Knowing When to Fold

When it’s time for aging CPA firm owners and partners to cash in or step down, recognizing and managing emotional stress is key to leaving with the upper hand. By Clare Fitzgerald | Fall 2017



You’ve spent a lifetime making business decisions based on numbers—putting invaluable time, money, and effort into growing your firm into a practice you’re proud of. This has been your livelihood. But you’re getting older, family and health is becoming more important, and the pace of change in the industry is getting to be a bit too much. But, you just don’t know how to leave or how to let go, and the stress and confusion is gnawing away at you. Well, you’re not alone.

Despite spending much of their lives making practical and strategic business decisions, it’s common for owners and partners of small and mid-size CPA firms to succumb to emotional stress and decision making when they start thinking about how to exit the businesses and careers they’ve spent their lives building. Emotions run high, and the stakes run higher.

“There’s a common misperception that succession planning means giving up autonomy, independence, and money. But that isn’t necessarily true,” says Lon Goforth, vice president of Prosperitas Advisors LLC, a consulting firm that provides merger, acquisition, transition, and succession services. There’s no shortage of horror stories and myths associated with succession planning, Goforth says, but when thoughtfully developed and implemented, succession plans can provide financial rewards and maintain the legacy that owners and partners worked so hard to create.

But an effective plan requires early awareness and management of fear, uncertainty, anxiety, sadness, and other emotional and financial burdens that commonly arise when professionals contemplate retirement and the prospects of merging, selling, or handing off the reins of their firms.

Here are some of the pitfalls to think about.

LATE BETS

Starting the process early is the biggest key to a successful transition. Unfortunately, many “owners and partners of firms wait way too long before they even start thinking about an exit strategy,” says Dominic Cingoranelli, executive vice president of Consulting Services for Succession Institute. “They let decades go by without thinking about it, and then suddenly they feel a sense of urgency and anxiety to get something done, and their emotions and expectations are all over the place.”

In the 2016 PCPS/Succession Institute Succession Survey of CPA firms, Succession Institute found fewer than 10 percent of solo and sole practitioner respondents had practice continuation agreements in place. In other words, the vast majority of such firms don’t make succession planning a priority. They have no backup should something happen to them before they’re ready to sell their practice.

“There’s not as much thought put into retirement now,” cautions Peter Fontaine, founder and managing partner of Chicago-based NewGate Law, a provider of legal and risk management services to accounting firms. “People say they love what they do, and they think they’re going to work forever. But the reality is that they’re going to get older,” he says, noting that those who fail to plan ahead often suffer the consequences.

“Even if you’re just starting up, you have to be thinking about who you’re going to bring in to run the firm when you’re ready to leave,” Fontaine continues. “Owners and partners who come to us at age 65 won’t have the best options available. They won’t achieve the transition of clients they would’ve wanted or the most favorable transaction terms. So many people rely on a buy-out as a retirement plan, but you have to put plans in place early for that to happen. If you want to retire at 65, start modeling your plan at 55. Give yourself a 10-year runway to get things in place.”

For many, a 10-year deferment isn’t an option at this point, but whatever the case, Goforth encourages the transitioning of responsibilities and client relationships over time to allow for the emotional realities to set in, pointing to the fact that those who quickly sell and walk away are those who are most susceptible to what he refers to as postpartum feelings.

RAISING STAKES

“With so many baby boomers retiring in the next few years, there are going to be a lot of firms in play,” Cingoranelli stresses, noting that acquirers can afford to be picky. Succession Institute’s survey found that 40 percent of single-owner firm respondents are planning on retiring in the next five years. Among multi-owner firms, one-in-six with less than eight full-time personnel will be considering merging upstream.

In other words, the firms that spend time refining their succession plans and practices—improving the client base, upgrading technology, and streamlining workflows and processes—will be more attractive in a market that could begin softening for sellers.

Cingoranelli also advises owners and partners to invest in their people: “A lot of clients come to us saying they need to get out because they’re working more and enjoying it less. That’s a common sign that they haven’t developed the people below them.”

But developing junior staff requires commitment, too. It’s not easy to relate to or develop the people in those roles when it has been 20, 30, or 40 years since you were in that same position—it requires major behavioral changes to be a coach or mentor, in addition to energy, time, and resources.

Most firms also don’t establish a solid path to partnership, according to Goforth. “People don’t realize that it takes one-and-a-half to two full-time equivalents to replace a partner. And it can take 18 to 24 months before people even begin to understand the requirements of a partner,” he explains. “If two partners are leaving within a few years of each other, it puts a tremendous amount of pressure on other staff.”

Because many small firms don’t properly groom their staff, they often miss opportunities for internal succession. “We talk with clients who initially think they don’t have anyone up to the task of replacing a partner, but often we can find someone who would be if he or she could just get some training,” Cingoranelli says. “That shortsightedness is a shame, because the idea that you’re going to be able to hire in experienced people to make the practice better is a myth. That’s why the smart money is to put your energy into developing your own people. Building up a cadre of strong people gives you options and creates added value.”

CHECKING REALITY

Exploring every option and creating added value is especially important for those looking to cash in their chips—so is a healthy sense of reality.

According to Cingoranelli, many CPAs expect to sell at a higher price and for more favorable terms than what the market is offering. And firm owners and partners often overestimate the amount of money available for an internal buy-out, Goforth adds. “A lot of times when we put pencil to paper, the numbers don’t work out the way they thought they would. There isn’t always plenty of money,” he says. This in itself can create further stressors.

“When people give themselves too rich a retirement, the staff left behind can’t afford the package that was set up, especially if multiple partners retire around the same time,” Fontaine explains. “That’s when we see young people leave and take clients with them. Bad succession planning can create a really unworkable structure.”

Whether working through a potential internal or external deal, owners and partners should carefully and strategically consider all of the opportunities and downsides. “The financials are important, but you have to make decisions based on more than that,” Goforth says, adding that transactions fail because people didn’t ask enough questions or take the time to thoroughly review all aspects of the deal.

“Most firms don’t have any clue how much work goes into a successful deal. Too often, the parties involved have lunch, go over numbers, shake hands, and then go back to business as usual. Or they make a decision based on whom they like. Those are recipes for failure,” Goforth cautions. “You have to take the time to talk about staff, timing, responsibilities, and the emotions involved for the successor and the retiree. Numbers don’t do deals, people do. Successful deals are built on the ability of people to have a like vision, even if they’re going in different directions.”

LETTING GO

When negotiating terms of a deal agreement, owners also need to think about their own transition. Finding ways to stay engaged can help ease the emotional burden of retirement. But at some point, partners have to come to terms with knowing that their top-dog role won’t last forever.

“People like the status quo, and panic sets in when they need to give up control. Some people literally can’t let go, and in many cases they come up with excuses to avoid doing a deal. Then when they die or are sidelined by a health issue, their inability to have made decisions creates confusion and extra work for staff or spouses,” Goforth explains. “People don’t understand how much stress and work it causes for others when they don’t have plans in place. You have to think about what’s best for your clients and your staff.”

Cingoranelli also notes that paying a partner retirement benefits while he or she continues to manage client relationships is not a good practice. “Until they’ve transitioned the relationships, your firm can’t really count on the clients staying after the retired partner has been paid and actually leaves.”

To ease the transition following a deal, Goforth often advises clients to consider inclusions for continuing to work for a determined amount of time. “A lot of people worry about being out of a job and not being valuable. By staying around for two to three years, then reducing your time, clients can continue to see you but also get to know the people who will be succeeding you. Most partners aren’t going to get pushed out as soon as the ink on the deal is dry.”

All things considered, planning your exit well in advance is the best way to ensure a smooth transition that leaves you at peace when the time comes to fold, move aside, or make room for those who will follow and carry on your legacy. “There’s not going to be a cure for aging,” Fontaine concludes. “You need to think about what your firm is today and what you want it to be in the future.”