Get up to speed on small firm succession trends
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Professional Insights

Get up to speed on small firm succession trends

1 year ago · 3 min read

Every firm experiences ownership change at some point, whether it’s because of owner retirement, promotion of new partners or a merger or acquisition. The Private Companies Practice Section (PCPS) and Succession Institute, LLC’s 2020 CPA Firm Succession Planning Survey offers unique insights into how firms are managing succession considerations. Here are select findings, along with advice on how firms can strengthen their succession plans.

We’re in the midst of a leadership change. The survey showed that 44% of solo practitioners (individual practitioners with no staff) and sole proprietors (single owners with staff) plan to retire in the next five years, and 31% in the next six to 10 years. Among firms with more than one owner, a large majority (73%) anticipated succession planning challenges soon and more than one-half (55%) were experiencing them already. That could mean that many firms will be facing a buyer’s market. If that’s the case, it’s important to ensure that your firm is one that will appeal to a potential buyer or merger partner. Steps to make that happen include:

  • Getting your financial reports in order. Potential buyers or merger partners will expect your firm’s financial information and underlying documents to offer a complete and up-to-date picture. With that in mind, maintain current financial reports for your firm just as you would for your firm’s clients.

  • Evaluating your client base. Do you have a valuable client list? Find out by analyzing your clients on factors such as growth potential, profitability, value as a referral source, timeliness of payment, ease of working with them and any other aspects you believe are important. Then rate each client based on how valuable it might be to another firm. This is a great reality check on the true value of your practice in a sale or merger. It can also help you identify clients who may not be quite right for your firm. Letting them go can allow you to focus your resources on higher value clients. Consider using the Private Companies Practice Section’s (PCPS) Client Evaluation Tool, exclusively available to PCPS members, to easily grade and rank your client base.

  • Bringing your technology up to speed. Buyers or merger partners are going to be seeking prospects whose technology is as up to date as their own. As a result, it’s a good idea to begin upgrading your technology needs today, especially if you are planning for transition within the next five years. Among other things, it will give clients a chance to get accustomed to working with more advanced levels of technology in your firm, such as in the cloud. That will lead to greater perceived client value in a deal—since the new firm won’t have to train your clients to work with more sophisticated technology - and a smoother transition. As an added benefit, each of these steps can improve your firm’s efficiency and productivity.

Many firms are not doing formal planning. According to the survey, less than 10% of solo practitioners and sole proprietors had practice continuation agreements (PCAs). In multi-owner firms, 57% did not have a written and approved succession plan, with the smallest firms least likely to have a plan in place. Although this survey was fielded in 2020 when we expected succession planning to take a backseat as CPA services were in high demand, these results do not differ greatly from the 2016 survey.

The potential for unknown events is strong motivation for creating or updating a PCA or succession plan. That event could be the death or temporary or permanent disability of a solo owner or partner, but agreements can also encompass events such as the loss of a staff member or client, both of which can be a significant concern for a small firm. The best advice here is that it’s never too early to get started, since the plans you make today can help set your firm on the best course for the future. You’ll find more information in the Private Companies Practice Section’s (PCPS) Practice Continuation Agreements: A Practice Survival Kit.

In your planning, don’t forget to include client or referral source transitions. According to the survey, 40% of multi-owner firms had not addressed client transition and few (7%) require referral source transition in their plans. Almost all deals are based on client retention, so it’s in practitioners’ financial interest to ensure workable transitions.

The majority of firms are expecting growth. Sixty-four percent of solo practitioners and sole proprietors expect growth over the next three years. This post-pandemic period is a great time for practice development as the pandemic highlighted many services CPAs can offer to clients. This includes traditional writeup, outsourced controllership or CFO, consulting and advisory services. Adding these services to traditional compliance work can enhance your firm’s value for a potential buyer or merger partner.

Deepen your understanding

These are just a few of the many observations to be drawn from the 2020 survey. Whether your firm is poised for growth, preparing for a sale or merger down the road or at any other point in a practice’s life cycle, the Succession Planning survey and related Private Companies Practice Section’s (PCPS) succession tools can help you benchmark your progress with firms of similar size and develop a plan to ensure your firm is prepared for what’s next.

The PCPS and Succession Institute’s CPA Firm Succession Planning Survey full results and commentaries will be available in late September.

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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