Securing Succession Success

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.”

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.

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.

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/