is their retirement nest egg. Therefore, without a successful sale, there is no successful retirement.

Making a Formal Plan

Finally, remember that succession planning doesn’t matter if it’s all done in your head. Going through the exercises here in theory won’t provide you necessary guidance and protection if you don’t translate them to a formal plan that can be adopted by all involved stakeholders.

There’s no better time to begin succession planning than now. Use these and other strategies to maximize your chances of a positive exit that supports your clients, your team, your financial health and your legacy.


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