October 25, 2018

The World Series of Succession Planning - Team Strategy for Solo Practitioners and Sole Proprietors

October 25, 2018

Bill_Reeb.png The World Series of Succession Planning - Team Strategy for Solo Practitioners and Sole Proprietors
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 Solo Practitioners and Sole Proprietors
Based on the 2016 PCPS Succession Institute Succession Survey

The 2016 Succession 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. 

Solo Practitioners and Sole Proprietors

These firms continue to operate for the most part without practice continuation agreements; less than 10% actually have one in place.  Nearly half of the sole practitioners and sole proprietors are planning on working until they reach 70 years of age or older, with some going out as high as 85 years or older. 

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 that will be 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. 

Considering what acquiring firms actually will pay, with a reduction for client attrition which inevitably occurs, many of these firms may net only 50 cents to 70 cents for each dollar of revenue—if they are fortunate enough to have a viable business with good clients and competent staff to transition to the new owner.  This is a big “if” inasmuch as 46% of these practitioners say they are happy doing what they’re doing and not much interested in making any changes to improve profits, value or attractiveness to a buyer.

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. 

Call to Action

If a firm is trying to develop its succession plan, this survey is absolutely the right place to start (available in full from PCPS in their Succession Resource Center).  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 and make it more attractive for both an external or internal purchase or merger.  So, take control of your destiny by starting to build your succession plan today!

The Ignite blog is an official publication of the Kansas Society of CPAs.
Copyright 2018