CPA firms struggling with succession

Some leaders say staff members aren’t ready for important tasks.

By Ken Tysiac
September 1, 2016

As members of the Baby Boomer generation age, CPA firms are struggling to find ways to
replace soon-to-retire partners, a new AICPA Private Companies Practice Section (PCPS)
survey reveals.

The percentage of multiowner firms with succession plans has decreased. Despite the
aging of the CPA profession and the fact that four years have passed since the last
succession survey, firms seem to have made little progress formalizing and implementing
succession plans. Almost half of leaders of multiowner firms said they are developing
initiatives to hand more work to lower-ranked members of their staff, but some said staff
members aren't prepared to handle important tasks. And many solo owners—perhaps
because they don't have plans for what will happen to their firms once they leave—plan to
delay retirement until they are past age 70.

HEAVY LIFTING
Instead of managing and developing new business, partners at CPA firms are performing
too many tasks that should be handled by lower-ranking staff members, according to Bill
Reeb, CPA/CITP, CGMA, the CEO of the Succession Institute, which administered the
succession survey in partnership with the PCPS. (See the sidebar "Strategies for
Succession" for other experts' suggestions for firm leaders to effectively transition into
retirement.)

"If you take a four-person firm and the partner does 80% of the heavy lifting, when they
leave, there is nobody to pass the work off to, and there's nobody that has the technical
capability to do it," Reeb said. "There is no succession plan."

The survey polled about 7,100 CPA firms with 850 respondents, a response rate of about
12%. Respondents at firms of various sizes were asked about a variety of issues, including
firm expansion plans, partner retirement plans, and whether firms have formal succession
plans. On this final point, firms have failed to make progress in recent years. Forty-
fourpercent of multiowner firms in the 2016 survey reported having written and approved
succession plans in place, compared with 46% in 2012. And one-fourth of multiowner firms
currently have succession challenges, with an additional 48% predicting succession
challenges within the next five years.

Meanwhile, mergers and acquisitions activity at CPA firms remains strong, as 49% of
multiowner firm leaders reported having been in active merger discussions over the past 24
months. That compares with 44% in 2012, and Reeb said it may be an indication that firm
leaders have not built the capabilities in their firms to find successors from within. Because
they haven't developed leaders with the skills needed to replace them, some partners find
that their only option for retirement is to sell their practice to another firm.

"We've got firms that are merging so much they have lost the ability to grow on their own
because they've tried to solve it through merger," Reeb said. "And at the end of the day, to
make all the economics work, they want the partners to be working and billing, but that
creates a short-term win and a long-term loss."

PARTNERS' PRIORITIES

Ideally, a partner should bill between 1,000 and 1,200 hours a year, Reeb said, and spend
the rest of his or her time on duties such as recruiting more business and managing the
firm. Whatever the ideal, the survey indicates that partners are spending too much time
doing manager-level or staff-level work. Forty-two percent of multiowner firm leaders say
they are making it a priority for everyone to push down work at every level. And 32% are
changing the way they operate so that the firm is not built around the expectation that
everyone, including partners, should work excessively long hours. A leading reason for
partners' heavy workload is that one-third of multiowner respondents said senior partners at
their firms believe younger members of the firm are not ready to step into their leadership
positions (see the chart "How Future Firm Leaders Are Developed"). Yet Dom Cingoranelli,
CPA, CGMA, Reeb's partner, said: "There are a couple issues behind this mindset. One,
the partners and managers are busy doing chargeable work, so they don't adequately train
anyone. And two, some of their people are more than willing and probably more ready to
step up than they are given credit for."

How future firm leaders are developed

"Partners are spending way too much time doing staff-level work," Reeb said. "And I tell
most firms, regardless of size ... that the average partner acts like a manager. And the
average manager acts like a supervisor. So they're not out in front of their clients, and that's
why we have a lot of firms with flat growth. They're doing too much of the detail work, and
they're not developing the manager level."

At many firms, partners have the opportunity (or feel compelled) to continue doing this work
long past the age when they would be eligible for retirement. Sixty-five percent of
multiowner firms surveyed said they have no mandatory age for sale of ownership or
retirement by partners. Reeb recommends that firms require owners to retire from
ownership positions by age 67, allowing them to continue to work on a year-by-year basis
as long as they remain competent. Many CPAs with single-owner firms also are delaying
retirement (see the sidebar "Single-Owner Firms Also Face Succession Challenges").

Single-owner firms also face succession challenges

Practice continuation agreements remain rare.

While firms with multiple owners are having difficulty developing future leaders, single-
owner firms are having their own problems with succession.

Just 7% of single-owner firms reported having practice continuation agreements with other
practices, a number that has changed little from 2012 (6%) and 2008 (9%). And many solo
owners—perhaps because they don’t have plans for what will happen to their firms once
they leave—plan to delay retirement until they are past age 70.

Almost half (48%) of single-owner firm leaders plan to wait until they are 70 or older before
they fully exit from their firms (see the chart below). Six percent plan to wait until they are 80
or older to retire.
WORKLOAD INCREASING

The workload most firms are facing appears likely to increase in the near future. More
than three-fourths (78%) of multiowner firm leaders said they expect growth overall in net
revenues from fees over the next three years. Those who predicted net revenues would rise
said they anticipated growth by an average of 8% per year over the next three years.

Individual respondents said their succession challenges include:

 Finding qualified help at all levels with a long-term commitment to public accounting.

 Attracting and retaining talent with potential to be a future owner.
 Not having staff available to take on client relationships.

This inability or reluctance to hire, combined with rising revenue and aging partners, is
creating significant challenges for firms, Reeb said. He said younger people at firms are
starting to push back against continued "workload compression" that forces them to work
long hours with no end in sight to the overload. When the younger workers eventually
refuse to accept this lack of work/life balance, the managers and partners are the only ones
left to do the work. And the staff-levelwork gets pushed up the organizational chart to
people who should be managing and developing business, Reeb said.

"They're not hiring enough to even get the work done now," he said. "And then they're
growing. Well, if they're not hiring enough to keep up and they keep growing, then workload
compression will get worse, good staff will leave due to the lack of work/life balance, and
more work will continue to be pushed back up to partners and managers, creating a
dysfunctional, vicious cycle."

Cingoranelli said: "Staff all the way up to manager level at some firms have already left for
greener pastures because the firm continues to tell them it's working on the staffing issue,
but nothing seems to change, the long hours are still there, and partners keep selling more
work."
WHAT FIRMS ARE DOING
Firms do have other options for getting more results out of their people's valuable
time. Two-thirds of multiowner firm leaders said they are leveraging technology whenever
possible, and 65% said they are streamlining workflow and processes. Forty-nine percent
said they are spending more time training their people, and 46% said they are improving
their client base by firing troublesome clients or encouraging existing clients to use more of
the firm's services.

Reeb suggested that firms that are growing their revenue also need to hire more staff as
they are expanding—or even before they expand—to create the capacity to do the work.

"If I don't have anybody to do the work, I can't have a succession formula," he said,
"because there's nobody to do it once the partner leaves."

Strategies for succession

Although succession can be a challenge for CPA firms, many experts have advice on how
to minimize the pain and maximize the effectiveness of firms as leaders make the transition
to retirement. Here are some of the best strategies that several experts have to offer:

Joel Sinkin, president, and Terrence Putney, CPA, the CEO, both of Transition
Advisers LLC

The value of an accounting firm is not innate. It is usually directly related to the firm’s ability
to transition the key duties from an owner to another person, usually a new owner.
Especially in smaller firms, the most important duties of the retiring owner that need to be
addressed are client relationships. Therefore, a key component for many owners’
agreements should be motivating an effective transition of client relationships.

Many owners’ agreements tie retirement payments to postretirement client retention in a

similar fashion to what would be expected in an external deal. Although this approach has
the advantage of protecting the firm from a financial obligation that is not supported by
ongoing revenues, it can have the opposite effect of what was intended. The fear of losing
clients sometimes motivates an owner approaching retirement to hold onto relationships for
as long as possible because “no one can replace me.” A better approach is to require
adequate notice be given for an owner who wants to retire coupled with a clear plan for
transition of client management responsibilities. Usually, it takes at least a two-year notice
to provide enough time for clients to become familiar—and comfortable—with a successor.
If the new relationship doesn’t stick, the firm has time to assign a new successor.

Full story: “How to Price an Owner’s Interest in a CPA Firm,” Dec. 2014

How do firms replace a retiring partner’s role? Sometimes they can allocate the retiring
partner’s duties to other partners in the firm. As an example, a partner in a five-partner firm
is managing a $750,000 general book of business. The remaining partners believe they can
allocate the clients among the existing partner team because they all have the capacity to
take on extra work. The billable hours for the retiring partner will need to be replaced.
However, that can be done across all levels of the firm by hiring two more staff members. A
new partner does not need to be added to the team to replace the retiring partner. This is
called role reallocation.

In contrast, firms may lack the necessary capacity in their partner group and need to bring
on a new partner to take over the responsibilities of a retiring partner. This may be due to a
lack of the necessary capacity at the partner level to assume all the responsibilities left
behind. Or the retiring partner may have special technical skills or firm management
responsibilities that are significant. This is called role succession, which means the firm
needs to create succession for this partner’s role.

Full story: “How to Manage Internal Succession,” Feb. 2014

Jennifer Wilson, Convergence Coaching

Don’t wait until the last minute to tell firm leaders or begin a transition. Even if you
aren’t required to give notice, you should share your retirement plans with the key leaders in
your firm and make concrete plans to begin introducing others to your clients and preparing
for a complete transition, which ideally occurs over at least two cycles of service.

Don’t hang on too long. The idea of giving up a work identity and responsibilities can be
overwhelming, leading to the temptation to stay in a particular position too long. Your firm
needs to learn to thrive without you, and the people around you deserve an opportunity to
step up and take on your clients and other responsibilities.

Don’t communicate that you’re retiring when you’re simply transitioning. If you and
your partners plan to have you continue working at the firm in some capacity, consider
using different language to describe this first step in the retirement process.

Transition completely, even if you’re going to continue working after you officially retire. For
instance, if you have been playing the role of managing partner, plan to transition all
leadership responsibilities before your official completion date, and define a new role where
perhaps you are active in the market, developing business, and/or teaching a portion of
your firm’s leadership curriculum.

Don’t be selfish. The days of your calling the shots are waning, and the people you’ve
entrusted must step up and do what’s best for the firm. Hopefully, your love of what you’ve
built will enable you to step outside of yourself to do what’s right for the greater good.

Full story: “Retirement: Avoid the Pitfalls and Plan for the Possibilities,” March 2016

Harry L. Olson, CPA, president of Accounting Broker Acquisition Group

The most important aspect of any deal from a seller’s perspective should be whether the
buyer has the qualifications, ability, capacity, desire, and incentive to provide quality service
to the seller’s soon-to-be former clients. By making this the primary concern, a seller can
mitigate myriad potential legal and other problems that could occur after a sale to an
otherwise unqualified buyer.

In most CPA practice sales, buyers perform extensive due diligence on the seller and the
practice. A seller must not overlook performing extensive due diligence on the experience
and reputation of a potential buyer.