Securing Succession Success





Act now. Start planning for succession several years in advance. Don’t wait until you’re almost ready to retire.

As soon as a potential successor candidate has been identified, start the grooming process. Look for someone who is decisive, assertive and entrepreneurial.

Consider an acquiring firm and be proactive about possible mergers. Small firms offer value to larger firms. A broker can find prospective buyers while maintaining confidentiality.

Create value in your practice by ensuring recurring revenues, whenever possible.

Donald Jay Korn is a freelance business writer. His e-mail address is .

T alk to any small CPA practitioner with an eye toward retirement and they will tell you one of their biggest challenges and concerns is finding a successor for their business. As baby boomer CPAs head toward retirement, a wave of buying and selling is likely to hit small firms; that is, at least, those small firms that have properly positioned themselves. This article looks at some of the strategies sole practitioners and partners in small firms are using to realize the full value of the practices they’ve spent decades building, for themselves and their heirs.

Finding a successor may not be easy in the near future, with relatively few 30- and 40-something CPAs ready to step into the shoes of the vast pool of soon-to-be retirees. The first key to success in this increasingly competitive environment is to act now. “Plan several years in advance,” says Joel Sinkin, senior partner, Accounting Transition Advisors, a mergers-and-acquisitions consulting firm.

Waiting until you’re almost ready to retire may be a mistake, warns Gary Bong, who is managing partner of Blanding Boyer & Rockwell, a firm with several locations in California. “Don’t depend on one interview at the last minute. If you speak to several firms over the years, you’re more likely to find the right fit when the time comes.”

Many CPAs will look closer to home before searching for a buyer. “The natural first choice is to hope your own kids will succeed you,” says Earl Sigmund, a CPA who is president of New Business Learning Center in Richboro, Pa. To make the transition work, that individual must be willing and able.

“Just because a relative is a CPA doesn’t mean there is a good fit,” says Bill Reeb of Winters and Reeb in Austin, Texas. If your firm does little or no audit work, a CPA who predominately does audits probably would not have the background to service your clients.

And what about dealing with a qualified relative who does not want to be your successor? “This would rarely make sense,” says Reeb.

“You only want to sell to a motivated buyer,” adds Sinkin.

Another option is to consider a current employee as a successor. Promoting from within may lead to a smooth transition, especially when the firm’s new leader already is familiar with staff and clientele.

“In most cases, you’ve hired the person in advance or it’s a colleague with whom you’ve worked,” says Marty Shenkman, a CPA and attorney in Teaneck, N.J. “Start to groom that person to take over once you feel he or she is a potential successor.”

“Look for the appropriate licenses, experience, and excess capacity to take on the workload,” says Sinkin. “If those aren’t present, look elsewhere. The same is true if you don’t want to deal with a family member.”

But there’s more to finding a successor than just the hard skills necessary to do the work. “You want a successor who is entrepreneurial, who is assertive, and who is a decision maker,” says John Ezell, president of Professional Horizons, a consulting and brokerage firm specializing in accounting and tax practices. “That type of person is more likely to be able to manage your staff and know how to treat clients.”

Marty Abo of Abo and Co., a CPA and consulting firm in Voorhees, N.J., found such a person when he hired an entrepreneurial associate with a master’s degree in taxation: Pat Sharkey, who became a partner. When Abo acquired another CPA firm, Sharkey took over its management. “The acquisition provided a nice ‘trial marriage,’ ” said Abo, “and has allowed us to formulate a framework for a transition to Pat’s also running this office should I retire, die or become disabled.”

If there is no obvious successor among relatives or employees, you need to find an outsider.
Sigmund’s solution was to look for an acquiring firm. “I wanted to find a buyer who’d please my clients and my employees,” he says. “And I wanted to get fair value for all the work I had put in over the years.”

Sigmund went to a broker, Max Krotman, executive vice president, Globalforce International, Melville, N.Y., who found several prospective buyers. “The buyers all wanted my clients,” says Sigmund. “But nobody wanted my location [in Morrisville, Pa., across the Delaware River from Trenton, N.J.] or my employees. I had visions of my clients fleeing these new owners.”

Throughout the process, Krotman maintained confidentiality. “You don’t want your employees or your competitors three blocks down the street to know you’re negotiating the sale of your practice,” says Sigmund.

The buyer turned out to be Marty Abo’s firm. “This firm was looking to expand,” says Sigmund. “It had a young partner, Pat Sharkey, who would take over the office. He loved my location and would give my staff a chance to succeed with the new firm.”

Sigmund was confident that Sharkey had the personality to work with his clients and his five-person staff. “I told my clients that the new firm would deliver the same quality of service that I had,” Sigmund says, “in addition to offering new disciplines such as estate planning and business valuation.”


Internal Succession Checklist

Identify managers or other staff with potential. Consider providing training for the most promising candidates.

Understand the difference between a top-notch manager and a leader. Candidates to succeed you should have not only strong technical skills but also entrepreneurial instincts and demonstrated leadership talent.

Mentor promising staff. Employees must understand what it means to handle clients and run a business if they are to take over.

Don’t just talk about mentoring and client contact. The practice will stagnate if younger CPAs aren’t introduced to existing clients and taught how to bring in new ones.

Include junior staff in decision making. This offers them greater responsibility, improves morale, and aids in the retention of talented people.

Set up a timetable for new leadership. Will your successor take over when you have retired, or will the reins be passed sooner than that?

Don’t underestimate the amount of time it can take to groom a successor. It can take as long as five years for a successor to qualify for and grow into the new role.

Adapted from Preparing for Transition: The State of Succession Planning and How to Handle the Process in Your Firm , a white paper from the AICPA Private Companies Practice Section (PCPS).

During the negotiations, Sigmund learned that similar CPA practices generally are being sold for 1 to 1.5 times current revenues, payable over several years. “My deal is in that range, over six years,” he says. “I won’t get paid in full for clients who leave the firm, but I do have the opportunity to share in any increased revenues from my old clients.” Sigmund occasionally goes back to his former office, where he is compensated for new work he does.

From new owner Sharkey’s point of view, the deal offered Abo and Co. a chance to move into an underserved market with a firm that had many small business clients. “We liked the client base,” he says. “Small businesses need a large amount of tax and accounting work. In addition, there was the potential to expose the business owners to our other services.”

After the deal closed in late 2005, Sharkey raised billing rates. Client losses were minor so revenues rose. Abo and Co. reported that its Morrisville office grew by nearly 30% in 2006, and revenues continued to increase sharply in the first half of 2007, according to Sharkey.

Partners at small CPA firms often rely on each other for practice succession. That might not work, though, if the partners are around the same age and want to retire at about the same time. Even if there is a difference in ages, partnership-based plans may have flaws.

“We had three partners, in our 50s, 60s and 70s,” recalls Jim Rotter, whose Carmel-by-the-Sea, Calif., firm was Hanson Rotter Green. “We didn’t have a formal plan, but we expected the younger partners would compensate the oldest when he retired. Instead, it was the youngest partner who left the firm.”

What’s more, the partner who left was the firm’s audit partner—no one else had the requisite experience in that area. “We decided to look for a firm that did audits,” says Rotter. Through an ad in California CPA magazine, Rotter’s firm found Blanding Boyer & Rockwell (BB&R), of Walnut Creek, which he describes as a “perfect fit.”

Hanson Rotter Green had 12 people altogether. BB&R was then about three times that size. The larger firm not only had an established audit practice, it had grown through a number of mergers so it was familiar with the process.

“We came to an agreement in which all three of our partners, including the one who left the firm, will be compensated by our new firm based on gross revenues from our clients,” says Rotter. The payout is over 10 years, he says, but he and surviving co-partner Court Hanson now have a formal agreement in place with BB&R, an agreement that provides for compensation after they stop practicing there.

The merger took place in January 2007. Rotter, now partner-in-charge of BB&R’s Carmel office, says that office is having a “good year so far.” Clients and employees have been retained, cultures have been merged, and support from the larger firm has made life easier. “I’m definitely more secure about my own future,” he says. “I’d urge other small CPA firms to start earlier than we did on a succession plan. You never know when one of your partners might leave.”

Bong, of BB&R, also urges small firms to “be more proactive” about possible mergers, if that seems to be the right path to a successful succession. “Talk to larger firms,” he says. “Often, small firms have value to offer larger firms. They have built up a business with clients that larger firms will want.” BB&R has done nine mergers so far, Bong says, which indicates that his firm has found that smaller practices are worth pursuing.


Tips for a Successful Transition

Joel Sinkin of Accounting Transition Advisors offers these suggestions to position your firm now for a future sale or merger:

“Un-spoil” your clients. If you go to see every client and spend a great deal of time with each one, your clients will be used to it. A successor will be expected to offer similar service, and your clients may become dissatisfied if that’s not the case.

Gradually phase out the hand-holding. Cut back, but don’t do an about-face on day one.

Train your clients. Don’t accept late payments, for example. Get your clients used to the idea that they’re dealing with a professional practice, not an old buddy

Make sure you have employment agreements with key staff people. These agreements should include non-compete clauses.

Don’t sign a new office lease. That locks in your successor to the location and may reduce the pool of prospective buyers.

Concentrate on chemistry. If you can’t eat lunch with a prospective buyer, don’t do a deal with him or her. Such a successor is likely to alienate clients and employees.

Announce an affiliation rather than a sale. Personally introduce clients to your successor. The more gradual you handle the change, the greater client
retention you’re likely to see.

Choose continuity. Your clients have stayed with your practice for a reason,
including location, fees, service or your manner of doing business. After selling an accounting practice, stay with the new firm for a while to ease the transition. During this period, do your best to see that changes are made slowly so that clients can get comfortable with the new owner.

Even after you find the right fit, your succession plan might call for a not-so-quick exit. Terry Dillon sold his firm but agreed to work for another two years.

“I was getting worn out, ready to try something else,” says Dillon, who founded his firm in Plainfield, Ind., 30 years ago. “I approached Bob Donovan to see if he would be interested, and we hammered out a deal in a few months.”

Donovan heads Donovan and Thomas, a CPA firm in nearby Danville, with nine CPAs and a total staff of 20. In early 2006, it merged with Dillon’s five-person firm.

“We looked at the type of clients there,” says Donovan. “The majority were small business owners.” As mentioned, such clients may generate regular tax and accounting work.

“We also looked at how likely we were to maintain those clients,” says Donovan. “The clients had a long relationship with the firm, which had earned their trust. We thought there was a good chance many of those clients could be retained. The whole game is relationships.”

The risk of such a relationship-based merger, for the acquirer, is that clients will depart when the trusted CPA no longer is around. (Such departures also will reduce the future payout to the CPA who sold the practice.)

To reduce that risk, Donovan and Thomas entered into a two-year contract with Dillon. The firm now uses Donovan & Dillon as the name for its Plainfield office, and Dillon still practices there, along with others who had been on his professional staff.

His two-year contract is almost up, but Dillon says he might still come into the Plainfield office from time to time. He’s also going to see if he can do some work from his condo in Florida, where he might spend time in the winter.

Bob Donovan’s son, Jeff, a partner in the parent firm, will eventually be spending a few days a week in the Plainfield office, according to Dillon. “The Plainfield and Danville offices are only seven miles apart so that shouldn’t be a problem. In addition, my office manager, who knows my clients, will remain,” says Dillon. The hope is that familiar faces and Dillon’s ongoing presence will help the new firm retain most, if not all, of his existing clients.

For sole proprietors as well as small firms, one key to succession planning is to create value in your own practice. If you can offer a successor or an acquirer a reliable revenue stream, you’ll be in a good bargaining position. That’s the strategy being pursued by Marty James, a CPA in Mooresville, Ind.

“I am 48 years old, I love what I do, and I expect to continue to work for a while,” says James. “Now, I do not have a formal succession plan in place. It is on my mind, though, as something I need to address.”

Eventually, says James, he envisions a merger as a possible exit strategy. “I’m trying to grow bigger and become attractive to a buyer. I want to build business in such a way, with recurring revenues, that someone could step in.”

For years, says James, he has been offering investment management services, which yields steady asset management fees. “We refer to our firm as ‘financial planning CPAs.’ ” The asset management business, he hopes, will enhance his firm’s marketability one day.

Expect the Unexpected

While most CPA firm owners will age gracefully into retirement, some will have to give up their practice far earlier than expected due to disability or even death. To protect themselves and their heirs, CPA firm owners of any age need to be prepared.

Sidney Kess, a CPA and attorney in New York City, tells of a sole proprietor CPA who hired someone to help with her firm’s computer systems. “She eventually made the newcomer a partner,” says Kess. “Then she died suddenly, at age 52. There was no succession plan so her partner got it all—the practice she had built—at no cost while her heirs got nothing.”

You never know when you’ll become unable to practice—temporarily or permanently—so you need a formal arrangement in place to protect you, your practice and your family, no matter what your age.

Bill Reeb of Winters and Reeb says one option is to enter into a mutual practice continuation agreement with another sole proprietor.

“These need to be drafted very carefully to be sure the other party will step in right away, if necessary,” says Reeb. “Otherwise, you might be injured in January, but the other CPA won’t get around to your clients until after tax season. By that time, your clients may have found another accountant and your practice will have lost most of its value.”

Life insurance may be another vital part of your succession plan.

Partners who enter into mutual succession agreements should hold policies on each other’s lives. “Otherwise,” Reeb says, “your heirs might not see the money.”

“A 10-, 20-, or even 30-year policy should be sufficient for most agreements,” says Lee Slavutin of Stern Slavutin-2, a life insurance agency in New York.

Make sure there is a conversion option (to a cash value policy) for the duration of the term. If the policy might be needed to fund a buyout at retirement or to provide liquidity to pay an estate tax, a cash value policy may be a good choice because you may well outlive a fixed-term policy.

A practice succession agreement should have some mechanism for keeping the buyout value current. If that amount increases, the insurance coverage may have to be adjusted accordingly.

Some firms, though, are structured in such a way that they can’t offer a sure cash flow to a buyer. Michael J. Jones, partner in the CPA firm Thompson Jones in Monterey, Calif., says that succession planning is difficult for his firm because of its non-traditional structure. “We don’t do income tax or audits,” he says. “We focus on estate tax planning and litigation support.” Thus, Thompson Jones does not have regular clients who provide recurring revenues so it’s not an apparent merger candidate.

“My partner—and wife—DeeAnn Thompson and I have been trying to see if there is some way to get value for our practice,” says Jones. “In the meantime, we have substantial life insurance on each other.”


Securing the Future: Building a Succession Plan for Your Firm, 2005 (#090486)

National Business Valuation Conference, Dec. 2–4, New Orleans
Practitioners Symposium, May 5–7, Las Vegas

To place an order or register go to , or call the Institute at 888-777-7077.

JofA articles
Build, Buy or Sell ,” April 07, page 34
Two-Stage Deals ,” March 06, page 43
Have a Fallback Plan ,” Sept. 03, page 57

Web site
Succession Practice/Continuation Planning,


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