Exit Strategies for Firm Owners: What’s the Right One for Me?

Jan 12th 2017
Managing Director Transition Advisors
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For many owners of small to midsized CPA firms, succession is often treated as the elephant in the room – they know it’s there but do their best to ignore it.

Unfortunately, succession planning, or in many cases, the lack thereof, doesn’t simply fade away – if anything, it increases almost exponentially as practitioners inch closer to retirement age. If it’s not addressed in advance and efficiently, then their options decrease almost as rapidly.

For those who have actually proactively begun the process of passing the ownership torch, the next question that invariably arises is what is the best avenue to take with regard to an exit strategy? The answer depends on a number of factors, including an owner’s time frame for slowing down and whether to look internally or externally for succession.

With the average age of equity owners in firms ranging from $2 million to more than $20 million in billings being just under 54, it’s almost certain that either you or one of your partners will be slowing down or exiting altogether within a five- to 10-year time frame.

So, what’s the best course of action? This article will explore the four most common strategies: a sale, internal succession, merging upstream, and turning out the lights.

1. Selling

A sale of an accounting practice is sometimes unfairly stereotyped as a total loss of control on day one. And that ushers in a very real fear of an immediate loss of clients.

But if the deal is structured properly, and the seller remains involved with the practice to ensure a smooth transition for clients, allowing them to acclimate themselves to the successor firm, that will result in a higher retention rate and subsequently allow the seller to gain the maximum value for their practice.

Sometimes you may encounter a buyer who can estimate the percentage of clients they will retain and offer a fixed price for the practice at closing. But most likely the terms of the deal will hinge on client retention.

2. Internal Succession

To transition the reins of the firm internally, there are two critical requirements: correctly transitioning the owner’s responsibilities and, of course, their clients to the chosen internal successor and a deal structure that makes sense. When a partner or owner retires, you must make sure that the firm can effectively pick up that person’s workload. Thus, you need to have both the capacity to replace the retiring partner and the skill set.

Don’t make the critical mistake of assuming that you can “spread it around” to the remaining owners, as they are often at maximum capacity themselves. Also, make sure you replace the role – not just a body.

If, for example, the retiring owner was the firm’s “rainmaker,” you can’t expect to insert the quality control partner and expect the same results. Ditto if that exiting stakeholder owns specialized credentials or licensing.

From a financial viewpoint, you must make sure the debt obligation to the retiring owner is self-funding and not met as a result of having to reduce the compensation of the remaining owners. Nobody will be willing to do the same work for less money.

3. Merging Upstream

If your succession exit strategy does not lie internally, then you must look elsewhere for a successor. An upstream merger into a larger firm holds a number of advantages for partners exiting within five years or less, including greater resources, a wider platform of services, and more cross-selling opportunities.

A larger firm will also more than likely be able to free the owners from administrative and billing duties, and allow them to focus on new business development and, ideally, add to their compensation. Under the two-stage deal structure, which will be addressed in greater detail in the next article, it allows the seller firm owner to maintain reasonable control of the practice and income level during the length of the transition period.

For multipartner firms, where some owners are seeking near-term succession while others seek long-term financial and professional growth, an upstream merger with the “right” firm allows partners with different sunsets and goals to work out customized deals for each partner.

4. Turning Out the Lights

Practitioners who stubbornly put off succession planning or are unwilling to go the merger route and lose control will work until either their health forces them to quit altogether or their clients eventually leave as a result of attrition and inattention. Needless to say, there are huge downsides to this strategy.

First and foremost is that you are allowing a valuable asset – namely your firm – to wither and die on the vine. Secondly, you are telling your clients that despite their years of loyalty, which allowed you to maintain the lifestyle you wanted, they are no longer relevant and need to search elsewhere for a new firm. They deserve better than that.

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