Snapshot from the PCPS Succession Planning Survey | Sole/ Solo firms
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Snapshot from the PCPS Succession Planning Survey | Sole/ Solo firms

1 year ago · 5 min read

Every four years, the AICPA’s Private Companies Practice Section (PCPS) works with the Succession Institute to survey practitioners and better understand succession challenges in CPA firms. One survey is exclusively for sole practitioners, or individuals with no staff, and sole proprietors, or single owners who employee administrative or professional staff, including CPAs. Here are the 2020 survey’s key takeaways for those practitioners.

A startling number of owners are planning to retire soon. That’s not too surprising, given the large volume of baby boomer owners moving into retirement and looking to sell or merge their firms. The survey found that 44% of owners in the sole/solo practitioner segment plan to retire in the next five years, and 31% in the next six to 10 years. As an exit strategy, most respondents (37%) favored merging their firm, but nearly the same amount (35%) expected to sell the firm. More than one-quarter (28%) planned to work until retirement then turn out the lights and walk away.

Recommendation: Even if retirement is on the horizon, this is not the time to wind down and limit your investment in your firm, your staff, or your clients. Buyers are seeking strong financial performance, but they also want a well-run practice that’s poised for future growth. That means up-to-date technology, a solid slate of quality clients and the kinds of processes and procedures that maximize productivity and profitability.

At the same time, many CPAs are expecting top dollar for their practice. An increase of firms ready for sale or merger may result in practitioners getting lower prices than expected. Owners may not be able to negotiate for more than $1 for $1 of client billings retained. In fact, a combination of a likely lowering of market rates, potential loss of clients due to attrition, and capping revenues billed per client means a seller’s end price in the next four or five years could easily net down to less than $1 for $1 of client billings. In addition, 78% of solo/sole practitioners are expecting payment in full at the time of sale or a down payment upfront, but 34% of potential buyers who responded to the survey plan to provide no payment up front.

The situation may not resolve itself soon, since even the most growth-oriented firms can only purchase so many practices before they surpass their capacity to manage growth and transition. At the same time, ongoing staff recruitment and retention challenges can constrain growth if a firm is too lean to take on new clients.

Recommendation: Be the firm that others want to buy. Once again, the best approach is to accentuate your firm’s advantages. In a sale or merger, the size of the firm typically does not matter as much as the quality of the practice.

The steps that surveyed firms were taking to enhance their value included:

Owners can also benefit by being informed about their local markets. Determine when you might plan to sell or merge your firm and get a sense of whether you will be facing a buyer’s or seller’s market based on the plans of other firms in your area. Speak with your peers, business brokers, and other professionals in your market to find out about the terms of recent purchases or mergers of firms like yours to decide if your expected payment amount or terms are reasonable. If not, how can you improve your firm’s salability? Does this information change your retirement plans?

Less than 10% have practice continuation agreements (PCA). That number is little changed from past surveys. A total of 47% of survey respondents said they understood that they needed an agreement but felt they didn’t know how to get started. Smaller percentages either thought they didn’t need one (20%) or that one wasn’t necessary right now (22%). A few (11%) were in the process of completing one. Firms with lower net annual revenues (NAR) (less than $1M) tended to say they needed help getting started, while those with higher NARs ($2M+) were more likely to think an agreement was not needed or could be postponed.

Recommendation: Create a formal, written PCA to protect yourself, your firm, your family, and to secure your staff’s future and find the best home for your clients. Get started with your PCA with the Private Companies Practice Section’s (PCPS) Practice Continuation Agreements: A Practice Survival Kit. This resource includes items such as sample agreements and tips on how to find a potential successor.

COVID-19 has had little effect on timing. Survey participants don’t believe the pandemic will lower practice values or change their retirement or merger/sale horizon. Most (63%) believe their practice will be worth about the same post-COVID as it was before and 24% think their practice will be worth more.

Of those respondents seeking to sell or identify a merger partner, 72% think the pandemic had no impact on their timing to sell or merge their firm. Fourteen percent indicated that it lengthened their time frame to sell or merge while the same amount (14%) responded that it decreased their time frame.

Many firms found that, during the peak of the pandemic, they were able to develop deeper client relationships by fully embracing a trusted client advisor role and providing new services, such as business relief advisory services, in their clients’ moment of need. This could account for firms reporting minimum impact from COVID-19 on the value of their firm.

Recommendation: For firms with staff, consider the needs and expectations of your team members to continue to work remotely. Develop remote work policies that benefit both the staff and the firm and that would be attractive to potential buyers who have also embraced remote work.

Most firms anticipated overall growth over the next three years. Owners’ expectations varied greatly, but 41% expect an average growth rate between 1% and 5% per year while 38% expect between 6% and 10% per year.

Firms are exploring practice opportunities outside the traditional service areas. The most popular include:

  • Client accounting services. This broadly defined area can include traditional writeup services and surrogate controllership or CFO services.

  • Consulting/advisory services. This is another wide category that often includes informal, consultative discussions with clients about tax, financial matters, and/or other general management issues, in addition to, more formal consulting engagements. It can also include nontraditional services such as business valuations and litigation support.

  • Wealth management. This service line often includes holistic investment and financial planning for both individuals and businesses.

Recommendation: Continue to leverage the deeper relationships developed during the pandemic to identify opportunities to expand your service lines and provide additional services to your clients. Use the Private Companies Practice Section’s (PCPS) Research tactics checklist, available exclusively to PCPS members, to better familiarize yourself with your clients’ businesses and industries. Position your firm and the expanded services as the solution to their concerns.

The PCPS CPA Firm Succession Planning Survey| Solo Practitioner and Sole Proprietor Report offers great insights into addressing these and numerous other planning needs and opportunities for firms. Turn to the Private Companies Practice Section’s (PCPS) Succession Planning Resource Center, available exclusively to PCPS members, as well, for invaluable guidance, resources, and templates to walk you through the planning process and the options available.

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