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Succession Planning Myths vs. Reality

May 8th 2015
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One of the most frequent questions practitioners ask with regard to succession planning is when should they begin? Ideally, succession planning should begin the first day your firm opens for business, but seldom is that ever the case.

The truth is you can never begin succession planning too early, but sadly, many firm owners begin too late or procrastinate to a point where their succession options are whittled down to a merger with very unfavorable terms or shuttering the business for good.

And make no mistake: Succession is approaching crisis proportions within the accounting profession.

The 2012 survey from the American Institute of CPAs' Private Companies Practice Section division found that 61 percent of current firm partners are over the age of 50, and 67 percent of the firms polled expected at least one partner to retire within five years. And more than half of the nearly 1,000 single and multipartner firms indicated that more than one partner would exit within that five-year frame.

But compounding an already dire situation are the misconceptions that many practitioners harbor regarding succession solutions. Unfortunately, we’ve seen many firms rely on what are basically pipe dreams rather than proven succession-planning strategies and suffer the inevitable consequences.

Here are some of the most common myths regarding succession planning, along with the sometimes harsher realities:

Myth No. 1: “We will internally develop or lure away a young CPA with a good book of business and groom them to be our successor.”

Reality: You and 50,000 other CPA firms around the country are searching for the same thing, and that is what we like to call “the Holy Grail” – young talent with or without an existing book of business. If you have a weak internal bench, don’t foolishly think that a young “high potential” employee will miraculously walk through your door ready to one day take the reins. If your succession solution doesn’t lie internally, then you need to look at external solutions, such as a merger.

Myth No. 2: “Three to five years out is too early to start planning for succession.”

Reality: If anything, a three-to-five-year timeline may not be enough. Here’s why. While practitioners may email or telephone their clients several times a week, the majority of accountants only see them in person ONCE a year – usually around tax time. So for example, if an owner or partner wants to transition from working full time in three years, that’s often just three client visits to ensure that critical “hand off” during client transition. You cannot transition people through email and phone calls.

Myth No. 3: “A bigger firm will make a better merger partner.”

Reality: While in some cases that may be true, bigger isn’t always better. There are a number of criteria that have to be taken into consideration with a bigger partner: firm cultures, mandatory retirement ages, equity (for multiowner firms that may have young partners not ready to slow down), and billing rates, as well as perks and benefits. In addition, smaller firm clients are accustomed to and expect more hand-holding than normally practiced by larger firms. Here’s a caveat we always share with our clients regarding the size and scope of potential merger partners, and it goes like this: “Bigger isn’t always better. Better is better.”

Myth No. 4: “Merging is not an option. My loyal clients would never make the transition.”

Reality: It’s true that clients do express fears when they hear their firm is going to merge – particularly those firms that have “partner loyal” clients as opposed to “brand loyal” clients. They worry that the partner they trust will no longer be there or their fees will suddenly surge. But successfully transitioning clients is a matter of proper “packaging.” You never position a merger as the loss of your firm, but rather the gain of the successor firm and the synergies it represents going forward.

You also need to divide up your client base and determine who gets a personal visit, who gets a phone call, and who gets a letter announcing the affiliation. For those getting a visit, it’s critical that the new merger partner accompany you so the client can put a face with a name. For those receiving a letter, it must be mailed out on the seller’s stationary. If a client receives a letter from another accounting firm, chances are they will perceive it as a solicitation. As counterintuitive as this may sound, the greater the loyalty between a client and their accountant, the easier it is to transition them.

Myth No. 5: “If all else fails I can always sell my firm and get 1X for it.”

Reality: Unfortunately, firm valuations have been dropping steadily in past years, turning many areas into buyer’s markets. Unless you are in a major metropolitan area, such as New York or Chicago, many firm valuations in secondary or tertiary cities have dropped significantly under 1X revenues. Don’t hang your succession plans on a wish list of receiving a very high multiple because more often than not you’ll be disappointed.

About the author:
Bill Carlino serves as managing director at Transition Advisors, a national full-service consulting firm specializing in ownership and succession issues, including M&A. 

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