By Douglas P. Hepburn, CPA/PFS, CFP
Succession planning is critical for any business to maintain its value and continuity in perpetuity. For CPA firms, however, with their basis in professional services, there are many challenges, from client interaction to the amount of resources available to dedicate to exit planning. These issues, and more, are often overlooked by many, from sole proprietors to regional firms. However, with proper planning and an acknowledgement that you will leave one day, any size firm can preserve the value of its client base as an asset for future owners.
There are estimates that nearly 75 percent of CPA firms will deal with the exit of at least one partner in the next 10 years, but even more concerning is that more than 50 percent of CPA firms/practice units are sole proprietors. Add to that several lean years in the past for the number of entrants into public accounting, and you have a potential succession nightmare on your hands. Just ask any hiring partner about the market for qualified seniors. Without proper staffing at all levels, partners and managers find it difficult to leverage their time, resulting in compressed margins and limited production capacity.
For a professional-services-based business, the relationships that the principals build are the business. Those relationships take years to cultivate and need to be managed while services are fulfilled. If a trusted and familiar individual isn’t able to manage those relationships in the absence of a partner/shareholder, those clients are more likely to leave.
Many partners and sole proprietors covet their relationships, fearing they may be stolen by disgruntled or overly ambitious staff. For that reason, practitioners have become successful at rewarding technical competence at the expense of good business development and relationship skills. Therefore, many who are better suited to the latter two roles leave a practice before they have a chance to prove themselves. So, without a well-groomed successor, practitioners have put their firms in jeopardy of losing the very clients they coveted upon a partner’s retirement, disability, or death, without the originator or heirs being fairly compensated.
Documenting an exit plan is the most critical part of the planning process, yet nearly 81 percent of firms surveyed by the AICPA had not set forth their succession plans in writing. If you are part of an informal partnership, make sure it gets formalized with a partnership/member’s/shareholder’s agreement. Sole practitioners may think this doesn’t apply, but if you haven’t identified a buyer - one whom your clients trust and feel comfortable with - for your practice, your clients will feel left out in the cold, most likely turning away from the business you worked so hard to build. The solution to most succession issues is to plan ahead and anticipate the inevitable. The further ahead you plan, the better, but don’t forget to consider short- and intermediate-term plans as well. When expected events happen, follow the plan; if unexpected issues arise, dealing with them will be easier because a framework for action will already be in place.
Once a firm has a good staff or senior accountant, it is important to provide a career path to keep those people engaged for the long term and provide them the professional development opportunities to assume more responsibility. The most successful businesses can run flawlessly with the owner absent for months at a time. A key to that is developing staff that can perform their duties independently. Firms should consider using objective tools, such as role-based assessments, to ensure that candidates are a good fit for the team.
Proper selection and training will increase the probability of retaining good staff. There will always be the chance they will leave, so be sure to cross-train staff so you have backup talent in the event that someone is sick or departs the firm.
Many firms fail to view other local firms as potential partners because of past rivalries or competitiveness. Too many CPAs see obstacles where, in fact, there may be opportunities. By not considering other local firms as partners or merger candidates, many firms miss the chance for a good marriage in the local area, where cost, culture, and economic factors are all well-known. Going outside the area adds complexity, especially if you consider the added overhead from multiple offices, integrating different regional business cultures, leadership coordination, as well as uncertainty and morale problems among the staff. Firms that provide financial services have the additional factor of making sure successors are properly licensed and supervised for securities or investment advisory duties.
You never know who will be a good successor until you meet that person. Not talking to other professionals in your industry only serves to limit your own potential to grow and reduces the value of your firm. If you become active in your chapter, state, or national society, you will meet like-minded CPAs.
CPAs know that they can do anything they put their minds to, but doing everything may not be the best use of your time. Instead of doing everything your-self, consider hiring experts to help you fulfill your vision, such as a human capital consultant, process excellence expert, or even a succession planning advisor. Clients engage you for your expertise, why wouldn’t you engage an expert in another field to help you achieve your goals?
If you are planning on selling your firm to fund your retirement and haven’t planned ahead, you are already at a disadvantage before negotiations even start. Everyone’s interests, yours, your client’s and your staff’s, are best served by planning for your firm’s successors. Since the only constant in life is change, engaging in planning as an ongoing activity can create value and a platform for growth that will be rewarded for years to come.
Douglas P. Hepburn, CPA/PFS, CFP, is president of Hepburn Financial Advisors in Phoenixville. He can be reached at dhepburn@hepburnadvisors.com.
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