October 25, 2018

The World Series of Succession Planning - Team Strategy for Multi-Owner Firms

October 25, 2018

Bill_Reeb.png The World Series of Succession Planning - Team Strategy for Multi-Owner Firms 
William (Bill) Reeb, CPA, CITP, CGMA
Chief Executive Officer, Succession Institute, LLC

Batter up – the World Series is in full-swing! Now is also a good time to knock your succession planning out of the park with these helpful stats and tips from Bill Reeb, CPA, CITP, CGMA, Chief Executive Officer of the Succession Institute, LLC and one of the most influential visionary leaders in the succession planning game. 

In this ‘World Series of Succession Planning’ feature, we’re showcasing a ‘doubleheader’ style blog – one for Solo Practitioners and Sole Proprietors and one for Multi-Owner Firms based upon the findings of the 2016 PCPS Succession Institute Succession Survey. 

Spark the future-ready sustainability of your organization and register now to hear Bill Reeb deliver a Professional Issues Update (available in-person or videocast) on November 14 at Member Value Day in Wichita (2 FREE hours CPE)!

Team Strategy for Multi-Owner Firms
Based on the 2016 PCPS Succession Institute Succession Survey

The 2016 survey generated some interesting comparisons with past survey results.  It also provided some additional information to enhance one’s understanding of the status of succession planning at this time within the CPA profession.

Multi-Owner Firms

With results comparable to the last survey, less than half of all firms have succession plans in place, although over 80% of the firms expect succession planning challenges in the next five years.  At larger firms, 61% or more of firms with 26 or more FTEs have succession plans in place, with firms above 101 FTEs at 76% and firms above 201 FTEs at 100%.  In a positive trend, the recognized need for succession plans has moved downstream from firms with 51 or more FTEs to those with 16 FTEs and greater. 

It is easy to see why so many firms might expect succession planning challenges over the next five years.  Over 70% of them will have one or more partners leaving within that timeframe, and half of that total will have two or partners retiring.  Over half the firms indicated that they will have 25% or more of their equity in transition, and nearly 30% will have 50% or more of equity in transition.  Without adequate planning and infrastructure in place, this can be a game changer and not in a positive way.  This is because many firms will not be positioned to allow new leadership to seamlessly take over, which could easily result in split-ups, sliding backwards from the One-Firm to an Eat What You Kill model, loss of accountability, forced merger, etc. 

Infrastructure includes such basics as a written partner agreement, but less than 40% of firms smaller than eight FTEs have one, and less than half of firms in the eight to less than 16 FTE size range do, with firms of 101 FTEs or more all having them in place.  However, among many of the firms that do have such agreements in place, too many critical issues (such as partner roles, damages for taking clients and staff, partner termination, etc.) are not being addressed in the agreements.  Mandatory date of sale is a key issue in succession management, but even in some of the larger firms, there have been difficulties in getting retirement age partners to retire. That being said, more and more firms are beginning to address these and other types of issues.  This is a very positive trend even though the succession plan statistics remain fairly consistent with past surveys.  These infrastructure issues must be addressed in order to develop an integrated and equitable succession plan. 

Similarly, developing the next tier of leaders is incredibly important, especially considering the number of senior partners who will be retiring soon and the amount of ownership that will be in transition as a result.  Generally, the larger the firm, the more likely it is using a variety of tactics to develop its people.  However, even some of the largest firms indicated that they are “doing nothing to develop leaders at this time.”  

One thing that we find throughout North America is firms trying to do more and more with less and less, especially in the area of staffing.  This year, our survey produced data that allow us to quantify just how much further understaffed firms will likely be over the next three years.  Based on past hiring and turnover experience for each firm, revenue per FTE and firm growth expectations, it appears that firms, across the board, will be short-staffed on average by about 12% under very conservative estimates.  This shortage will be in addition to any existing staffing shortages that exist today (not to mention even greater shortages that should exist if firms would better and more timely deal with their poor performing people).

Mandates for All Firms

It should be clear that firms are going to have to move faster and more effectively in staffing, training and culture changes to support staff development.  Necessary changes will include adding or enhancing accountability, instituting or improving performance pay, and rethinking performance metrics under any new pay structure. 

For those firms whose owners embrace change as an acceptable path to the future and are on board with preparing for succession and handing off the firm in a sustainable fashion, the future is very bright.  They can map out a route that will accommodate the landslide of ownership change that is just around the corner. 

But, if a firm becomes stuck in a rut characterized by “this is the way we’ve always done it,” owners and managers most likely will spend more and more time working for about the same or less money, with ongoing problems in leveraging themselves, delegating and finding someone to step up when they leave. 

Firms that have begun, or begin now, to prepare, regardless of firm size, have significant opportunities ahead of them.  A lot of it comes down to doing the basic things right, replicating them and building on them.  Through this emphasis on “blocking and tackling,” these firms will be able to create a viable structure staffed by professionals who have been consciously developed by those above them, and ready to step up when those above them step out of the business.

Merger News regarding Solo Practitioners and Sole Proprietors

For multi-owner firms interested in the expectations and perceptions of solo practitioners and sole proprietors pertaining to the merger or purchase of their firms, we have added this summary we pulled from their survey report (If you want more details on the survey results for Solo Practitioners and Sole Proprietors, request the survey report from PCPS that specifically addresses that group). 

Nearly half indicate that their first choice of exit strategy is to merge into another firm.  As well, a total of 40% plan on retiring in the next five years.  Considering that our profession has roughly 44,000 firms, with only 585 having 21 professionals or more, we believe that the merger market for small firms is about to heat up, and the marketplace is likely to get very soft towards the end of that five-year period because of the glut of firms in play.  

We found a wide-gap between what solo owners expect to receive for their practices as well as the terms of the deal compared to what the market is currently doing.  For example, 16% of solo owners are expecting a lump sum payment at the time of sale, but only 5% of buyers actually are doing that.  46% of solo owners are expecting a selling price set at time of sale and paid out over time, while only 20% of buyers made that offer.  And only 35% of solo owners expect to be paid based on client retention while 68% of the acquisitions occurred in that manner.  This gap will widen as more firms sell when the baby boomers start to retire en masse.

Call to Action

Overall, the survey showed that while firms are not making much progress in creating succession plans, they are making progress addressing succession planning issues, including infrastructure, governance, accountability, etc.  As you will notice if you download the entire survey (available in full from PCPS in their Succession Resource Center), over and over we point out positive trends as firms have taken action regarding critical succession planning tactics.  So, we feel our profession, when you look closely at the succession survey details, has moved in the right direction since our last survey.  As well, if a firm is trying to develop its succession plan, this survey is absolutely the right place to start.  Based on the questions and narrative shared, every firm can easily identify the steps they should be discussing and considering in order to put together a quality succession plan and implementation approach.  And by doing so, those firms should not only reap higher rewards due to greater profitability and improved operational processes in the short-term, but simultaneously increase the value of their firm due to greater sustainability.  So, take control of your destiny by starting to build your succession plan today! 


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Copyright 2018