Priming the Partner Pipeline

CPA firms should employ these best practices when trying to pump young blood into their partnership ranks.

The dual-headed monster of recruiting and retaining quality staff while implementing a succession plan is causing problems across our profession. From the sole practitioner, up to the multi-partner practice, anxiety levels at CPA firms are rising as baby boomer partners retire in droves.

The pain isn’t likely to subside anytime soon either—65 percent of partners are over the age of 50, and 80 percent of CPA firms are first generation firms. And, unfortunately, most partners lack the quality talent to replace them. While most partners will say they prefer the exit strategy of developing new partners internally to replace themselves and buy them out, most firms end up merging out of existence. So much for the legacy they wanted to preserve.

If you want to be a firm that does leave a legacy, that has the flexibility to let senior partners wind down and overcome common succession hurdles, here are eight critically important best practices you should follow to ensure your talent pipeline is full of prospective partners and your firm is positioned for sustainability.

1. Look for “the right stuff”

Potential partners are the staffers that build strong relationships with clients and demonstrate credibility with staff. They’re the effective communicators and committed mentors, aiming to help staff learn and grow. Other partners should feel good calling them “partner,” because they’re trustworthy, show good judgment and reliability, are team players, and are leaders. While not every person needs to be a rainmaker, prospective partners should be comfortable with practice development. Finally, they should possess technical knowledge at a sufficiently high level, allowing current partners to confidently delegate complicated assignments to them.

2. Inspire staff to want to be partners

CPA firm partners have a great gig: It’s challenging work; you’ll have a mutual love affair with clients; you’ll be an entrepreneur in a growing business; there’s unlimited job flexibility; and it pays great—$300,000 to $500,000 per year for many. It’s great to be a CPA firm partner!

Alas, many partners still tell me their young staff don’t want to be partners. The partners naturally conclude that there’s something wrong with young people, that they must lack ambition. But they’re dead wrong. There’s something wrong with the partners!

What’s wrong, in so many cases, is that the partners do a lousy job of talking up how great it is to be a partner to staff. Partners need to not only explain to the staff what it takes to be a partner, but also be proactive in inspiring staff to achieve the requirements. This is mentoring.

3. New partners need not all be equity partners

Twenty-five years ago, only 10 to 20 percent of all “partners” were non-equity partners; today it’s 56 percent. It has become common for firms to promote their tenured, valuable, productive “worker bees” to equity partners—even if they lack practice development and leadership skills—as a retention effort, simply out of fear of losing them. I’d caution against overusing this retention strategy. Make equity partnerships more exclusive, and use the non-equity partner career path more often.

4. Make buy-in affordable

Not long ago, the gold standard for determining a new partner’s buy-in amount was a three-step process: 1) compute the firm’s net assets, making sure to include goodwill (often at one-times revenue); 2) arbitrarily set an ownership percentage to award to the new partner; 3) multiply the ownership percentage by the value of the firm—voila. The new partner was instructed to deliver a suitcase full of cash, totaling several hundred thousand dollars, to the firm.

Those days, for the most part, don’t exist anymore. New, young prospective partners are neither willing nor able to afford huge buy-ins. Instead, firms should set statutory buy-in amounts that are more nominal, usually in the $75,000 to $150,000 range, to both encourage the pursuit of partnership and make it affordable.

5. Make buyouts sensible

The surest way to cause a prospective partner to reject a partnership offer is to have a retirement/buyout plan that is outdated and onerous to new partners. Firms should require proper retirement notices and effective client transition to other firm members as a condition to receive their buyout payments.

In most cases, the main way firms finance retirement buyouts are by no longer having to compensate those retirees. Meaning, if the income to the remaining partners goes unchanged or decreases, the buyout plan was poorly conceived. Buyouts should be structured to benefit the firm and the remaining partners while offering a stable, sensible retirement for the departed partners.

6. Help new partners understand their power

Yes, new owners of a firm are legally entitled to a vote. But they quickly discover that having a vote isn’t a big deal, and they don’t have the inalienable right to participate in every decision.

There are two reasons for this: First, even though the firm may be organized as a partnership, it’s run like a corporation—most decisions are made by the managing partner and his or her team and the executive committee. Second, perhaps influenced by the above, firms rarely take formal votes of the full partner group. Instead, most decisions are made by consensus after a discussion. Having a vote really means having the opportunity to persuade your other partners.

7.Minimize the impact of ownership percentages

Overreliance on ownership percentage results in unfair treatment of partners, especially when it comes to buy-in, compensation, voting, and buyout. Mitigating this should be a priority.

The importance of keeping buy-in amounts standardized and affordable eliminates the need for using ownership percentage to determine the buy-in amount. Savvy firms then allocate partner income based on performance rather than the arbitrary ownership percentage.

Many firms evolve to the point where a large amount of the ownership percentage is held by a small number of “power partners.” This can disenfranchise partners with small ownership percentages and discourage new and prospective partners. So, rather than voting based on ownership, I encourage firms to adopt a one partner, one vote policy.

Much like voting power, determining a partner’s buyout amount based on ownership percentage often results in buyout amounts that are above or below what the partner deserves. Instead, firms should look at how the retiring partner has contributed to the value and profitability of the firm.

8. Position mandatory retirement as a good thing

Seems counter-intuitive, doesn’t it? If partners have this great gig, why would they agree to retire before they really want to? The answer is succession planning.

Firms dominated by partners in their late 60s and 70s will gradually lose their best and up-and-coming talent—who see these old guys clinging to their clients, billable hours, and leadership roles. This deprives young people of personal and professional growth opportunities.

By establishing fair and strategic mandatory retirement policies, firms set the tone that development, opportunity, and innovation are important, respected, and encouraged. It also requires partners to continue to focus on being committed mentors, which is what helped them become partners in the first place.

Incorporating these time-tested steps into your CPA firm’s succession plan will ensure it’s on the path to sustainability, pumping young blood into the partner pipeline, and preserving a legacy instead of selling out.

---

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 here, and Marc can be reached at 847.251.7100 or [email protected].