Ride out the gray tsunami in your firm with a solid succession plan
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Professional Insights

Ride out the gray tsunami in your firm with a solid succession plan

1 year ago · 5 min read

These U.S. Census Bureau stats highlight the big demographic shift of boomers approaching retirement age that has become known as the “gray tsunami.” Did you know...

  • Approximately 10,000 baby boomers cross the 65-age threshold every day

  • By the year 2030, every boomer will be age 65 or older

  • Which means 1 out of every 5 U.S. citizens will be of retirement age

Let’s get real for a moment. Who wants to imagine that the work relationships that we pour our time, energy and passion into will no longer exist as we know them? Pondering what will happen to ourselves, our practices and our clients when we retire can be uncomfortable. Not to mention thoughts of an unforeseen personal emergency or tragedy happening to us or our family. Brushing these tough issues aside is human nature. Especially when schedules are packed with other pressing business and personal demands. As a result, important decisions such as succession and continuation planning fall by the wayside.

But the past 18 months have shown us how quickly life can change. These trying times remind us to use the advice that we recommend to our clients – plan for your future.

Scrap the blame game

Rather than feel guilty about not having a clear succession plan in place, cut yourself some slack. It is not too late and recent survey findings show that you’re not alone. If you don’t have one, this is a good time to start. If you do, now is the perfect time to make sure it is current. Uncertain where to begin? No worries. This article is filled with ideas and tips to point you in the right direction.

Succession planning across the profession

A logical starting point is to explore the current succession planning trends in the profession. Consider these key takeaways from the latest Private Companies Practice Section's (PCPS) CPA Firm Succession Survey. Conducted every four years with the Succession Institute, the findings reveal what is on the minds of today’s CPA firm owners. For greater relevance, the survey is broken down into two categories. First is solo practitioners (individuals with no staff) and sole proprietors (single owners who employee administrative and/or professional staff). Second is multi-owner firms.

  • 44% of multi-owner firms have a mandatory age for retirement or sale of ownership while retirement age varies for sole/solo practitioners.

    • 50% of multi-owner firms have age 65 set as the mandatory age, 20% at age 67 and 13% at age 70

    • 43% of sole/solo practitioners plan to retire in the next five years and 31% in the next 6 to 10 years

  • 94% of sole/solo practitioners do not have a written continuation agreement with another firm and 57% of multi-owner firms do not have a written, approved plan.

  • Most survey participants, both sole/solo practitioners (72%) and multi-owners (88%), do not believe the COVID-19 pandemic will change their merge/sale or retirement horizon – 66% of sole/sole practitioners and 75% of multi-owners anticipate growth over the next three years between 5-10% annually.

  • Mergers and acquisitions are on the minds of practitioners as an exit or continuation strategy – 24% of sole/solo practitioners and 46% of multi-owner firms have been involved in discussions.

  • 42% of multi-owner firms are paying $1 for $1 of client revenues to retiring partners and 71% of sole/solo practitioners anticipate a ratio of $1 paid for $1 of client revenues upon the sell of their practice.

So what next?

Here are some proactive steps that you can take now to make a big impact on your future.

1. Schedule time for your own plan

If you are a sole/solo practitioner and do not have a practice continuation agreement (PCA) in place, get clear on its importance. A PCA is a contract that provides for the assumption of your practice by another CPA firm or individual under a predetermined plan. First, it helps protect your practice, the business interests of your clients and the financial interests of you and your family in the event of death or temporary or permanent disability. Second, it can be a vehicle for your retirement. Want to know more? Tap into the Private Companies Practice Section's (PCPS) Practice Continuation Agreements: A Practice Survival Kit for essentials to create your own agreement.

If you are a partner in a multi-owner firm and do not have a succession plan, this is a good time to initiate a conversation with your partner group. If your firm has a plan in place but you and your colleagues have not reviewed it recently, this is a sound next step. Examine the details and identify what key points are missing, such as mandatory retirement age, how the firm plans to replace retiring partners, client transition and compensation and benefits for retiring partners. Check out the Private Companies Practice Section's (PCPS) Succession Planning Guide & Tools, exclusively for PCPS members, for practical resources that you and your partners can put to work in your firm.

2. Learn the worth of your practice then work to strengthen it

With a growing number of firms for sale and more expected in the coming years, it is important to understand the value of your practice and what you can realistically make from a sale, merger or acquisition. Learn the details about recent mergers and acquisitions of similar sized firms by speaking to your peers and business brokers. Also know the market conditions and whether it is a buyers’ or sellers’ market. These factors can determine your bargaining power and your ability to better negotiate.

Rather than fret about what the market may hold when you are ready to transition, focus your attention on creating a sought-after firm that buyers want. There are many actions that you can take now to improve the appeal and value of your firm. Inventory your most valuable attribute.

  • Are your rates and fees comparable with the market?

  • Is your firm fully staffed?

  • How would you rate the quality of your clients?

  • Is your firm technology up to date?

Identify gaps to fill. Highlight your attributes in the stories you tell on your website, social media and in-person with referrals and potential buyers. For more ideas, tune in to Work on your firm now, retire well later from the Small Firm Philosophy podcast.

3. Focus on growth

CPAs have been a guiding light to clients during the pandemic, providing valuable support, assistance with business relief related loans and forgiveness, insights to keep the doors open and strategies for new revenue streams that meet changing client needs. To continue this good work and prepare your firm for growth, here are three effective strategies to consider.

  • Explore ways to address client needs with value added services
    Two popular solutions include client advisory services (CAS) and environmental, social and governance (ESG) services. CAS can include a host of assistance for example, traditional writeup, outsourced CFO and controllership. ESG can range from preparing environmental related financial statement disclosures to governance consulting engagements. Check out CPA.com’s Client Advisory Services and ESG reporting and attestation: A roadmap for audit practitioners.

  • Leverage technology
    The past year and a half have expedited our use of technology to run our practices and connect with our clients and colleagues. But this is simply the starting line. What new ways is your firm using technology? Are there repetitive, time-consuming manual practices that you would like to apply technology such as data science and artificial intelligence (AI) to streamline your practice? Take advantage of these Private Companies Practice Section's (PCPS) technology resources exclusively for PCPS members, and the upcoming Digital CPA conference (PCPS members save $200!) for more tips and insights.

  • Identify and develop future leaders
    For those firm with staff, who will replace you when you retire? Will they be ready when it is time to hand over the reins? These are important questions that need your attention in the short-term so the proper talent will be in place and prepared. Have a look at the Private Companies Practice Section's (PCPS) CPA firm competency model, exclusively for PCPS members, to help guide staff to positions of leaderships.

Here’s to planning for your future now so you will be ready to ride the wave into your retirement.

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