Succession planning on the rise, but about half of CPA firms haven’t implemented a plan

With Baby Boomers nearing retirement, the number of succession plans in place for CPA firms is on the rise. But fewer than half of multiowner practices have succession plans ready, mentoring is largely informal, and the development of future partners is in decline, new research shows.

Forty-four percent of multiowner firms are either discussing a merger, acquisition, or sale or are planning to do so in the next two years, according to the 2012 PCPS Succession Survey, a joint project of the AICPA Private Companies Practice Section (PCPS) and Succession Institute LLC. Among sole practitioners, only 6% have practice continuation agreements (PCAs) in place.

The survey, released Tuesday, is based on responses from more than 500 multiowner firms and more than 400 sole proprietorships.

The survey shows that CPAs are thinking about succession planning but are still reluctant to act, often shelving plans for more immediate concerns. If firms haven’t gotten far on succession planning, the best way to start, according to the survey’s suggestions, is with a three-year written plan.

Succession planning, 79% of owners say, will be a significant issue for their firm within the next 10 years. So, what are the senior partners doing about it? When compared with answers from four years ago, the last time the survey was conducted: less than before.

Informal coaching dropped to 47% from 56% in 2008. Formal training in supervisory skills dropped to 31% from 44% during the same period.

Part of CPAs’ succession-planning hesitance is a concern over the replacements. Forty-two percent of senior partners cite a lack of confidence in the leadership ability of junior partners as the single biggest challenge to succession planning.

The report suggests that most firms are missing out on one key aspect of succession planning by not having formal written requirements for new owners; 71% said they didn’t have such exit-plan guidelines. While 60% of senior partners say they are training for specific competencies in leadership-targeted staff, just 15% of practices have identified specific leadership requirements. So some respondents in that training majority appear to be unclear on the competencies themselves.

Forty-six percent say they have written, approved succession plans in place. That’s up from 2008, when 35% of firms had formal plans.

Nearly two-thirds (65%) of the multiowner firms in the survey had 25 or fewer full-time employees. In general, the bigger the firm, the more likely it had a succession plan. One-fourth of firms with three to seven full-time employees had succession plans, but 86% of firms with 101 to 200 employees did.

Sole proprietors hesitant to groom successor

Among sole proprietorships, most owners say they don’t have a PCA in place to cover unforeseen events such as death or disability. When sole proprietors with employees were asked what they were doing to develop future leaders, 52% answered, “Nothing.”

Those who are taking steps to develop talent are doing it less than they were four years ago. Twenty-four percent listed informal coaching by an assigned partner as a development strategy, a drop from 42% who were coaching in 2008. Just 6% of sole proprietorships have a formal mentoring program, down from 16% in 2008.

However, sole proprietors are thinking about exit options. Twenty-two percent of them plan to merge with another practice two to four years before retirement, and 19% plan to reduce their hours until they’re ready to leave. Seventeen percent plan to sell clients to another practice, and 42% are considering all three options: merge, reduce hours, or sell.

About half of sole proprietors considering a sale of their firm expect to receive 100% of each dollar of client revenue as their payout. However, the report cautions that a buyer’s market is likely to drive down valuations and that an owner should expect some client attrition when a firm changes hands.

“As a result, selling CPAs can expect their actual realization to be lower than $1 for $1 of revenue,” the report says. “In our experience, even when the seller helps the buyer retain clients, the total payments made to the seller approximate about 70 cents on the dollar for the entire book sold, and could easily be as low as 60 cents on the dollar.”

Tips to carry out your plan

The survey offers steps that senior partners as well as sole proprietors can take to keep succession planning on track. Here are a few highlights for senior partners:

• Write a three-year plan. This plan should include details on client transition, training for future leaders, and projections for the firm’s selling price.
• Know your exit strategies. Depending on the makeup of your firm, your path to retirement can vary. Research your options, set exit rules for partners, and seek an expert adviser.
• Develop your staff. It’s difficult to have an inside successor or successors if that talent isn’t given proper training. Allow the stars of your firm to take on more responsibility
• Evaluate your rates and clients. Your PCA will be easier to implement if your practice is in line with the firm that could take over. Now is a good time to examine your client list and what you’re charging.

Here are highlights of the survey’s succession planning tips for sole practitioners:

• Implement a PCA. It’s best to immediately ensure a smooth transition if faced with unforeseen circumstances.
• Leverage technology. Now is the time, if you haven’t already, to let a computer take over low-value, routine functions.
• Include an opt-out clause. Though you’re certain to perform due diligence when considering a merger or acquisition, insist on a one-year opt-out clause to make sure the relationship is working the way you expected.
• Strengthen client relationships. Focus more of your attention on top clients. Don’t be afraid to shed marginal clients (the ones who regularly pay late, for example) or recommend another firm for them.

—Neil Amato (namato@aicpa.org) is a JofA senior editor.