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 MPF WHITE PAPER 

 2012 PCPS Succession Survey 

GEARING UP TO WIND DOWN  American Institute of CPAs Succession Institute, LLC

November 20, 2013

Multi-Owner Firms

2012 PCPS Succession SurveyGearing Up to Wind Down

1

Table of Contents

Acknowledgements ...................................................................................... 2

Introduction ................................................................................................... 3

Who Responded? .......................................................................................... 4

Succession Plans ........................................................................................... 5

Funding the Retirement Benefit ................................................................. 10

Firm Infrastructure – Policies and Procedures ............................................ 11

Mandatory Retirement or Sale of Interest .................................................. 14

Vesting Requirements ................................................................................. 15

Calculation of Retirement Benefits ............................................................. 18

Retired Partners .......................................................................................... 22

Penalties ...................................................................................................... 28

Transitioning Clients .................................................................................... 30

Compensation ............................................................................................. 31

Succession Strategies ................................................................................. 34

Future Leaders ............................................................................................ 37

Staffing Levels ............................................................................................. 40

Best Practices .............................................................................................. 41

2

Acknowledgements

The Private Companies Practice Section (PCPS) is a voluntary add-on firm membership section of the AICPA that brings together CPAs interested in the business of practice management. PCPS partners with more than 7,000 CPA firms of all sizes nationwide and provides targeted and customizable practice management tools in the areas of technical resources, business development, human resources, benchmarking and succession planning. The PCPS Executive Committee, made up of CPA volunteer practitioners, oversees this section and steers programs to help improve the quality of services and operating success of PCPS member firms. The PCPS Executive Committee promotes the importance of succession planning by endorsing this periodic survey.

The 2011 – 2012 PCPS Executive Committee members are:

•William(Bill)Pirolli,CPA,CFF,PFS,DiSantoPriest&Co,ChairofPCPS

•GeorgeWillie,CPA,CGFM,BertSmithandCo,Vice-ChairofPCPS

•BarryBeck,CPA,PFS,DABFA,BarryDanielBeck

•CherylBurke,DiCicco,Gulman&CompanyLLP

•JasonDeshayes,CPA,RobertF.ButlerCPA,PC

•LorettaDoon,CPA,CaliforniaSocietyofCPAs

•Joseph(Joe)Falbo,CPA,TronconiSegarra&AssociatesLLP

•DickFohn,CPA,PFS,MossAdamsLLP

•Robert(Bob)Goldfarb,CPA,SchoenfeldMendelsohn&GoldfarbLLP

•KarenKerber,CPA,Kerber,Rose&Associates,SC

•ScottKies,CPA,HeinfeldMeech&Co,PC

•Anthony(Tony)King,CPA,King,King&Associates,PA,CPAs&ManagementConsultants

•David(Dave)McIntee,CPA,CFF,CVA,McInteeFusaro&Associates,PLLC

•DennisMeservy,CPA,DennisK.Meservy

•MelodySchneider,CPA,Schneider&Shilling,CPAsLLC

•JerryTopp,CPA,EideBaillyLLP

•MichelleZimmerman,CPA,LMHenderson&Company,LLP

Wearegratefulfortheremarkableworkofourpartner,SuccessionInstitute,LLC,thatonceagainprovidedthesurveyexecutionandanalysis.SpecialthanksgotoBillReeb,CPA,CITP,CGMA,andDomCingoranelli,CPA,CGMA,CMC.

3

IntroductionLet’sfaceit.Successionplanningrequirestimeandresources—twocommoditiesinshortsupplywhentryingtomeetdeadlines,satisfyclientsanddevelopnewbusiness.Successionplanningdoesn’tbringinnewengagements,anditcantakeyearstoseeareturnoninvestment.However,it’sthatlong-termreturnthatmakessuccessionplanningsocriticaltothefutureofthefirm—fromthecontinuityofclientstotheretirementofpartners.Oncethefirmrecognizestheimportanceandvalueofstrongsuccessionplanning,itcanbeginstructuringitspracticeinawaythatpreserveskeyclientrelationships,maximizesownerincentives,andmotivatesfutureleaders.

Thisreportsummarizesselectedresultsofthe2012PCPSSuccessionSurvey,ajointprojectbetweenPCPSandSuccessionInstitute,LLC.Thepurposeofthissurveyistoupdatetheprofession’sunderstandingofthesuccessionplanningchallengesforCPApracticesandwhattheyaredoingtoaddressthem.Ofnearly1,000respondents,morethan500multi-ownerfirmsparticipated.Giventhedepthandbreadthofthedatacapturedinthesurvey,webelievetheresultsprovideaclearpictureofthestateofsuccessionplanningforourprofession.

Thissurveyreportpresentsa“goodnews,badnews”pictureofsuccessionreadinessforourprofession.Thegoodnewsisthat,comparedwiththeresultsfrom2008and2004,moreCPAsareengagedinsuccessionplanningandaredealingwithitmoreeffectively.

Thebadnewsisthatmorethanhalfofmulti-ownerfirmsstilldonothavesigned,documentedsuccessionplans.Ofthosewithplans,somefirmshavenotfullyimplementedthem,andmanyoftheplansdon’tcontainourprofession’sbestpractices.Additionally,leadershipdevelopment—gettingthenexttierofpeoplereadytotakeover—continuestochallengemanyfirms.

Asdeterminedinthe2008survey,multi-ownerfirmsgenerallymirrorthelargerpopulation.Thatis,manypartnersareagingbabyboomersheadedforretirement.Asaresult,wepredictthatoverthenext10yearstherewillbeanexcesssupplyoffirmsforsale.Wealsobelievethatmanypartnerswillchoosetoleavetheircurrentpracticesduetopoorsuccessionplanning.Forthepastthreedecades,opportunitiestosellormergeafirmintoanotherhavenotbeendifficulttofind.Thissituation,however,isnotsustainable.Andwhilewell-runpracticeswilllikelyhavemoreoptionsandgreaterdemandforamergerorpurchase,assupplyincreases—evenwithhighdemand—marginallyrunpracticesmayhavetoofferbargainpricestoattractbuyers’attention.Thiswillbecomeacriticalissueforfirmswithsuccessionplansthatincludeapotentialsaleormerger.

Atsuccessfulmulti-ownerfirms,alloftheowners—notjustthemanagingpartner—takeanactiveinterestinfosteringanenvironmentthatpositionsthepracticeforgrowthandtransition.Thesepartnersunderstandthatfirmsarebusinessesratherthanmerelyprovidersoftechnicalservices.Theyspottheemergingleadersandbegingroomingthemearly.Theyrealizethatthesteadysuccessofthefirmwillultimatelyenhancetheirownbottomlinesintheformofbuyoutsandretirementbenefits.

Wehopeyoufindthedataandcommentaryhelpfulasyouworktoensurethefuturesuccessofyourfirm.

4

Who Responded?This report shows the results of 509 multi-owner firms:

1Totalamountsdonotadduptothesumofindividualaveragesbyposition.

2Participantswereallowedtoenterminimumvaluesinfieldsforrevenueandcompensation.Theseaveragesdonotreflecttheminimumdefaultvalues.

Respondents, by Net Annual Revenue (NAR) Respondents, by Full-Time Equivalents (FTE)

Firm staffing and owner compensation were as follows:

$50M+3%

$25M < $50M2%

$2M < $3.5M18%

$3.5<$5M10%

$15 < $25M3%

$500K < $1M17%

$1M < $2M22%

$8M<$15M7%

$5M<$8M8%

<$500K10%

351+ FTEs < 3 FTEs

1%2%201 - 350 FTEs2%

16 - 25 FTEs16%

26 - 50 FTEs17%

101 - 200 FTEs4%

3 -7 FTEs18%

8 - 15 FTEs30%

51 - 100 FTEs10%

1-2 FTEs

3-7 FTEs

8-15 FTEs

16-25 FTEs

26-50 FTEs

51-100 FTEs

101-200 FTEs

201-350 FTEs

351+ FTEs

Equity owners 1.67 2.10 2.73 3.65 5.33 7.82 13.41 30.22 68.75

Non-equity owners or income partners

0.00 1.00 1.20 1.62 2.38 4.97 5.88 9.33 38.50

Professional employees excluding owners

0.00 2.09 5.00 10.58 21.35 47.31 89.58 186.00 493.63

Paraprofessional and administrative employees

1.00 1.64 3.09 5.10 8.17 14.52 28.69 48.78 149.00

Average total FTEs1 1.83 5.32 10.95 19.78 35.61 73.10 136.75 274.33 749.88

Average partner compensation2 $71,540 $157,380 $216,657 $301,408 $339,384 $344,906 $389,298 $437,555 $390,625

5

Succession PlansThisareaofpracticemanagementrangesfarandwide,anditisimportanttonotethedifferencebetweensimplyhavingapolicyandactuallyexecutingaplan.Policiesaretiedtothelarger,strategicbusinessgoals.Theytendtobemoregeneralandlesscomprehensivethanplans,whichgomuchdeeperintothedetails.Let’scomparetwopractices—onewithapolicyandonewithaplan.

JohnSmith,managingpartnerofSmith&Co.,LLCfeelsprettygoodaboutthefirm’ssuccessionpolicy.Thoughnotidentifiedbyname,seniormanagersareencouragedtopursue“appropriate”leadershipdevelopmentthatpreparesthemtoinheritgreaterclientandstaffresponsibilities.Thepolicycallsforan“adequate”amountoftimetotransitionclientsfromonepartnertoanother,dependingonthespecificsofeachsituation.Johnhascapturedtheownergroup’sinterestinpossiblemergers—eitherupstreamordownstream—dependingonavailableopportunitiesandmindsetsofactivepartnersatthetime.Finally,thepolicyclearlysetsforththefirm’sexpectationthatretiredpartnerswillshareclientknowledgeandbeavailableforhelpasneededbytherelevantengagementteam.

ComparethistothefirmofDoe&Co.,CPAs.

Asthemanagingpartneratthisfirm,JaneDoeunderstandsthatspecificsarenecessaryforgoodplanning.LikeJohn,shehasspentafairamountoftimetalkingtothefirm’spartnersinordertodocumentandcommunicatethefirm’ssuccessionplan.UnlikeJohn,however,Janehasgonemuchfurther.ThesuccessionplanofDoe&Co.,CPAs,isbuiltaroundatimelinethatidentifiestheplannedretirementdateofeachpartnerandincludesaprocessfordevelopingathree-yearhorizonofcriticalmilestonesinthetransitioningofclientspriortoeachretirement.Retiringownersknowtheircompensationisdirectlytiedtothesemilestones.Foreveryclient,aprocessexiststoidentifyfuturerolesforstaff.Insomecases,Janerecognizesthelackofinternalexpertiseoncertainengagements,andshehasplannedforthesystematicdevelopmentofstafftoensuretechnicalcompetence.Additionally,retiringpartnershaveaclearlydefinedsetofrights,responsibilities—andlimitations—regardingtheirparticipation,ifany,inthelifeofthefirmafterretirement.Oncethey’vesoldtheirinterest,theynolongermanageclientrelationships,andtheyonlyworkastechnicalmanagersiftheremainingpartnersagreetoit.Thedocumenthasbeensignedbyallofthecurrentownersandresidesonthefirm’sintranet.

It’seasytoseethattheplanofDoe&Co.goesmuchdeeperthanthepolicyofSmith&Co.Whichismorelikelytoachievethedesiredresults?

Comparedtothe2008results,morefirmsin2012nowhavewrittenplansinplace.Still,morethanhalfoffirmscontinuetohaveagreatdealofworkaheadofthem.

6

We currently have a written, approved succession plan in place:

2012 2008

Yes 46% 35%

No 54% 65%

Total 100% 100%

1-2 FTEs

3-7 FTEs

8-15 FTEs

16-25 FTEs

26-50 FTEs

51-100 FTEs

101-200 FTEs

201-350 FTEs

351+ FTEs

Yes 14% 25% 33% 49% 55% 75% 86% 78% 67%

No 86% 75% 67% 51% 45% 25% 14% 22% 33%

Generallyspeaking,thesmallerthefirm,thelesslikelyitistohaveawrittenandapprovedplan.Amongfirmswith50orfewerFTEs,55%orlesshaveasuccessionplan.

Thereareavarietyofreasonswhysmallerfirmsmaynothaveasuccessionplan.Inthecaseofasilobusinessmodel,eachownerdecideswhenheorsheisgoingtoretire,andunderwhatconditionsorterms.Theownercanindividuallydecidetoselltheirownbookofbusinesstowhomevertheycanatwhateverpricecanbenegotiated.Additionally,thebuyer(s)couldbetheirexistingpartnersoranotherfirmentirely.Eveninthiscase,everypartner—andideally,thewholefirm—shouldmakearrangementsnowtodealwithfuturesuccession.Theplanshould,ataminimum,addresscrisissituations,butideallyshouldaddressplanneddeparturesandsuccessionmanagement,aswell.

Alittlemorethanhalfoffirmswithsuccessionplansperiodicallyupdatethemfornewdevelopments.Thismeansthat,overall,roughlyaquarteroffirmshaveanexecutedsuccessionplanthatismonitoredandupdatedperiodically,giventhatonly46%ofrespondingfirmshaveaplanand,ofthose,only51%haveimplementedit.

Becausesuccessionplanningissocriticaltothefutureofyourfirm,itshouldbetreatedwiththesameimportanceasothertypesofsignificantplanning.Asaresult,it’sgenerallyagoodideatorevisitthefirm’splanonceayear.Thisfrequencyallowsforanyupdatesbasedoninternaltransitions(i.e.,newhiresordepartures)aswellasanyimportantchangesinthemarketplace(i.e.,mergeropportunities).

7

The following best describes the progress on our current succession plan:

2012 2008

Do not feel the need to have a plan, written or otherwise 7% 10%

Know we have a problem, but we don’t really know how to get started putting together a plan

15% NA

Will start the process in about 10 years 3% 3%

Will start the process in about 5 years 11% 11%

Will start the process in the next year or two 22% 32%

Have started the plan and will soon complete it 30% 35%

Have a plan drafted, but it has not been formally approved 12% 9%

Total 100% 100%

2012

We have a plan in place; it has been implemented and is periodically is updated to address issues as they arise.

51%

We have a plan in place, and significant progress has been made in its implementation.

30%

We have a plan in place, but relatively little progress has been made towards implementing it.

19%

Total 100%

Sizematters.One-hundredpercentoffirmswithmorethan50FTEsor$8millioninnetannualrevenueacknowledgedtheneedforaplan.Thatmakessensesincethelargerthefirm,themorecriticalitistohaveplans,policies,agreementsandotherinfrastructuretosupportthefirm’slongevityandvitality.

Themajorityofrespondentsfeltthatsuccessionplanningwillbeasignificantissueinthenearfuture.Althoughmorefirmshaveimplementedplans,many(includingthosewithplans)stillrecognizethatsuccessionwillbeachallengetomanage.

Thelargerthefirm,themorelikelyithasafullyimplementedplan.

Evenfirmswithoutasuccessionplanarestartingtorealizetheirimportance.Fifty-twopercentofthesefirmshaveeitherstartedtheprocessorplantodosointhenext24months.

As to the status of our succession plan, we:

8

2012 2008

We will have succession planning challenges in 6 to 10 years.

32% 17%

We will have succession planning challenges in 3 to 5 years.

28% 30%

We have current succession planning challenges. 22% 20%

We will have succession planning challenges in the next 1 to 2 years.

13% 14%

Our succession planning challenges are more than 10 years away.

5% 3%

Succession issues will arise, but we have ways of dealing with them.

NA 16%

Total 100% 100%

2012

Yes 79%

No 21%

Total 100%

Evenamonglargerfirmswithsuccessionexperience,theexistingplansarestillnotrobustenoughandoftenlacktherequisiteaccountabilitytoaddressthevastmajorityofissuesencounteredwhenapartnerretires.Thisincludeseverythingfromproperlytransitioningclients,toreplacingthelostexpertise,totransitioningthatpartneroutofhisorherleadershiprole.

Mostfirmsrecognizedthattheywillbefacingsuccessionplanningatsometimeinthenextdecade,regardlessoftheirsize.Althoughthetimehorizonisfurtheroutinmanycasesthanweexpected,webelievethatmaybeduetothedifficultyofpredictingexactpartnerretirements.

Timing of our succession planning challenges:

Do you expect succession planning to be a significant issue for your firm in the next 10 years?

9

Lookingcloseratthetimingchallenges,wefindthattheaveragetrend—acrossallfirmsizes—isforretiringpartnerstobeoutpacedbythosereadyforadmission:

Thischartindicatesplentyoffolkswhoareready,willingandabletoreplaceretiringpartnersinthenextfiveyears.Theproblemisn’tthelackoftalenttoreplenishtheownerpool.It’stheaccompanyingleverageneededtosupporttheadmissionofnewpartnersintheformofadditionalfirmrevenueandstaff.Asyoucansee,successfulsuccessionplanningdoesn’tjusthappen—ithastobethoughtoutwellinadvanceifthefirmwantstokeepitsclients,developitsstaffandsupportitsownersinretirement.

1.80

1.40

1.60

1.20

1.70

1.30

1.50

1.10

1.002012

Retirements Admissions

1.26

1.57

1.27

1.64

1.34

1.58

1.29

1.71

1.36

1.72

2013 2014

Average Partner Retirements and Admissions

2015 2016

10

Funding the Retirement BenefitOverall,80%offirmsdonotpre-fundretirementbenefits.Ofthosethatdo,thefundingaverages41%oftheretirementbenefit.Typically,thesmallerthefirm,thelesslikelyanyportionofapartner’sbuyoutliabilityisfundedbythefirminadvance.

Amongfirmsthatfundretirement,thefundedamountrangesfrom23%to55%oftheexpectedretirementbenefitliability.Thismakessensebecauseitassuresthatpartnerswhoareabouttoretirehavesomefinancial“skininthegame”untiltheydepart.Whyisthisimportant?Whentheseniorpartners’benefitsareentirelyprefunded,theirpersonalfutureisguaranteed,andtheyhavenoinvestmentinthefirm’sfuturesuccess.Thismayencouragepartnerstopostponeinvestmentsinareassuchastechnology,trainingandmarketinguntilaftertheirretirement.

1-2 FTEs

3-7 FTEs

8-15 FTEs

16-25 FTEs

26-50 FTEs

51-100 FTEs

101-200 FTEs

201-350 FTEs

351+ FTEs

Percentage of respondents who do not pre-fund equity buyout

71% 91% 82% 84% 72% 74% 57% 67% 63%

Percentage of total equity buyout that is funded (for those reporting pre-funding only)

55% 56% 40% 35% 39% 52% 33% 27% 23%

11

Firm Infrastructure – Policies and ProceduresPolicies,proceduresandagreementsarenecessaryforsuccessfulfirmcontinuation.Notsurprisingly,smallerfirmsaremuchlesslikelytohavetheinfrastructureoflargerones.Informalityoftenisthehallmarkofsmallerfirmsandisveryappealingtothoselookingtoavoidthebureaucracyofalargerenvironment.However,anowner’sdeathorwithdrawalputstheentityatrisk.Withtherightpoliciesandproceduresinplace,afirmcanmitigatethisriskandseektoreducethepotentialconflictamongotherpartnersorstaff.Mandatorysaleofownership—establishingwhenanownerwillsellhisorherownershiporretire—canbeaparticularlycontentiousissueforfirms,andastraightforwardagreementcanpreventconflictandhelpsmoothtransition.Morethanthree-fourthsofthosesurveyedhaveabuy-sellpolicythataddressesapartner’sdeath.Almostasmanyfirmshaveapolicydealingwithtotaldisability.Onbothfronts,thisisanincreaseoverthe2008responses.Theironyisthatfarfewerfirmshaveaddressedsuccessionplanningthanhaveagreedonbuyoutterms,whichcouldleadtonegativeconsequencesinmanagementandtransition.

Interestinglyenough,alittlemorethanhalfofthefirmshaveclearlydefinedrolesandresponsibilitiesforpartner,managersandstaff.Whilethisisalsoanincreaseoverthe2008responses,itstillsuggeststheongoingpotentialfordisagreementsoverresponsibilities,bothbeforeandafterthebuyoutofakeyowner.Thiscanonlyresultingovernancedifficultiesfortheroughlyone-halfoffirmswithoutsuchclearboundaries.

Aswasthecasein2008,lessthanone-thirdoffirmstiepartnercompensationtoastrategicplanorindividualpartnerperformancegoals.Thislackofaccountabilitymayleadtoseriousdifficultiesduringasignificantchangeinownership.

12

Which of the following standard operating policies/procedures has your firm formally developed and documented with powers, roles, responsibilities and limitations?

2012 2008

Buy-sell policy for partner leaving due to death 77% 62%

Buy-sell policy for partner leaving due to total disability 71% 59%

Partner voting rights (one person one vote, vote by ownership, etc.)

67% NA

New client acceptance 67% 73%

Partner buy-sell valuation of their ownership interest 66% 55%

Billing and collection policies 65% 56%

Terms and conditions for sale of ownership interest (retirement)

63% 56%

Buy-sell policy for partner leaving and not taking clients or employees

62% 46%

Partner group roles and responsibilities 58% 40%

Managing partner’s roles and responsibilities 57% 48%

Managers’ and staff roles and responsibilities 56% 52%

Termination of a partner 55% 45%

Buy-sell policy for partner leaving and taking clients or employees

52% 40%

Buy-sell policy for partner leaving due to partial disability 52% 43%

Manager and staff goals identified each year 45% 38%

Existing client new project acceptance 42% 35%

Admission of partners 39% 37%

Capital requirements for a partner 39% 39%

Maximum payout of guaranteed payments for partners who have retired or sold their interest in the firm (this is a cap on total payouts to all partners receiving benefits)

36% 37%

Voting thresholds and requirements to approve the sale/upstream merger of the entire firm

33% 4%

Partner compensation plan tied to strategic plan 29% NA

Partner goals identified each year 29% 28%

Executive committee roles and responsibilities 25% 23%

Business transition requirements with accountability in the event of improper client transition

22% 14%

Retired partner’s roles and responsibilities 17% NA

13

2012 2008

Terms and conditions (how you will pay them and what they are allowed to do) under which retired owners can continue working for the firm

64% NA

Acts that can trigger forced retirement of an owner (illegal activities)

64% 62%

Key person insurance to cover outstanding and potential retirement payment obligations

63% 54%

Acts that can trigger forced retirement of an owner (owner disability)

63% 52%

Acts that can trigger forced retirement of an owner (misconduct such as sexual harassment, public embarrassment of the firm, etc.)

55% 57%

Age for mandatory retirement or mandatory sale of ownership Interest

47% 48%

Acts that can trigger forced retirement of an owner (lack of performance)

36% 31%

Personal liability of remaining owners for retired owners’ full payout

34% 27%

Specific recourse or cures should a retired owner not be paid in full

24% 20%

Ability of existing partners to reduce the retirement benefit of retiring partners due to improper client transition

20% 18%

Ability of retired owners to block mergers or total sale of the business unless retirement obligation is paid in full prior to transaction

11% 11%

Ability of retired owners to block the sale of a line of business unless retirement obligation is paid in full prior to transaction

7% 6%

Generallyspeaking,littlechangedhere.Thesmallerthefirm,thelesslikelyitistoaddresstheissuesnotedbelow.

Which of the following partner issues are addressed in your firm’s agreements or policies?

Firmswithupto25FTEsarelesslikelytohaveamandatoryretirementagethanlargerfirms,whichmayhinderbuy-sellorsuccessionmanagementefforts.

14

Mandatory Retirement or Sale of InterestAt what age is a partner required to retire or to sell his/her ownership interest?

2012

Prior to 60 years old 0%

60 years old 3%

61 – 64 years old 8%

65 years old 54%

66 – 69 years old 15%

70 years old 14%

71 – 74 years old 1%

75 years old 1%

More than 75 years old 0%

Mandatory retirement is fixed at each owner's full benefits Social Security age

4%

Total 100%

Theagerequirementsofsmallandlargefirmsgenerallymirroredeachother.However,fewerlargefirmsallowpartnerstoworkuntil70beforeretiring.

15

Vesting RequirementsMostfirms’vestingrequirementsarebasedonyearsofserviceasanownerandtheowner’sage.

Which of the following are included in your firm’s vesting requirements?

Thelargestfirmrespondentsarefarlesslikelytotakeintoaccountyearsofservicepriortoadmissionaspartner.Thisispreferabletotakingintoaccounttotalyearsofservice,sincetimeasastaffpersonhasseeminglylittleconnectiontopartnerbuyoutterms.Vestingbasedontotalyearsofserviceallowsownerstoretireearlierthanifvestingwerebasedsolelyonyearsasanowner.Thiscancreateacoupleofproblemsforthefirm:1)someofthesepartnersmaystillbeintheirprime,andthefirmmayprematurelyrelinquishtheirexpertise;and2)thefirmmayassumetheywillworklongerthantheyactuallydoandfailtodevelopqualifiedpeopletotakeoverintime.

One-thirdoffirmsrequiredfewerthan10yearsofvestingforretirementbenefits,includingadisproportionatenumberofsmallerfirms.

What is the minimum number of years of service required to vest for retirement benefits?

Forfirmsrequiring20ormoreyears,thevastmajority(70%)requiredexactly20years.

2012

Years of service in the firm only as an

owner63%

Age of owner 59%

Year of service in the firm including time

as staff and owner16%

Other 6%

2012

5 or fewer years 16%

6 years 14%

7 – 9 years 3%

10 years 28%

11 – 14 years 2%

15 years 13%

16 – 19 years 1%

20 years or more 23%

Total 100%

16

What is the minimum age allowable for owners to retire and receive full retirement benefits?

Afewfirmsacrossallsizerangesallowforretirementwithfullbenefitsataminimumageoflessthan55.Fullorevenpartialretirementbetweentheagesof50and60maypresentchallengestofirmstryingtoreplaceapartner’stechnicalexpertise,clientandreferralsourcerelationships,timeandproduction.Inaddition,partnersinthisagerangehavevaluablecompetenciesandconnectionsthatfirmsmayregretlosing.

2012

Prior to 55 years old 8%

55 years old 26%

56 – 59 years old 3%

60 years old 23%

61 – 64 years old 12%

65 years old 23%

66 – 69 years old 3%

70 years and older 2%

Total 100%

17

2012

Prior to 55 years old 41%

55 years old 30%

56 – 59 years old 2%

60 years old 8%

61 – 64 years old 10%

65 years old 6%

66 – 69 years old 1%

70 years and older 2%

Total 100%

Largerfirmstendtoallowpartialbenefitspriortoage55asmuchormorethansmallerfirms.However,largerfirmsalsohavealargertalentpoolfromwhichtodrawwhenapartnerleaves—aluxurythatmaybeunavailabletosmallerfirms.Firmsofallsizes—especiallysmallerones—mightwanttoreconsiderallowingaccesstopartialretirementbenefitstooearly.

What is the minimum age allowable for owners to retire and receive partial retirement benefits?

18

Calculation of Retirement BenefitsWhich of the following does your firm use to calculate the retirement benefit (just the deferred compensation, guaranteed payment, etc. portion of the benefit)?

2012 2008

No current agreement to pay a retirement benefit 37% NA

Ownership percentage times NAR 23% 17%

Other 16% 41%

Multiple of salary 14% 19%

Client book of business 10% 23%

Total 100% 100%

“Other,”apopularresponse,includedmethodsrangingfromtaxbasisequitytoaccrualbasiscapitalaccounts,toagreeduponamounts,businessvaluation-basedamountsandotherformulas.

Farfewersmallerfirmshaveagreementsthanlargerfirms.Evensomeofthelargerfirmslacksuchagreements.Thiscanpresentseriousproblemswhenit’stimeforapartnertoleave.

19

2012 2008

50 cents or less on the $1 6% 5%

55 – 70 cents on the $1 8% 11%

75 cents on the $1 10% 14%

80 cents on the $1 13% 7%

85 – 95 cents on the $1 9% 7%

$1 on the $1 43% 43%

More than $1 on the $1 8% 7%

Not applicable 3% 6%

Total 100% 100%

ForfirmsusingownershippercentagetimesNAR,46%paylessthan$1for$1ofrevenue,whileslightlylesspayafull$1.Just8%offirmspaymorethan$1for$1,similartothe2008responses.

Which of the following best approximates how you value the ownership interest in the firm to calculate the retirement benefit?

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

1-2 FTEs

No retirement bene�t agreement Multiple of salary

Ownership % times (NAR) Client book of business

3-7 FTEs 8-15 FTEs 16-25 FTEs 26-50 FTEs 51-100 FTEs 101-200 FTEs 102-350 FTEs 351+ FTEs

How do you calculate your firm’s retirement benefit?

Onaverage,aboutaquarteroffirmsupto200FTEsusetheownershippercentagetimesNARtocalculateretirementbenefits.Largerfirmsfavorthemultiple-of-salaryapproach,whilefirmsinthemiddle(8–50FTEs)prefertousethebookofbusinessmethod.

20

Forfirmscalculatingretirementbasedonthepartner’sbookofbusiness,32%paylessthan$1for$1ofrevenue,while63%payafull$1.Asnotedabove,onlyafewpaymorethan$1.

Which of the following best approximates how you value the client book to calculate the retirement benefit?

Firmswithmorethan100FTEsgenerallydonotusethismethodofvaluation.Firmsizedoesnotaffectwhetherthefirmpaysmoreorlessthan$1for$1ofclientbookrevenueusingeitherthebookofbusinessorpercentageofownershipmethodsofcalculatingtheretirementbenefit.

Amongfirmsusingamultipleofsalarytodeterminebenefits,alittlemorethanhalfpaylessthanthreetimessalary.Alittlemorethanathirdpaysthreetimessalary.Only13%paymorethanthreetimessalary,consistentwith2008results.

2012 2008

50 cents or less on the $1 4% 5%

55 – 70 cents on the $1 14% 11%

75 cents on the $1 4% 14%

80 – 95 cents on the $1 10% 15%

$1 on the $1 63% 42%

More than $1 on the $1 5% 7%

Not Applicable 0% 6%

Total 100% 100%

21

Which of the following best approximates the multiple of average salary you use to calculate retirement benefits?

Morethanhalfofthefirmswith51to100FTEspaylessthanthreetimessalary.Thisalsoistrueforthefewsmallerfirmsthatusethismethodofcalculation.

2012 2008

Less than one year's salary 7% 6%

One year's salary 10% 8%

One year's salary times 1.5 7% 3%

One year's salary times 2.0 11% 17%

One year's salary times 2.5 17% 14%

One year's salary times 3.0 35% 39%

One year's salary times 3.5 6% 3%

More than one year's salary time 3.5 6% 5%

Not Applicable 1% 5%

Total 100% 100%

22

Retired PartnersWhile42%offirmsreportthatretiredownersarenotinvolvedinfirmoperations,nearlythesameamountstillallowretiredownerstocontinuemanagingclientrelationshipsorengaginginbusinessasusual.Thiscancomplicatethetransitionprocess.Insomecases,retiredpartnerssitinonorparticipateinboardandmanagementmeetings,whichcanhamperclienttransitions.

Which of the following best describes the involvement of retired owners in the firm?

Thelargerthefirm,themorelikelyitwillbethatsomeretiredownerscontinuetoworkunderannualcontracts,performingspecific,delineatedduties.Thisisagoodpractice.

2012 2008

Retired owners have no involvement or influence in firm operations.

42% 36%

Retired owners still are active in the community and serve as ambassadors for our firm.

20% 16%

Retired owners continue to manage client relationships. 19% 16%

Retired owners do what they have always done, but just work fewer hours.

17% 17%

Retired owners still work on some of their old clients, but another partner handles the relationship.

17% 23%

Retired owners are on an annually renewable contract with specific allowable activities.

17% NA

The firm allows retired owners to continue working even to the point of diminishing skills, but their work is closely monitored.

8% 4%

Retired owners do not operate under a special agreement and are allowed to continue working for the firm until they are asked to leave.

6% 10%

Retired owners are invited to board/management meetings but do not vote.

6% 7%

Retired owners are invited to board/management meetings but do not vote. However, they are still very influential.

5% 3%

Retired owners are commonly invited to board/management meetings and still vote.

1% 2%

Retired owners still do pretty much what they did before they retired.

4% 4%

Other 23% 34%

23

Thesmallerthefirm,themorelikelytheretiredownerscancontinuetodowhatthey’vealwaysdone,butworkfewerhours.Theyaremorelikelytobeinvolvedinorinfluencefirmoperations.Thesepracticescanhamperthetransitiontonewleaders.Firmsshouldfindaspecificongoingrolefortalentedownersbutshouldnotallowthemtobeapartoforinfluenceleadership.

Alittlemorethan40%offirmsmaketheircompensationplansavailableforretiredownerswhocontinuetowork—butboththeretiredpartnerandremainingpartnersmustallwantthearrangement.Thelargerthefirm,withsomeexceptions,themorelikelythisistheirpolicy.

Someretiredownerscontinuetoearnasalaryforworkingatthefirm,andaboutanequalnumbergetpaidbasedonapercentageoftheirbillingsorcollections.Less-than-desirablecompensationpracticesforretiredownersincludepayingthemtomanageabookofbusinessandpayingtheminthesamewayasactivepartners.

Our firm’s compensation system:

2012 2008

Is available to retired partners if mutually agreed upon by the partner and the firm

41% NA

Will pay retired owners a salary to continue working for the firm

35% 24%

Will pay retired owners a percentage of their billings or collections for client work

32% 23%

Will pay retired owners to bring in new business 30% 14%

Is available to every retired partner if they wish to continue working in some capacity within the firm

14% 21%

Will pay retired owners to remain active in the community as ambassadors for the firm; serve on boards of directors; be involved in charity events, etc.

12% 5%

Will pay retired owners for the book of business they continue to manage after retirement

10% 4%

Is the same for retired partners as it is for active partners 5% 2%

Other 9% 15%

24

Which of the following are included in payments to retired partners?

Exceptattheextremes,responsesdifferedlittleacrossfirmsizebasedonFTEs.

Inafindingthatechoesthe2008survey,89%offirmsmakenoexceptionstopreviousagreementsonretirementpayments,withonly11%payinganamountthatfromtheoriginalagreement.Thisresponsewasconsistentamongallsizecategories.Thetopexceptionsincludedapartner’srefusaltoleavewithoutadditionalincentiveandapartner’sfailuretoadequatelytransitionclientrelationships.

Please indicate why your firm has paid a retiring partner above or below the originally agreed upon calculation.

2012

Retirement benefit (deferred payments, guaranteed payments, etc.) for a partner's ownership in the firm

70%

Return of capital or redemption of stock 67%

Share of net book value 33%

2012 2008

Partner wouldn't agree to retire without additional incentive 30% 12%

Partner did not adequately transition client relationship 27% NA

Partner did not work long enough to meet vesting requirement 17% 6%

Partner's performance warranted the adjustment 13% 15%

Partner left without adequate notice 13% NA

Partner's unethical behavior warranted the adjustment 10% 6%

Partner left to compete with the firm 10% 12%

Partner was offered this amount in lieu of termination 10% 9%

Client base was only of marginal interest to the firm 3% 15%

Partner serviced a unique specialty niche 3% NA

Other 40% 40%

Whentheactualbuyoutdifferedfromtheoriginalagreement,30%oftheadjustedpaymentswereforlessthanwhatwascalledforintheretirementpayoutformula.Aboutathirdofthefirmshavepaidupto20%aboveagreed-uponamounts.Anotherthirdhavepaidapremiumofmorethan75%oftheagreedamounttoenticepartnerstoleave.Firmsthatallowexceptionstoagreed-uponbenefitswillfindthemselvesfacingmorechallengesthanshouldbenecessary.Witheachexception,thefirmcreatesanincreasingamountofuncertaintyregardingexpectationsfortheownersandcashflowforthefirm.Thebestapproachistobuildastrongagreement,amenditasneededandsticktoituponexecution.

Attwo-thirdsormoreofthefirms,paymentstoretiredpartnersincludetheretirementbenefitaswellasareturnofcapitalorredemptionofstock.

25

2012 2008

More than 50% below RPF 6%

41-50% below RPF 0%

31-40% below RPF 6% 47%

21-30% below RPF 6%

11-20% below RPF 6%

1-10% below RPF 6%

1-10% above RPF 6% 7%

11-20% above RPF 27% 13%

21-30% above RPF 0% 13%

31-40% above RPF 6% 0%

41-50% above RPF 0% 7%

51-75% above RPF 0% 3%

76-100% above RPF 10% 10%

More than 100% above RPF 21% 0%

Total 100% 100%

Choose the option that best describes the change in the retiring owner’s payout formula (RPF) and overall package from what was originally prescribed.

Nosignificantpatternsexistrelativetofirmsizeforthisdata.

Attwo-thirdsormoreofthefirms,paymentstoretiredpartnersincludetheretirementbenefitaswellasareturnofcapitalorredemptionofstock.

26

Which of the following occurrences will force a change in the payment duration, monthly payment, and/or total payout of standard calculated retirement pay?

Smallerfirmswerelesslikelytosaythatearlyretirementwillforceachangeinbenefitsthanlargerfirms,buttherewerenoothersignificantdifferencesbasedonfirmsize.“Other”responsesincludedavarietyoffactors,includingoverallcapsontheamountofbenefitsthatcanbepaidoutfirm-wideinanyoneyear.

2012 2008

Competing with the firm after retirement 74% 53%

Taking staff 43% NA

Early retirement 42% 36%

Egregious misconduct in the community 26% 21%

Uncollectible accounts receivables or work in process 21% 17%

Sale of the business 14% 19%

Loss of retiring owner’s clients anytime during the payout period 13% 7%

Merger 10% 13%

Loss of retiring owner’s clients within first two years of payout period

9% 12%

Liabilities incurred after retirement based on retiring owner’s clients

9% 10%

Loss of retiring owner’s clients within first year of payout period 7% 12%

Sale of a line or business 1% 4%

Other 10% 18%

Inanotherpositivetrend,74%ofparticipatingfirmssaidthatcompetingwiththefirmafterretirementwillresultinachangeintheretirementbenefits,comparedtoalittlemorethan50%inpastsurveys.

Only43%ofthefirmssaidthattakingstaffwillaffectaretiringpartner’sbenefit.Giventheimportanceoffindingandretaininghigh-qualitystaff,whywouldanyfirmputitstoppeopleatriskwithoutsomefinancialpenalty,especiallysincetheyarelikelytobethebestpeople?Similarly,only42%adjustaretiringpartner’sbenefitdownwardduetoearlyretirement.Ownersdepartingwithoutnoticeorintheirprimecreateafinancialburdenforthefirmandmakeitmuchmoredifficulttocreateaviablesuccessionplan.This,inturn,jeopardizeslong-termsustainability.Itisfarmoredifficulttobuildforthefuturewithoutaclearideaofwhoshouldbegroomedtoreplacewhichkeypeople—andwhentheyshouldbeready.

27

2012

An owner is entitled to retire and receive retirement benefits (deferred compensation, guaranteed payments, etc.) only when he or she meets our firm’s vesting requirements.

66%

An owner is entitled to retire and receive retirement benefits (deferred compensation, guaranteed payments, etc.) at any time after being made an equity owner.

24%

An owner is free to retire at any time and sell his/her clients to anyone for the best price.

10%

Total 100%

Under what conditions is a partner entitled to receive a retirement benefit (payments)?

Generally,thelargerthefirm,themorelikelyitwastochoosethefirstoption.Smallerfirmsshouldtakenotethatvestingrequirementscanhelpthemavoidarevolvingdoorforpartners.

28

PenaltiesNon-compete Agreements

Seventimesoutof10,anownerwholeavestocompetewiththefirmwillbeineligibleforaretirementbenefit.

Which of the following best describes your partner non-compete or employment agreement?

Smallerfirmsareslightlymoreinclinedtoallowretiredpartnerstocompeteandstillreceiveretirementbenefits.Additionally,somefirmswillallowaretiredpartnertocontinuemanaginganominalnumberofclientsifthey:1)aresmall;2)arenotperceivedasimportanttothefirm;and3)haveverycloserelationshipswiththeretiringowner.Usually,thereisadollarthresholdattached.Forexample,aggregaterevenuescannotexceed$20K–$50K,dependingonthesizeofthefirm.Inthesesituations,thissmallgroupofclientsisconsideredexemptfromthenon-competeterms,andretirementbenefitsarepaidaslongasthethresholdisnotviolated.

Amongfirmsthatchargepartnerswholeaveandcompete,27%assessapenaltyoflessthan$1for$1ofrevenuetaken,while45%charge$1for$1ofrevenuetaken.Another15%chargebetween$1to$2ofrevenuetaken,with13%charging$2ormore.

2012

Retired partner cannot sell accounting-related services and still be entitled to his or her retirement payout.

70%

Retired partner can sell accounting-related services, but those revenues will reduce the retirement payout.

16%

Retired partner can sell accounting-related services without any impact on the retirement payout.

14%

Total 100%

29

Thesmallerthefirm,thelesslikelyitistochargeapartnerfortakingclientsand,withsomeexceptions,thelargerthefirm,themorelikelyitistodoso.Here’sthekeyquestionforafirm:Isitinyourbestinteresttoallowpartnerstopaymarketvaluefortheclientstakentostartanewpractice?Sinceitismostlikelythey’lltrytotakethebestclients,itseemsfairtoexpectthemtopayapremium. Taking Staff

Atmostfirms,partnersdon’tfaceafinancialpenaltywhentheyleavethefirmandtakestaffwiththem.Thisisasignificantopportunitytoimprovepoliciesandagreementswithintheconstraintsofapplicablelocallaw. When a partner leaves the firm and takes staff, what multiple of salary will the partner be charged?

Smallerfirmstypicallydon’tassessdamagesfortakingstaffasoftenasortotheextentthatlargerfirmsdo.Yet,losingstaffcanbecostly.Afterfactoringinrecruitingservicefeesandtrainingcosts,eventwotimessalarymightnotbeanadequatebreakevenlevel.

2012

No charge 22%

75 cents or less per $1 of revenue taken 5%

$1 per $1 of revenue taken 45%

$1.25 per $1 of revenue taken 8%

$1.50 per $1 of revenue taken 7%

$1.75 on the dollar of revenue taken 0%

$2 or more per $1 of revenue taken 13%

Total 100%

2012

No charge 70%

Less than 50% of salary 4%

51 – 99% of salary 2%

100% of salary 16%

101 – 199% of salary 3%

200% of salary 3%

More than 200% of salary 2%

Total 100%

When a partner leaves the firm and takes his or her clients, which of the following best describes what the partner will be charged for each dollar of annualized revenue taken?

30

Transitioning ClientsWhentwoorthreeyearsawayfromretirement,partnersatnearlyone-thirdoffirmsarerequiredtostarttransferringclientsaccordingtoafirmplan.Anotherquarterhavenorequirementsuntilaboutoneyearbeforeretirement.Althoughmanysmallerfirmsmayfindthreeyearstoolong,aone-yeartransitioncarriesagreatdealofriskandwilllikelyresultinlowerclientretentionuponthepartner’sdeparture.

For30%offirms,noownersplantoleaveinthenextfiveyears,sotheyhavenotaddressedthisissue.Still,itwouldbeadvisabletocreatetransitionpoliciessoonerratherthanlater.Wefindthatdiscussingtransitionwhennooneisclosetoretirementgeneratesthemostrationalandproductiveconversations.

When owners are two or three years out from retirement, they:

2012 2008

Are required to start transferring their clients to owners or managers selected by the firm

32% 32%

We do not have any owners planning to retire in the next five years, and this has not been addressed.

30% 23%

Are not asked to do anything unique until one year before retirement

25% 27%

Are required to start transferring their clients to owners or managers selected by the retiring partner

18% 17%

Are removed from the firm-wide partner compensation plan and receive a special plan that motivates them to focus on transition activities

5% 7%

Are rewarded financially for specific clients transferred during each year of transition

4% 5%

Are penalized financially if a certain number of clients are not transferred each year

4% 4%

Other 9% 15%

Thelargerthefirm,themorelikelyitistoselectthepartnerstowhomclientsaretransferred,aswellastoprovidefinancialrewardsorpenaltiesbasedontransitioning.Still,atsomelargerfirms,retiringpartnerschoosetheirownsuccessors,andfewfirmsofanysizeuseaspecialcompensationplanforretiringpartnersthatdiffersfromthoseofremainingpartners.Withoutspecialcompensationplansforretiringowners,however,firmscanexpectthemtocontinuedevelopingtheirrelationshipsastheytrytomaintaintheirclientserviceresponsibilitiesandbillingsratherthantransitioningtherelationships.

Althoughtheretiringownermighthavesomeinsightintowhichownerwouldprovidethebestfit,thisdecisionshouldnotbeleftexclusivelytohimorher.Thefirmshouldsetforthatransitionplan,andthepartnershouldhaveincentivestofollowit—orfacepenaltiesifnot.

31

CompensationThe majority of firms are using both objective and subjective criteria in their partner compensation systems. Which of the following describes your compensation system?

Smallerfirms,withafewexceptions,tendtofavorprimarilyobjectivemetricsforpay,whilelargerfirmstendtocomplementwithsubjectivemeasures.

Althoughtheverylargestfirms(200ormoreFTEs)favorclosedcompensationsystems,aratherhighproportionoftherestofthefirmsmaintainopensystemsinwhicheveryownerknowswhateveryotherownermakes.

Does your firm use an open or closed compensation system?

Whenexaminingspecificfactorsincludedincompensationsystems,itisinterestingthatlessthanafourthoffirmsadjustpayforgrowingtheexistingbusinesswithacurrentclient—thatis,actingastheirtrustedbusinessadvisor.Onanotherfront,thefirm’speoplerepresentitsgreatestresourceandbestinvestment,yetevenfewerfirmsofferanincentivefortraininganddevelopingtheirpeople.

2012

A guaranteed portion of salary with the rest based on both subjective criteria and objective formulas in our compensation plan.

41%

Based only on objective formulas in our compensation plan. Any money a partner receives during the year is simply a draw against that final calculation.

25%

A guaranteed portion of their salary with the rest based only on objective criteria in our compensation plan

20%

Based on both subjective criteria and objective formulas in our compensation plan. Any money a partner receives during the year is simply a draw against that final calculation.

19%

2012

Open compensation system 84%

Closed compensation system 16%

Total 100%

32

2012 2008

A salary or base draw 81% 82%

Ownership percentage 45% 48%

Development of new business 35% 34%

Size of the owner’s client book or fees managed 34% 34%

Billable/collectable hours 31% 32%

Profitability of book 29% 30%

Performing certain identified firm functions (managing partner, department heads, chairing committees, etc.)

27% 29%

Growing the existing business with a current client 24% 21%

Training/development of staff 19% 19%

Individual achievement toward implementation of firm strategy

18% NA

Capital accounts 16% 20%

Cross-selling other services into your client base 14% 14%

Business transferred to other partners/managers 12% 13%

Performance incentives based on metrics for the partner group

11% NA

Profitability of department 10% 11%

Leverage (ratio of partner to staff work) 10% 10%

Client satisfaction goals 7% 9%

Other 9% 9%

Which of the following describes your compensation system?

Firmsofallsizestendtofavorsalaryorbasedrawandfinancialrecognitionofownershippercentage,butmostoftheotherelementslistedarefoundingreaterproportionasthesizeofthefirmincreases.

33

2012

The managing partner does not set goals for each partner and has no individual ability to adjust partner pay.

81%

The managing partner does not set goals for each partner but still has discretion to adjust partner pay.

45%

The managing partner sets goals for each partner based on the strategic plan and has discretion to hold partners accountable for achieving their goals.

35%

The managing partner sets goals for each partner based on his/her individual ideas and criteria (not based on the firm's strategic plan) and has discretion to hold partners accountable for achieving their goals.

34%

The managing partner sets goals for each partner based on the strategic plan but does not have the ability to hold partners accountable with discretionary compensation.

31%

The managing partner sets goals for each partner based on his/her individual ideas and criteria (not based on the firm's strategic plan) but does not have the ability to hold partners accountable with discretionary compensation.

29%

AnotherinterestingfindingishowfewfirmsallowthemanagingpartnerorCEOtoholdpartnersaccountablethroughasystemthatincorporatesgoal-settingandpay-for-performance.Pay-for-performancecanbepartofarobustaccountabilityframework,particularlyinfirmsoperatingunder,orseekingtomoveto,aone-firmmodel.

Which of the following best describes the role of the managing partner in the partner compensation process?

Onceafirmreaches100FTEs,themanagingpartnerismorelikelytosetindividualstrategicgoalsforpartnersandholdthemaccountable.Belowthatsize,however,notmanymanagingpartnershavethatpower.While“partneraccountability/unity”wastheNo.1concernforfirmswith21ormoreprofessionalsinthe2011PCPSCPAFirmTopIssuesSurvey3,itisdifficulttoattainsuchunitywhenthemanagingpartnerdoesn’thavetheauthoritytogetpartnerstoworktogetherinthebestinterestofthefirm.Allpartnersshouldbeaccountabletosomeone,includingthemanagingpartner.Failuretocreategoalsfocusedonmeetingeachpartner’skeydutiesandimprovingweaknessescanhinderafirm’ssuccess.

3 Visitaicpa.org/PCPSforfullsurveyresults.

34

2012 2008

The firm and the clients of the senior owner(s) will be transitioned to the remaining owners or incoming owners per everyone's expectation.

83% 79%

The firm will be sold so that the senior owner(s) can maximize the value of their investment.

8% 11%

The firm will merge due to the senior owners' lack of confidence in the leadership ability of the remaining junior owners.

7% 8%

The firm will most likely merge in order to fund the retirement of the senior owner(s). This is fully supported by the junior owners.

7% 6%

The firm will be sold due to the senior owners' lack of confidence in leadership ability of the remaining junior owners.

7% 4%

The senior owners will run the firm long past retirement age as they maximize their income and reduce their workload. Any remaining clients will be sold at retirement, and the firm will be closed.

5% 7%

The firm will split up because the remaining partners do not have a shared vision or can not agree on governance issues or a business model.

2% 2%

The senior partners will keep their positions in the firm, taking large compensation packages with diminishing workloads until the junior partners force them out or the firm splits up.

2% NA

Generally,largerfirms(100FTEsormore)expecttotransitionclientsandownershipinternallyandarenotentertainingotheroptions.Onthehand,smallerfirmsarehopingforaninternaltransitionbutarestillconsideringtheiroptions.

Thecurrentmarketplaceforaccountingpracticesisteemingwithactivity.Forty-fourpercentoffirmssurveyedhavebeenactivelydiscussingmergers,acquisitionsorsalesinthepast24months—ortheyplantodosoduringthenext24months.Ofthat44%,nearlytwo-thirdsplantodotheacquiring.Onefirmineveryfiveisopentobothsidesofthetransaction,dependingontheparticularsofeachopportunity.

Succession StrategiesTheoverwhelmingmajorityoffirmsindicatedthatownershipandclientswillbetransferredtotheremainingownerspereveryone’sexpectations.Theprevalenceofotheroptions,however,leadsonetoquestionthecertaintyofthoseplans.

Which of the following describes the likely transition of your firm when the current senior owner(s) retire?

35

Which of the following best describes your role in a potential mergers or acquisition?

What is the targeted size in annual revenues of firms you are looking to acquire?

Thelargerthefirm,themorelikelyitisconsideringsomekindoftransaction:Morethanhalfoffirmswith26ormoreFTEsindicatedanactiveinterestinM&A.Notsurprisingly,thesmallestfirmsplantobeacquiredwhilethelargestfirmsplantodotheacquiring.Exceptfortheextremes,firmsopentobothsidesofthetransactionwerefairlywelldistributed,regardlessofthenumberofFTE:

Asnotedearlier,seniorpartnersinmulti-ownerfirmsmaylackconfidenceintheiryoungerpartnersandresistsellingtothem.Infact,thisrankedasthetopperceivedchallengetosuccessionplanning.Thebestsolutionistopromotetherightpeopleanddevelopthemproperly.Eventhosewhodosellormergewillfindthatthedealwillreflect,atleastpartly,thequalityofthefirm’speople.Firmscanonlyhandlesomanyleadersatonetime.Untilaleadershipvoidiscreatedorbecomesavailable,itishighlylikelythatnoonewillstepup.Veryoftenfutureleadersdon’tstepup—notduetoalackofdesireforleadershipopportunitiesbutratherforfearofappearingtopushasidecurrentleaders.Athree-yearwindowgivesthefirmenoughtimetoconductthenecessaryworkofleadershipdevelopment.

Anothersignificantchallengeisthelackofawrittenowneragreementthathasbeensignedbyallofthepartners.Withoutauniformlyadoptedagreementinplace,itfollowsthatconflictingpartnergoalsalsorankedhighonthechallengelist.Theseconditionstypicallyoccurwhenthereisasilobusinessmodelratherthanatrue,one-firmbusinessmodel.

2012

We are the mergor/acquiring firm. 64%

We are the mergee/firm being acquired. 15%

Both as mergor/mergee or acquiring firm/firm being acquired.

21%

Total 100%

1-7 FTEs

8-15 FTEs

16-25 FTEs

26-50 FTEs

51-100 FTEs

101-200 FTEs

201-350 FTEs

351+ FTEs

Either as mergor or mergee 5% 22% 26% 31% 15% 26% 14% 0%

We are the mergee/firm being acquired.

36% 29% 15% 4% 3% 5% 0% 0%

We are the mergor/acquiring firm. 59% 49% 59% 64% 82% 68% 86% 100%

1-7 FTEs

8-15 FTEs

16-25 FTEs

26-50 FTEs

51-100 FTEs

101-200 FTEs

201-350 FTEs 351+ FTEs

Minimum $204K $341K $588K $587K $1.26M $3.1M $2.5M $5.1M

Maximum $600K $1.15M $1.8M $2.4M $5.1M $9.9M $15M $70.6M

36

Althoughfirmsofallsizesfacemostofthesechallenges,firmswithfewerthan51FTEsaremostlikelytolackapprovedpartneragreementsandamandatoryretirementage.Unlesstheownerscanagreeonsolutionstotheseissues,it’spossiblethat:

1)Spin-offsandsplit-upswilldisruptseniorpartners’buyoutandretirementplans.

2)Retiredpartnerswillstayindefinitelyandtaketheirretirementbenefitsintheformofsalary.

2012 2008

Senior partners feel that younger members of the firm are not ready for leadership positions.

42% 38%

The firm does not have an approved owner agreement. 28% 26%

The firm has multiple owners with conflicting personal goals. 26% 25%

There is no penalty for retiring partners who improperly transition their clients.

25% 22%

The firm does not have a mandatory retirement age, so partners work less while still drawing large compensation.

19% NA

Retiring partners are unwilling to transition clients. 16% NA

Retirement-age partners are unwilling to retire. 11% 11%

Retirement payout is based on book size or hours billed, so retiring partners are motivated maximize income rather than facilitate transition.

9% 7%

Retired partners still manage important client relationships and, as a result, exert influence over the remaining partner group.

6% 6%

Other 12% 13%

Please identify the challenges that are hampering your firm’s succession strategy.

37

2012 2008

We do not have formal written requirements. Ours are informal and are subject to change based on the perspectives of the current owners.

71% 70%

We have documented subjective requirements to be considered for ownership.

29% 24%

We have a non-equity partner track to ensure a good fit prior to becoming an equity owner.

27% 22%

Our competency model identifies both objective and subjective requirements for ownership.

15% NA

We have a minimum “client book” size requirement for ownership.

13% 11%

We have a net-revenue-per-partner requirement, and partner opportunities become available only as firm revenues increase.

12% 11%

We have formal requirements for moving from non-equity to equity partner.

12% NA

We have a “new business development” requirement for ownership.

9% 6%

Other 0% 3%

Thesmallerthefirm,thelesslikelytherearetobeformalwrittenrequirementsforfirmownership.Surprisingly,though,about30%offirmswithmorethan50FTEsdonothavethemeither.Still,thelargerthefirm,themorelikelyithasincorporatedseveraloftheoptionslistedhere.

Future LeadersOvertheyears,oursuccessionsurveysconsistentlyhaveshownthatmostfirmsdonothaveformalwrittenrequirementsforadmissiontopartnership.Firmswithsubjectiveand/orobjectivecompetenciesrequiredforpartnershipareintheminority.Asaresult,thisisoneofthebestplacestojump-startyourfirm’ssuccessionplanning. What are your firm’s identified and formalized requirements for new owners?

38

Which of the following are currently in place to facilitate the transition between the retiring and remaining owners (i.e., minimize impacts on profitability, culture, services, etc.)?

2012 2008

Training staff at all levels below the owners 62% 69%

Making it a priority to delegate work at every level 49% NA

Requiring partners to delegate and increase leverage 46% 43%

Requiring partners to increase time on client relationships and decrease time on work in the office

41% 33%

Clarifying responsibilities, powers and limitations in the board, executive committee and managing partner roles

39% 25%

Changing our operations to reduce the expectation that everyone, including partners, should work excessively long hours

38% 43%

Moving away from the silo model of operations 37% 38%

Holding partners accountable to written operating policies and procedures

27% 27%

Ensuring modularity in partner/retirement agreements reflects current needs

25% 36%

Implementing a formal partner-in-training program 20% 17%

Updating partner compensation system so that the managing partner can hold partners accountable for achieving specific, annual goals

20% 20%

Appointing a younger partner as the managing partner rather than by seniority

15% 12%

Other 6% 6%

Forthemostpart,thelargerthefirm,themorelikelyitisusingoneormoreofthesetechniques.Whenitcomestofindingwaystoworkfewerhours,ofcourse,firmsofallsizesarelookingattheiroptions.

Whenaskedaboutcreatinganenvironmentthatfacilitatestransitionsasseniorownersretire,morethan60%offirmsaretrainingstaffatalllevelsbelowthepartners.Additionally,asyou’llseeonthenextpage,60%havealsosaidtheyaretrainingforspecificcompetenciesinstaffidentifiedasfutureleaders.Thisissurprisinginlightofthepreviousgraphresponsesthatindicatedonly15%offirmshaveidentifiedspecificrequirementsforpartnercandidates.Ifafirmhasn’tidentifieditsrequirementsforleadership,howcanitadequatelytrainthosewhowillstepintosuchroles?Nearlyhalfofthefirmsareencouragingpartners,managersandstafftodelegatemore.Asnotedearlier,however,manymanagingpartnerslacktheabilitytomotivatefirmownerstodelegateworkanddeveloppeople.Theseresponsessuggestthepotentialforgapsbetweenafirm’sstatedphilosophiesanditsactualpractices.Again,here’sanotheropportunitytostrengthenthefirm’ssuccessionplan.

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What are you doing to develop the future leaders of your firm?

Generally,thelargerthefirm,themorelikelyitisusingoneofthesetechniques.Thedatasuggestthatafirmtypically“waits”untilithasmorethan15FTEsbeforeadoptingsomekindofdevelopmenteffortforitsfutureleaders.

2012 2008

Identification of and training for specific competencies 60% 75%

Informal coaching by an assigned partner 47% 56%

Formal training or education in delegation and supervision 31% 44%

Formal training or education in interpersonal skills 30% 36%

Nothing is being done at this time 26% NA

Giving experiential assignments to develop competencies 24% 25%

Formal mentoring program 22% 24%

Formal leadership development (partner-in-training) program – through CPA firm association

16% 17%

Formal leadership development (partner-in-training) program – in-house

12% 15%

Coaching by an outside consultant 12% 14%

Formal leadership development (partner-in-training) program – through state CPA society

6% NA

Formal leadership (partner-in-training) development program – through AICPA

5% 17%

Other 3% 7%

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Thelong-runningpatternoffirms’hiringpracticeisthis:Headcounttendstoriseorfallinresponsetocurrentandplannedworkload.Rarelydoheadcountincreasesoffsetnaturalorplannedattrition.Thisoftenleadstoalackofadequatehiringandforcesfirms,especiallythosewith100FTEsorfewer,todemandunreasonablehoursoftheirpartnersandstaff.

Withtheexceptionofafewsmallerfirms,mostmulti-ownerfirmsexpectpositivegrowthforeachofthenextthreeyears.Growthestimatesvariedbyfirmsize,moresignificantlyin2012thanin2014.By2014,mostfirmsareplanningforgrowthofaround7%.Eventhesmallestfirmsanticipateatleast5%growth.Iftheseassumptionsholdtrue,whatarethestaffingimplicationsforyourpractice?Perhapsmoreimportantly,whataretheleadershipimplications?

1-2 FTEs

3-7 FTEs

8-15 FTEs

16-25 FTEs

26-50 FTEs

51-100 FTEs

101-200 FTEs

201-350 FTEs

351+ FTEs

We expect positive growth in 2012. 100% 86% 85% 87% 92% 82% 95% 100% 100%

Expected growth rate 5.17% 8.13% 7.34% 6.52% 6.80% 6.15% 4.58% 5.56% 7.11%

We expect positive growth in 2013. 100% 90% 95% 98% 98% 96% 100% 100% 100%

Expected growth rate 4.80% 7.48% 6.88% 6.19% 7.02% 6.65% 7.12% 6.11% 7.00%

We expect positive growth in 2014. 100% 92% 95% 98% 99% 98% 100% 100% 100%

Expected growth rate 5.00% 7.37% 7.05% 6.16% 7.63% 7.37% 7.40% 7.00% 7.22%

1-2 FTEs

3-7 FTEs

8-15 FTEs

16-25 FTEs

26-50 FTEs

51-100 FTEs

101-200 FTEs

201-350 FTEs

351+ FTEs

Average annual new hires 0.00 0.75 1.06 1.77 2.69 5.22 16.14 22.11 49.63

Average annual departures 0.17 0.61 0.87 1.25 2.19 4.41 12.90 25.56 50.88

Staffing LevelsOnaverage,mostfirmsarehiringenoughtooffsetattrition.Inthetwolargestcategories,however,attritionslightlyexceedsnewhires.Thismaybeduetotheeconomicdownturnandaneedtoresize.Still,largerfirmshaveabettercapacitytocoverexcessworkloadforshortperiodswhenattritionexceedsnewhires.

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Best PracticesBuildingabetterpathtosuccessioninvolvesenhancingthestrengthandvalueofyourpractice.Here’show.

Start With a 3–Year Written Plan Ittakesaminimumofthreeyearstoimplementthetypeofchangesevenasmallpracticemightrequiretoensuretheseamlesstransitionofclientsandstaff.Identifythekeymilestonesneededtomoveyourpracticeforward.Assigndatesandaccountabilities,andbeginactivelyworkingtoachieveyourplan.Beginnowtomakechangesthatwillbenefitthepractice.Whetherthestrategyisinternalsuccessionviaexistingstafforexternalsuccessionthroughamergeroracquisition,theresultsshouldsecuretheowners’retirementbenefits.

Ataminimum,yourplanshouldaddressthefollowing:

Firmvision–Whatdoyouwantyourfirmtolooklikeinthreeyears?

KeyInitiatives–Howwillyouachievethevision,basedonthefollowingconsiderations?•Clienttransition-Whenandhowwillcontroloverlong-standingclientsandengagementsberelinquished?-Howwillyoungerstaffbeinvolvedontheseengagements?•Futureleaders-Whatkindoftrainingshouldjuniorstaffreceive?Willitbeonthejoborthroughformalseminars?-Whatwillbetheiraccountabilitiesandfuturepaymentobligations?•Sellingpricetarget-Whatstepswillyoutaketocreateastrongerandmoreviablebusinessthatiscompetitivelypositionedformultiplesuccessionoptions?•Retirement-Whatwillbethemandatoryretirementage?-Whatwillbetherights,responsibilities—andlimitations—ofretiredpartners?-Howwillretirementcompensationbetiedtothefirm’ssuccessionplan?

Actionplans–Whataretheaccountabilityassignmentsandduedatesforimplementingtheinitiatives?

Performancemetrics–Howyouwillmeasuresuccess?

Foradditionalplanningconsiderations,visitthePCPSSuccessionPlanningResourceCenter,anddownloadacopyoftheQuickStartGuideforSuccessionPlanning(aicpa.org/PCPS).

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Improve Operating Policies & Procedures Whatcanyoudotoimproveyourprocessesandcreateefficiencies?Understandthatgoodpoliciesandproceduresdriveconsistentoperations.Consistencyisthekeytogreatercertaintyforpartnersandstaffwhenitcomestoallfacetsofthefirm:clientacceptance,clientserviceandsatisfaction,billingandcollection,clientmovementbetweenpartners/managers,evenhiringandfiring,compensation,andfirmadministration.Increasedcertaintyreducesthepotentialforsurprisesandcreatesasystemthatreliesonpositionsratherthanpersonalitiestokeepthewheelsturning.Andwhensurprisesdoarise,therewillbelessneedtocreatenewrulestodealwiththeexceptions.Youwanttocreateanenvironmentthatfollowsprocessandprocedure,holdspeopleaccountable,andmakeschangesthroughtheappropriateuseofgovernance.Youdonotwanttobetthefirm’sfutureonthecharismaorentrepreneurialinstinctsofeachnewleader.

Considerstandardization,andmotivateemployeesandpartnerstoconform.Ensurethatthemanagingpartnerhastheauthoritytoholdpartnersandstaffaccountableforcompliance.

Define the Rules for Retiring PartnersAsnotedearlier,asurprisingnumberoffirmsallowretiredpartnerstocontinuedoingmuchofwhatthey’vealwaysdone:serveclientsandinfluencethedirectionofthefirm.Aclearlycommunicatedretirementageshouldpreventorminimizethehardfeelingsthatcomewiththedifficultyofaskingsomeonetoleavebeforeheorsheisready.Thefewestproblemsariseatfirmswhereretiredownersarenolongerequityowners,andtheyarenotallowedtoparticipateinorinfluencethemanagementofthepractice.

Donotcompletelyfundtheexitingowners’retirementliabilities.Consider,instead,fundingabout15–20%oftheliabilitytokeepthepartnersinvestedinthefutureofthefirm.

Structurecompensationandbuyoutsinawaythatrewardstheretiredownerfortheportionofthebusinessheorshebuiltpriortoretirement.Afterretirement,however,anyadditionalcompensationshouldreflectthepartner’sworkonlyforactivitiesthathavebeenapprovedbytheremainingpartnersormanagingpartner.Ideally,thisarrangementwillalreadybedocumentedinthefirm’ssignedcopyofthesuccessionplan.

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Develop Your People Groomingstaffandenhancingtheirskillsinvolvesmorethanannualcontinuingeducation.Identifytherequisitetechnicalcompetencies,andtrainyourpeopleinthoseareas.Offerfinancialincentivesthatmotivateallfirmmemberstobecomeinvolvedindevelopingstaffskills.Movebeyondthetechnicalrealm,however,andensurethatthosewithleadershippotentialaregivenopportunitiestomanagepeopleandsituations.

Asstaffmembersdevelop,getthemactivelyinvolvedinclientrelations.Somefirmsbelievethebestwaytogrowthepracticeisthroughhiringoutsiderainmakers.Thatmaybetrueofafirmwithanoverwhelmingmajorityoftechnicalpartners.Often,however,thereisanabundanceofcurrenttalentjustwaitingfortherightopportunity.Ifthefirmcancombinetherightcoachingwiththerighttiming,mentoringhasthepotentialpaydividendsforallofthefirm’sowners—bothcurrentandfuture.

Identifythestarsonstaffwhocandomorethanhandleclients—they’retheoneswhoalsodemonstrateaninterestinthebusinessofthefirm.Theseareyourcandidatesformanagingpartner.Involveemergingleadersindecision-makingdiscussions.Allowthemtoaccumulateexperiencethatwillenablethemtorunthefirmwhentheirtimecomes.Notonlywillthishelpthefirmdevelopitsfutureleaders,butitwillalsohelpretaintoptalentthroughincreasedmoraleandpersonalinvestmentinthefirm.

Use Equity Wisely Managementofthefirmshouldbeinthehandsofleaderswithgoodclientserviceandentrepreneurialskills.Firmsshouldbepreparedtomakeunpopulardecisionsaboutequityratiosandwhoownswhatportionoftheequity.

Improve Your Governance Inadequategovernancemaybeoneofthegreatestweaknessesoffirmsunder$30million.Here’sanopportunityforfirmstolearnfromtheirclientssinceasignificantnumberofthemaremanagedthroughcorporategovernancewheretheboardsetsoverallpolicyandprovidesoversighttotheCEO.TheCEO,inturn,ischargedwithmovingthefirmforwardinthedirectionsetbytheboard,andheorsheisempoweredtoholdtherestoftheemployeesaccountable.Goodgovernancedoesnotmanagebyconsensus.

Likewise,firmsshouldhavehealthyconversationsaboutstrategybutthenturnoverthetacticstothemanagingpartner.Partnersshouldbeexpectedtosupportthedecisions.Ownersshouldalsoensurethatthecurrentgovernancestructureiscohesiveandpromotespartnerunity—ratherthanonethathasbeenpiecedtogetherovertheyears.Startdevelopingastructurethatissustainableandcanwithstandachangingoftheguard.

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Budget for Leadership Goodleadershipoftenistheresultoftimingandtraining.Acknowledgetheleadtimefordevelopingapartneratyourfirm.Howlongdoesittakeyourfirm’stypicalpartnertobecomereallygoodatdeliveringthekindofserviceandexperienceyourclientshavecometoexpect?Dependingonthesizeofthefirm,theremayberetiringpartnerswhocanlendsomeday-to-daycoachingandmentoring.Besure,however,thatthosecoachesandmentorshaveexperiencebuildingbetterleadersratherthansimplyproducingcopiesofthemselves.

Implement a Robust Compensation Framework Compensationshouldsupportgovernancepracticesandthefirm’soverallstrategy.Paypeopletoachievethefirm’svision.Thepartnergroupshouldapprovethegeneralcompensationframeworkandbasepay,butthemanagingpartnershouldhavesomediscretion(15%–20%)overeachpartner’soverallcompensation.Thisgivesthemanagingpartnersomeabilitytosetandmonitorindividualperformancegoals.Acompensationcommitteecancreatethefirm’scompensationframework,butonepersonshouldmakedecisionsabouteachfirmmember’sperformanceandpay.

Firmcompensationshouldbeperformance-basedandincludebothobjectiveandsubjectiveelements.Ensurepersonalgoalsforpartnersandstaff,andbesuretomonitorthemquarterlyandupdatethematleastannually.Thisisthebestwaytoensurethatindividualsaremeetingtheirownobjectiveswhilesupportingthefirm’soverallstrategy.

Evaluate Your Rates and Your Clients Howdoyourbillingratescomparetothoseofyourcompetitors?Iftheyaretoolow,theywilllimityouroptionsforbuyersandundervalueyourpractice.Youmayneedtoraiseyourratesandupgradeyourclientlist.Strengthenyourrelationshipswithyourtopclientsandreferralsources.Identifymarginalclientsandeithermotivatethemtobecomegoodclients(byraisingfees,movingtheirworktotheslowseason,encouragingon-timepayment,etc.)orrecommendanotherfirmthatbettersuitstheirneeds.

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