and Succession in Small to Midsize Accounting Practices
Max T. Krotman
NOVEMBER 2005 - In
the last 30 years, there has been a substantial decrease in
the pool of individuals studying accounting. Many outstanding
students that might have entered the accounting profession
instead chose careers in law and finance. As a result, there
are fewer top professionals now than there were three decades
ago. This demographic pattern has had a significant impact
on the internal growth of existing firms, the succession planning
within firms, and the lengthening careers of senior accounting
practitioners. Accounting firm partners between the ages of
50 and 65 are faced with passing the torch to professionals
with less experience. This problem is particularly acute in
small and medium-size firms.
to the Shortfall
the last 10 years, small and midsize firms with partners
between the ages of 50 and 65 have responded to the shortfall
with a variety of internal responses, such as the following:
Bidding up the price of available talent;
Intensely nurturing the talent available;
Utilizing technology to leverage the time of partners
Avoiding the provision of services that are less profitable
or highly time consuming, such as payroll work and bookkeeping;
Merging practices to increase the efficient use of talent,
incorporating organizational efficiencies, and freeing
partners from nonbillable administrative time;
Retaining senior partners beyond their expected retirement
Turning away new clients or shedding existing clients;
first alternative to solve the shortage of staff is internal:
promote from within. If that fails to meet the needs, the
firm must hire outside talent to ensure its survival, growth,
and ability to pay out retiring partners. Because of market
conditions, it is often necessary to use an executive search
agency to find the right people.
from within provides hope and incentive to the next generation.
Staff may be motivated to work harder because they see that
good service is rewarded by advancement, and management
gets to work with a known quantity. Among the advantages
of importing outside talent are new skills and ideas and
the possibility of expanding the business.
neither method is satisfactory, then it is necessary to
use external solutions.
and acquisitions have become more popular in recent years,
partially because of the talent shortage but also because
of the increasing realization of their benefits.
or merger of partners. Usually, a firm seeks
to acquire or merge-in a smaller firm. Ideally, the combined
firm will have new equity partners that will be a minority
in the combined firm, and fees brought in by the new equity
partners will be less than half of those of the combined
firm. Ideally, the revenues of the new partners will be
closer to one-third of the total.
example, a $2 million/four-partner firm would seek to merge
with a $1 million/two-partner firm. A $6 million/six-partner
firm would try to find a firm with less than $3 million
in collections and fewer than three equity partners. If
these ratios were to hold, all partners could add significantly
to their books of business because they could take advantage
of the larger firm’s administrative infrastructure.
selecting a smaller firm, a larger firm seeks to maintain
the preeminence of its partners. The goal is to acquire
the staff and niches developed by the smaller firm and to
use the expertise and billing rate of the larger firm to
increase the income generated by the partners from the smaller
situation occasionally works in reverse. For example, an
efficient, smaller firm might successfully acquire a firm
with greater billings and more partners, but with far less
profitability per partner because each partner manages a
smaller book. Once the larger firm follows the model of
the more efficient, more profitable company, the combined
firm benefits from its addition of the partners.
staff and future partners. Some larger firms
purchase or merge a smaller firm in which the senior partners
are approaching retirement but have developed an excellent
staff. These employees can be not only a working asset in
the combined firm, but may also supply future successor
partners. In this scenario, the senior partners of the acquired
firm may remain full- or part-time for a finite period.
the partners in the acquired firm that are planning retirement
are insecure about their original firm’s ability to
pay them out. Often, they are willing to sell to obtain
security. In the current market, this works well for the
seller. They have avoided sharing their profits with junior
partners and have not diverted their energies by nurturing
merger or buyouts work best when the staffs of the two firms
are complementary or when the overpaid, long-term staff
of the acquired firm can be retired, trimming payroll. Usually,
some or all of the partners in the acquired firm want to
work one to five more years after the merger, but their
primary goal is to secure their retirement. On the other
hand, there are scenarios where the acquiring firm may value
a high-quality staff more than the clients purchased.
succession. If a firm has not successfully
developed younger partners, it can merge with a smaller,
more youthful one whose partners can become the future successors.
The larger firm should commence this program when a senior
partner intends to retire within the next one to three years,
even though retirement may be five to 10 years away for
most of the partners.
the short run, the merged partners of the smaller firm give
up their preeminence to the senior partners of the larger
firm. The larger the firm, the larger the constraints. These
mergers are most successful when the smaller firm’s
partners appreciate the increased earnings, security, and
future opportunities they will enjoy with the bigger firm.
a large firm. The Big Four and the other large
accounting firms, with more than $20 million in revenues,
offer another option to many firms and partners. These firms
can easily absorb partners and their clients. The partners
are not “bought out,” and they join the firm,
contribute their clients, and receive the firm’s standard
or “tweaked” retirement payout. This is very
suitable to those satisfied with being a respected, well-remunerated
professional within a large organization. Others grimace
at this role change and loss of autonomy.
firm is totally secure. The disintegration of Arthur Andersen
and the demise of other leading firms in the past 30 years
prove that size alone is no guarantee of safety. One could
argue that a smaller, solid firm is a better source of security
than a large firm whose financial health defies accurate
analysis. The smaller firm, however, must constantly keep
enough high-quality staff to maintain its status.
of Successful Mergers
all successful mergers, the increased financial rewards
resulting from the economies of operating through one organization
help to soothe egos. Some of the economies result from—
shared technology expertise and expense;
affordability and availability of higher-level talent;
the ability to cross-sell clients through the additional
support that a larger firm can offer its partners.
synergies follow successful sales or mergers of practices.
Some advantages are—
complementary staffs (e.g., good junior partners from
one firm and good senior partners from the other);
ability to eliminate overpaid people;
addition of staff with expertise useful to the firm; and
complementary staff time (e.g., the merger of a firm specializing
in tax services with a firm that has underutilized time
during tax season).
same factors apply to the skills and expertise of the partners,
both professionally and administratively.
differentials are beneficial to firms. Even if one firm
is far more advanced than the other, it will take less than
a year to bring the weaker firm up to pace. If reversed,
the incremental cost to equip and train the new people is
dwarfed by the additional time and efficiency recovered.
addition, the personalities of the firms and the partners
must work or the merger will not be successful. There must
be basic agreement on moral issues, and the personalities
cannot be abrasive or incompatible with each other.
these issues emerge quickly in the preliminary meetings
between firms. They appear during the negotiation process,
the due diligence, and the documentation. If problems arise,
they can usually be settled if all parties are alert but
are an increasing number of large firms, because an increasing
number of professionals have seen the value in merging.
There are proportionate benefits for firms at lower levels
as well. The right sale, merger, or acquisition is truly
a win–win proposition.
T. Krotman, JD, is vice-president and general counsel
at Globalforce International Inc., Melville, N.Y. He can be
reached at 800-261-7522 x147 or firstname.lastname@example.org.