AICPA vice president of small firm interests Carl Peterson dives into the details of finding an exit plan for smaller practices, which can be even more fraught and complex than for larger firms.
Transcription:
Dan Hood: (
Welcome to On the Air with Accounting Today. I'm editor in chief Dan Hood. Between the tsunami of retiring baby boomers and the constant flood of M&A deals going on in the profession, succession is on a lot of people's minds in public accounting, but a lot of the high-profile models under discussion are large firms. And there isn't as much guidance around how small practitioners can ensure the longevity of their firm and realize the value that they've built into it. And here to talk about all that is Carl Peterson. He's the vice president of small firm interests at the AICPA. And we caught up with him during AICPA's annual Engage conference in Las Vegas in early June. Carl, thanks for joining us.
Carl Peterson: (
Thanks Dan. I'm happy to be here.
Dan Hood: (
Yeah, I think this is gonna be a good conversation. I'm looking forward to it. The first thing I wanna talk about is sort of are the succession issues for small firms, different than those for larger firms. Are there bigger, you know, different areas they're worried about?
Carl Peterson: (
You know, a lot of the issues are the same. I think the drivers might be a little bit different. You know, small firms, they don't have usually that pipeline of staff that's moving up the ladder wanting to become a partner, wanting to take over — a lot of small firms don't have that luxury. And so they're worried about what's gonna happen next. And now I've been building the same for all these years, and this is my retirement program probably. And I think there's all this value in it. And all of a sudden I wake up after taxi season and go, oh, I should retire. I should, you know, what am I gonna do? And then they're scrambling.
Dan Hood: (
Right. Right. And who do you hand it over to? Right? You say, oh my gosh, I don't have a team of, of people like behind me or, or partners working with me that I can be like your problem now until you retire. Well,
Carl Peterson: (
Well, there's that. And then a lot of times, even if you're a two or three partner firm, the other partners go, oh, we can't take, we don't have the capacity to take over all your work. What are we gonna do? We have to merge up or merge with somebody else.
Dan Hood: (
Mm-hmm um, so, and now I'm curious about this, cuz there's been some talk for particularly for larger firms that, you know, the pandemic and, and, and the movement of baby boomers through retirement. Cause that's been going on for a decade and it's a lot of them have sort of said, well, obviously I thought I was gonna retire, but now I can't. So their plans are changing over time. Are you seeing similar things for smaller firms?
Carl Peterson: (
I think plans are changing. I would say I would've said early on in the, during the pandemic that a lot of owners was going, you know what? I'm gonna stay in this for a while. You know, this is not the right time for me to retire or have a session. Um, but today I think now we're seeing a bigger wave of firms, oh, saying I'm done, I'm gonna retire. I've had more calls this year since the end of tax season personally said, Hey, when you're in town, can we get together? And I know exact and they, some of 'em say, I wanna talk about succession, other ones. I, I know that's what they wanna talk about.
Dan Hood: (
Right, right. So me that's, I, I, thing I should have started with is what we think. I, I think of it as succession, largely because like I said, in larger firms, there is a, a line of succession you've got partners or hopefully, yes, this is a problem for larger firms. They don't have that pipeline of, of younger partners. But the ideal form of it is you have younger partners pop up. Right. Is it really a succession thing or is it more of a retirement? It's,
Carl Peterson: (
It's a retirement strategy, right? This is my strategy for retiring out. There is not usually a succession opportunity per se, right. For small firms. Uh, it's really retiring. That's the strategy.
Dan Hood: (
So it's a different way to think about it cuz when you put it that way, right. The succession thing is, has a sort of ongoing, someone's looking after my retirement funds for me while I retire and they're, they're succeeding
Carl Peterson: (
Me. Exactly. Exactly. And, and, and the retirement strategy, really, you're looking for a firm to buy you out to acquire you. There's gonna be that period of time where you, you know, you transition clients and all of that, but oftentimes, you know, small firms, the owners wait too long to do that.
Dan Hood: (
And is that the primary method, is that, that sell out to selling out to a, another firm?
Carl Peterson: (
Absolutely. Absolutely. Even when I came to a, I C P a, that's what we did. Right. You know, my partner, wasn't gonna take on, you know, the, the, all the client work and everything else. And so we merged up that was our, our strategy. And at the same time, as we were doing, another firm was doing it with them at the same time. So that is a, a, you know, a very, uh, you know, frequent strategy. I mean, it it's whatever he does in a small firm. Yeah.
Dan Hood: (
Yeah. Well, and it's interesting cuz what we hear from larger firms, uh, particularly ones that are interested in M and a, is that they're getting more picky, uh, cause there's more firms on more smaller firms on the market for them to go through.
Carl Peterson: (
Yes. Oh, oh my gosh. So they are getting more picky. And so last year I met with a firm, uh, and I, it was super successful firm, small firm, two partners, five, maybe six, seven staff people. And uh, their numbers are phenomenal. But when they talk about being picky, we went through and I I'd asked questions about software applications. Are they in the cloud? What are they doing with technology? And they're not there. And I said, your numbers are fantastic. When your realization rates, you look at per dollar, what you guys are getting is probably as good or better than so many large firms that are out there. That would be totally interested in getting that. Right. But the problem is you are not innovated. You're not leveraging technology and being progressive through your clients are gonna be used to that. I mean, you're not that attractive. Right?
Dan Hood: (
Right. Well that's, that's kind what it boils down. I said, picky. I think the firms themselves think of it as strategic, but really it is, there's a bit of pickiness, right? They're saying, oh my God, you don't have this. You don't have that. And maybe we, since you brought it up, let's talk about some of those things that make you attractive as a, as a firm technology, I think is a big one. Right.
Carl Peterson: (
Right. Technology is a big one. And it's really just the fact whether or not you embrace technology and leverage technology. It doesn't really matter what technology you're using. Right. You don't have to worry about, oh, is my software the same platform that the acquiring firm's gonna have. That's not the issue. It's just, are you progressive enough? Are you leveraging technology? So are you your firm and your clients, um, used to that, right. Right. That's what they're looking. It's
Dan Hood: (
More of an attitude that it's a culture that yeah. Yeah. Yeah. Um, because they're probably, I mean for a lot of firms, right. They're gonna rip and replace your systems.
Carl Peterson: (
absolutely.
Dan Hood: (
They want, they want you to use their software, but they want you to be comfortable using a new software and being, you know, taking that attitude
Carl Peterson: (
Towards them. Right. They, they absolutely know that if, if you, if you're not doing that already, when they come in, rip it out, it's gonna be a problem. Right.
Dan Hood: (
Right. Um, you mentioned clients and I think that may be another aspect of, of, of what makes you attractive as a firm. You, what your client base looks like.
Carl Peterson: (
Yeah. You, you, you, what your client base looks like is attractive from different reasons. Right. Are you industry specific, you got a niche or something like that that makes you attractive. That's all. That's great. Um, do you have clients that are paying on time? Do you have clients that are ch have challenging services or engagements that you're involved in? Do you have, you know, are, are you one of those shops? That's strictly a compliance shop, strictly a 10 40 shop. That's not very attractive.
Dan Hood: (
Um, and since we're talking about smaller firms, I was gonna say, there's also, we see larger firms aiming to buy uh, uh, firms for staff, like looking, just to get, just to get head numbers. We're talking about smaller firms. So they're probably, that's not something you can do much about you can't suddenly have, you know, higher 40 people to make yourself attractive for a merger. But yeah. Are there any aspects of that, that, uh, that small firms can, can do to sort of brush up on that? I mean, other than hiring, going out and hiring for people, which no one can do, but I mean,
Carl Peterson: (
I was just gonna say, if we, if we're gonna have the solution to the pipeline for everybody that wants to hire somebody,
Dan Hood: (
I think every small firm should solve it. The, and then, then tell us what they did. Yeah.
Carl Peterson: (
Yeah. Well, and I guess I used the word pipeline and, and, and, uh, bill par mentioned yesterday, it's really not the pipeline issue. It's a capacity issue. Right, right, right. Small firms don't have the staffing to, to have additional capacity. And if they had staff, you're absolutely. They would be like the golden goose that, uh, bigger firm wants to merge in because you have somebody, um, what, what can they do? It's again, leveraging technology might have to look at outsourcing. If you haven't already taken that up and doing that, you need to have show the capacity and the processes to get the work done. And if you don't have the staff, you gotta find a way to do that. Right.
Dan Hood: (
Right. Well, and some of that goes, right. You said that technology aspect of it, right. If you're comfortable with technology using that to, uh, not replace staff, but take care of that work. Right. Um, that at least shows you're willing to, to embrace that, uh, that aspect of the profession.
Carl Peterson: (
Absolutely. And there's so many opportunities, I think not only outsourcing, but leveraging technology, whether it's, uh, you know, scan and populate, a lot of small firms aren't necessarily doing that, cuz they're afraid of it. They're, you know, they've been around for so long. They've got the processes in place and it works for them. They're getting great numbers, but in the end they're not really being smart about leveraging technology.
Dan Hood: (
So good technology attitude is a big one, good client base. And should probably also mentioned, right. You want a client base that's not super old, right. If you're client based software
Carl Peterson: (
Hiring that's problem. Well, I would, I laugh about it because our own experience as well was, you know, when we merged in, we had a great client base, but the thought process never hit me about, oh, you know what? Some of my clients are older, they're aging out, they're gonna be selling, which is a great, and so they're gonna get this, you know, uh, great service fees maybe on, on analyzing the sell out and the succession for that client. But then they had annuity of that is gone. Right. Right. And so, yes. So, but so I think you have to look at your clients and rate them for one. So you have, you know, what kind of clients you have that you can share that story with whoever you're looking to merge into. Um, but I think you have to be realistic and look at, oh, these clients are probably gonna age out. Right.
Dan Hood: (
Right. And, and we mentioned pipeline, right? You can have a pipeline of clients as well. You're looking at a, at a, at a good spread of them, you know, no one expects you to have all 20 somethings, but
Carl Peterson: (
Right. No, but you know, we had, uh, in, in our own personal experience was we had some great referral clients that were pretty young. And uh, when that came over, that really took care of like the retiring out clients. Right. The referral clients brought in the new ones to replace it. So
Dan Hood: (
Yeah. Uh, cause you do. And one of the things we hear from, from people, even from very small firms that are like, we're, they're young, there're just starting up and they're saying, yeah, we could go out and acquire a million practices and build a book of business very quickly just by buying retiring partners practices. Or we can just wait. That's true. Which, which is a terrible scavenging kind of thing. But, but, but a pretty good business strategy if you're thinking about it. So
Carl Peterson: (
Yeah. And it's, that's actually more true and occurs in the rural areas because there's nobody else for them to go to. So that's AB it's, it's sad actually in a way to think about, you know, the small firm owners have been doing this for years and years building up what they think is their retirement plan and really you're right. That's a strategy that young entrepreneurs gonna use and why not? Well,
Dan Hood: (
Yeah, exactly. And that's the thing, if you're as a, as a, the practitioner's looking to sell, if you're not bringing some extra value to it, that's I think that's maybe one of the big secrets. You gotta have something extra,
Carl Peterson: (
You have to be attractive. There's gotta be some hook that somebody goes, I want your practice. I want it for this reason. And it could be your clients. It could be, you've got some practices that I want to learn your processes that is gonna make me better. Right. Or you're in a niche that's gonna make me better. It's gonna enhance the niche I'm already in. This is fantastic. I, I do worry about those small firms that are in the very typical general practice concept of a general practice. Right,
Dan Hood: (
Right. Uh, cause there's a lot of, this is the other, there's a ton of them. Yeah. Um, it's, it's troubling. Uh, I wanna talk, um, we've, we've, we've hinted at some of the mistakes firms we're making, obviously we look more strongly at what they can do to make the sales. Great. Uh, I wanna talk a little bit more about some of those mistakes they're making, but we're gonna step away for a quick break. All right. We're back with Carl Peterson and the a, I CPA talking about succession specifically for small firms, which as we strive really is kind of retirement. It
Carl Peterson: (
Really is a retire. Yeah. That's, that's their strategy. Yep.
Dan Hood: (
Uh, and, and, and one thing I wanna talk about, cause we wanna talk about mistakes that they're making and we've, we've hinted at some of them outright addressed. A couple of 'em we really wanna talk about, um, are you seeing more and more people saying, well, I, I was thinking about retiring. I was thinking about selling, but instead I'm just gonna keep doing this in part cuz one thing we here is a lot of us accountants who love what they do. Right. They enjoy working with our clients, they enjoy the work. Uh, they're used to leaving the house. Their spouse likes it when they leave the , you know? Right. So it seems like I, I, I, I just in the course of my work and I'm sure yours more, so mine even run across a lot of older CPAs who just love it or seem like they love. Right. Are they better? Cuz they're still doing it. Are you seeing that more and more? Or
Carl Peterson: (
Is that oh absolutely. I do. It, it it's, uh, it I'm concerned about it though, actually. Right? You, you, I run into so many practitioners that are older that are, uh, still doing work. They love it. You're absolutely right. They're passionate about it. They're engaged. They're clients love them. But what often happens though, is they get into those Twilight years. They are even less and less progressive. Right? I'm not saying that they're all that way. I know some old practitioners that are super progressive, do nothing, but be in the cloud and, and doing all the right things. But generally speaking, I'd say that the, uh, older demographics and those staying in longer than maybe they should, in a sense of, they're losing out an opportunity to merge out and get the value of the practice.
Dan Hood: (
I hear let's talk about, well, let thinking about that. Let's uh, so obviously that's, if you're you're waiting too long, right. Is one thing, particularly if you're not keeping up your practice or you're not keeping up with things like technology, you mentioned the need to keep up with technology and I I'm gonna throw out a mistake that I think I hear a lot of firms are making, which is, um, thinking, well, I'm gonna be going in three, four or five years. I don't need to upgrade anything cuz I'm just gonna sell it. So what's the point. Maybe if I, if I can sell it, then I don't have to worry about the upgrade. That's their problem. are you seeing any of
Carl Peterson: (
That? Or unfortunately we do. And, and, and again, they're missing out on an opportunity. You have to keep investing and you have to keep stay progressive. Otherwise the value firm is not gonna go up. It's gonna start going down. And those firms that don't wanna be picky or have the opportunity to be picky or cuz you're not attractive. The, you know, that that's one of the biggest mistakes I think the firms make is they wait too long. One. They don't, they're not investing in technology. They're just saying, you know what, I'm gonna be done in three years. I don't need to. Right. But they're also waiting too long to start the process and finding what are my options emerging and what are firms looking for today and what are they gonna be looking for tomorrow?
Dan Hood: (
So, I mean, so talking about, think about how long is there a, how long should firms be or should an owner really? Because I keep saying firms really we're talking about individuals, uh, yeah. Or largely individual, maybe one or two partners. How long should they be? I say budgeting is the right word. How long should they be giving for this process? Like, you know, when should you obviously it's the old, uh, today is the best time to plant a tree is 20 years ago.
Carl Peterson: (
Right, right
Dan Hood: (
Today. But how long should they be giving
Carl Peterson: (
It? Well, they shouldn't be waking up after tax season and saying, you know what? I'm gonna merge now. Right, right. Because it's not gonna happen this year in a very successful manner. You're not gonna be happy with it. You might not even find the right. You know, firm to merge into that even is urge into that. You're gonna, is willing to look at you. So time to start is now you need to start. You have to have a lead time. I believe at least of one year. Okay. And here we are at the end of tax season, people are looking, wanting, do something by the end of this year, it could happen, but it's gonna be challenging, right?
Dan Hood: (
You're gonna need to be, you need to already be attractive. You need to be in a market. That's got a lot of buyers,
Carl Peterson: (
Right? You already have to be attractive. You, you can't look at your client base and say, oh, I can raise my fees and get that up and look better. It's too late. Right. They're not gonna look at just today. Right? You can't make the changes you need to make to be attractive. You're right. You, you have to be attractive from the get go of. You're gonna try to get it done in the next few months. Right.
Dan Hood: (
So, or, but if you're willing, if you can give it three years, four years, that gives you a little bit of runway. I mean, ideally right. Well ideally you're preparing for your succession, you know, for 30 years, but it
Carl Peterson: (
Probably opens up the options that you are gonna have. If you try to get it done in the next six to nine months, your options are pretty limited. You can't make many changes to become attractive and you have a very limited time to have somebody else. You, you have to kind of dance with somebody to a certain stint, right. And, and date them to make sure that they're, they're interested in you and you really are interested in them because there are gonna be other issues. It's not like you close the deal and they take over and life is good, but there's a transition period.
Dan Hood: (
And that's, well, this is another thing. I think a lot of people don't necessarily recognize that, um, you're not gonna sell it right away or you sell it right away, but you may need to be there for a little bit of
Carl Peterson: (
Time. If you wanna get the value, you're gonna have to stay there for probably minimum of three years. Probably five years make that transition
Dan Hood: (
As much as that. Okay. So this is definitely something people need to be grant
Carl Peterson: (
For. Yeah. If somebody's already 70, 75 years old, which they're out there, you don't have that time. Yeah.
Dan Hood: (
Yeah. All right. So not giving enough time, clearly not keeping up with technology. Uh, what are some other mistakes you're seeing, uh, folks making,
Carl Peterson: (
Oh my gosh. Not, not being ready with the story of who you are, what your clients are like, what your process is. You need to look at your firm like you do. When a client comes to you and says, you know what? I'm looking to sell and or I'm looking to buy this, can you analyze this company, analyze your firm and be prepared with the documentation to make that story sell.
Dan Hood: (
Um, and that documentation is that kind of thing. That's gonna go over. I, you mentioned, uh, you know, you can't fix everything in year. Some of that's gonna be numbers, right? You wanna make sure that your numbers look back over a period of time. So that include that kind of thing.
Carl Peterson: (
Absolutely. You gotta look at, you know, most of these firms are still doing time sheets. So you gotta look at your realization rates, utilization rates, right? Your productivity, all those things. But you can't look at them one by one and say, this is the story that, Hey, how great am I? Or you can't look at my grocery. Evidence says, you know what? I'm a sole practitioner and I'm doing, you know, a million dollars. That's great. But what if your net income to partner, isn't really solid, right? There's the numbers tell a whole story. And that's, that's what you do with your clients. You're, you're helping them tell the story and, and understand it. You need to do the, with your firm because somebody's gonna come in and do their due diligence. And they're gonna look at all the different components and it tells a story and you have to be ready for that.
Dan Hood: (
Right. And the story can be, I think it's probably worth mentioning, right? The story can be we're improving. You know, it doesn't mean if you were, you were in a great shape three years ago, but if you can say, listen, I know my practice wasn't ideal, but we're working in all the right directions. I'm, you know, I'm talking to tech vendors to get myself into the cloud. I'm doing this, I'm doing that. If you can show improvement, that's gotta have some that
Carl Peterson: (
You can show improvement. And those numbers are gonna tell that story. You show improvement or maybe you have a dip and you can show, well, here's where, you know, here's why that dip in that particular metric happened. But look, you know, these other metrics tell a story of why that happened. And these are all positive things cuz in the long run, here's where we're going.
Dan Hood: (
Cause a lot of it is about that. It's it's attitude. Cause it is a little bit of a salesmanship to tell 'em the story's probably better put than selling, but you're effectively selling your practice. Right? You're selling it to, uh, you want people to, to buy into it. You wanna tell the story about why this is important, why it's got a bright future. Even, even if you leave in Sweden,
Carl Peterson: (
Right? Why is my client base so great. Why are the processes in the firm that I have? You know, if I was young enough, I wouldn't be selling it, but I'm selling it cuz I that's my strategy. Right. But here's why it is so great. And how I got it to be where it is.
Dan Hood: (
Excellent. Um, I wanna talk, we talked a lot. We talked about, uh, things they need to do. We talked about mistakes. Some of them are making that are pretty common. I wanna talk a little bit about new options in part again, just because a lot of this comes through the, the, the, the prism of larger firms where PE for instance, private equity coming in suddenly opens up a whole lot of opportunities to them. Are there opportunities, not necess, maybe not necessarily PE but over ones like that, that are coming in.
Carl Peterson: (
Y you know, I, while a small firm is probably unlikely to have a private equity group come in and look at consider, you know, investing money and, and, and doing that sort of thing. Um, but I think there's trickle down right? Where the private equity is doing these big deals, whether it's Eisen or CI co whoever, you know, they've got an infusion of dollars and part of their strategy may end up being acquiring a niche practice. Maybe you have what they need to accelerate their client accounting services, because, you know, small firms are usually fantastic at client accounting services offerings, right. So they may pick you and use those PE funds that they have. I think that's where the trickle Down's gonna happen. If it does happen with smaller firms outside of that, you know, I, I don't think there's really many options. It, it is partly cuz there's, there's such a shortage of staff out there. Yeah, yeah. And capacity problem. So right.
Dan Hood: (
But still, so basically still a, the only clean yourself up, get your act together, right? Embrace the little technology, create a, a forward positive moving forward story that you can, uh, that you can take out.
Carl Peterson: (
And you need to create that story before you start talking to people,
Dan Hood: (
You don't, you don't be figuring it out in the middle of the, uh, the first lunch where you're trying to convince them. It's interesting. You talk about that trickle down. I was telling to somebody who was pointing out for a lot of the PE firms, right. They're splitting off test functions. And so they're starting to look when you split off the test functions for some of these firms you're ending up with would end up being actually much smaller firms cuz it's, you know, half or a third or a quarter of the business, whatever it may be. Um, uh, and I'm always fascinated by when you start looking at those numbers and you start having these outside people come in, looking at that, uh, potential for sort of rollups and people looking at the profession in ways that the profession doesn't necessarily look at itself, um, and thinking about those kind of options. So that's part of the reason why I was asked. I was curious if that kind of thing might be coming up, but, um, as you say, it's probably a lot less likely that there'll be benefiting from the PE money directly, maybe in trickle down sort on the run might.
Carl Peterson: (
Right. And there's gonna be other, I think indirect activity that's happening impacts on smaller firms from the PE activity, cuz I'm assuming that the PE activity, you know, those firms that have those funds might be putting an upper pressure on compensation. So you may have, you may be impacted that with your staff, but I think that's a good thing in the end cuz that hopefully that'll attract people in the profession or retain people that we need to be have in the profession.
Dan Hood: (
Fingers crossed let's hope for all these things. Right? Yeah. Excellent. All, uh, this has been, there's a, it's a lot for, for small firms, small practitioners to think about, um, any final thoughts you, you would leave them with as they, as they, as they look at their practice and what they wanna do with it. Any things, uh, final words for them? Well, I
Carl Peterson: (
There's a more and more activity. So the competition to, to finding those firms that are willing to acquire you, uh, is, is gonna be greater. And so you gotta make sure you got that story ready to tell. All
Dan Hood: (
Right. All right. Get your, get your story chops in order to get your, uh, your firm in, uh, in good shape and be ready to, to, to talk it up in a good way. Right? Excellent. That's right. Carl Peterson of the a I CPA. Thank you so much for joining us. Thank you Dan. I appreciate it. Thank you all for listening. This episode of the, the air was produced by accounting today. Way to review us on your favorite podcast platform and see the rest of our content on accounting today. Dot com. Thanks again to our guest back to the list.