A few years ago, three partners of a local CPA firm sat around the table talking. All of them were Baby-Boomers in age and they talked about what would happen to their 20+ person firm after they retired.
Two choices seemed logical. One, they could entice a larger firm to buy them out or, two, they could hire and train staff to replace them. Either choice required work to build value in the firm and maximize the anticipated “sale” of the business in the future.
At some firms, seasoned Baby-Boomer partners are preparing to exit within the next ten years. They may have children (or grandchildren) in the family who are being groomed to take over the business.
(Eighty-four percent of multi-owner firms surveyed in 2016 by the American Institute of CPAs said they believe succession will be a big issue for them in the next decade.)
Planning your future exit from the business can differ depending on the size of the business. Regardless of the industry you are in, training future partners in advance is important for Baby-Boomer entrepreneurs to plan for.
Some businesses include mandatory requirements in written agreements, describing how an outgoing partner must transition clients to work with their replacement. Partners or co-owners who opt to sell their part of the business may encounter roadblocks because the market is saturated in their area of expertise. This poses a challenge for soon-to-be retirees and their firms. Planning in advance will increase the probability of a successful sale for those who hope to sell their career-long business at an acceptable price.
Young professionals who are looking to buy in to an existing business must be sensitive to business founders approaching retirement, as many have spent their careers building their firms and may be hesitant to step away.
If you are a young Millennial looking to buy out the owners or you’re a partner or co-owner who is planning on retiring soon, open and ongoing communication is a key element to successful transition.
At some firms, particularly those providing professional and technical services on things like taxes and financial matters, owners can decide to expand their firm now to avoid a leadership gap when they retire. The business might establish specialties in specific areas so that the founder can appoint younger talent to lead in those niche services. Existing owners may think about when to strategically give notice of retirement to co-owners, so that younger leaders have a firm timeline for when they’ll become partners.
In one business, with a staff of about 10, the co-owners re-organized to have multiple people serve a single client. This makes a client more likely to stay with the firm when the founder or co-owner leaves the firm. Ten percent of multi-owner CPA firms surveyed by the AICPA in 2016 reported that they’ll likely look to merge with another firm after their current senior owners retire.
In a merger situation, large firms may shop for specialty expertise in smaller businesses, related to their industry. They’re likely to ignore a firm without a strong niche. Firms who avoid technology, like using paper instead of cloud-based systems, may drive away interest from a potential buyer.
Ten years ago, small firms most often merged with larger organizations because they lacked a succession plan. That’s changed, with many firms now merging as a strategic move. Large firms may offer pricey technology, for example, that small firms need so that they can compete and reduce costs.
As Baby Boomers retire, younger entrepreneurs have immense opportunities to buy into a solid firm. However, generations may clash. For example, a retiring founder may choose to meet with clients face-to-face, while on the other hand incoming partners could pick email communication. There is a huge opportunity for multi-generations to learn from each other on those fronts. However, buy-out deals can fall apart because of different philosophies on how to do business. Planning in advance will mitigate fall-out and maximize returns for the founder(s) when they are ready to exit.