The Correlation between Succession Planning and Client Retention 

by William T. Fricke, CPA, CFF, CGFM, CGMA 

Before starting my own practice, I worked as a partner in a large local CPA firm in Atlanta for around 20 years. In 1999, my partners bought me out of that practice so that I could go out own my own and I created Fricke and Associates. Currently, we have nine employees, with seasonal help during busy season. In my time in practice, I’ve had quite a bit of experience with succession, in terms of both acquiring other firms as part of their succession plan and preparing my practice for the future. Though succession is never an exact science, I have found that my experience with acquiring other firms has been a valuable learning tool in creating a succession plan for my firm.

Learning Through Experience
I’ve been through the acquisition process with a number of firms over the years, but I have two specific recent examples I want to address. Three years ago, I was approached by a sole proprietor who was getting older and was running his practice out of an office that was quite a distance from his home. As he was aging, his family became concerned about his travel and the long hours of providing all client services and performing all administrative functions of the business. They worried both about the practitioner being on his own and what would happen to the firm if something were to happen to him. I was using the same IT consultant as this practitioner, who heard about this situation and put us in contact. We established an agreement and that practitioner moved his practice into my office space. All of the work for his clients began going out under my firm name, though he is still working and is the signer on all of the returns for those clients. My firm handles his billing and administrative work and, while he is still working, we keep 20% of the cash flow from those clients and he retains 80%. When he retires or something happens that prevents him from continuing to work, these percentages will switch. We will be retaining 80% and paying either the CPA or his estate the remaining 20% over a five year period.

On the other end of the spectrum, last year I was contacted by one of my larger clients because his wife’s mother had passed away and she had been operating as a sole proprietor from her home. She had a small practice with no employees, and had no kind of succession plan or practice continuation agreement in place. My firm agreed that we would do what we could to help salvage the practice. The most difficult part was sorting through her client files and determining who her clients were and what work was in process for them. The daughter of the family wrote a personal letter to each client, informing them of what had happened and that we would be assisting as soon as possible. We then sent a follow up letter and reached out via telephone. In the agreement that was created, we are paying the estate 25% of cash collected from those clients over the next four years.

I feel that the difference between planned and need-driven succession will be evident in our client retention rates. With the second firm, there was no continuity and it was a very difficult process. We’ve retained around 50-60% of those clients, which I believe is good considering the circumstances. With the first firm, we are expecting to retain upwards of 90% of those clients once the original owner stops working with us, because we have been able to build the clients’ awareness of our firm and its processes and give them a smooth transition.

Addressing Common Succession Challenges
In planning for the succession of my firm, I am fortunate to have two other CPAs in my firm who are previous firm owners themselves. One is an older practitioner, who will be retiring in the coming years himself, but the other is a younger CPA who will take over my practice once I decide to retire or am no longer able to work. I had been looking for an experienced senior manager or junior partner level employee, and actually connected with this individual through LinkedIn. He joined my firm three years ago, and we developed a similar agreement to the firms we have acquired. He has gradually been taking over some of the practice management duties of the firm, and once I am no longer in practice he will take over the firm completely. There are trigger events in the agreement that will put this plan in motion such as retirement, disability or death. Together, we negotiated a purchase price that will be paid out to myself or my estate over a five year period after the trigger event occurs.

There are a number of challenges in planning for succession. One major issue that I often see is determining when firm owners will retire. In smaller firms especially, it can be difficult for practitioners to let go of their business until they are forced to do so. This is an issue that will be unique with every agreement, and you really have to be flexible to determine a timeline that will work for both parties. Other issues can include valuing the practice and determining how the buyout will be paid. Many firm owners expect one lump sum payment at the time of sale, but that can negatively affect the value of the practice as most practitioners will pay less if they are asked to pay all at once. Luckily there are formulas available, either through utilizing consultants or previously existing agreements, which will assist with navigating this issue.

My main piece of advice for firms is to begin planning for succession sooner rather than later. No one will be able to work forever, so it’s best to have a plan in place before you or your family are forced to create one out of necessity. I would suggest beginning to plan at least five years out from your intended retirement date, if not sooner. This will also lead to a smoother transition for your clients and add to the long term value of your practice. In my experience, it’s also best to form these agreements with firms that are similar to yours, in terms of services, client base and fee range among other things. This will make the transition easier for the firm and for your clients. Take the time to plan for succession the right way, and it will surely pay off in the long run.


Fricke and Associates, PC is a small firm based in Norcross, GA. William T. Fricke, CPA, CFF, CGFM, CGMA is the Managing Director.
 



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