Transition & Succession

Planning for the Future: Succession Planning and Mergers

I’m sure that you, as I, have noticed that the accounting profession in the United States is being changed as new finance and tax laws are coming into existence. In many firms, these changes, along with the normal work load, are more than enough to keep you busy. However, in a profession mostly run by Baby Boomers looking to retire in the next few years, two more issues are added to an already full docket … the continuation of the firm and how to fund retirement.

In the past, firm owners were able to put together a succession strategy, and retire without too much difficulty. Now with marketplace, financial, and cultural changes, firms are finding it difficult to get a footing on the new forms of succession and mergers.

Succession Planning and Practice Continuation Agreements (PCAs)

If you are the owner of a CPA firm, and are contemplating your retirement, you probably recognize the importance of planning for your future, and the future of your firm. You are not alone. A number of firms have recognized the need to form a plan, and have succession plans or practice continuation agreements in place. Others, having just realized the need, have a great deal of work ahead of them.

In October AICPA and Succession Institute LLC released the 2012 PCPS Succession Survey on succession planning which canvassed more than 500 multi-owner firms and more than 400 sole proprietorships. The survey found the following:

•Slightly more than 50% of multi-owner firms don’t have a signed, documented succession plan in place.
•79% of firm owners say succession planning will be a significant issue for their firm in the next 10 years.
•Only 6% of sole proprietors have a practice continuation agreement (PCA) in place.

Difficulties in Succession Planning

Seeing the importance of planning for the future of your firm is a completely different matter than trudging through the large amount of work necessary to set a plan in place. Often the work of forming a plan and setting it in motion is put aside with the recognition that doing the work of today is more important than tomorrow’s plan. This is particularly true in smaller firms that are trying to survive with just a few employees.

Not only is time a limiting factor, but as seen in the 2012 PCPS Succession Survey, finding young talent to train can also be challenging. According to the survey, forty-two percent of senior partners said one of the largest challenges to succession planning is a lack of confidence in the leadership ability of emerging partners. For smaller firms, there is the additional challenge that the only CPA in the firm may be the owner, so there is no one else to train.

As firms search amongst their employees, or outside of their firm, for talent to train up into leadership, they are finding that owners or partners want to retire earlier than planned due to burn out. Nicholas Potocska, CPA, said, “With an avalanche of new tax requirements and interpretations, even beyond the new health care reform, it makes it more and more difficult (even if possible) to keep up with changes…. It burns people out.”

This hits even harder in small firms. The strain of keeping up with new information is added to by “increased use of technology to perform daily functions (tax, audit software, forensics). Then, people are pressured by having to hold service rates to be competitive while simultaneously spending more time working to make extra money,” said Potocska.

Mergers & Acquisitions

Lack of time to set out and approve a plan, lack of talent, and retirement coming on quickly for owners/partners has firms searching for other methods to provide for the future. Many owners are turning to mergers and acquisitions as the answer to the question of how to preserve the firm they built while also funding their retirements. In fact, according to the 2012 PCPS Succession Survey, almost half of accounting firms in the United States were either currently in merger talks or were expected to be within two years.

Challenges in Mergers & Acquisitions

While mergers have been proven to be an excellent option for accounting firm owners, they do come with drawbacks.

The number of firms looking to merge with another firm has made the market a “buyers market”. Naturally, this affects the valuation of firms in a negative way. The survey showed that slightly over half of owners expect to receive 100% of each dollar of client revenue as their payout when they sell their practice. However, it will most likely not be what they actually receive.

The 2012 PCPS Succession Survey reports that, “selling CPAs can expect their actual realization to be lower than $1 or $1 of revenue…. In our experience, even when the seller helps the buyer retain clients, the total payments made to the seller approximate about 70 cents on the dollar for the entire book sold, and could easily be as low as 60 cents on the dollar.”

The retention of clients is also a challenge when merging, and can negatively impact the valuation of a firm. Many buyers anticipate the loss of some clients during a transition, and have made provision for it. Then, along with putting less money down on acquisitions, buyers realize that many clients are partner loyal, so they are emphasizing a longer retention period of partners within the purchased firm. While this may help a buying firm retain more clients from the purchased firm, it is a factor the owners/partners of selling firms need to consider.


JofA Articles:
“Developing Your Personal Brand Equity,” July 2010, page 42
“Succession Planning: The Challenge of What’s Next,” Amato, N. January 2013
“CPA Firm Succession: Solidifying the Future,” Sinkin J. CPA, & Putney, T. CPA. July 2013, page 53-54


2012 PCPS Succession Survey (sole proprietors)
2012 PCPS Succession Survey (multiowner firms)