By William Carlino

For owners of small and midsize CPA firms, succession is often like the proverbial “ignoring the elephant in the room:” they know it’s there, but they try their best not to think about it. Unfortunately, succession stresses don’t simply fade away. If anything, they increase almost exponentially as practitioners inch closer to retirement age. If a plan is not addressed in advance and efficiently, the business owner’s options diminish quickly.

For those who have begun the process of passing the ownership torch, the question that invariably arises next is what is the best avenue to take with regard to an exit strategy?

The answer depends on a number of factors, including an owner’s time frame for slowing down and whether to look internally or externally for succession.

The average age of equity owners in firms with billings of $2 million to more than $20 million is roughly 54. It’s almost certain that either you or one of your partners will be slowing down or exiting altogether in the next five to 10 years. This blog highlights the four most common strategies: a sale, internal succession, merging upstream, and turning out the lights.

Selling

The sale of an accounting practice is sometimes unfairly stereotyped as a total loss of control on day one. That gives rise to a very real fear of an immediate loss of clients. This need not be the case.

If the deal is structured properly and the seller remains involved with the practice to ensure a smooth transition and acclimation for clients, this will result in a higher retention rate and subsequently allow the seller to gain the maximum value for their practice. Sometimes you may encounter a buyer who can estimate the percentage of clients they will retain and offer a fixed price for the practice at closing. But most likely the terms of the deal will hinge on client retention.

Internal Succession

To hand over the reins of the firm internally, there are two critical requirements: correctly transitioning the owner’s responsibilities and their clients to the chosen internal successor with a deal structure that makes sense. When a partner or owner retires, you must make sure that the firm can effectively pick up that person’s workload. Thus, you need to have both the capacity to replace the retiring partner and the skill set. Don’t make the critical mistake of assuming that you can “spread it around” to the remaining owners. They are often at maximum capacity themselves. Also, make sure you replace the role, not just a body. If, for example, the retiring owner was the firm’s “rainmaker,” you can’t expect to insert the quality control partner and expect the same results. Ditto if that exiting stakeholder owns specialized credentials or licensing. From a financial viewpoint, you must make sure the debt obligation to the retiring owner is self-funding and not met as a result of having to reduce the compensation of the remaining owners. Nobody is willing to do the same work for less money.

Merging Upstream

If your succession strategy is not internally based, then you must look elsewhere for a successor. An upstream merger into a larger firm holds a number of advantages for partners exiting within five years or less, including greater resources, a wider platform of services, and more cross-selling opportunities. A larger firm will also more than likely be able to free an owner from administrative and billing duties and allow him or her to focus on new business development and, ideally, add to their compensation. Under a two-stage deal structure, the seller firm owner can maintain reasonable control of the practice and income level during a transition period. For multipartner firms, where some owners are seeking near-term succession while others seek long-term financial and professional growth, an upstream merger with the right firm allows partners with different sunsets and goals to work out customized deals.

Turning Out the Lights

Practitioners who stubbornly put off succession planning or are unwilling to consider a merger where they give up control will work until either their health forces them to quit or their clients leave as a result of attrition and inattention.

There are many downsides to this strategy. First and foremost, though, is that you are allowing a valuable asset – your firm – to wither and die on the vine. Second, you are telling your clients that despite their years of loyalty, which allowed you to maintain the lifestyle you wanted, they are no longer relevant and need to search elsewhere for a new firm. They deserve better than that.

William Carlino is managing director, national consulting services, at Whitman Transition Advisors LLC, a consulting firm dedicated to ownership transition and succession strategies for CPA firms. He can be reached at wcarlino@whitmantransition.com.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.