insight magazine

Partner Perspectives

7 Reasons Your CPA Firm May Not See a Second Generation

Here are the common problem areas preventing CPA firms from succeeding with their succession plans.
Marc Rosenberg, CPA President, The Rosenberg Associates


Why is it such a challenge for CPA firms to succeed and survive beyond the first generation? The short answer is that CPA firms suck at succession planning.

Let me explain. Most CPA firms’ operations are geared toward maximizing short-term profits; they focus on today at the expense of tomorrow. I see evidence of this regularly as a practice management consultant.

Consider the 60-year-old sole practitioner who wants to sell her firm and work eight more years. Her firm books annual revenue of $1 million and she takes home $600,000. She meets with several buyers, all of whom are interested in her practice, but none are willing to continue her $600,000 salary. The profitability of her practice simply can’t be sustained in the buyers’ operating model. Why? Because she doesn’t invest in the future of her firm. She hires low-level people, provides little training, maintains a below-grade office, doesn’t keep her technology current, does no marketing, and she takes short-cuts on quality control. While this sounds so wrong in so many ways, it’s what many small CPA firm owners do. But these cut corners enable the pocketing of a hefty salary today — at the expense of tomorrow.

Tim Christen, a former manager partner at Baker Tilly and former chairman of the AICPA, says it well: “The most important thing you can do for your own success is make the people below you successful.”

Unfortunately, I see a lot of CPA firms doing things that thwart succession planning. Here are seven common problem areas that prevent CPA firms from succeeding to the next generation.

AFFLUENCE

This is a good place to start, because money explains a lot of things in life. Partners in local, multi-partner Chicago firms earn, on average, $460,000 annually. That’s higher than what 99 percent of all people in the country earn. Proper succession planning requires partners to (a) shift a substantial amount of their time away from client work to mentor up-and-coming staff, thus helping them grow and (b) invest a substantial amount of money to ensure the firm’s future.

Many partners simply aren’t willing to make these investments. They reason: “I work hard, enjoy my work, and my clients love me. Our firm may not be perfect, but we’re doing a lot of things right.” And who can blame them when they earn what they do. Affluence, however, is a corrupting influence on succession planning.

MERGERS

We all know about the frenzied pace of CPA firm mergers in the past 5-10 years. Countless numbers of firms have rested easy when it came to an exit strategy, reasoning that if they failed at succession planning, they could always execute a reliable fallback plan: sell to a larger firm.

Well, things have changed dramatically in the past two years. A huge volume of sellers has flooded the market, enabling buyers to cherry-pick the best and the brightest firms. More firms than ever are being turned away by buyers. Exuberant confidence in being able to sell your firm as an exit strategy is misguided.

MENTORING

There are several key components to a properly conceived succession plan, but clearly the chief component is staff development: mentoring, training, and leadership development. Mentoring works — if you do it right. Unfortunately, many firms skimp on their mentoring efforts.

First, partners need to have the skills to be an effective mentor. Contrary to popular thought, many people are not natural-born mentors. The better firms have “train the mentor” programs.

Second, devoting the proper amount of time to mentoring is critical. Partners are extremely busy with their clients. If they’re going to devote time to mentoring, it will have to come at the expense of something else, like billable hours and admin time.

Third, the partners “gotta wanna” be mentors. Everything in life is attitude, isn’t it? If someone hates mentoring but they do it because it’s politically incorrect to abstain, this awful attitude will affect the job they do as a mentor.

Last, there needs to be accountability for effective mentoring.

COMPENSATION

I love it when you ask a firm how important staff is. The politically correct response is: “Our staff is just as important as our clients.” But they don’t walk the talk. If staff is just as important as clients, we should expect to see a meaningful amount of weight assigned to staff mentoring compared to production metrics in partner compensation systems. But we don’t. In fact, if the partner compensation systems of CPA firms under $15 million were audited, one would find little weight given to staff mentoring at many firms.

RETIREMENT

If you want to successfully preserve your firm for future generations, you need to understand that there’s only one reason why your brighter, more ambitious staff stay — to take over your firm, its clients, and your $400,000-plus salary!

Firms with stagnant growth and partners who never retire (and refuse to delegate work to staff) will virtually guarantee the eventual exodus of their top talent. That’s why mandatory retirement plays a crucial role in succession planning. In the words of AICPA Chairman Barry Melancon, mandatory retirement “allows for the predictable progression of lesser tenured, and often more diverse individuals into the firm, thus facilitating the orderly transition of clients from senior partners to those who will succeed them.”

BUYOUTS

A win-win partner buyout/retirement plan is essential. Firms need to make sure their buyout plans do the following:

• Bring in new partners on a regular basis (this means you need regular revenue growth) to avoid clusters of partners retiring at the same time.

• Preserve the firm’s cash flow. Don’t cripple your firm with onerous buyout obligations. If your plan is structured correctly, when a partner retires, the remaining partners should earn more money because the buyout payments are more than offset by no longer having to compensate the retiring partner.

• Compensate retiring partners for their contributions to the firm. Buyout payments should be based on the growth and profits generated by the retiring partner. Don’t allow buyout payments to become unearned entitlements unrelated to the firm’s value.

NEW PARTNER BUY-INS

Most firms have gotten away from the unfathomably steep $400,000-$1 million buy-ins for new partners (computed by multiplying ownership percentage times the firm’s value). Buy-ins for new partners need to be affordable to avoid scaring away up-and- coming potential partners. Consider more reasonable statutory amounts in the $75,000-$150,000 range.

We’ve seen the enemy, and the enemy is us. Partners, if you are disappointed by the succession planning prospects at your firm, you need only look into a mirror. You can’t develop future leaders by willing it or talking about it. You need to start walking the talk about staff being just as important as clients. Pursue the mentoring and development of your staff with the same passion and survival instinct that you have for providing great client service and bringing in business. Do that and maybe you’ll be one of the few that survives to a new generation of leadership.
Perennially cited by Inside Public Accounting as one of the 10 most recommended consultants in the country, Marc Rosenberg, CPA is a nationally renowned consultant, author, and speaker on CPA firm management, strategy, and partner issues. His 14 practice management books are available at https://rosenbergassoc.com/shop/, and Marc can be reached at 847.251.7100 or marc@rosenbergassoc.com.