Managing Director Transition Advisors
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A Blueprint for Succession Failure

Aug 25th 2016
Managing Director Transition Advisors
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When it comes to facing succession and ownership transition within CPA firms, experience has taught me there are two types of practitioners – those who are proactive with regard to securing their next generation of leaders and those who continue to procrastinate despite repeated efforts to convince them otherwise.

Case in point ...

The other day I was visiting a long-time client, who, as he approaches 70, continues to put in ridiculous hours when at that period in his life he should be more concerned about lowering his golf handicap like many of his peers. Instead, he comes into the office on most weekends even during the 1040 off-season.

His daughter also works at the firm, but the owner told me in all honesty that she lacks the requisite leadership and business development skills to pilot the firm into the future, as do several of his long-time senior managers. So, in essence, his “bench” was empty, effectively ruling out any possibility of an internal succession plan.

I then addressed the elephant in the room by recommending the “M” strategy: “Merger.” By his reaction you would have thought I asked him to sign over his capital account to me even though there are several merger structures that would have enabled him to maintain reasonable control, autonomy, and income while providing him a succession plan.

Without disclosing the colorful language that ensued, which would unquestionably have earned an NC-17 rating if it were a movie, it’s fair to say that he was less than enthusiastic about the idea. “Just find me a young guy or gal (sic) and that will solve any succession problem we may or may not have,” were his marching orders. It was a sure-fire strategy with one glaring exception.

Some 45,000 or so firms across the country are searching for the same exact thing – what we like to call “The Holy Grail” – a young “high potential” CPA with the requisite skill set to assume the leadership reins of a succession-starved practice. Unfortunately, many firms with far-greater resources than were at my client’s disposal had hired nationally known recruiters to help them find just such a person. And, in many cases, without success.

One firm I know that was so frustrated at the lack of results in its quest to find that elusive candidate even went as far as to begin litigation against one headhunter in an effort to recoup their fee.

The undisputed truth is that there is too large a void in the talent pipeline to replace the 77 million soon-to-be retiring baby boomers to ensure a successful succession for many CPA practices across the country. In fact, more than 70 percent of firms with 15 people or less do not have any type of succession plan in place – formal or otherwise. And 67 percent of firms in a recent poll expect at least one partner to retire within five years.

Want more good news?

By 2020, more than 70 percent of the American Institute of CPAs’ 400,000-plus membership (both in public and private practice) will be eligible to retire, and more than 60 percent of current equity owners in firms are over the age of 50. Also keep in mind that one person in this country turns 65 every eight seconds.

Compounding those depressing statistics on the state of dwindling human capital available to the accounting profession is the fact that firm valuations have been steadily dropping over the past several years.

In short, the days of the once-aggressive CPA firm consolidators paying multiples ranging from 1.5 to as much as 2 times have long gone the way of America Online, Vanilla Ice, and New Coke. Only in major markets, such as New York, Chicago, or Los Angeles, are multiples in the neighborhood of 1X to 1.25X for small profitable firms even a remote possibility.

So, if you’re holding off on planning your succession until you get the valuation you think you “deserve,” which is frequently a synonym for “unrealistic,” my advice is to get a good book and relax because it’s going to be a very long wait.

But, back to our client …

He remained defiant to the idea of merging with a larger firm and said he had to get back to work. Of course he did. I’m somewhat skeptical that our conversation will pick up again in the near future.

Sadly, his firm like others that treat succession like an unknown medical condition – if they choose to ignore it hopefully it will go away – will ultimately create both client and real-estate opportunities in the future for competitors that have been far more proactive with regard to succession planning.

Editor’s Note: So what’s your succession plan? Do you even have one? Feel free to share.

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By venkat339
Nov 4th 2016 21:04

The real story behind such procrastinators is the ultimate fear of losing control of the process and possibility of loss of capital and equity values. Now that the trends are more visible, I believe much more educational approach to the effects of M & A could be the ideal methods of pursuing the slow but consistent channeling of "value-oriented " consolidations in selected metro zones and realistic multiples.

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