We’ve seen the impact the COVID-19 pandemic took on succession planning for accounting firms. For anyone who didn’t exit during the pandemic but were thinking about it before, they’ve had their plans pushed back. Our businesses are quite different than they were before. We survived, but what on earth do we do now?
In this episode of Pulse of Practice “Setting Course for the Next Chapter”, Paul Miller, CPA from Business by Design, and I discuss the importance of accounting firm leaders to continue to build out their succession plan. When the day comes when you’re ready to step away from your business, are you prepared to do more than just simply turning out the lights?
Taking a measurement of your accounting firm.
From ‘What happens when baby boomers retire?’ to ‘Business succession failure plans’, one look through the Checkpoint Learning catalog shows the topic of succession planning is hot on accountant’s minds. After a lifetime worth of work, and a lifetime of building an asset, we see so many firm owners and partners, especially small firms, shorting themselves on what the possibilities might be for building residual income.
If your business is your asset, it must be able to operate without you being at the center. Otherwise, you are the asset and your firm is not. Firm leaders must take a measurement of their own business. What is the productivity and revenue from the firm without the owner being part of that production?
“We talk about this with our clients, there is a fork in the road when it comes to business,” notes Paul. “On one side of that fork is a business that is basically just a checkbook. I try to be as profitable as possible and when I’m working, I make money. But when I’m done, I shut the lights and walk away. That’s it, and there is nothing wrong with that business model. But I think you have to be very intentional that your long-term net worth is built somewhere else.”
Paul compares this to the business model of a real estate agent. A real estate agent making $700,000 a year is not necessarily going to sell their business to someone else. Their goal is to be as profitable as possible, take a part of that profit, and build net worth in other assets that can build a passive income.
“Many firms discount their own labor and knowledge,” adds Paul. “It’s kind of a crude analysis, but I’ve seen firms that have a firm principal: a couple of employees, they grow, they get busier, they get a couple more employees. Now, their overhead goes up, but the firm principal on it makes the same amount of money but with three times as many headaches.
“I think we must go on that other side of the fork and say, if we invest in the business, then we need to demand the rate of return from the business outside of our labor. Can that business run without me? That is the challenge of a personal service business and a relationship business, being very intentional with that.”
Investing in your business so it can make money without you.
We’ve seen firm owners fall within a dangerous spot where their only focus is to produce income, which wasn’t the succession plan when it all started. The plan was to sell the book of business and to be able to sell off that asset. We hear about multiples of revenue going down in terms of what you can get for your book of business, but the firm owners never adjusted their plans based on those scenarios. Now, if you are planning to leave your business within 3 to 5 years and you haven’t been smart with the money you have made, you’ve got a problem and your window is short.
Again, there is nothing wrong with the plan to just make money, if you are aware of what you are doing. However, if that wasn’t your plan to start, and your environment has shifted, you’ve got to move quickly and decide: how do I maximize profit right now? How do I invest into my business better so that it can make money without me?
“We all in our professions probably think we’re immortal,” jokes Paul. “It’s funny, life gives us all the twists and turns as you get older. You have the market itself, the industry devaluing the 1040-type of business, artificial intelligence creeping in, the pandemic, and your own life, health, and desires. That’s why I think we must start with this in our minds: let’s not just work through another year. Let’s start being very intentional about what we can do. Start with the small stuff, because if you think 3 to 5 years is a long window, it goes by pretty quickly.”
When the baby boomers move out of this profession, a lot of knowledge is leaving with them. This is important intellectual capital, and we must think about what we can do to continue to add value. As a business owner, I need to find a way that I can make money when I’m not really working. That’s the idea, and hopefully that is the reward of making investments in things throughout your lifetime ability to practice.
How can you shift the production from yourself to the firm?
Let’s say you’re in that 3 to 5-year window before retirement, and you’re looking at your succession plan. You’re realizing you don’t have this big, sellable asset because your business is completely dependent on you. What are some things you can do to shift the production from yourself to the firm as a whole?
“The words ‘soul searching’ come to mind,” says Paul. “I think you’ve got to look at the person in the mirror and decide, is this really what you’re going to be able to do? Because it’s too easy to come up with excuses, to be busy, to put off tasks, etc. So, you need to get yourself in the mindset. This is what I want for me. What is the next version of my firm going to look like?
“The second thing that comes to mind is looking at your business through the eyes on an investor. What are my systems in process? You need to have a uniform process. Real simple things like knowing who your customers are, who you serve, what levels of service you provide, how you do your pricing, these things need to be standardized. Bringing in more people won’t help if you don’t have the right foundational pieces.”
It is difficult to find the time, energy, or accountability to figure the routine stuff out. Frankly, it’s not what brings in the money instantly. We’re not going to put in the work because we have not properly associated it with the end game. Once you put in that effort and standardize your business, you’ll be able to back out of more of the day-to-day.
It’s not going to happen overnight. Nobody attends a seminar and comes back with the changes implemented right away. We’ve seen firms make unbelievable transitions, but there are steps to take.
“Our business is changing right in front of our eyes,” notes Paul. “If you don’t realize how our profession’s and our clients’ needs are changing quickly, that is going to devalue your practice tremendously.
“We are here to interpret and implement change for our clients. If you are simply focused on completing tasks, you are going to be devalued the most. If you are managing your client relationships and evolving those relationships, you’re going to be valued at the highest point.”