EXECUTIVE SUMMARY
|
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
djk72nyc@yahoo.com . |
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.”
CONSIDER CANDIDATES 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.”
FINDING A SUITOR 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).
|
COMING TO TERMS 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.
PARTNERSHIP PERILS 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.
|
DELAYED DEPARTURE 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.
VALUE ADDED 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.
|
PRUDENT POLICIES 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.”
| AICPA
RESOURCES
Publication
Securing the Future: Building a
Succession Plan for Your Firm, 2005
(#090486)
Conferences
National Business Valuation
Conference, Dec. 2–4, New Orleans
Practitioners Symposium, May
5–7, Las Vegas To place an order
or register go to www.cpa2biz.com
, 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, http://pcps.aicpa.org/Resources/Succession+Planning/Succession+Practice+
Continuation+Planning/ | |