Accounting and CPA firms play a crucial role in the financial health of businesses, yet they often face significant partner-related challenges that can impede the health of their firms. Unfortunately we see some of these issues bubble up when one or more partners wants to exit. These issues can impact not only the internal dynamics of the practice but also client satisfaction and overall growth. Below are the three biggest partner issues we’ve observed and strategies to avoid them.
The only absolute way to avoid partner issues is to keep 100% of the equity in your firm. We’ve worked with and spoken to firm owners who earn several million per year in gross revenue without bringing on partners. We also interviewed an owner that scaled to $100M in annual revenue while maintaining a controlling interest in his firm. (Check out our firm growth guide to learn more about how that was accomplished and the managing partner’s reasoning for structuring it this way.) Oftentimes being the sole decision maker makes running and growing your firm so much easier in order to rapidly make changes in a shifting landscape. However, If you already have partners, we have some recommendations.
1. Differing Vision and Goals
Partners often have varied visions for the firm’s future, which can lead to conflicts in strategy and direction. These differences may stem from personal ambitions or differing priorities regarding client services. This is a big reason to make sure that before you bring a partner on board, that you make sure your visions for the future of the company are largely aligned.
It’s wise to facilitate regular strategic planning sessions where partners can openly discuss their visions and collaboratively set goals. A unified strategic plan can align partners and provide a roadmap for the firm’s future. Visions are constantly evolving and a cadence of meetings helps partners to evolve together.
On our team we have a leadership board. There is only one owner, but the premise is the same, we talk about our vision for the company and delegate tasks/ responsibilities we want to share to each other and the team. This helps us all work together for a common goal. We follow the EOS “level 10 meeting structure”. For us, this is a weekly meeting.
2. Succession Planning Challenges
Many firms regardless of size struggle with succession planning, especially when partners are close to retirement but have not discussed an exit timeline thoroughly amongst each other. This may be one of the biggest issues we see from a mergers and acquisitions perspective. There have been many practices that have listed with us with three or four partners and one of the partners is just not ready to sell.This person will often stall the deal or kill it entirely. It can be hard to watch the other partners ready for retirement unable to properly exit.
This is why it is so important to establish a robust succession plan well in advance.There are many ways to do this, but agreeing on a timeline is key. It can be equally helpful to decide ahead of time on your ideal terms and percentage of the firm you want to sell. With the employee shortage plaguing the accounting industry right now, it’s not unheard of for firms over a few million dollars to retain some equity share in the firm being sold. This can work out well for any partners who just aren’t ready to exit when everyone else is. It can be a lengthier sales process because fit becomes even more important when an existing owner plans to continue working in a partnership with the new buyer. Ensuring the firm is attractive to outside prospects can be even more essential.
In preparing your firm for a sale, get those owner hours under 2,000 per partner, or lower if you can. Make sure cash flow or EBITDA is at least above 30% and ideally over 50%. This range will change as firms become very large or are in a rapid growth phase, but 50% cash flow to owner should be the gold standard for small to medium sized firms. A firm that is less owner dependent, regardless of how many owners there are, is a more scalable, sellable firm.
3. Resistance to Change
As the accounting profession evolves, some partners may resist adopting new technologies or practices, fearing disruption to established processes. This reluctance will hinder the firm’s growth and adaptability. This is especially true as private equity enters the accounting space and starts implementing more aggressive business strategy into firm ownership. Change is inevitable and will be either what helps you grow or the reluctance to accept it will hold you back. We see change accelerating in the industry going forward. The talent shortage is projected to get worse before it gets better. There is a lot of consolidation and technology changes that are also rapidly changing the industry.
To help with this issue, you need to foster a culture of innovation by encouraging partners to embrace change. We like the idea of one partner being in charge of innovation to bring new ideas to the partner group to help drive positive change in the firm. The innovation partner can also be responsible to provide training on new technologies and demonstrate their long-term benefits to promote buy-in among the partner group. Successful firms are embracing the ways automation can ease partner involvement in the firm and attract new staff. Another way to help partners resistant to change is by having those strategic planning sessions like we mentioned for the first issue on vision alignment. It can be easy for partners to practice in silos, communication is the key to being on the same page.
The main takeaway:
By fostering open communication, aligning goals, planning for succession, and embracing change, firm partnerships can thrive. Ultimately, a harmonious partnership structure not only enhances internal dynamics but also leads to improved client service and sustained growth and an easier exit when the time comes.
