A Pattern Exists in CPA Firms
Most firms want to remain independent. Some mergers occur to expedite the growth process, but most M&A happens because a firm’s options are limited. There is a direct correlation between succession and lack of professionals capable of selling. The impaired value problem. The emphasis placed on technical production due to staffing issues has created an imbalance of professionals who do not have networks and can create the business needed to fund existing and projected partner buyouts.
Succession Plan Statistics
There are a lot of numbers on this without a real consensus, but there is agreement the majority of CPA firms do not have a succession plan. Those who do have a plan often have a document in writing with no one taking steps to implement the plan and/or their plans have been altered by staff turnover and the lack of funded retirement partner buyouts.
Core Drivers Impacting Decisions to Merge or Sell Include
There is a lack of succession minded professionals who:
- Want to take an equity position
- Possess the skills to successfully develop business
- Have the financial resources to buy-in to the firm
- Will put in extended work hours
Many professionals do not understand the path to partnership in their firm and are concerned with taking over the existing underfunded partner retirement account liability.
Lack of Succession Undermines Firm Value
Today, if another firm were to discuss acquiring or merging in your practice you want to be in position to command the best price and terms. Lack of a succession team and rainmakers tells a buyer/upward merger firm that your position is compromised.
Be Prepared for Declining Firm Values
Artificial intelligence will reduce tax fees. Assurance and accounting work will become more automated. Baby Boomers who have held out will flood the market with firms to sell. Basic economics of supply and demand will drive pricing down.
What Message Are You Sending Staff?
No mandatory retirement age leaves the door open for a succession disaster. Future leaders often leave and their team below them crumbles because they do not see an end date for aging partners. When partners stay beyond traditional retirement dates, staff interprets that as a closed door. What’s left is often potential partners who are technical experts that rarely bring in new work.
CPAs Created the Succession Problem
The technology bubble of the late 90’s and the 5-year accounting degree reduced the labor pool of future CPAs. Those who went into accounting were given work and never had to bring in business or network. Today, firms have professionals who want to be partners who have minimal to no sales capabilities and no referral networks. How can you conduct an internal succession that requires the next leadership group to create the revenue to fund exiting partner buyouts? The math does not work.
The Impact of Majority Ownership
This can cripple growth. Aging leadership who has controlling interest in a firm often resist investing in solutions that have a payback several years out. They do not want to decrease short-term compensation to pay for a solution that will not benefit them until after they are retired. This is one reason few accounting professionals know how to sell. No one wanted to make the investment. It takes years to get a professional to become a rainmaker or even a “B” level business developer.
It Is Really Unfair, But It Is Reality
Today’s retiring partners entered into a system where they paid in to pay out the retiring partners with the expectation that when it came time for them to retire the next generation would buy them out. Unfortunately, today’s next generation is looking at lifestyle and is looking at large payout liabilities and is not feeling they want to take on that burden. Let us help you sort through those issues in your firm.