5 steps to a great succession transition
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5 steps to a great succession transition

4 months ago · 3 min read

For accountants and their firms, succession planning is a process that should begin early and be revisited often. And it’s a process that is – or at least should be – well underway at most practices.

Consider the following. In the most recent PCPS Succession Planning Survey—taken in 2020—44% of the sole or solo practitioners polled indicated they were planning to retire in the next five years, with an additional 31% expecting to retire in the six to 10 years. Nearly three-quarters (72%) of respondents said they expected to merge or sell their firms. Among multi-partner firms, 73% of respondents said they would have succession planning challenges soon, and 55% reported already dealing with them. What can practitioners do to prepare themselves and their firms for succession? Here are five steps to enhance the chances of having a great transition when the time is right.

Get an early start

Change takes time, so you should start planning seriously for retirement at least five years in advance. A long-term approach to succession allows you to strengthen some of the assets that buyers or merger partners want to see. Those include a robust and successful client base, strong staff competencies, and up-to-date technology and other resources that make your firm more productive and efficient. It’s much easier to focus on these areas over several years rather than doing it in a hurry shortly before retirement. Your firm is an asset and preserving its value should be an ongoing effort.

Prepare your financial story

Buyers or merger partners will want to know detailed information on firm finances, including current financial statements and key performance indicators and metrics. CPAs provide this information for clients, so be sure you have the same data ready for your own firm. Comprehensive financial information gives potential buyers or merger partners a level of comfort about the firm, its value and its prospects.

Identify what sets you apart

I was recently talking to a small firm practitioner in Minnesota who was concerned about how best to differentiate his firm in the M&A process. He was concerned because he considered it to be a traditional practice in a crowded market. But in our discussion, he mentioned that the firm did a great deal of work in transfer pricing because of its proximity in Canada. That in-house knowledge would certainly be valuable to many potential buyers.

It can be easy to take some of our firms’ advantages for granted. To solve that problem, when you’re preparing to sell or merge, do some brainstorming—with other firm members or trusted friends or contacts—to remind yourself of all the firm has to offer. You may have a unique practice area or expertise, a strong profile in your local community, or a desirable client roster. Include these assets in the story you tell potential buyers or merger partners about your firm.

Prepare clients properly. Clients have probably not given much thought to your retirement, so it may come as a real surprise to them. When you broach the subject, maintain a positive and upbeat attitude, showing your excitement about the firm’s future. Talk about why you’ve chosen to sell to or merge with another firm or to turn over the reins to an internal firm leader. Listen to the clients’ fears and concerns and be ready to reassure them that the quality, level of service and other key advantages will not change. Emphasize, as well, the benefits that the new owner or firm can offer. Describe the planned transition process, including whether you will be staying on with the firm or available for outreach for a set period, which can minimize client concerns. Since many deals depend at least in part on projected client retention, taking these steps can be enhance your retirement payout as they put client fears to rest.

Consider tail insurance. No matter what kind of involvement you have with your firm after a deal is struck, you are not necessarily free of potential liability if a client makes a claim after you leave. That’s why it’s a good idea to investigate extended-claim reporting-period coverage, also known as tail insurance, which extends your professional liability coverage to cover claims on previous work. Your buyer or merger partner may actually insist that you have it. Coverage may last one, three, five or an indefinite number of years, depending on your state’s insurance commission rules, and it can also protect your estate. You don’t need it when you’re still in practice and carrying insurance, but it’s wise to buy the longest coverage term and insure yourself.

All of us put many years into building and maintaining a great practice. Taking the right steps along the way can help ensure we continue to benefit from that effort even after we retire.

Carl Peterson, CPA, CGMA, is the Association’s vice president of small firm interests. Have questions for Carl? Contact him directly at carl.peterson@aicpa-cima.com or 651-252-4618. And be sure to sign up for Carl’s Small Firm Update webcasts. The next one will take place September 22 from 2pm to 3pm ET.

Carl Peterson, CPA, CGMA

Carl Peterson, CPA, is Vice President of Small Firms at the Association of International Certified Professional Accountants.

In this capacity, he meets with small CPA firms regularly to understand their issues and represent these firms from an advocacy and firm development perspective. Peterson serves as the voice of small firms within the AICPA on standard-setting, regulatory and small business issues. He is responsible for ensuring AICPA initiatives continue to meet the needs of small firms.

Carl is a licensed CPA, and previously served as a managing partner at Peterson, Peterson & Associates, PLC, in Minneapolis/St. Paul, where he built its service and client base.

Carl has a history volunteering within the profession, including having served as a member of AICPA Council and as a member of the AICPA’s Accounting and Review Services Committee. In addition, he has served the Minnesota Society of CPAs as Chairman of the Board of Directors, as well as Chairman of the Political Action and Legislative Affairs committees. In 2013, he was honored by the Society with their Distinguished Service Award.

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