by Michael R. Gillis, CPA, PFS, CGMS, Managing Partner, DMJ & Co., PLLC
As part of providing great service, CPAs help clients plan their exit and succession strategies. But all too often, CPAs don’t look at their own shop to ensure they also properly plan for an inevitable succession event. The NCACPA Succession Planning Task Force is working to provide resources and encouragement to CPAs in planning their own succession. A CPA firm that properly plans for its succession is the best course of action for the firm, for the families involved, for the clients, and for our responsibility to the public. Succession Planning Task Force members encourage you to review the succession resources, including access to a free On Demand program, at ncacpa.org/succession-planning-tools-resources. In addition, the AICPA Private Company Practice Section (PCPS) has a Succession Resource Center detailed information on the following:
- Drivers of Change for the CPA Profession
- Positioning Your Firm
- Selling Your Firm
- Merging Your Firm
- Developing New Leaders
- Turning Out the Lights
- Transition Roles and Responsibilities
- What is the Value of Your Firm
- Due Diligence
- Key Elements to a Partnership Agreement
Succession planning is clearly needed, so what are the options to consider?
Merging your firm can be a good solution, but don’t wait too long to plan and consider. We often tell clients to “run your businesses like it is always for sale.” This guidance certainty applies to CPA firms as well. If you think a merger would be the best succession solution for your firm, make sure you take steps to keep the value of your firm high and to be attractive for larger firms to acquire. Examples of these steps include:
- Keep your technology up to date.
- Have adequate staff in place. With today’s staffing shortages, not having adequate staff will greatly decrease the value of your firm. Leverage metrics to become an important measure of value.
- Monitor your average realization rate and keep it trending higher. Large firms will be looking at firms that have clients paying higher average rates.
- Be prepared to work for the new firm a minimum of two years to transition relationships.
- Consider having a Practice Continuation Agreement in place in case of an emergency while you explore merger options.
- Culture, culture, and culture are the three most important things to consider in identifying a merger candidate.
Selling Your Firm
Much like a merger, selling can also be a good solution Those important points to make your firm attractive for a merger also applies to a sale. Also consider the following:
- All the things listed above in the merger option.
- Are you willing to accept contingent deferred payment terms based on client retention?
- Do you want to structure your sale to receive long-term capital gain tax treatment?
- How do you identify the right potential buyer while protecting the confidentiality of your process?
In my opinion, this is probably the most rewarding option, but this also is the option that requires the most work and most planning. Consider the following:
- Identify the next generation of leaders of your firm early and talk to them often about the process.
- Invest in leadership development training.
- Set realistic value formulas so future owners can pay for the firm with as little risk as possible to their current income.
- Have your partnership/ownership agreements and lease agreements up to date.
- Consider a cap on the firm’s annual retirement payments as a percentage or revenue or profit before owners’ compensation.
- Transition client relationships early.
- Take some extended vacations while the Next Gen runs the place.
- Plan your personal life post career. This may be the most important part of the whole process.
Do Nothing. Turn Out the Lights
While this is an option, consider the few advantages and the many disadvantages:
- You stay in control until the end.
- What do you do in an emergency situation to protect your clients?
- How much value does your firm lose if you are unable to serve client even for a month or so? Who is your back up?
- Do you continue to invest in up-to-date technology?
- Please have a practice continuation agreement in place.
As the saying goes, nothing is more certain than death and taxes. A succession event for your firm is also as certain, please plan for it.