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Business Continuity Planning (for a CPA firm)

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#1
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So during the course of estate planning for myself (only 40 years old but you never know) I've decided to reach out to some larger local firms who could easily absorb/merge in my practice.
Seems a win/win to provide a resource to my clients if something happens to me, as well as to maximize my estate for my heirs.

Any of you have a similar plan, or ever dealt with a Continuity plan?

I am not sure what terms will be offered. I would think 20% for 5 years would be reasonable. There obviously has to be some type of retention wording factored in. I also assume 100% would be unlikely and the offers might be closer to 50-75% paid over a period of time.

Any feedback appreciated, and if you don't have a similar arrangement I would encourage you to look into it.
 

#2
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Continuity planning is a difficult topic when you are a sole practitioner. Effectively, your firm can quickly become worthless and so the value is going to be based on a lesser multiple or have various reductions built into it.

The other issue is I simply do not like any of the other firms in my area to take on my clients. I have built a unique firm from a service standpoint, and do not believe the others will be able to offer the same level of service my clients have come to expect. The one CPA I hoped to have an agreement with is not in a position to be able to absorb my clients.

I am meeting with someone today concerning succession plan, but it is not a CPA (preferred but NOT required by my state). It would be for them to simply close out my company's affairs and distribute any client information that must be released back to them. I do not care about selling in event of my death--if I die, my life insurance will always be exponentially more than what my company is worth.
 

#3
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I'd be interested in what kind of feedback you get from these larger firms. How big must a firm be to easily absorb your firm?

We have had to say no to a couple of local CPA's on their own who thought we would jump at the chance to help them out. Bottom line is there is no way our current staff could absorb any more than 30-40 clients, max. So when these guys approach us, it might be a win/win for them and their clients but it is a no win for us. We do not want to be put in a situation where somebody's else's problems becomes our problem because we wanted to be nice guys.

And I am not sure if a firm with $2-$5 million in revenues is going to jump at the chance to pick up a firm any smaller than $500k unless you were a boutique firm with a lot of wealthy individuals, with an average 1040 price of say $500 or higher.
 

#4
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CornerstoneCPA wrote:Continuity planning is a difficult topic when you are a sole practitioner. Effectively, your firm can quickly become worthless and so the value is going to be based on a lesser multiple or have various reductions built into it.

if I die, my life insurance will always be exponentially more than what my company is worth.


I've come to the same conclusion.

A sole practitioner is better of getting a million or two of term life insurance, and identifying a firm that all clients can be referred to in the event of said practitioner's passing.

I feel there will be a lot of confusion, chaos, and client frustration if a loved one has to "step in" and try to sell an accounting practice. Most of our loved ones would be out of their depth here I imagine.

Really what you want to do is make it easy on your loved ones, and take care of your clients. I think the above is about a good a trade off as is possible.

Don't tell your loved ones about the insurance though...you don't need them messing with your brake lines, especially in the middle of busy season.
 

#5
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ManVsTax wrote:
A sole practitioner is better of getting a million or two of term life insurance, and identifying a firm that all clients can be referred to in the event of said practitioner's passing.

I feel there will be a lot of confusion, chaos, and client frustration if a loved one has to "step in" and try to sell an accounting practice. Most of our loved ones would be out of their depth here I imagine.


Agreed. I am going to name my company as a beneficiary on my existing insurance policy for a specific amount to provide additional funds, and am working with someone to handle closing out the business if I die before I eventually sell. I do not want to appoint my wife, because if we happened to both be killed in a car accident, for example, it defeats the point of succession planning. Plus, I saw what my mom went through in closing out my dad's firm when he died and I do not want that being placed on a family member.

Eventually I will get a small standalone policy with my company being the sole beneficiary. In the interim, I'll just redirect about 2-3% of what my wife would receive and have it go to company, and then she will be entitled to any remaining assets after firm is closed out.
 

#6
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So my firm is very young, and very small, so I assume it would be absorbed relatively easily with little to no increase in overhead.
I started in mid 2019 and billed out about 20k, and billed out about 90k so far this year.
The 2 firms I contacted are both interested in the prospect.
One firm has 2 partners and maybe 4 staff, so there might be 4 tax preparers in total.
The other firm has 5 partners and maybe 18 staff in total.
I also know the managing partner of the largest firm in the area that does about 11mil a year, but there are about 45 minutes away and probably not a good fit.
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Obviously as a one CPA firm/one man show, most of my clients are my clients because of who I am.
I am sure a lot would be lost in the transition, and I'd probably have a strict retention only type situation in place for a % per year. My guess is 50-75% might be on the high side of what my estate could expect, paid over 3 or 5 years.
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I'll update the thread to let you know how it goes.
I'm also only 40, so the chances of this even coming into play is hopefully pretty slim, but you never know.
 

#7
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Just be careful with firm you choose to take over your clients. Make sure they will be able to service your clients to the same standards they have come to expect. If same standard, you can expect a decent retention rate. If not, you'll be lucky to have it be at 50%. You will likely lose some, regardless, simply because people do not like being "forced" into a situation...these types like to choose who they work with rather than suddenly be pushed into another service provider.

When my dad died, I had already gone into private accounting and my sister (also a CPA) facilitated a sale to the first interested buyer she came across because it benefited her the most. Within two years, the firm she sold to had lost nearly all of my dad's clients due to billing practices and poor service. Additionally, my sister violated her noncompete due to how miserable the firm was to work for (she also became an employee as terms of sale), which led to a legal battle and eventual out-of-court settlement I know nothing about (we do not speak).

Similarly, if you ever bring in a partner, CHOOSE WISELY. I partnered with my sister for a very brief period of time and it was terrible. I exercised my buyout option, which prompted a battle of lawyers for six months and about $10k in legal fees just to my lawyer. This is what led to us to not speak and that was over 3 years ago. I do not foresee myself ever having a partner after that experience, and what I have witnessed elsewhere. Yet another situation of previously agreed upon terms not being honored and, ultimately, sheer greed.
 

#8
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ReckedCPAEA wrote:I started in mid 2019 and billed out about 20k, and billed out about 90k so far this year.


That's some pretty solid growth.

If you don't mind me asking...what's the makeup? Tax, bookkeeping, etc?

Did you take clients with you from your prior firm? How do you generate leads?
 

#9
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I am still employed with my prior firm, so this is my side hustle.
I have another thread on here about my "sweat equity" and promises for partnership turning into a don't let the door hit you on the way out. Employer is 75 years old, no buy/sell, no non-compete. My growth over the next 3-5 years looks VERY promising.
Breakdown details.
Charging $300/hour, no deadbeat clients(haven't been stiffed yet), all tax and consulting work, no payroll, no bookkeeping.
38% personal, 56% business, 5% consulting, 1% other.

I had a decent number of basket cases this year needing multiple years of personal filings, and in one case multiple years of late business returns.
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No advertising, referrals only.
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A couple things helped me this year. 1. The aging baby boomer non-responsive CPA firms in the area.
So many clients I picked up this year were just tired of never getting a call back.
2. There was also a partner in a firm that left the area, leaving the non-responsive partner to run the business, so I ended up picking up some of those clients through good referrals. They were all a friend circle that used the same accountant, and once they realized their person had left, they wanted away from the firm.
3. The tax director from a local firm that was being acquired by a national firm left and bought out a retiring practice. They bought a big book, plus more clients followed than anticipated so they could not take on any more clients. We had a nice friendly relationship so my card was passed along to any new people that came in. This is where 2/3rds of my basket cases came from.

There are 2 firms in my area for sale currently, and another about 30 minutes away.
These people have no exit strategy, and the most common complaint I hear in the area is you can't find young people that want to work anymore. No one wants to do the tax season hours, especially for someone else to reap all the rewards.
Last edited by ReckedCPAEA on 22-Oct-2020 11:19am, edited 1 time in total.
 

#10
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Good for you. Keep it up.
 

#11
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NC
ReckedCPAEA wrote:I am still employed with my prior firm, so this is my side hustle.
I have another thread on here about my "sweat equity" and promises for partnership turning into a don't let the door hit you on the way out. Employer is 75 years old, no buy/sell, no non-compete. My growth over the next 3-5 years looks VERY promising.
Breakdown details.
Charging $300/hour, no deadbeat clients(haven't been stiffed yet), all tax and consulting work, no payroll, no bookkeeping.
38% personal, 56% business, 5% consulting, 1% other.

I had a decent number of basket cases this year needing multiple years of personal filings, and in one case multiple years of late business returns.
-
No advertising, referrals only.
-
A couple things helped me this year. 1. The aging baby boomer non-responsive CPA firms in the area.
So many clients I picked up this year were just tired of never getting a call back.
2. There was also a partner in a firm that left the area, leaving the non-responsive partner to run the business, so I ended up picking up some of those clients through good referrals. They were all a friend circle that used the same accountant, and once they realized their person had left, they wanted away from the firm.
3. The tax director from a local firm that was being acquired by a national firm left and bought out a retiring practice. They bought a big book, plus more clients followed than anticipated so they could not take on any more clients. We had a nice friendly relationship so my card was passed along to any new people that came in. This is where 2/3rds of my basket cases came from.

There are 2 firms in my area for sale currently, and another about 30 minutes away.
These people have no exit strategy, and the most common complaint I hear in the area is you can't find young people that want to work anymore. No one wants to do the tax season hours, especially for someone else to reap all the rewards.


That’s awesome.... setting the practice right years 1 and 2 are key. I went from 40 K to 200K in 2 years here in Charlotte in the late 90s. I’ve never looked back, turn away a ton of quality work and I simply shake my head when I read some of the BS that other CPAs here deal with. I would say you should remain selective. my goal was to always make what a partner in a mid sized firm made. So.... after 2 years, if I made less than $200K net, I was behind. Put 15 percent in a SEP/401K and when you get my age you’ll have millions. keep it up!!!
 

#12
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Yep, identify your ideal client base and stick to it. Do not accept everyone that contacts you. Part of how I have grown so much, as well.

I have a net income figure in mind. When I hit it, I am done growing, will maintain it for 3-5 years years, and will then begin preparing to sell. My goal is to be out of this public accounting world at 45 and investing in small businesses that need financial and general business guidance. That gives me 10 years to achieve it all before selling out. Already have a target company for obtaining an equity position as controller for a small business I truly believe in and know will be quite successful, and odds are pretty high that it will come to fruition.
 

#13
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I did a practice continuity agreement. I think it was worth it. The firm is around double our size. It is like life insurance. There is nothing to lose if this is done. There is more to gain such as the employees potentially having a job unless they decide to move on and my spouse not having to think about selling a practice if I pass. Yes 20% over 5 years looks reasonable. You can have the lawyer review it before you sign it. I don't think there is anything to lose. It is life insurance.
 


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