A Well-Planned Succession: Crafting an Equitable Deal

If your firm has thought at all about a merger or acquisition, you’ve probably noticed that you’re not the only one. The topic of M&A in the accounting field seems to be everywhere. Why is that? 

With the expansion of technology and its ability to handle the more traditional aspects of accounting, firms are being forced to change and adapt. More niche firms exist, and specialties are desirable to add to a practice. And, of course, as baby boomers retire, their firms need new leadership or restructuring, possibly through a merger with another firm.

There is also the simple fact that there are only so many ways to grow a firm. You can add one client at a time, develop a niche, or merge with another firm, adding their assets to yours. M&A remains the fastest way to grow your firm, and as such there will always be a market for it.

Often, partners looking toward retirement need a successor, and there is no appropriate successor on your bench. If your firm needs an outside successor it’s important to start considering that process before retirement is close at hand.

In order to bring in the right successor at the right time, ask yourself how many more tax seasons you want to work full time. If you only want to work through three or four more seasons before slowing down, that means you may only meet in person with those clients three or four more times. Asking yourself that key question puts your time limits into perspective, and helps you know how quickly you should start integrating a successor into your client relationships to achieve a strong transition.

When preparing for a successor think about your investments, such as technology, office space, property leases, and staff. Before investing or committing in any of these areas, consider whether a successor will want or need these assets.

The flip side of these questions is to think about the assets a potential successor brings to the match. You should learn why the other firm wants to merge. Look at how much staff it has and how much space it requires. Find out if it’s up to date with its technology and assess its financial strength.

The Four C’s

Generally, the considerations for selecting a successor fall into four categories: chemistry, continuity, culture, and capacity. Relationship chemistry is critical. The reason your clients are yours is because of you and your relationship with them. If you wouldn’t enjoy going out to lunch with a potential successor, the relational chemistry between the two of you is probably lacking and will likely be lacking for your clients as well.

When it comes to continuity, capacity, and culture, you should know:

• What are the other firm’s specialties?
• If your clients come to your office, will the other firm’s location be convenient?
• Is it retaining its clients, and does it have the capacity to take on your firm’s work?
• How do its billing rates compare with yours?
• What is it like to be a partner, staffer, or client with the other firm compared to yours?
  • How long have partners and staffers been with the firm?
  • How old are the owners/partners?

How to Structure Your Transition

There are several ways to structure a transition to a successor. First is a straight sale in which a firm owner wants to transition to part-time and then to retirement. A straight sale is a direct process, but often firms do not start this transition early enough.

Another structuring method is a merger to buy-out. In this instance the seller plans to stay with the newly created firm for six or more years, so they will be bought out but continue working full-time.

In other situations, firms take a creative approach to structuring their transition by carving out a segment of clients to sell. For example, a firm might keep its niche practice, but sell the more traditional accounting side of its business. Or, a firm could choose a portion of clients to keep for themselves but sell the rest of their clients in order to slow down but maintain a reasonable level of work. In some instances a firm does not have the staff for an internal succession but has too many clients to transition easily. That firm could sell a portion of its clients in order to be more appealing to the right buyer.

The last type of transition structure we’ll look at is the two-stage deal. In a two-stage deal, the seller stays on for a pre-determined amount of time, such as three years. During that time, the buyer takes on operation costs and the seller is paid a percentage of collections that keeps the seller whole in his or her historic income. The seller works on transitioning clients while also still working in the practice. In this deal the seller retains reasonable control, autonomy and income while simultaneously transitioning.

At the end of the three years, stage two begins. Stage two is the actual buyout during which the retention period starts, and the seller may continue to work part-time. The two-stage approach provides a great transition which leads to higher client retention, and allows the seller to work less in the admin portion of his or her firm while focusing on the transition. The buyer saves on labor costs, rent, software and malpractice insurance in addition to setting up a smooth transition.

Multiple Partners in Various Career Stages

Many firms have multiple partners, each in different phases of their careers. Some partners will be ready to retire and others might want to work for two or three more decades. In this instance, the firm can apply different transition structures to each partner, depending on their needs. Partners who are ready to retire can do a straight sale, partners who want to slow down within five years or less can do a two-stage deal, and those who want to continue working for six or more years can do a merger. The various transition structures can accommodate the differing needs of partners even within the same successor firm.

Client Retention and Communication

And as with any transition, timing is essential. Prior to closing the deal, very few should know about the transition. When the deal is signed there is usually an effective date set for weeks or months later. After the deal is signed and before the effective date, the sale or merger can be communicated to the two firms intentionally and with care. Communication might start with a firm-wide meeting, followed by group meetings. Mentoring teams could also be implemented to assist staff with the transition. Clear communication that anticipates the needs and concerns of the entire team is key.

Client retention is also a major consideration for all parties involved, making communication with clients a critical component to the deal as well. Firms should be aware that their clients will have questions such as, who will serve me in the future? Can I trust the new firm? Will my costs increase? Where will the new office be located?

The selling firm should communicate with its clients with these concerns in mind. Determine which clients will need to receive a visit, a letter, or a phone call. As the transition takes place, consider details such as initially mailing letters in the seller’s envelopes so clients recognize it; what type of greeting is used to answer the phone; and even what message is recorded in the company voicemail. The key to a successful transition is emphasizing the gain of the new combined successor firm, not the loss of the original one.

In any sale or merger, always keep in mind the details as well as the big picture considerations for the deal, including the chemistry between the two parties, continuity for staff and clients, firm culture, and the buyer’s capacity to handle the workload. And remember that a good deal is a fair deal; sellers should be rewarded for their years of sweat equity, but the buyer needs to have positive cash flow.

Joel Sinkin is president of Transition Advisors, LLC and can be reached at [email protected]. On November 14, 2019, he will be presenting a live webinar entitled “Seven Step Roadmap to Closing a Merger, Acquisition, or Sale.” To learn more about Sinkin’s latest thinking about M&A in the accounting industry, register for the webinar here.