The grim reality of succession planning
It’s here and it is bad. There are plenty of statistics on CPA firm succession. Most paint a more-than-acceptable version of the truth – but when you peel back the details, reality starts to settle in.
The “true” reality of the CPA succession landscape is:
- Fifty percent of firms have no clue how to exit. No plan. Nothing.
- Thirty percent think they have a plan. They put a plan on paper with names, but there are no execution steps. Most of the people in the plan have never sold, and their financial path to partnership is undefined and unclear. They look at the buyout numbers, know they cannot sell because they fear it, and the math does not add up. This is not a succession plan.
- Only 20 percent have a functioning plan. One in writing supported by training to help the upcoming succession team run the firm and teach them how to sell. All the technical expertise and management training has limited value if no one can bring in work.
We talk to CPA firms every single day. Ones who are seeking a way out. Here’s what we hear:
- Staff cannot afford to buy the current partners out.
- Most firms have limited personnel who can sell.
- Few firms have any money set aside to co-fund exiting partner liability.
- The dream of “We just need that one good younger person to come in who can buy us out.”
What is fueling the problem?
- That “one person” is rare. Why would that young talent want to buy your firm out? Especially if the partners are overvaluing the practice. Partner buy-out expectations may need to change.
- Staff has changed. Less want to own. The legacy buyout process has some flaws in it. It needs refinement. It can be fixed, but not without effort.
- Firms do not understand runoff. Runoff is clients who sell, die, leave for service or price issues, plus one-time consulting fees. Industry runoff averages 7 percent. An aging client base adds to runoff.
- This runoff factor is a widely overlooked in succession planning and determining a firm growth strategy. A 5 percent growth target means you need 12 percent of new work when you factor in the runoff.
The 20 percent who have it figured will be the sharks. They will eat whatever portion of the other 80 percent that they want to acquire/merge in. And they will be doing those firms a favor by bringing them in.
Now, a crushing blow: Baby boomers are aging and running out of time. The average baby boomer is about 65 years old. As more aging firms want out, the market will be flooded with sellers. The majority of these firms are compliance-focused. Values will fall. Some firms will not be saleable. Young staff are reluctant to buy 1040 clients and 60 percent realization audits.
Think about your position. If you think your succession plan is flawed or want to take advantage of the 80 percent out there who need an exit plan, act now. Many firms without succession potential have good firms with great clients and staff. They just ran out of runway to create their internal succession.