Critical Tips on Succession Planning

September 7, 2016

When do you plan to retire? For most solo practitioners or sole proprietors today, the average expected time to retirement is about eight years, and 40% are planning to retire in the next five years, according to the results of the PCPS/Succession Institute 2016 CPA Firm Succession Management Survey, which will be released later this month. For practitioners in smaller firms, the firm itself can be a critical piece of their retirement plan, with many relying on a sale or merger to fund the years after they leave practice. With an asset of such importance, it’s vital to have a succession plan that will work to protect you, particularly since the competition to sell is likely to become fiercer in the coming years. Based on my own experiences in selling my small firm, I would urge practitioners to allow for plenty of lead time and to have a formal succession document in place in advance to achieve a smooth transition.

Planning Ahead
I was not prepared to sell my firm when I learned about the opportunity available at the AICPA a few years ago. When I decided to make this move, I had a short term transition plan in place, but things moved more quickly than I anticipated. I started the conversation with another firm about merging in December 2013, right after my second interview with AICPA. We continued the due diligence and discussion of terms over the next five months, which is a short timeframe for that part of the process. Since the merger decision wasn’t yet final, there was no disclosure to the public or clients at that point, but this is a critical time in making sure culture, client mix and fee structures work together. That usually takes six to nine months, with a closing or merger date right afterwards. For us, June 2, 2014 was the merger date. Then firms normally want two to three years to transition clients after the effective date of the merger. Since I was taking on responsibilities at a new job, we didn’t have that transition period, which made it difficult to reassure clients that we were making the right move and that the new firm had the right staff to meet their needs.

That experience demonstrated that ample preparation is key to successful change. In order for a smooth transition to take place, be sure to plan ahead by:

  • Determining what kind of transition you’re seeking. If you’d like to pass the firm on to a promising staff member, it’s never too early to begin grooming that person to fill your shoes. If you’re planning to merge into another firm, then start working sooner rather than later to analyze your technology and processes, address issues with problem clients and take any other necessary steps to enhance your firm’s value to a potential buyer. No matter what your expectations, it’s wise to integrate succession concerns into day-to-day practice decisions. Practitioners can turn to the PCPS Quick Start Guide in the PCPS Succession Planning Resource Center for a concise overview of these and other issues, and to a PCPS podcast on the first three steps in creating your succession plan.
  • Having a sense of your firm’s value. Without a ballpark idea of what your firm is worth, plus a realistic idea of what kind of deal might be best for you and your practice, it will be tough to create a succession or transition plan for your firm. Fortunately, there’s help available. For tips on understanding where you stand, go to the PCPS Succession Readiness Assessment and the PCPS Succession Timing Calculator. You can also turn to a PCPS podcast on how firms are valued for an internal sale.
  • Focusing on the people involved. A firm transition will have a significant impact on staff and clients, which is why communication—early and often—with the people closest to the firm is so important. When I sold my firm, I learned that sending a letter to clients informing them of the change is a good step, but it’s not sufficient for your top clients, especially ones who have been with you for a while. For them, a personal communication or meeting will convey your appreciation for their business, your interest in them and your commitment to ensuring their needs continued to be served. If I could go back, I wish I would have been more diligent in creating a more personal approach for my clients since I know that my quick transition left many of them surprised and worried about their future with a new practice. Getting those messages across can help ensure that clients will stick with the new firm or new owner, which can have an impact on your payout. You can find templated letters and additional guidance in Chapter 5 of the PCPS Succession Guide. The same is true for staff. In addition to any general announcement, reach out to your people beforehand to discuss the change and their future. This personal touch will help ensure that your firm’s most value assets—its top people and clients—will transition to the new arrangement.

Set Up Your Insurance Policy
By that, I mean your practice continuation agreement (PCAs), an invaluable tool for sole practitioners and many small firm partners as well. A whopping 93% of sole proprietors do not have written PCAs, according to the latest PCPS survey, a little change from the last study in 2012. That’s certainly surprising, because these documents offer peace of mind that your clients, staff and family will be taken care of if the worst happens. The latest PCPS survey found that 18% of those without PCAs thought they didn’t need one, while 25% understood the value but believed they weren’t necessary at this time. But future events are impossible to predict, so I would urge all practitioners to have a plan that will ensure their firm can continue or be taken over if you are no longer able to manage it or decide to make a quick transition similar to myself. A total of 42% who didn’t have a PCA recognized the importance of having one but were uncertain how to get started. The good news is that the PCPS Succession Planning Resource Center includes a wealth of tools on PCAs.

Put Your Best Foot Forward
Clearly, we can assume there will be a large number of practices coming to market or changing ownership in the near term. The steps you take now to get ready for change and enhance your firm’s value in the marketplace are well worthwhile because they can also improve your efficiency and profitability in the meantime. Take the time now to reap the many benefits of planning for succession.

Carl Peterson, CPA, CGMA, is the AICPA’s Vice President of Small Firm Interests. Have questions for Carl? Contact him directly at or 651-252-4618, and tune into his free Small Firm Update webcasts.