CPA and Accounting Practice Succession in 2019 – Part 4 of 4

There are 3 previous blogs related to this final blog on CPA succession in 2019 and beyond.  This final blog will provide a checklist, so to speak of the different ways one should prepare and plan for succession.  Mergers have become the preferred method for buyers who generally provide some cash to the selling firm principals, but also require some equity in the new company.   In addition, there will likely be work requirements for partners so clients can be fully integrated before full exit is possible.  Full exit is then possible from the buyout terms of the agreement, but usually not for 3-7 years after the merger is complete with clients and employees fully transitioned.  We are not saying that a quicker exit is not possible…it is.  However, if you are going to take your succession seriously, you have to be strategic and intentional about it, which involves looking at all possibilities.

We wanted to provide a list of variables that exiting principals can change in the years leading up to the time of succession to ensure that they have the best chance of finding that succession partner.  Some of the items below will not be items that all firms can participate in but should provide excellent points for you to think about. 

1. Multi-Disciplined Approach to Revenue Creation – As mentioned and discussed in this blog series, strategic buyers are concerned about the long-term stability of compliance revenue in their firms due to artificial intelligence.  Diversify your revenue streams or at least be vocally open to diversification.
2. Human Capital – With mergers being the preferred buy-side strategy, principals exiting their firms will likely have to stay on for 3-7 years after a merger is complete to ensure that clients are transferred effectively.  Not only this, but buyers are looking for youth.  We are in a market where youthful and talented CPAs are at a huge premium.  A strong contingency of experience and youth will help significantly.
3. Firm Culture – If you have a firm that has a culture that is resistant to change, change it.  New firms will be gauging the culture of the firm in a serious way.  Firms that are resistant to new processes to enhance productivity, technology, or multi-disciplined firms will be tossed aside.  You must demonstrate your willingness and be able to speak for your staff on the need for change.
4. Productivity Metrics – Buyers will expect you to understand your metrics and the metrics of your staff.  Know your strategy for setting and reviewing bill rates as compared to the market.  Know your chargeable and billable hours, realization of those bill rates and manage your staff to achieve higher productivity numbers through process change.  Many smaller CPA firms do not track billable hours.  Don’t be surprised if a potential suitor walks away if you don’t track hours.  We are not encouraging a billing methodology change, but tracking the hours is critical for the buyer to see the productivity.  The Rosenburg Survey publishes industry wide metrics and you should know where you are related to the averages. 
5. Bill Rates – Larger firms usually bill a little more aggressively than small firms do.  Know where you are in relation to the market averages and some of the larger players in town.  Firms will want to buy a firm that is at least in the vicinity of their bill rates.  Because larger firms bill heavier, a review of pricing and potential increases in the years leading up to finding a succession partner will be very helpful.
6. Non-Compete/Non-Solicit – All employees with access to data or customer contact personnel should have a non-solicit.  Partners do not need these as CPA ethics guidelines have restrictions in them already, but all non-partner staff should have one.  One of the biggest concerns of buying entities is that non-partner CPAs will walk off with some of the clients.  Even if you have known these individuals for years, get the non-solicit.  Without a non-solicit or non-compete in place, buyers will walk away.  There is too much unmanageable risk.
7. Merger versus Acquisition – With a merger, equity partners still have a voice and can help to shape the merged company.  This entails starting your exit plan 3-7 years before you want to fully exit into retirement.  In addition, a merger where selling principals will be part of the equity of the new company can help to move around disclosure laws and hiccups within the transition process for CPA practice sales.

There are many things to consider when exiting your practice.  The size of the practice, the expectations of the buyers, human capital, diversification, bill rates and productivity metrics are all key components of this new environment.  There are also a number of things you should expect during the transition into the new firm.  To get more information on succession, exit and transition, please consider talking to a specialty intermediary that has buyers or merger partners in their network and who understand what will be required to fully exit your firm.  Berkshire Business Sales and Acquisitions is a specialty broker in Arizona that has been selling and merging large and small accounting firms for the last 10 years with a national buyer pool and a customized approach to fit your needs.  Ryan Gipple – 602-614-3583    www.stepheno129.sg-host.com.