Deal Structure Provides a Path to Retirement for CPAs Who Fear a Loss of Control or Income

The 2012 PCPS Succession Survey, a joint project of the AICPA Private Companies Practice Section (PCPS) and Succession Institute LLC, found nearly 80% of CPA firm owners expect succession to become a major issue for their firms in the next 10 years (see "Succession Planning: The Challenge of What's Next," JofA, Jan. 2013, page 44). The same study revealed, however, that more than hall of all accounting firms--and more than two-thirds of those with 15 or fewer professionals--do not have a signed succession agreement in place. The percentage of firms with signed succession plans is on the rise, but it is behind where it should be with large numbers of Baby Boomer CPAs eyeing retirement over the next several years. The trend is not surprising. In more than 20 years of consulting with thousands of accounting firms, the authors have found that CPAs often put off planning for retirement and succession. Two main reasons for this are: * Loss of income. Transitioning a firm or book of business means selling in the minds of many practitioners. Selling means at least partial loss of current income. A practitioner who is three years away from slowing down often can't justify giving up current income to accomplish what feels like a long-term goal.  Loss of control. Most owners and partners believe they are the master of their domain. The idea of losing some control is so distasteful they prefer to ignore their succession concerns rather than affiliating with a successor firm and experiencing any change. To overcome these concerns, practitioners need an option that allows them to commence the transition of relationships with clients and staff the basis for the value of an accounting firm--in a manner that enhances the retention of those relationships without giving up control and income before they are ready. This is where a two-stage deal comes into play. A two-stage deal is designed for practitioners who are six years or less from reducing their time commitment to the practice. In essence, the two-stage deal involves affiliating now with a successor firm, starting the transition while the practitioner is still in control of his or her practice, and postponing the adjustment in income until he or she slows down. At that point, the retiring/selling partner would start receiving payments for the sale of the practice. The first stage of a two-stage deal lasts a maximum of six years and is particularly important for practices with partner loyal clients. It usually takes two to five years to properly transition partner-loyal clients from the departing CPA to the successor, whereas brand-loyal clients typically take less time to transition. Example. A sole proprietor was generating $500,000 in annual revenues with one full-time senior professional, a fulltime paraprofessional, and a clerical person while netting 40%, including perks and benefits. This owner wanted to work three more years full time and several more years in a part-time role thereafter. The buyer was a three-partner firm generating $2.2 million a year working with similar clients, under a similar culture and fee range. Stage One was set up to be a maximum of three years. At its inception, the two practices were combined. Stage One could end sooner at the discretion of the selling, or transitioning, owner. The successor firm provided the practice with the same amount of labor required in the past through a combination of retaining and replacing staff, as both were deemed necessary by the parties. The successor firm took over most of the administration, and the deal was held out to the public as a merger. The transitioning owner was able to come and go reasonably as he saw fit, run his practice through the successor firm's infrastructure, and retain significant autonomy and control. Because he historically generated a 40% margin, the successor firm agreed to assume all the operating costs of the practice and pay 40% of gross collections from the transitioning owner's original clients as compensation. …

Field of study: Business