Accounting firms today are dealing with a double whammy that makes succession planning problematic. First, a wave of retirements as baby boomer owners retire. And second, a staffing shortage made worse by the pandemic. These two feed on each other and make both problems worse.
As an accounting firm broker, I’ve found that both problems can be solved at the same time by building a firm that is highly desirable. This not only makes your firm a more pleasant place to work — and more attractive to scarce talent — but succession often takes care of itself. If you don’t like working there, no one else will.
For smaller firms with revenues under $5 million, my team has noticed that the most successful firms focus on four pillars. Building a firm that focuses on these pillars takes discipline. It won’t be easy. This approach may not be to every firm owner’s liking and may not be possible for all firms. But the firms that intentionally focus on these pillars tend to have fewer problems with both succession and staff retention. They are also a lot more fun to own.
1. Focus your service offerings. You’ve got to be clear about what you’re good at and what’s in your wheelhouse. Most CPAs come from a really good place of wanting to serve their clients. They want to do everything they can for their clients. They are so giving, but often at their own expense.
A long-term tax client will need an expert witness for a divorce case. So now you’re also an expert witness. And then another client will need a business valuation. Pretty soon, you’re doing all these different things, and none of them very well. You’ve got a scattered practice that no one will want to buy. And you will struggle to find those unicorn CPAs who can help with all the different pieces.
You’ve got to have a bit of a cold business-mindedness about running your firm. You’ve got to prune away those service offerings that aren’t in your wheelhouse. Don’t dabble.
2. Be selective about your clients. At least once a year, go through your client list and identify your best and your worst clients. What are the commonalities that make your best clients pleasant to work with? Use those characteristics to build a profile of your ideal client. Simply identifying those characteristics can help you recognize the best opportunities for your firm and can make you more appreciative of your good clients. As a team, brainstorm ways you can nurture the best ones and give them exceptional service.
Terminate your worst clients. Your staff will thank you when they no longer have to put up with the terrible clients, and when they can spend more time with the great ones. Some bad clients can be turned into great clients simply by correcting expectations and applying financial or other consequences for noncompliance. However, many of those bad clients will never change. Those deserve to be fired.
One of our past clients had a team meeting to “vote clients off the island.” They dressed up in their best Hawaiian clothes, and as a group suggested which clients needed to go. The staff loved this, and it injected some fun into an otherwise difficult task.
3. Be picky about hiring. Even though we are in the midst of the worst talent crunch we’ve seen in years, be careful about who you invite to join your team. You don’t want just warm bodies to fill in empty spots in your org chart, but you want people who fit in your firm culture and who are in alignment with the vision you have for your firm. You can teach the skills, but you can’t teach the culture fit. Once you have the right clients and the right people, you can focus on the culture of your firm.
I used to think that firm culture was a luxury, but it’s becoming a competitive advantage. Firms with great culture develop almost a kind of gravity around them. People see that this is a fun place to be, and they want to be there. Often, though, the best people will require a premium in salary if you want them to stick around.
4. Price your services appropriately. If your prices are too low, you may not be able to afford the team you need. If you don’t have the right team and enough revenue coming in, you won’t have the luxury of not being overscheduled to make up for the shortfall. Too much work and too little capacity puts more work on your plate, increasing your owner hours. You may also find that you start overworking the whole team, which then negatively impacts your staff retention.
High owner hours is often a symptom of poor pricing. Today’s buyers and future leaders look at owner hours as a metric to gauge the desirability of a firm. A decade ago, we could sell firms where owners were working 3,000 hours or more. Today, a big selling point is owner hours around 1,700 to 1,800 or fewer.
These four pillars apply equally whether this is a solo or a larger firm. However, changing to focus on these can be harder for multipartner firms because the decision-making process is more complex. In some cases, the best solution for a forward-thinking leader is to exit a multipartner firm and start a solo practice where they can build the business they want to work in.
Effortless succession
When you build a firm with these four pillars as the foundation, succession planning takes care of itself, often internally. As a firm owner, you’ll have no trouble getting out of your firm because everyone will want to get into your firm.
These four pillars create a better place for staff, a better place for clients and a better place for partners. Your firm will develop a great reputation in town or even across the country in today’s remote world. Firms like these are highly desirable and highly marketable. Firms with high owner cash-flow and low owner hours typically attract a large number of buyers and sell for premium prices and terms.
As a broker, I find the ideal time to start the work to create a highly marketable firm is at least five years out. We find this to be the minimum window for planning. Spend some time and take a hard look at your firm to see what is desirable and what’s undesirable. Prune away what needs to be pruned away. With five years, you have time to fill gaps in staffing and to get profitability where it needs to be. You have an opportunity to make it better.
Ignore these pillars at your own risk
It’s easy for me to see what needs changing, but firm owners get caught in inertia. Making big changes is daunting. They don’t believe there’s a different or better way than how they are running their firms. Too often it takes a crisis to make changes. Someone leaves or the internal successor decides not to buy. If you wait until that crisis, it may be too late to change. But if you have already built your firm on these pillars, this is only a temporary setback.
We are in a period of rapid change. Technology is changing the way accountants do their work, and what clients expect from their accountants. Staffing constraints will become an even bigger issue than they are now, and will require changes sooner than tech will require. COVID has exposed the fault lines. Firms lacking the foundation of these four pillars will not be able to change as fast.
