CPA Practice Advisor - 5

FEATURE

SUCCESSION PLANNING
FOR S M ALL AC C OU NTING FIR M S
By Joel Sinkin and Terrence Putney, CPA.

THE FIRST QUESTION I typically get asked regarding succession planning is when to start
the process. A key issue is how much you personally interact with your clients. An effective
transition of client relationships requires a personal touch. Our experience indicates over
80 percent of clients are personally seen by a partner only once per year. Even though
you might communicate by email or phone frequently, you
cannot effectively transition a personal relationship with a
client that way.
Transition requires the client
experiencing the selling partner/
owner and his/her successor working together on the transition. If you
are three years from dramatically
reducing your time commitment to
the firm or retiring altogether, you
may only have three visits with
your clients to have that experience!
Even five years may mean only five
more personal interactions! Clients
of small firms are traditionally
very partner-loyal, not firm-loyal.
For this reason, it takes additional
time to transition clients to the
successor firm. If you are one-tofive years away from retiring, a
Two Stage Deal may be for you. It
is a method of retaining reasonable
control, autonomy and income while
performing a proper transition. Click
on this link for more information
on the Two Stage Deal (https://bit.
ly/2JNeIrd). Since it will take time
to identify the "right" successor
firm and then work out the deal
structure and terms, we advise you
start working on your succession
plan at least five years prior to your
intended date to slow down.

HOW TO CHOOSE YOUR
SUCCESSOR
Most firms define the "right" buyer
as the one that will retain clients
which maximizes value. One tool we

use in identifying the best match is
what we call the four C's:
* Chemistry: If you don't want to eat
lunch with a potential buyer why
would you sell to them? Most of
your clients and staff are with you
because of positive chemistry. Why
would you think your clients and
staff would like someone you don't?
* Capacity: If your firm has one or
more partners retiring, does the
successor firm have the capacity on
a partner level (and the skill set) to
replace them?
* Culture: This is an important but
elusive topic. Culture is defined by
how clients are serviced and billed,
the IT platform, staff overtime
policies and so much more. We suggest you analyze culture by asking
yourself the following questions:
* What is it like to be a partner in the
successor firm?
* What is it like to be a staff person?
* What is it like to be a client?
The answers to those last three
questions will help you discover if
the cultures align.
* Continuity: Change is a dirty
word to most people. Ideally your
clients see this as the addition of
the successor firm and not what
was lost of your firm. Will your
clients feel there is continuity or,
instead, wholesale changes they
feel uncomfortable with?

MARKET CHANGES
Until recently the market has
favored sellers. That has changed
dramatically in the last several
years.
Staffing shortages have left
firms with less capacity than in the
past making them less interested in
buying firms where partners and
staff need to be replaced. Firms
owned by Baby Boomers are hitting
the market as sellers in increasing
numbers and that will continue over
the next several years. The supply
of sellers is starting to outpace the
demand from buyers allowing buyers to become more selective and
therefore depressing values. Many
profession pundits suggest that soon
traditional services provided by
accounting firms will be taken over
by Artificial Intelligence. Meanwhile,
blockchain technology may depress
the need for audit and accounting
services. This has made some buyers leery of acquiring firms with
traditional practices for fear much of
the fees generated by these services
will decline if not be lost altogether
down the road.

AUGUST 2019 ■

There are exceptions. Some geographic
areas have a high density of
small CPA firms which tends
to attract an adequate pool of
buyers. Practices with strong
consulting niches are more in
demand now than traditional A&A
and tax firms. A firm with strong
young talent is also a more attractive
acquisition.
Based on what the future market
appears to look like, the trend of
decreasing valuations and declining
demand will continue. Because there
is no way to know what the future
holds, we would encourage firms
that are pretty sure they will seek a
sale or upstream merger in the near
term to start the process soon.
Try to lock in your succession
plan and price based on today's
marketplace. An accounting firm
and its clients are still an asset with
tremendous market value. No one is
suggesting an owner of a CPA firm
should be Santa Claus and give their
firm away. Just don't assume what
you think is available today will be
there tomorrow. ■
Joel Sinkin (jsinkin@
transitionadvisors.com)
and Terrence Putney, CPA
(tputney@transitionadvisors.com) are the Senior
Partners of Transition
Advisors, LLC, (www.
transitionadvisors.com
and 866-279-8550) which
exclusively consults with
CPA firms nationally on
their growth and succession strategies through
merger and acquisition.

www.CPAPracticeAdvisor.com

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