More frequently than ever, I witness stories of small, single-partner CPA shops that suddenly end. Most of them end because the sole partner passed away or became disabled. In many of these cases, clients are left to scramble for a replacement CPA. Along with that, any enterprise value that the sole partner may have had in the enterprise withers away to a fraction of its real value … and sometimes zero.
The bottom line is this: Succession planning is not something that you only do for clients. You must practice what you preach and ensure that your clients have continuity of services and that your beneficiaries receive value for the enterprise value that you've created. Single-partner firms need to plan ahead, regardless of your age, for the distinct possibilities of tomorrow.
Based on the reality that tomorrow could be the last day at work for anyone reading this, I'm going to lay out some of the steps that you may want to do now (or after tax season) to protect your professional practice in the event something really bad happens to you.
Who will fill your shoes?
Your first order of business is to line up someone or another firm to act as your successor under the possible scenario that your disability may be temporary — say, less than one year — or permanent.
If you believe your successor lies within your firm, then it is time to have a real discussion about your expectations regarding communications with clients, new or expanded roles for your associates if you're not coming to work, and compensation plans for those who step up and help preserve the firm and its revenue stream.
Much of this hinges on the anticipated length of your absence. For a month or two, depending on the time of year, this could be immaterial or a huge issue. At the very least, iron out with your staff the protocol for communications. You may consider some formal communication to those clients directly impacted. It is better that they hear bad news about the sole partner from the firm, rather than the rumor mill. If properly notified, I believe clients will rally around the firm, the family and the employees and want to pitch in by remaining loyal clients.
You then need to evaluate current compensation and the fair value of the service your successor may deliver to the firm during your absence commensurate with the increased responsibilities and time commitment. The compensation adjustment is usually related to the longevity of your disability. If you will be out for a month or two during your slow season, that adjustment may be modest and in the form of a performance bonus for the extra load that was absorbed.
But if you expect to be out for three months starting Feb. 1, or for a much longer period such as a year or more, the compensation adjustment may be very different. For some that are capable, compensation may need to go way up, with some consideration to profit-sharing from the firm's bottom line during your absence.
Another significant point to consider: If you believe your team can hold the practice together for a year or so without you, then you need to make sure that your financial house is in great order. That means a good cash cushion to support you when you're not billing hours, both short- and long-term disability insurance, and some life insurance to replace the lost value in the firm should you pass away suddenly.
If it turns out that your disability becomes permanent, then you may need to consider a few other options. The first would be your assessment of the talent remaining as potential partners. If they are partner material, then you may proceed as you may with any other third-party sale. A significant distinction, however, between your incumbent team and selling to another firm may be access to capital. A third-party buyer will generally have capital, whether equity or debt, lined up for acquisitions. With your in-house sale, you may end up having to bank the transaction and structure an earnout paid to you over a period of years.
For those practitioners whose inside team is definitely not capable of filling the partner's shoes for up to a year, you must find another solution. You would need to find an outside successor, on either a contingent or permanent basis. In theory, this sounds simple. In practice it is definitely not easy.
For temporary disability situations, you would most likely need a firm where you know the partner(s) well. You obviously want someone technically competent, ethical, and respectful of the long-term relationships that you've built. Systems compatibility and other operational issues must blend well for this type of arrangement to have a chance of success. Most firms are struggling to serve their own clients efficiently, let alone absorb another partner-level workload being temporarily dumped on them. If you can find a firm to enter into a temporary service agreement, the two big issues will be compensation and client expectations. It is likely that if this temporary service happens in the peak of busy season, for example, your clients should understand the possibility that their personal or business tax returns may be extended.
A more likely scenario, based on what leading firms are willing to do, is to merge with another firm. With your disability on the table, it is likely that there would be language in such a deal whereby your merger partner has the right to buy you out if your disability is deemed permanent.
Sharing the details
If you find a firm to have on standby in case you can't work for a while, they'll want to know what they are getting themselves into. Is the client base and service model compatible? Are fees, costs and net profit similar? Are your clients and the demographics of your business what they are looking for as they build their firm? In short, they'll want to perform full due diligence to accept the role. At the conclusion of their due diligence and quality of earnings analysis, they'll know whether they want your firm or not. You'll never find a firm to pinch hit without knowing what it would mean if they became the owner.
To that end, begin assembling the data and documents that a potential suitor would want to see. I would start with a formal business valuation, performed by a third party. This valuation would be important under any possible scenario: your disability, your death, a merger or a sale.
In the valuation process, you'll need to gather pertinent financial data for the valuation firm. The obvious things are a few years of tax returns for the practice, a client roster for the same period, billings by client and by staff person, net realization … . You know all the metrics to help determine the value of an accounting firm.
But the valuation will also give you some valuable practice management insight. It will expose the strengths of your firm and it will expose your vulnerabilities. The biggest vulnerability in the valuation process is likely to be your lack of a successor! So make sure the evaluator is doing the work with your firm as a going concern, as if you were going to sell it now and stay on as long as deemed necessary to ensure a smooth transition of client service and trust.
After the valuation is complete, you need to start approaching colleagues that you admire and ask them if they'd entertain a conversation about your firm. You may have to kiss a lot of frogs to find the firm that is a good fit and wants to work with you on that basis.
As mentioned earlier, this issue is not top of mind for many practitioners, let alone a younger professional. But don't let your age deceive you; younger professionals need to have a succession plan also. If you are on the back nine, and within five years of a desired retirement, your time is today. You can't afford to gamble and see where the chips fall; there is too much riding on your health. You need to practice what you preach, and do this for your clients, your staff, your family, and your own peace of mind.
In fact, after you've considered these possibilities for yourself, your mind should begin to wander: How many of your clients are the sole owners of their businesses? How many of them have gone through a full succession analysis? You know that the likely answer to that is none to perhaps a few. I think that this is another service you can deliver to these clients to make them realize how much you care about them.
