Selling/Succession 4+ Partner Firms FAQ

This is the goal of almost every firm in the country. So understand you have much more competition for younger talent than you have for new clients. Nearly every firm, regardless of size, struggles with this question. And, often when a firm is fortunate enough to land that star talent, they eventually lose them. This scenario does not have to happen in your firm. If you want to pursue that star talent, you will need a strong, progressive culture to generate interest in your firm. The following points are very important to the acquisition and retention of younger, competent talent:

• You can't attract talent with empty offers. Promises that "someday all this will be yours" does not get the job done and is often considered an empty basket. If you find someone that is talented, you must be prepared to provide them specific (and written) guidelines as to how they achieve the following levels: manager, income partner, non-equity partner and finally, full partner. Within your firm, you may not have all these levels or titles but the point is you must provide more than an empty offer. Some may require equity day one, especially if they bring with them a strong client base.
• Quality of life issues are important. Times are different and so is the attitude of today's workforce. Many firms say they are "quality of life" conscious but really are not. When a firm focuses on measuring ability or leadership by hours billed instead of productivity, new business generated - or other key components of practice leadership, it's sending a mixed message. Be consistent, be fair and be clear or you will lose the talent you have. Many firms are having additional success in attracting talent by having flexible hours, opportunities to work remotely and other flexible approaches.
• Reward the Rainmaker. In today's environment the bulk of new client acquisition comes mainly from two sources (1) a client taken from another firm and (2) additional and new services offered for current clients. The fact that these two sources are predominant in the acquisition of new clients makes the rainmaker even more valuable. Good rainmakers are worth their weight in gold. Do not be stingy in rewarding the rainmaker.
• You need staff to do the work. Not every staff member is of leadership quality. But you also need competent and dedicated technicians to do the work. Firms that discount the staff member because he/she does not bring in business are missing this point. If a staff member is talented and has a solid career ahead of them, do your best to acquire or retain this talent as well. Partner-level talent does deserve special recognition but it is important to recognize and reward all those that contribute to the success of the firm. Also many firms need partners in areas where their ability to generate new clients is less important (such as the quality control partner) yet their roles are no less important to the success of the firm than that of the rainmaker.

Many firms face the dilemma of how to reward staff who have been productive, loyal and dedicated, yet may not be the rainmaker. If you do not have competent and motivated technicians, client attrition will always be a concern. We are not necessarily suggesting you reward your solid technicians with the same opportunity as a rainmaker. That needs to be determined on an individual basis. A successful and highly profitable firm needs to acquire and retain talent at all levels. Financial reward is often a component of a reward plan but so should be other offers such as participation in the firm at an "income partner" or "non-equity partner" level.

• There is a difference between ownership and leadership. This is a problem with many CPA firms as the owner(s) have not authored and/or executed a strategic mentoring or training program to elevate the competency level of their staff to be future leaders. Many of the most successful firms in developing partners from within have training and mentoring programs to accomplish this goal; they invest in people. Many firms do not have a progressive recruiting program. Many firms do not possess a template defining levels of achievement for younger staff or for those possessing management aspirations. Consequently, the younger talent is left guessing or does not genuinely understand what is expected to achieve certain levels within a firm. Staff left guessing will most often guess that there is not an opportunity at your firm and will take steps to find one elsewhere.
• Recruiting should be an ongoing activity. Even the smallest firm needs to be actively recruiting. You may not have the financial or other resources to compete with the top firms in your area, but recruiting can take many forms and does not necessarily translate into making major financial offers to potential hires. There are alternatives such as recruiting for internships or offering to speak to accounting classes or groups at your local college or university. Your future and your value will depend, in large part, on your ability to attract both new clients and talented and loyal staff.
• Baby-Boomer crisis looms large. This is not a secret. Our profession, like America itself, is aging rapidly. Without taking the steps suggested above, your practice - regardless of the number of partners you have - will become what is commonly referred to as a "wasting asset". That is not a good thing. You and your partners have worked too hard, too long and made too many sacrifices to watch your value slip away. The acquisition of talented professional staff is one of the key considerations of firms considering a merger. (For more on mergers see the merger information in this section.)

For more information:

• How to Manage Internal Succession by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2014
• Planning and Paying for Partner Retirement by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2012

Much of it has to do with the disclosure in the section about acquiring and retaining younger talent but it does go deeper than that. Let's take a look at events in the late 1990s which set a foundation for the current merger mania:

• A 1998 AICPA conference was one of the first to focus on the plans of competing consolidators. It sold out, and was standing room only, and the AICPA had to rerun the event to accommodate the overflow from the conference.
• "Bigger is better" was the mantra driving the voracious M&A appetite.
• Consolidators such as CBIZ, HRB Business Services, American Express Tax & Business Services and Centerprise Advisors (now known as UHY) made bold claims and began a plan of executing very aggressive acquisition plans.
• Technology has made it easier to operate satellite offices
• Perhaps the largest factor: the aging of the Baby-Boomers

According to a 2016 AICPA survey:

• 35 percent of the CPA firm owners will retire by 2020
• In the next five years, 57.5% of the firms said they would have 25% or more of their ownership in transition and 27.8% will have 50% or more of their ownership in transition.
• In other words, a quarter of all multi-owner firms will have a controlling interest in the firm changing hands during this time period.

The major reasons merger mania is alive and well now and for the foreseeable future is that merging firms, at a minimum, expect to:

• Establish internal and external plans for their short term and long-term succession
• Establish competitive advantage
• Eliminate competitive disadvantage
• Affiliate for purposes of niche development and/or enhance current niche services or industry focus
• Solve a potential problem such as future succession issues or industry penetration
• Expand their geographic footprint for better client acquisition opportunity
• Cross-sell services
• Expand current services portfolios
• Stabilize revenue streams
• Leverage or use current excess capacity
• Build better bench strength

For more information:

• Mergers Emerge as Dominant Trend by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013

First and foremost, if another firm gains a competitive advantage, it often puts you at a competitive disadvantage. An example of this would be in the case of firms located in major metropolitan areas such as Chicago, Philadelphia, Los Angeles, etc. that have historically billed out for services at a higher rate, are now acquiring or merging with firms outside these metropolitan areas and pushing out work to those other locations that can complete it at lower rates. If the client is billed at the historical rate and services are now performed at a lower cost, the reduction in service cost (additional profit for your competitor) becomes a tool to accomplish many things including, but not limited to:

• Competing with you at comparable rates
• Reducing the amount of work you can go after or compete for
• Having the financial wherewithal to acquire currently available talent
• Expanding its geographic reach, potentially infringing on an area or industry that you may serve
• Negatively impacting your bottom line directly or indirectly
• Making it less likely you can compete for a piece of the business on certain clients

Should you hit the panic button? No, but you should begin a process of strategic planning and practice analysis. It does not take much thought to realize the potential ripple effect on the smaller firms in the coming years and values of practices continuing to drop. For more information:

• Mergers Emerge as Dominant Trend by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013
• A Two-Stage Solution to Succession Procrastination by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013
• Alternative Deal Structures for Succession by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2014
• CPA Firm Mergers: Is It a Buyers' or Sellers' Marketplace? by Joel Sinkin, AccountingToday.com, c2012

The short answer is that your firm should consider anything that strengthens and provides advantages not currently available in your firm. A merger may or may not be a solution but the potential benefits of a merger should be analyzed, and it needs to be done with an approach of an independent third-party mindset. In this increasingly competitive market, it is very important that all potential solutions be investigated with no predetermined bias. If the purpose of a merger is clearly defined, the responsibilities and expectations are definitively detailed and the advantages are properly communicated to both staff and clients, a merger is a potentially powerful solution. A merger can provide the single largest client acquisition program possible. Think about the difficulty and time spent acquiring clients one at a time. Is that productive use of staff, time or resources? A merger can produce hundreds of potential clients immediately, especially if one of the purposes for merging is cross-selling opportunities. There is no question a merger can also minimize the effects of a firm's Achilles' heel such as succession concerns, the near-term need for large expenditures for technology, replacing retiring or incompetent staff, or the need to outsource client work because current capacity (or ability) is not available. A merger can help you penetrate additional markets, niches and obtain more access to talent to increase your bench strength. Visit the Merger section for information about all aspects of merging including identifying a merger candidate, due diligence, partner agreements, staff transition strategies, integration considerations and other key success components. More information on mergers:

• Mergers & Acquisitions of CPA Firms: Understanding the Roadblocks To Successful Deals (Part 1) by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2009
• Mergers Emerge as Dominant Trend by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013

The single most important step to protecting value is to understand how value is determined. Protection of value is achieved through a variety of methods. Before we disclose those methods lets identify current external factors putting pressure on practice value:

• Aging of our profession. The aging of our professions is producing ever-increasing numbers of firms seeking succession and/or merger opportunities. Over the next several years these numbers will continue to increase and produce downward pressure on practice values.

With a properly designed and executed succession plan, the potentially negative impact of our profession's aging can be minimized or eliminated. It is possible to lock-in practice value, maintain control of your income, keep client relationship responsibility and choose the time and timing of your succession.

• Increased regulatory environment. For some firms, depending on their current service portfolios, increased regulatory environment may force a decline in attractiveness, which translates into value. Note: The regulatory environment can actually be made into an advantage for some firms with proper analysis and planning.
• Outsourcing. In 2011, the CPA exam was offered outside the US for the first time in history. Many believe this trend will accelerate and soon produce global competition for service currently performed by many local tax and accounting firms.

Many firms currently outsource tax work to other countries. When this is done, the rate for producing tax returns is literally a few dollars per return. The small firms will feel the impact of this outsourcing in the next decade. It is going to become extremely difficult if you are competing for business with CPA firms outsourcing work beyond our borders. Those are just a few external challenges to value. Setting those aside for a minute, it is important to understand and acknowledge that value can be completely different even when two firms are exact clones of one another. Many arbitrarily assign a multiple of revenues and declare that is the value. While multiples are often used to make a value declaration, it is how the multiple is derived that is the true manner in which value is determined. Some methods firms have found that has helped their value include, but are not limited to: being up to date in technology, having clients who are open to speaking to more than one person in the firm so transitioning clients is easier, not being stuck in any long term lease commitments, practices who have young talent, lucrative niches and good operating systems in place. Closing your deal prior to slowing down so you can execute a strong transition is also a key. For more information:

• A Two-Stage Solution to Succession Procrastination by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013
• Alternative Deal Structures by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2014

Many mergers need to define and address differing partner goals. However, that is not the challenge. The challenge is when a firm elects not to consider a merger and must tackle the differing goals and desires of its partners when the firm infrastructure will not support or cannot support such goals. When that happens, unfortunately, many firms choose to ignore the obvious and continue on as if the issue is not relevant. This situation significantly contributes to the firm (and the remaining partners) experiencing decreasing valuations of the practice. This issue is being significantly compounded by the effect of the Baby Boomers reaching the age of retirement. Many firms are experiencing difficulty replacing the more tenured partners with younger partners because there are a limited number of available younger principals, or managers capable of becoming partners. If a firm currently does have younger partners, another concern is the potential that the younger partners are going to shoulder future financial challenges as they bear responsibility for the retirement packages or buy-outs of the retiring partners. Another challenge facing many multi-partner firms is when two or more partners have the same retirement goal. The impact of two or more partners reducing their roles can have a negative ripple effect if the firm is unable to replace the role of the retiring partner(s), not just replace the partner(s). Because of the above events, a merger many often have a series of agreements: a master agreement addressing the merger of the firms and separate agreements addressing the specifics of each partner's individual goals. This multi-agreement requirement may also affect value, individually or collectively, depending on many factors including but not limited to:

• How the firm operates and allocates compensation and bonuses at the partner level. Does the firm operate with an "eat what you kill" compensation structure or something different?
• What is the size of the partner group and will several be leaving within a short period either of each other or of the merger date?
• What is the competency level of staff, manager or potential partner-level staff staying on?
• What are the purposes, goals and expectations for the merger?

These questions are often more cumbersome than fulfilling the goals of the individual partners, even when they differ. There are many positive reasons for firms to merge, especially when the due diligence of opportunity is performed efficiently. It is true that the differing goals of the partners may very well be a positive and not a concern. The review of the individual goals should be benchmarked against the opportunities, internal and external, because only then will the potential for a good decision be realized. One of the most powerful questions you can ask is, "What if...?" Every firm should respond to a series of these questions, including:

• What if we do nothing?
• What are the positives?
• Negatives?
• Exposures?
• Effects on the business?
• Effects on profits?
• Effects on continuity?
• Effects on value?

Once a list of responses to these questions is calculated, compare the responses to the goals of the partners. It is often interesting how this analysis will identify the viability of maintaining those goals, slightly altering the goals or, at a minimum, clarify the need for a merger and with whom. Remember, most multi-partner firms have partners in varying categories, some seeking to reduce their time commitment to the firm shortly, others in several years and remaining partners who are many years from their sunset. You can structure a merger with one successor firm who can help all three categories of partners achieve their goals. For more information:

• Case Study: A 4-partner firm with two partners who seek near term succession and two who seek professional and financial growth
• How to Manage Internal Succession by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2014
• Planning and Paying for Partner Retirements by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2012