Selling/Succession 4+ Partner Firms

The challenges facing firms with four or more partners are often different than firms with fewer partners. In the larger firm, it is less likely a partner will possess a book of business that is a significant percentage of the overall firm. So there is a higher probability a partner can reduce his or her time commitment to the firm with less exposure to client attrition. However, many firms - with a partner group numbering four to six for example - face the difficult task of coming to agreement about the necessity for and specifics of a partner succession plan.

In addition, the aging of the Baby-Boomers has already had a significant impact on the accounting community relating to succession issues and this impact is expected to increase over the next 10 years. This refers to the dramatic increase in the number of partners of accounting firms that will be seeking succession in the near future. This increase in the quantity of practitioners seeking to reduce their time commitment to the firm, coupled with an already reduced quantity of high-end young staff ready to take on a partnership role will likely further reduce values of accounting firms and convert a "sellers' marketplace" to a "buyers' marketplace." This is why so many firms are seeking to institute their succession plan now in order to take advantage of current values. There is a method of structuring your long term succession and obtaining today's higher values, while still retaining control, income and autonomy until the time that the role reduction takes place.

Additional Data on Succession Trends

In 2016, the PCPS Division of the AICPA conducted a survey on succession issues in the profession. The following data demonstrate why there is likely to be a significant increase in the number of firms seeking external succession solutions in the very near future:

They asked what ownership percentage was likely to be transferred during the next five years. Just taking a broad view, the series of questions on this topic first provided an average amount of ownership expected to be transferred over the next five-years. In each of the following years, of the firms surveyed, these percentages of equity ownership on average are expected to retire and will need to be transitioned to other owners:

• In 2016, an average of 5% of the ownership is expected to transfer
• In 2017, an average of 5% of the ownership is expected to transfer
• In 2018, an average of 7% of the ownership is expected to transfer
• In 2019, an average of 6% of the ownership is expected to transfer
• In 2020, an average of 12% of the ownership is expected to transfer

This totals 35% of current partners expect to transfer their ownership interest between 2016 and 2020.

Then, drilling down deeper:

• In 2016, 8.6% of the respondents said 25% or more of the ownership of their firm would be retiring, and 4% would have 50% or more of the ownership retiring
• In 2017, 8.8% of the respondents said 25% or more of ownership of their firm would be retiring, and 3.6% would have 50% or more of the ownership retiring
• In 2018, 11.6% of the respondents said 25% or more of the ownership of their firm would be retiring, and 5% would have 50% or more of the ownership retiring
• In 2019, 9.3% of the respondents said 25% or more of the ownership of their firm would be retiring, and 4.3% would have 50% or more of the ownership retiring
• In 2020, 19.2% of the respondents said 25% or more of the ownership of their firm would be retiring, and 10.9% would have 50% or more of the ownership retiring

This creates a far more urgent picture regarding the succession landscape for our profession. If you total up the next five years, this data shows that 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.

Mitigating this environment is the talent shortage, which will most likely continue, yet the demand will be gaining strength. There may be no hotter commodity in public accounting today than young talent, especially if they have a book of business.

The ripple effect is making it even more difficult as both national and regional accounting firms, and business and industry can dangle the dollar carrot in front of new CPAs and lure them away from the smaller firms. This puts additional pressure on the firms in the four to eight partner groups because making a lucrative offer to a talented and motivated younger CPA is not something many firms of this size are able to do or desire to since it would likely result in a drop in their income.

For firms of this size, it is critical that steps are taken and strategic succession or transition plans are made to minimize the potential negative financial effect on the firm, upcoming partners, staff and the potential for a parallel reduced service level to the clients.

You can control succession, internal or external, (or the sale of your practice) if you understand your options and have the information to make informed decisions. (See also Selling and Succession: 1-3 Partners as much of that information can be applicable to a larger firm.)

• How do we attract younger talent for a potential internal succession solution?
• Why is merger mania gripping our profession?
• What are some of potential effects of merger mania on my practice?
• Should my firm consider a merger as a succession solution?
• How do we protect and/or realize our value?
• What if the partners have different succession goals?

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