Don’t Stick Your Head in the Sand – Make a Succession Plan!

By Pamela Q. Weaver, DBA, CPA

The AICPA 2008 PCPS Succession Survey results showed that succession planning was not a top concern for firms with two to five professionals. But considering that a large number of baby boomer CPAs will retire in the next five to 10 years from these smaller firms, this lack of focus on succession issues may be problematic. Compounding the issue is a shortage of the next level of staff prepared to take over these firms, which will likely result in a buyers’ market for those who must sell their firms to retire.

Here are a few things to consider as you begin to formulate a succession plan.

Set a Retirement Date

Your first step is determining the retirement date and setting up a timeline of activities. Working backward from the retirement date, pencil in the activities you need to complete in order to keep your succession plan moving to fruition. Not only does setting the retirement date get you started, but developing leaders know when they will take over, employees know what to expect in case of sale or merger, and you won’t surprise your clients with your retirement.

Analyze Your Firm

Early in the process, it is important to perform a thorough analysis of your firm. Do you focus on audit, tax, consulting, or some other niche? What industries do you service? Is your client base increasing, decreasing, or changing characteristics? Is your staff expertise appropriate or do you have underutilized resources? Does your fee structure make sense?

Then catalog what your firm has to offer. What are your most important assets? For a merger or sale, why is your firm an attractive candidate? For an internal buyout, why do your staff members want to become owners? In other words, you are trying to determine how your firm is different from the others on the market.

Determine Your Needs

Be honest about what you expect at retirement as well as your financial needs. Do you expect the buyout to be the primary funding of your retirement, or is it just part of a diversified plan? Do you want to walk out the door on the appointed day or gradually reduce your involvement over time? These expectations help drive your succession plan.

Potential price of the buyout is a key consideration. Valuing small professional firms can be difficult, especially when the retiring party is highly involved with the firm and the clients. The details of the buyout, including down payment, length of payout period, and retention adjustments for lost clients can all affect the price.

You may wish to have your interest in the firm valued by an independent expert in valuation. Among other considerations, the valuation professional will look at the characteristics of the firm, the ease of assimilation into another firm, and the potential competition among buyout candidates in your area to give you a range of values. Be realistic about your expectations regarding price. Evaluating the buyout deal from the buyer’s perspective can help draw attention to an unrealistic value.

Common Succession Options

Four of the common succession options include:

  1. the internal buyout in which the retiring owner transitions the firm to internal staff members;
  2. a merger with another firm;
  3. selling the firm to an outsider; and
  4. reducing the workload over time, shutting the door, and walking away.

Each option has pros and cons. Retiring owners should consider which option best suits their needs and then choose a second option for a backup plan.

Internal buyout. The first step for the internal buyout is identifying potential successors among the existing staff. Identify who in the firm has the necessary technical, supervisory, rainmaking, business, and social skills to take over the firm. Question whether the chosen successors have the drive and desire to take over the firm and if the rest of the staff will readily accept the new role for the chosen successors. Successors will need sufficient time to transition into their new roles without the retiring leader hanging on too long.

The financial aspects of the buyout involve a balance between the needs of the retiring leader and the ability of the successors to afford the buyout. When setting a price, ask whether the firm and the succeeding leaders can afford the plan. If the buyout leaves cash too tight, the successor may become frustrated because of the delay in obtaining financial rewards during the buyout period.

Merger. A merger involves creating synergy between your firm and the other firm involved in the merger. One goal is to choose a merger partner with a complementary practice to maximize client retention. Clients need to feel comfortable with the new arrangement and confident they will receive continuity of service and maintenance of expected fee levels.

Staff retention is another important aspect of a merger. Look for a merger candidate who is willing to create a new combined firm rather than just assimilating the smaller firm into the larger firm. Firm culture considerations such as values, work-life balance, roles, philosophy of client service, centralized or decentralized management, compensation, and software all contribute to the success of a merger. Also, address the arrangements for staff not absorbed in the merger, whether voluntary or involuntary. Fair treatment of colleagues sets an important tone and affects the acceptance of the new firm.

Clearly understand the role of the retiring professional in the combined firm. How long does the retiring professional stay at the new firm, and to what degree does the retiring professional have control over his or her previous clients and staff? Must the retiring professional adhere to the partner policies at the new firm? What is the retiring professional’s compensation, especially as the involvement diminishes?

A properly drafted termination agreement provides a safeguard should the parties find they are not compatible. Essential considerations include the timeframe for the termination agreement, fair division of clients and assets, and financial agreements. The retiring professional should have a backup plan in case the merger does not work out.

Sell to an outsider. Selling the firm to an outsider can be challenging. To find the right buyer, you may wish to use a professional broker. Understanding that the large numbers of baby boomers retiring could create a buyers’ market, you must be clear on what differentiates your firm from the others on the market.

Selling to an outsider presents unique challenges related to both client and staff retention. A period of overlap between the buyer and seller can help mitigate these challenges but may create new issues regarding who is in control. Any agreement should specify the length and parameters of the overlap between buyer and seller, as well as the impact of client attrition.

Think about how you plan to introduce the buyer to the clients and how you plan to reassure the clients that the new owner will continue to meet their needs. Understand that for many clients, the CPA is a trusted advisor and the client may find it difficult to transfer this trust to the new owner.

Potential changes in fee structure may also be a concern. The ultimate price you realize for the sale of your practice may depend upon the degree of client retention and service revenue for a specified period of time.

Staff members will also have concerns regarding a potential change in firm culture and may become conflicted regarding transferring loyalty from the retiring owner to the new owner. Changes in compensation and benefits, changing roles, and change in location may cause staff members to reconsider whether they wish to stay with the firm. If staff members have been integral to the service delivery to clients, staff retention may affect client retention.

Phase-out. The final succession strategy involves the gradual constriction of the business, the loss of clients through attrition, and selective referrals of existing clients to other firms. Although simple, this approach involves no cash inflow for the value of the business. Therefore, the phase-out approach requires alternative financing for retirement.

The phase-out may work better with small firms that do discrete consulting projects rather than ongoing engagements. The owner may chose to sell the equipment or absorb the equipment personally. This approach may be hard to manage in terms of timing because the retiring owner may curtail the business too soon and run out of work before he or she is ready to retire.

While phase-out is a chosen strategy for some retiring professionals, the method may be the default option for those professionals who do not properly plan their succession. Untimely health issues or another unplanned situation may force the owner to take this option and thus fail to receive value for the practice they have built up over the years.

Regardless of the method you choose, tailor the plan to fit your firm. Start early and take the time to determine which exit strategy makes the most sense for your firm considering your financial needs, your professional staff, the market, and the availability of merger candidates and/or qualified buyers.


Even if your retirement is several years away, begin to assemble the documents you will need to give to a potential buyer of the firm. You will need several years of financial statements and tax returns. A potential buyer will want to see annual billings for three to five years, as well as collection information. You will also need to develop a list of assets, transferable leases, software licenses, and other agreements.

Before you release any information to a potential buyer, check with your attorney regarding the appropriate privacy and non-disclosure issues. Make sure that all terms are in writing and agree to all terms in advance rather than figuring out the details as you go along. Consult with experts with experience in matters relating to the succession of accounting firms.

Death and Disability

As part of your succession plan, include plans for your disability or premature death. While these topics can be unpleasant to think about, failure to consider these topics can put your firm and your family’s future at risk. In addition to disability insurance, make sure you have written plans for both your short-term and long-term disability. Who takes over for you if you can’t work? If your clients are transferred either internally or externally, do they come back to you when you return? Also, determine how long can you be absent before you must execute your succession plan.

Death and disability present special challenges for the single professional who may have no internal staff. Arrange with another professional to step in on short notice in case of emergency. [Editor’s Note: To be a part of the CSCPA’s emergency assistance/practice continuation program, visit]

Set up a clearly marked notebook with instructions on how to locate computer usernames and passwords, client lists, client files, tracking lists, calendar, etc. Make sure that family members know the location of this key information and have access to office keys and other essential items.

Other Considerations

Take your retirement dates and succession plan into consideration when making long-term commitments such as office leases, equipment purchases, staff additions, and long-term consulting arrangements. Saddling a potential buyer with these obligations might discourage buyers or affect the purchase price. Conversely, a beneficial assumable lease in a good location may be a positive aspect. Consider the facts and circumstances of each obligation.

If you are reducing your activity over time, question whether your compensation is realistic. In a buyout situation, make sure your successor can afford your buyout terms and still have sufficient earnings. Finally, if you had been previously counting on a buyout to be your primary source of retirement funding, consider supplementing your savings for retirement while you are still working to offset possible value reductions due to a buyers’ market.

Regardless of which succession option you choose, revisit your plans regularly. For internal buyouts, make sure the emerging leaders are still committed. Evaluate market considerations for sales and mergers. Circumstances change and a good plan accommodates those changes.

Retirement can be daunting, and selling or transitioning the firm that you worked so hard to develop can be difficult. However, don’t ignore the future by putting your head in the sand. Make a succession plan. You owe it to your clients. You owe it to your staff. You owe it to your family. And you owe it to yourself.

Pamela Q. Weaver, DBA, CPA specializes in tax and business consulting services and is the chair of the CSCPA Federal Income Taxation Committee and a member of the CSCPA Advisory Council. Weaver holds a Doctor of Business Administration degree focusing on optimizing business performance and leadership. She is also an adjunct faculty member at several local colleges and universities. She can be reached at