Providing a future: A succession story

Twenty-seven years ago, CPAs Marty Einhorn, Jeff Chernitzer, and Alvin Wall got together in Norfolk, Va., and decided they wanted to start something that would live on long after they retired.

Client relationships and the well-being of employees have always been important to the three co-founders of Wall, Einhorn & Chernitzer PC, which has grown into a full-service accounting firm known as WEC, with 11 shareholders and three related entities (a wealth management entity, a virtual back-office accounting entity, and a wholly owned subsidiary that provides sophisticated tax strategies for clients).

“It’s all about the people we serve,” Einhorn said. “First and foremost, we serve our clients. And in some cases, we’re in our fourth generation of clients’ families. And the people who work here, we’re blessed with very low turnover, and we want to take care of these people and provide a career for them. That’s what we have in mind.”

With a succession plan document firmly in place and a culture that supports development and promotion of personnel, WEC serves as a positive example for how to ensure a sustainable future for a firm, its clients, and its employees.

SUCCESSION A CHALLENGE FOR MANY FIRMS

WEC’s constant focus on the future makes it a progressive firm in this area, according to a recently issued survey report.

Just 44% of multiowner firms currently have a written and approved succession plan in place, according to a survey conducted in 2016 by the AICPA Private Companies Practice Section and the Succession Institute, a consulting firm that specializes in helping firms create a strong organizational infrastructure.

The lack of succession planning is leaving CPAs—as well as their clients and employees—in unfortunate circumstances. When firms don’t have well-designed succession plans, their only exit strategy may be a sale to another firm. With a sale as the only option in a market that’s saturated because many Baby Boomers are retiring, a firm is less likely to command top dollar or favorable terms for its clients and employees.

“With more and more Baby Boomers wanting to retire—and many of our firms are run by Baby Boomers—you hit a point at which the number of buyers is going to go down in proportion to the number of sellers going up,” said Bill Reeb, CPA/CITP, CGMA, the CEO of the Succession Institute. “So I think it becomes a softer market, and some people end up in a bad position.”

Einhorn, Chernitzer, and Wall were determined that their firm would never end up in an unfortunate position. About a year after starting the firm, they signed a document outlining its succession procedures. The plan provides details for how shareholders who are exiting the firm will pass control to new shareholders who have been groomed for the job.

One critical component in the agreement is the age at which the sale of an ownership stake is mandatory. Although 65% of multiowner firms responding to the succession survey have no mandatory age for the sale of ownership or retirement of owners, Einhorn and his colleagues believed it was important to establish a time when they would step aside.

WEC set its mandatory retirement age at 65. A shareholder who turns 65 is required to sell his or her interest in the firm. Wall did that on Dec. 31, 2015, and is now a limited-equity shareholder working under a mutually beneficial arrangement with the firm.

Chernitzer, meanwhile, works in a separate entity the firm set up for a wealth management specialization (WealthQuest Financial Services LLC) in 2000. About eight years ago, WEC renegotiated his agreement to allow him to remain a limited-equity shareholder in the CPA firm. Einhorn is the lone original shareholder who remains a full shareholder in WEC.

PUSHING DOWN

One of the most important components of a CPA firm succession plan is building bench strength. This can be difficult to do. One-third of senior partners at firms responding to the succession survey believe younger members of their firm are not ready to step into leadership positions.

WEC prevents that problem by taking a disciplined approach to developing successors. The firm gives extra attention and responsibility to the people identified to be promoted as potential new owners over the next five to seven years (see the sidebar, “Shareholder Agreement Strikes a Careful Balance”).

Each firm shareholder is charged with developing a plan for replacing himself or herself. A shareholder identifies a person (or perhaps multiple people) who will take over his or her duties when he or she retires. Usually the replacements come from within the firm, but on rare occasions, people from outside the firm are considered.

If the situation changes for a person being groomed as a replacement (perhaps the potential successor leaves the firm or decides that he or she desires a different career path), the firm immediately introduces a new plan. Because things do change, the succession plan is constantly evolving, and it is consistently a topic of discussion for members of the firm.

“We have just a very strong core group of people here, and we each have a responsibility to find a replacement,” Einhorn said. “And in most cases there is somebody designated for each of us, and if not, there are a couple of people that are being contemplated.”

The firm differentiates these high-achieving potential shareholder successors from others who may not have quite as much experience or may not be on a trajectory to be a shareholder. The succession candidates are groomed for the leadership roles the firm has planned for them in the future. These candidates are added to the firm’s “bench” and are given richer incentive plans and more firm responsibility.

Focusing on “pushing down” the work is another important part of a succession plan. It’s common, Reeb said, for CPA firm partners to have difficulty letting go of assignments that should be performed by employees who haven’t yet made partner. This can harm firms in three ways.

First, it inhibits the development of lower-level employees who should be developing skills and confidence by performing those tasks. Second, it prevents the partners from working on the true firm leadership tasks they should be handling, such as growing the firm and managing its people.

Third, it creates a huge workflow problem when a partner retires. Because the partner hasn’t pushed down those duties, there is no succession plan for the work, which gets pushed to another overloaded partner, as a vicious cycle continues.

WEC has an incentive plan to prevent this type of problem, as Einhorn has emphasized pushing down work since the firm’s inception.

Delegation at the firm is encouraged through shared goals in the incentive plan that cascade down throughout the organization. For example, one shared goal for which managers and supervisors are compensated is the hours charged by audit and tax staff and seniors.

The pushdown effort is not without challenges. Although the shareholders are able to focus on appropriate duties, Einhorn said, some of the managers, supervisors, and seniors at the firm have had difficulty pushing down work to their subordinates. Firm leaders find that employees often have trouble making the transition between being personal contributors (“doers”) and first-time managers. This can be particularly challenging at the firm’s “supervisor” level, which is where experienced seniors make an abrupt move into managing other people.

To meet that challenge, the firm made rapid skills development an objective for people at all levels.

“We’re trying to get our youngest and most inexperienced people the best possible training and the best possible mentoring so they can take on these responsibilities even earlier in their careers, because we’re so focused on that leverage factor,” Einhorn said.

EYE ON OPPORTUNITIES

Client interactions are another element of WEC’s focus on developing bench strength. The firm’s clients are served by a team, and the entire team is introduced to the client. In almost every case, multiple team members are present in meetings with clients. The firm does not allow this to drive up the costs to the client—hours are discounted when the firm brings extra people to client meetings.

“We see that as an investment in our client and our people,” Einhorn said. “What we don’t want is our clients to be discouraged by us having a team approach or our people discouraged by us having a team approach.”

About 75% to 80% of the client interaction is managed by nonshareholders. The shareholders take care to maintain strong relationships with clients, and a significant number of those relationships have been in place for many years. The shareholders are relied on for their experience and expertise in the work process, but routine communications and the scheduling of meetings and fieldwork are handled by the engagement team. And when someone new comes onto an account, the team member is introduced to the client as soon as possible. Through multiple levels of review, the firm’s senior members check the work of less experienced personnel to make sure the quality is top-notch.

This work on the part of the engagement teams makes it possible for shareholders to devote some of their time to managing and running the firm. For Einhorn, the managing shareholder, this includes investigating all opportunities for mergers and acquisitions.

“I’m always looking at those opportunities,” he said. “In the past, we would evaluate opportunities that became apparent to us. But we’re much more thoughtful about it, trying to be proactive and in the driver’s seat rather than just reacting to somebody else in the marketplace.”

WEC has never acquired another firm or been part of a merger, although the firm has established related entities (WealthQuest Financial Services LLC, virtual office services provider e:countable LLC, and wholly owned subsidiary CSG Strategic Tax Consultants). Because of the succession plan, the firm’s leaders are confident that they will not be pressed into a less-than-favorable merger when Einhorn decides he is ready to sell his ownership and/or Wall is no longer active.

Einhorn is confident that when the time comes, the firm will continue to thrive without him, Chernitzer, and Wall. That’s a goal they set out to accomplish 27 years ago when they founded the firm, and a succession plan that empowers the younger people in the firm has helped WEC achieve it.

“If we truly wanted the firm to be sustainable and to live on beyond us,” Einhorn said, “we need to let these younger folks take control and actually be the entrepreneurs in the process.”

Shareholder agreement strikes a careful balance

Firm seeks to make ownership stakes affordable while providing for retirees.

One of the most challenging things about succession for CPA firms is structuring shareholder agreements that are fair to new shareholders as well as those who are retiring.

Firms want to provide retirement funds for retiring shareholders while making it affordable for new shareholders to buy in. There are many ways to do this.

“I think every firm out there has come up with a little bit of a different way of doing it,” said Marty Einhorn, CPA/ABV, managing shareholder of Wall, Einhorn & Chernitzer PC in Norfolk, Va.

Einhorn’s firm strikes the delicate balance in its shareholder agreement with a formula that favors affordability for new shareholders:

• Gradual buy-in. The firm has a five-year buy-in process, with limited-equity shareholders buying in at 20% per year until they become equal owners with the rest of the full-equity shareholders. The gradual process makes it easier for young people to work their way up to a full stake in the firm.
• 10-year payout. Any equity shareholder who has been with the firm for at least 10 years becomes eligible for retirement at age 55. When shareholders decide to retire, they are paid deferred compensation over 10 years based on their share of the firm’s intangible value. They are not paid differently based on their own performance. “Basing somebody’s retirement on their personal performance just doesn’t feel right to our group,” Einhorn said. “We are compensated on an annual basis based on our personal performance, but we feel we’re all contributing to the growth of the firm, and this approach promotes delegation and teamwork.”
• Firm valuation. The firm assigns its intangible value at 50% of the firm’s net revenue. For example, if the net revenue is $25 million, the intangible value is $12.5 million. This also makes it a bit easier for younger shareholders to buy out those who are retiring, as it’s probably less than what the firm would receive if it were acquired.

Under this formula, retirees are paid below the firm’s market value for their equity, but younger shareholders also buy their shares at less than the market value.

“We feel like this is a conservative formula that really favors the firm,” Einhorn said. “And by favoring the firm, it benefits both the retiring shareholders and the remaining shareholders.”

About the author

Ken Tysiac is a JofA editorial director. To comment on this article or to suggest an idea for another article, contact him at ktysiac@aicpa.org or 919-402-2112.

AICPA resources

Articles

• “CPA Firms Struggling With Succession,” JofA, Sept. 2016
• “Succession Issues Likely to Fuel Urgency Around Retention of Women CPAs,” JofA, May 17, 2016
• “Retirement: Avoid the Pitfalls and Plan for the Possibilities,” JofA, March 2016

Publication

• Securing the Future (#PPM1307HI, vol. 1 & 2 set, paperback; #PPM1305P, vol. 1, paperback; #PPM1305E, vol. 1, ebook; #PPM1306P, vol. 2, paperback; #PPM1306D, vol. 2, PDF, online access)

For more information or to make a purchase, go to aicpastore.com or call the Institute at 888-777-7077.

Online resources

AICPA PCPS Succession Planning Resource Center (includes succession planning guide, podcasts, survey results, and Succession Readiness Assessment and Timing Calculator), aicpa.org/pcps/succession