How the accounting profession can succeed at succession planning

This article was current at the time of publication.

With a slew of accounting practices likely to face sale or ownership change in the next 15 years and the average age of senior practitioners only increasing, now is the time to start planning succession.

Where we are now

According to Statistics New Zealand’s provisional 2020 Annual Enterprise Survey – the latest available – NZ has around 5200 accounting services firms.

Of these, 2800 to 2900 are “regulated” through CPA Australia, CAANZ, or the Accountants and Tax Agents Institute of NZ, says Riki Sila, director of broker Accounting Practices.

The remainders are tax agencies or other unregulated practices.

The data shows the average revenue per enterprise was NZ$680,100 in 2020, suggesting only a handful of firms fall into the “large” category.

Bruce Sheppard CPA, principal of Auckland-based firm Gilligan Sheppard, says no more than 80 firms would make the “table stakes” NZ$5 million revenue to enable a full-value sale or transfer of ownership.

In common with many smaller businesses in NZ, accountancy faces a “demographic bulge” with owners approaching retirement.

Statistics NZ’s data indicates the average age of partners and employees across the profession is 56 (the average age of CPA Australia members in NZ public practices is 50).

Practice owners and partners will certainly be looking to pass the baton in some form over the next two decades.

Traditionally, all but the largest practices have been sold on the “fees market”, where the value metric is cents per dollar of ongoing or “compliance” revenue.

Sila says the market has recently been steady at NZ90 cents to NZ100 cents per dollar of revenue, with most firms changing hands for NZ$600,000 to NZ$800,000. Two multiple-partner firms recently sold for around NZ$2 million.

Sheppard notes that with many practitioners relying on the proceeds of a sale to fund retirement, maximising the value of a practice requires three to five years of exit planning.

The wild card for practitioners is client demographics, which tend to reflect their own.

“When you’re starting, you hunt in your sandpit, so your customers are your age, plus or minus 10 years,” he says.

“But the reality is, the future annuity revenue of a client aged 65 is considerably less than that one aged 25.”

This means that over time the value of the business declines.

Futureproofing tactics for accounting practices

Sheppard says practitioners need to start building generational spread into their business by taking on younger partners or employees who can appeal to their demographics.

Accounting firms need to keep in line with the changing demographics of who is running small businesses.  In particular, your firm can consider a need to be gender equal and have a more diverse cultural mix of senior staff including partners. 

Firms with existing partners and employees should identify an exact customer focus.

This, Sheppard says, is a critical factor for buyers, who don’t want to see staff lured elsewhere, especially if they take customers with them.

Sila agrees.

“A lot of buyers look at the bigger picture, and that’s clients,” he says.

In many firms, the most important relationship-holder after the owner is the 2ic (second in command), “but when a firm is sold, the goalposts change”. 

“If you’re on a salary, you just go where the dollars are, and I’ve seen a lot of sales turn bad because the 2ic leaves.”

Start planning now

Like Sheppard, Sila advises planning early. Also consider locking in key staff with equity stakes – 5 per cent to 10 per cent initially, with incremental increases.

However, Sheppard warns this is often more easily said than done.

“It’s very difficult to convince someone to buy a job,” he says. “If you want someone aged 40 to buy into the practice, they might ask themselves, ‘why would I want to bind myself to this enterprise?’”

Sila says it’s common for buyers to request earn-out clauses in contracts.

Accounting Practices advises practitioners to insist on non-recourse.

“Why should sellers go through the stress of waiting for the balance of their hard-earned money to be paid out?” Sila asks.

“You can’t make your clients like the new owner.”

Keep tech current

Some practitioners have been left behind by evolving technology, he adds.

Unfortunately, manual files won’t command top dollar.

Buyers need transparency on continuing revenue, and it’s essential to ensure systems are cloud-based and up to date with client data.

Sheppard estimates that excluding the Big Four accounting firms, only 20 per cent of public practices have sufficient equity partners coming through to ensure continuity and enable intergenerational equity transfers.

Of course, gradually transferring ownership to partners won’t necessarily realise the maximum possible lump sum for those exiting. 

“But I say to people, don’t let price get in the way of succession. Sure, they have to pay but don’t make it hard.

“It’s better for practitioners to accumulate wealth outside the practice.”