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.
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.
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.
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.
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.
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.”
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 email@example.com.