A sequenced transition can smooth a
firm’s ownership transfer.
| Although it’s not the
only way to go about succession
planning, a two-stage deal offers a
transitioning CPA an opportunity to imbed
a practice into a successor firm’s
infrastructure while maintaining a
considerable amount of autonomy for an
agreed-on period of time. |
negotiate the eventual transaction
contract just as in an
immediate sale. The firms agree to the
latest date when the sellers will reduce
their time commitment to the firm and
final payments will commence, usually
within one to five years.
Clients are served
under the buyer’s brand, and
the buyer hires any new employees. The
transition looks just like a traditional
merger to outside constituents. The
buyer’s payments are mostly or
completely deferred until the
contractual back-end date or a
triggering event occurs.
owners earn similar income as
before if they dedicate comparable time
and effort to the practice and fees
remain steady. They also can avoid
costly late-stage reinvestment in
practice sales have contract
contingencies that adjust the purchase
price based on client retention. It is
in both parties’ interests to give
clients and the successor an opportunity
to get acclimated to each other before a
trusted partner retires.
bring successor firms the
benefits of both a straight acquisition
and a traditional merger. Buyers delay
investment in the acquisition until they
assume complete control.
has been involved in succession
planning for accounting firms for more
than 15 years.
CPA, has been involved in many
acquisitions of accounting and
consulting firms as national M&A
director with RSM McGladrey. Sinkin
and Putney are the senior partners of
Accounting Transition Advisors LLC and
together have handled in excess of 700
mergers and acquisitions of accounting
firms. Their e-mail addresses are
ow can you have your
cake and eat it too? You aren’t quite ready to
retire, but you know you need to find a successor
for your practice. You wonder how much
accountability an owner firm will impose if you
decide to merge. You worry about a change in
culture, loss of identity and what your role in
the new firm will be prior to your eventual exit.
You want this settled. Consider a two-stage
deal—primarily designed for the small accounting
practice of one to three partners who want to
reduce their time commitment over a one- to
five-year period. It creates a flexible way to
affiliate with a successor firm when internal
succession is not an option. Retiring partners get
to start the process, achieve some long-term goals
and maintain some independence until they retire,
while the successor firm benefits more than from a
straight purchase or standard merger. Retiring
partners get to start the process, achieve some
long-term goals and maintain a measure of
independence until they retire, while the
successor firm benefits more than from a straight
purchase or standard merger.
|Step Out in Style |
A “two-stage deal” handles
succession in increments rather than all
at once. Stage one is a contractual
period during which a seller continues
to work at the firm, retaining income
and a level of autonomy. Stage two,
which is activated by an agreed-on date
or by a triggering event, is the buyout.
HOW DOES IT WORK?
Flexibility is the key to this type of
transition strategy, and the parties to a
two-stage deal can customize it to fit their
goals. The idea is to imbed a transitioning firm’s
practice into the successor firm but allow exiting
owners considerable autonomy for an agreed-on time
In stage one, a seller typically
relocates into the buyer’s office—the seller’s
practice becomes an infrastructure within the
buyer’s. The seller continues running his or her
practice with no change in income or schedule.
However, during this time clients gradually get to
meet the new owner. That helps stabilize client
retention and gives the buyer potential
cross-selling opportunities while the seller
reduces his or her role. Payments are deferred
during stage one even though equity is transferred
on the effective date of the deal. Stage two is
the buyout—when the payments commence.
sequence of a typical two-stage deal is as
The firms work out all the terms in
advance, just as in an immediate sale. Both
parties put everything in writing and have a clear
understanding of the purchase terms and the
The firms agree to the latest date
(the back-end date) when the seller(s) will reduce
their time commitment to the firm and buyout
payments will commence. This is normally in the
range of one to five years. Typically an agreement
lets a seller accelerate the retirement date
through triggers such as working fewer hours than
a certain quota, giving notice, permanent
disability or death, which triggers buyout
payments to heirs.
The firms consummate their
affiliation at the beginning of stage one. To
outside constituents the transition looks just
like a traditional merger. Clients are served
under the buyer’s brand, and the buyer hires new
During stage one, selling owners
manage their book of business much as they did
before. Their income stays substantially the same
if they put comparable time and effort into the
practice and fees remain steady.
The buyer defers making most or all
purchase payments for the equity until stage two,
which is the earlier of a trigger or the
contractual back-end date.
To make this
type of arrangement successful, several
considerations are important. For instance,
because clients normally choose their accounting
firm based on their comfort level with key
members, personalities are important. Don’t do a
deal with someone you don’t enjoy having lunch
with. Location and fees are important, too, so
choose a firm that will maintain a comparable
experience for your clients. Agree on the roles of
the individuals and the brand names that will be
used—never agree to agree later.
BENEFITS FOR THE TRANSITIONING PRACTITIONER
The two-stage deal allows a CPA to find a
successor and start the exit process before it
becomes a necessity. The specific benefits of this
approach for retiring owner(s) are
They can maintain their income level
as long as their time commitment to the practice
and the revenues from their clients remain steady.
It creates a safety net in the event
of death, disability or the loss of key staff.
All details of the future transition
are resolved for clients and staff.
Sellers can avoid costly late-stage
reinvestment in infrastructure.
They can focus on client service
instead of day-to-day firm management.
They can reduce the time spent
working in the practice at a more flexible pace
without jeopardizing the value of their business.
Because sellers now have back-up
resources and can devote less time to
administrative duties, they can focus on
increasing the value of the practice.
Client retention is enhanced because
the seller is still actively involved during the
transition—and higher retention equals higher
BENEFITS FOR THE SUCCESSOR FIRM
Successor firms using two-stage deals get
the benefit of both a straight acquisition and a
traditional merger—that is
They do not make an investment in the
acquisition until they assume complete control of
the client list and the seller’s compensation has
been significantly reduced or eliminated.
The transition of client
relationships to the buyer’s care is enhanced by
the seller’s active involvement over an extended
period, which provides a proper, supportive
They get new revenue opportunities
and additional profits from reduced overhead—one
office suite, one technology infrastructure and
one malpractice policy, for instance.
They don’t have to replace the
selling practitioner’s production capacity
immediately, which can be the acquired practice’s
They can begin to tap the seller’s
referral network, which often is extensive and
therefore ripe with opportunity at this mature
They gain the opportunity to
cross-sell services to the seller’s client list.
The date for the transition of
control of the practice is already established.
MASTER OF YOUR DOMAIN: A POTENTIAL CLASH IN
Fear of loss of autonomy and income are the
primary reasons retirement-minded practitioners in
small firms often procrastinate until they are
ready to retire for good. Although they know they
need to address succession issues soon—and that
clients and employees would benefit from their
active involvement in the process—they are
reluctant to give up being master of their domain.
They are set in their approach to managing,
accustomed to working on their own schedule, and
unwilling to embrace a dramatically different
role. In a typical merger, they would be right—the
successor firm would expect all partners to adhere
to its policies. That’s exactly why a two-stage
deal can work better.
Another area of
concern for transitioning practitioners is that a
traditional acquisition—structured to create a
return on investment for the buyer—can result in
reduced income even if the hours worked remain the
same. But a two-stage deal enables the successor
firm to defer most or all of its investment in the
acquisition, so it doesn’t have to demand an
THE CASE FOR NOW RATHER THAN LATER
Retiring practitioners also recognize the
need to properly transition the client base. Most
clients don’t have a yardstick by which to measure
their accountant’s level of competency or skill.
They remain loyal out of affection and trust. That
trust must be transferred from the seller to the
buyer, and the seller plays a critical role in
making that happen. Trust is earned through a
track record of experience, and transferring it is
a process that can take months or even years.
Small firms meet personally with clients
remarkably infrequently. Business clients may mail
in or drop off work and sit down with the partners
only at tax season—that once-a-year meeting is not
uncommon. So when partners are five years from
retiring from the firm or reducing their time
commitment, that may turn out to be only five
visits with some clients. A two-stage deal takes
full advantage of those five encounters.
Most accounting practice sales have contract
contingencies that adjust the purchase price based
on client retention after closing. It is clearly
in both parties’ interests to give clients and the
successor the opportunity to become acclimated to
each other before a trusted partner retires. That
way the seller is still available to assist in
completing the transition.
The risks and
challenges of accounting practice combinations are
unique, so consider hiring a professional who has
experience with acquisitions and mergers.
ABC, a two-partner firm generating $1.2
million in annual fees, recently sought assistance
in developing a succession plan. The partners were
each three years from retirement and were devoting
2,200 hours per year to the practice. One was
about 70% chargeable, and the other was 55%
chargeable, owing to a greater practice management
role. Including all perks, benefits, salary and
profit distribution, the partners were netting 36%
of their gross.
They were introduced to
several potential buyers. ABC narrowed the choice
based on the chemistry between it and firm XYZ’s
similarities in fee structure, service approach
Under the negotiated deal,
ABC moved into XYZ’s offices, but the retiring
partners maintained their existing entity, into
which their compensation was paid and in which
they were the only remaining employees. (In most
deals, professional staff is retained at least
initially, but keeping clerical/secretarial staff
is based on need.) During stage one the two
retiring partners were paid 36% of the gross
collections received from their original clients.
Each retiring partner could reduce the time
commitment to the firm and accept a pro rata
reduction in income at any time. The death or
permanent disability of a partner or a reduction
in work hours below 50% of past efforts would
trigger the buyout of that partner. If neither
occurred, the buyout would take place 36 months
from the effective date.
The deal was
publicized as a merger, and all client billings
moved to the XYZ firm name. Over the next three
years each partner introduced his or her clients
to the partners who would ultimately assume
control of the account.
practitioners were motivated to make the
transition in this form because it let them keep
control over their book of business, allowed them
to come and go as they saw fit and let them
continue to manage their clients. Their practice
and estate were protected in the event either
partner died or became disabled. Their clients did
not lose a CPA but rather gained back-up, support
and expertise from the newly combined firm.
The partners kept their income whole while they
remained fully committed to the practice. Because
payments were made to their preexisting entity,
they continued to incur perks and benefits and
maintain existing retirement accounts. There was
no need to adapt to the successor firm’s plans and
policies. The deal let them feel they had
maximized their firm’s value.
successor firm saw the following advantages: The
“merger” eliminated many overhead redundancies,
including staff, software and other technology,
and rent. ABC, with its different list, provided
additional services and generated additional
revenues. Its clients were willing to refer
business to the larger XYZ firm, and the
transitioning partners’ contacts referred business
the sellers would not have obtained before the
merger. The full transition would occur relatively
soon—by the end of the third year at the latest.
XYZ executed an excellent transitional strategy
and retained virtually all the ABC clients.
In the two years since this deal closed, XYZ
hasn’t lost a single business client to another
local firm and has maintained the same retention
rate of 1040 clients as the sellers had prior to
Note : Drawbacks to a deal of this nature
are limited, but they do exist. For the selling
firm that seeks succession,
It can be very difficult to go from
an environment in which you have no accountability
to one where you do, even if it is far less than
in a traditional buyout.
In most cases, the seller gives up a
brand, location and sometimes even staff. Those
changes can make the transition more emotionally
and professionally charged.
In the unlikely event a deal needs to
be unwound, the seller may have significant needs
For the successor firm, the
possible downside is
Whenever you add additional
personalities under one roof, there is always the
potential for friction.
If the successor firm retains staff
whose compensation is different from their
existing staff in a similar role, conflicts can
If there are few cross-selling
opportunities or savings from trimming overhead
redundancies, stage one may not offer much
| Because clients
normally choose an accounting
firm based on their comfort
level with key members,
personalities are important.
Don’t do a deal with someone you
don’t enjoy having lunch with. |
Location and fees
are important. Choose a firm
that will maintain a
comparable experience for your
Work out all the
terms in advance and put
everything in writing. Agree
on the roles of the
individuals and the brand
names that will be used. Never
agree to agree later.
Consider hiring a
professional who has
experience with acquisitions
and mergers. The risks and
challenges of accounting
practice combinations are
In another case study, sole practitioner John
Smith, who had $150,000 in annual fees and wanted
to retire in four years, structured a similar
two-stage deal. Smith’s clients were predominantly
monthly and quarterly and required a lot of
handholding. For the first year, a member of the
successor firm went with Smith on 25% of his
client visits. The second year Smith reduced his
hours by 20% and accepted pro rata reductions in
his income as the new partners became even more
involved with his clients. In the third year Smith
reduced his time another 20% and the transition
picked up steam.
Smith was so comfortable
that his clients were well transitioned that he
elected to retire after year three. Eight years
later the successor firm has retained more than
90% of Smith’s clients who still have viable
businesses, fees have gone up and those clients
have been a fruitful referral base.
Although it’s not the only way to go about
succession planning, a two-stage deal shows how a
compromise between a merger and a straight sale
can give selling practitioners more control and
input during a retirement transition, and make
firms that use acquisitions as a part of an
expansion strategy more attractive to sellers.
It’s win-win for them—and for their clients.
For information about
the AICPA’s Accredited in
Business Valuation (ABV)
designation, go to
call the ABV Hotline at
212-596-6211 or download the
ABV Handbook at www.aicpa.org/download/abv/abv_handbook.pdf
Strategies to Protect the
Value of Your Firm (#
Price Equals Value Plus
Terms, ” JofA ,
Dec.04, page 67.
the Most of Buy-Sell
Agreements ,” JofA
, Oct.04, page 37.
a Fallback Plan, ”
JofA , Sep.03, page
an Accounting Practice
Handbook, l oose-leaf
version (# 090407JA); e-MAP,
online subscription (#
Continuation Agreements: A
Practice Survival Kit,
by John A. Eads (#
Future: Building a
Succession Plan for Your
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Reeb (# 09046JA).
Planning: Strategies to
Protect the Value of Your
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