There are 76 million Baby Boomers in the United States, defined as those of us born between 1946 and 1964. Accounting firms across the country are full of Boomers with 61% of all partners now over the age of 50, all marching toward retirement.
Consider these three steps in valuing your practice for partner retirements.
Step One is determining the value of your firm. Remember we are describing an internal structure, not an external sale or merger. Also, this is a process/transaction that is between the firm and the retiring partner; not a deal that is done outside the firm between individual partners.
There are two pieces to value – accrual basis capital and goodwill. The goodwill is almost always expressed as a multiple of revenue and the generally accepted value historically was one times revenue.
The surprise for many of us Baby Boomers may be that the overall average goodwill value out there has been about 80% of revenue for several years. The latest 2014 Rosenberg MAP survey of 364 firms puts the average at 81%.
So, once we get our heads around what is perhaps a lower value for our firms, Step Two is determining how we split up the firm’s goodwill among the owners. The choices here include allocating it based on ownership percentages or books of business which you tend to see in smaller firms. But the direction that the profession is trending is to allocate the goodwill based on owner compensation.
Step Three is the process you utilize to pay out the value to the retiring partner. The capital is usually paid out in cash or over a short term with interest. The vast majority of firms are paying out the goodwill in the form of deferred compensation (ordinary deduction to the firm and ordinary income to the partner). We see terms ranging from seven to ten years, with no interest. Ten years has become the norm.
It is probably time to pull those agreements out of the drawer, dust them off and take a look! Read the full story on this topic here.
Most CPA firm partners ask the question a little bit differently. It goes something like: “We have X amount of revenue and Y number of partners, so how many chargeable hours should our managing partner have compared to the other partners?” And the next question usually is: “How big should the managing partner’s book of business be compared to the other partners”. If these two questions aren’t a topic of conversation among your partners, they probably should be.
First, it is much more important to make sure that you “manage” the managing partner’s charge hours than it is to manage the size of their book of business. Most managing partners that we work with continue to maintain relationships with key firm clients as their firms grow and their duties as the managing partner grow. Those clients typically stay in the managing partner’s book; but, they have to leverage the work differently than they used to and rely upon more involvement of other partners and staff to get the work done.
The much tougher metric to manage is the chargeable hours of your managing partner and the time that is left to run the firm. How do you know where those numbers should be? It truly is a function of the size and complexity of your firm. The problem is that we don’t adjust quickly enough as our firms grow and most managing partners are spending too little time leading and managing, and too much time serving clients.
This is not an exact science but you need to consciously bring down the hours as the firm grows. It won’t happen unless you plan for it. Most managing partners enjoy the client work, they’re good at it and are sometimes reluctant to give it up.
We see numbers all over the map depending on the firm and the makeup of the individual in the managing partner chair. Your goal should be to reduce the client service hours of your leader to free up time to serve what is your number one, most important client – the firm. Read the full story on this topic here.
Thousands of firms are working through the succession and retirement of senior partners and deciding along the way whether or not they can pull it off internally and stay independent. The single most important factor for success is what we see when we look over our shoulder – is the bench of people there to succeed us? Here are some ideas to recruit and keep employees on your team:
• Make recruiting a constant effort in your firm meaning that you are always looking for people, not just when someone leaves. If you make the commitment to hire more than you need another very healthy thing will likely happen – you will actually be able to make choices and outplace the weaker players, strengthening the team along the way.
• Firms having the best success building their bench almost always have a commitment to grow their own. That means a commitment to a campus recruiting process and not being afraid to compete with the larger firms.
• Create an internship program in your firm. It is a tremendous way to get a test drive before you actually hire someone.
• Make sure that you have a staff bonus program for recruiting experienced people. You want your team talking to friends about how great it is to work for you and with some skin in the game, they will be more inclined to send you quality candidates.
• Do a better job in defining your position descriptions and what it takes to advance to the next level in your firm.
• Make it clear what the career progression is in your firm and what the ladder looks like. It is important that everyone else in the firm knows who is on the partner track and who is not. You will lose younger “stars” who want to move up if they think the ladder is clogged by too many people above them.
• The college grads that you are hiring today want to be “a part of it”. Short of putting new hires on the Executive Committee, there are things that you can do to make your people feel more engaged. Here are a few examples:
1. Find opportunities to talk about your mission and vision often and how the firm’s actions and direction are consistent with them.
2. Put young people on task forces and committees of the firm. Better yet, form an Inclusion Committee to get their ideas on how the firm can improve communications with and involvement of the team.
3. Create opportunities to communicate with the team especially from the firm’s management/leadership group. For example, meet with your manager group after partner meetings to keep them informed; hold an open forum lunch for staff with your managing partner a couple of times a year.
Building your bench is a big job and it involves several different fronts. For smaller firms it is much more difficult to devote the resources to get it done. With that said, it is the answer to perpetuating your firm and accomplishing internal succession. Read the full story on this topic here.
As we work through the succession and retirement of senior partners in our firms, a lot of us are also reviewing and updating our internal documents and agreements. A key part of the update should be focused around how we bring new partners into the firm to replace the “old guys”. There have been changes in valuations and process that we really need to be aware of. Following are some of the best practices you should consider:
• How many partners do you really need?
• Do you have a PIT (Partner-in-Training) program?
• Should your firm use Non Equity or Low Equity partner positions?
• Have you looked at how you’re calculating the buy-in?
• What percentage of ownership does the new partner get?
• Financing the Buy-In. How should it be structured?
Regardless of whether you change anything or not, the Baby Boomer succession wave presents an opportunity to review and challenge how we bring new partners into our firms. Read my latest article which discusses the above topics in more detail.
Every firm is working through the succession maze and dealing with the exit of key partners in the firm. These partners leave holes in the firm that we have to fill. We need to recognize that our plans to fill them will be different depending on the role that the individual partner plays in the firm. With that said, there are four areas that you must cover for every partner. And each one deserves a plan of its own. They are:
Technical Skills and Expertise – Remember to focus on shoring up both service and industry knowledge for the firm.
Leadership – Leadership transition is one of the most difficult succession issues facing firms. Take a look at an article on my website for some ideas for the M.P. spot: Managing Partner 101 – Just What Exactly is the Job?
Hours – Because we need to move a particular client relationship, that doesn’t mean that we also have to replicate and move all of the partner hours intact to one individual. Make it a focus to leverage preparation and review time if you can.
Client Relationships – The client transition plan needs to be orchestrated over at least two years, it needs to be written and it needs to be supervised and managed by the firm’s managing partner. For the close personal relationships which are always the toughest to transition, you should plan on shadowing for at least two year-end cycles.
The retirements that we are just beginning to focus on are key to the future of our firms. Covering these bases will give you a better shot at a successful outcome. Read my full article on Succession – Cover These Bases for Every Retiring Partner.
There is no question that the most profitable firms (defined as high per partner income) in our profession have figured out that leverage and a well managed pyramid is one of the key ingredients. Why is it then that so many firms, and I would suggest the majority, are struggling with just the opposite – an upside down or inverted pyramid where there are lots of partners and managers but few staff.
We didn’t get here overnight and I would suggest that few of us planned to be here. We wound up with our top heavy firms due to a number of factors. Here are some of the primary culprits:
• Generational issues including the Baby Boomer Bubble, Xers, Millennials, etc.
• Lack of a people plan with effective, consistent recruiting and staff development processes in our firms. We don’t have a process to see enough new faces and we let people hang around too long.
• Promoting non-partner-track people or sometimes marginal folks to higher positions because “we’re preserving staff continuity” and “it’s best for the client” when perhaps it is just the path of least resistance and/or we have no one else.
• Partner compensation plans that focus on chargeable time. Partners stay busy first. Managers are doing staff work and no one has incentive to push the work down.
• “It’s just easier to do it myself and besides I’m a lot more efficient at it”.
If any of this sounds like you, here are some of the outcomes that are not desirable but pretty common. You have too few if any younger staff. You have a tough time keeping the ones you do have busy. Really talented staff, your “all stars”, leave because they don’t see any opportunity to advance in the firm. Managers and staff do the same work on the same clients year after year after year. You have a relatively expensive workforce and you have a difficult time getting paid at their billing rate for work that they have outgrown. Partners are full with compliance work and are not cultivating the high value consulting work. And, worst of all, you don’t have the talent at the right levels to succeed you as a partner in the firm.
Ouch! So, what do we do? First of all we need some time to work out of it. We didn’t get here overnight and we won’t fix it overnight either. Unfortunately, some firms are out of time and that is the reason the profession is seeing so much M&A activity. Hopefully that’s not you and you can start to make changes now, to work on the pyramid.
Read my full article on how to begin the journey in prioritizing and tackling the pyramid structure in your firm.
CPA firms are wrestling their way through partner retirements and the accompanying succession issues in numbers that the profession has never seen before. It’s the Baby Boomer Bubble, up close and personal. But the biggie and the focus of my latest article is the transition of client relationships.
If you buy into the critical importance of client transition and retention, then we should expect that most firms have developed both a pretty good transition process and some well defined requirements for the retiring partners. Unfortunately, more often than not, that is not the case. The 2012 Succession Survey conducted by PCPS and the Succession Institute reported that 78% of firms do not have client transition expectations with financial penalties for retiring partners, if they are not completed.
If you are one of those firms in the 78% bucket, my article will give you some ideas on how to do a better job with client transition. Please pull out your partner agreements, dust them off and see if they even deal with this critical issue at all.
As the Baby Boomers march toward retirement the likelihood of multiple partner payouts within your firm increases. A well executed client transition plan is the best protection for the firm and the best insurance a retiring partner has that they will receive those unfunded retirement payments down the road.
Tax Season 2013 is over and the M&A frenzy will pick back up again where it left off. So, what is your practice worth? What can you expect whether you are a buyer or seller? One thing is for sure – Baby Boomers are selling at a rate that the profession has never seen before. It is still a sellers market, for now. But the demographics and the thousands of practices that will soon be for sale suggest that may change over the next few years.
We are often asked by our clients about the market and what firms are selling for. Everyone wants to know “what’s the multiple?” But, it’s not just about the multiple; it’s about the overall deal structure and terms. The multiple is only one piece of the puzzle. The important components that go together to make up and influence the structure are:
Size of practice
Profitability of the practice
Term (number of years) of the payments
Length of time before the purchase price is fixed
Extent and quality of client transition
And finally, the multiple of revenue being paid
For more information and a discussion of the deal components outlined above click here.
There is no question that M&A is hot. The 2012 PCPS Succession Survey asked multi owner firms (509 participants) whether they had been in active M&A discussions in the last 24 months and /or if they were planning to be active in the next 24 months. Forty percent said yes!
One of the most interesting tidbits from the survey was a question directed to the 432 responding sole practitioners (solo) about practice continuation agreements. The idea is that the solo enters into an agreement with a larger friendly firm to “step in” and acquire the practice in the event of the solo’s death or disability.
Ninety four percent of the solos said that they do not have a practice continuation agreement with another firm. Your initial reaction might be that there is a big opportunity here and you should contact all of the solos in your area and start getting these negotiations and in place. That would be the logical but incorrect answer.
The message here is that there is just something about the sole practitioner that makes them want to practice as a solo in the first place, that gets in the way of executing something that seems to make so much sense. My suggestion is that if you are a larger firm, you probably should look to other options besides chasing practice continuation agreements.
One option is a two step deal. The basic notion is that in step one the solo and the larger firm cohabitate while the solo maintains quite a bit of the desired independence and continues to serve clients. Step two is down the road in two or three years and is when the buyout really begins.
The survey did provide some guidance on deal multiples and terms from the perspective of those same sole practitioners. There are a lot of factors in any deal that influence the multiple including things like geography, projected profitability in the acquiring firm, up front cash, retention/guarantee clauses, payout periods and the overall size of the transaction. Experience tells us that for most deals under two million dollars, four to six years is fairly common and we see most multiples ranging from 1 to 1.25.
If you are thinking about getting in the M&A game, I have heard a lot of partners say that they don’t want to do a particular deal with this or that firm because they will be fixing someone else’s problems. I’ve got news for you. If you are the acquirer, you are always fixing someone else’s problems. Make sure that you fully understand what they are.
As we work to move our firms forward and to improve them, feedback from our two most important contingencies, clients and employees, has never been more critical. Knowing how we are doing and where we need to focus to improve is especially important in this slow recovering economy. We just have less of a margin for error to work with as top line growth has slowed or disappeared and we have tightened our belts.
My clients are hungry for data and are turning more and more to surveys to gather it. When I was in the managing partner role with my prior firm, I wanted to know how we were doing and even more important, how do we compare relative to our peers. That data was not available.
The independence of the collection process combined with peer benchmarking (how do we compare?) elevate the value of the information and the ability of the firm to make good decisions based on the data.
Unfortunately there has not been a consistent, reliable source of data for the profession, beyond financial surveys, that firms can depend upon. Recognizing that void, a new company has been formed. It is SurveyCPA.com and it is dedicated to building national benchmarking data and helping firms with the following surveys:
• Upward evaluations of partners and managers
• Employee engagement and satisfaction
• Client satisfaction
The surveys provided by SurveyCPA have been developed specifically for cpa firms and the questions reflect the uniqueness of our profession. The benchmarking data will be on a national scale with the plan to stratify that data both on geographic regions and also size of firm.
SurveyCPA is a joint venture between Rita Keller, a national consultant consistently named to the top 100 most influential people in the profession, and Gary Adamson, CPA, author of this article.