Bittersweet Journey

August 23, 2018

Succession Planning and What You Should Know

By Lynda R. Bowman, CPA
The phone rang. I recognized the number and answered quickly, before my staff could pick it up. I was expecting to hear the familiar voice of my friend and colleague on the other end. However, it was one of his staff accountants informing me that my dear friend of almost 20 years had suddenly passed away. That was Dec. 29, 2015, and I’m still travelling this bittersweet journey.

I met my friend, Wesley, in spring 1996, when we both started attending San Jose State to earn our master’s of science in taxation degrees. We had been good friends since and shared office space for a couple of years until we outgrew the space. Although we had considered operating as one firm, we determined we wanted our own firms and moved into larger separate offices. But we stayed in contact constantly, including teaching a tax class together for UC Santa Cruz Extension. And since our firms were small, with just a few employees each, we were a great resource to each other, especially during tax season.

Picking Up the Pieces
When I arrived at his office after receiving the phone call, the first order of business was a long cry session with his staff, then his staff and I talked through the outstanding projects and respective deadlines. Since it was almost the end of the year, a few tax projections needed to be finalized, a couple of corporate tax returns needed to be reviewed and signed, and tax engagement letters were printed and ready to be mailed; however, nobody was available to sign them.

This is when I experienced the first of many roadblocks. I contacted the California Board of Accountancy to explain what happened. I mentioned that although we had never formally finalized our succession plan, I was available to help during the transition while his wife—the office manager and now owner of the firm, an S corp—decided what she wanted to do with the firm. The response I received from the CBA was unsettling: Since there was no longer a CPA on staff, the firm no longer could operate as a CPA firm. 

The other issue was notifying clients. I have been a member of the CalCPA Management of an Accounting Practice (MAP) Committee and we have encountered many phone calls from spouses of CalCPA members who had passed away asking what do they do next. In fact, I had handled a number of those calls, given them contact information of other CalCPA members who could help. Now, it was my turn to contact my colleagues, who provided me with contact info of people who could help with the sale of the firm. 

Just a few days after Wesley’s passing, his wife met with one of these contacts, a broker, to discuss the best way to notify clients about Wesley’s passing. She was shocked to receive the advice to not to say anything until the subsequent CPA was identified. The broker indicated that the value of the firm goes down dramatically once clients are aware of the CPA’s passing and clients may start looking for another CPA. When Wesley’s wife notified me of this, we were both conflicted. How could we not notify the clients right away? 

Many of us who own a small CPA firm think of our clients as family. I knew his clients would have been heartbroken and upset to find out that he had passed away and not have a chance to attend his memorial service. His wife and I decided to notify the clients of his passing and provided information regarding his memorial, as well as information regarding the transition. 

Of the nearly 500 people who attended Wesley’s memorial, more than half were his clients and many commented that they felt that they were well informed and well taken care of.

The business broker helped Wesley’s wife determine the value of the firm and a listing went out. She and I met regularly through the transition and approximately 30 days after he passed away and at the beginning of tax season, I doubled my firm size, client base and office locations. The next phase in this bittersweet journey was about to begin.

What I Learned Over The Past Two Years
: I had a hard time putting an offer together to acquire the firm. How could I negotiate the purchase price of the firm knowing this would impact them financially? I wish that Wesley and I had continued our succession planning discussion. Even though there still would have been a lot of issues in the transition, the sensitive issue regarding valuation would have been dealt with early on instead of being faced with it during a very emotional time.

CBA: As I stated before, the CBA indicated that the firm no longer could operate as a CPA firm since there was no CPA owner. Both Wesley and I had established our firms as S corps, thinking this would make it easier to transition to a new owner. That actually is not the case when it comes to operating the firm under a different name. When I was selected to acquire his firm, I wanted to merge the two firm names into one to continue his legacy. However, according to the CBA, you cannot operate a firm using a new name without prior approval from the CBA. The agent I spoke with stated that it could take up to three weeks before the approval is issued. That would put this near the end of February before we could officially operate the firm under a combined name. What that meant was I had to acquire his firm and fold all of his clients under my existing firm name. As of that moment, his firm no longer existed. That was sad for me because I had no way to honor his legacy.

Staffing Issues: This was probably the biggest challenge and one that is still in progress. Both Wesley and I had about the same size firm and staff, but we had different firm cultures, processes and procedures. Trying to combine all that into one firm in about 30 days was extremely challenging and put an intense burden on my staff. His staff was not only going through the grieving process, but also had a sense of displacement. Their work style was different than my firm’s, so there were some clashes early on in the acquisition. 

I held an all-day staff retreat on the first day of the acquisition where we talked through processes and procedures, as well as had an off-site, team-building activity. I had thought the day had gone really well, but found out later that the staff felt differently. Since the processes and procedures we had in place were designed for a small firm (four people), they did not transition well to a firm of 10. There were issues during that first tax season surrounding who was responsible for what, which created a lot of stress on my staff. After our first year together, we went on an extended off-site staff retreat to help align our procedures. I hired an outside consultant to moderate the discussions, which was valuable, but there were still comments from some staff who felt things were functioning as two firms. 

There were some staff changes because of that—some necessary, some unfortunate. I had made some poor hiring decisions shortly after the transition because I was desperate for additional staff, but that created a toxic work environment for employees who were trying their best to work through the transition. I wish now that I had hired the outside consultant at the beginning and worked out some of the culture differences earlier, which could have helped prevent some of the major issues we had to deal with later. 

One of the things I have learned from all this is the importance of being transparent with staff and maintaining strong lines of communication. We hold weekly staff meetings to discuss and diffuse any tension that the staff is feeling. I do daily check-ins with the staff to answer any questions, and have quarterly lunches with each staff member to just chat about life in general. I’m so proud of how hard my staff has worked to get us through this tough transition and am grateful to work with such a dedicated team.

Multiple Office Locations: I had made a decision to keep both offices open for the duration of that first tax season. I thought it would be good for Wesley’s clients to not have too much of a change. I also thought it would be good for his staff because it would allow them a familiar work place. In hindsight, I don’t think it was a wise decision. With two locations, I was trying to juggle my time between each office, which left staff at one office feeling deserted and it always seemed that no matter where I was, I was needed more at the other location. 

The last few weeks of tax season I stayed at a hotel that was between the two office locations so I could work into the wee hours of the morning and catch a quick nap and a hot shower before heading to the other location. I think adrenaline (and a ton of caffeine) kept me going. I believe now that it might have been better to combine both locations into one office right away.

Technology: Wesley and I used different tax software and versions of Office, document management and client portal systems. I kept everything status quo, thinking it would make it easier on the staff, but it meant I had to learn the software systems and procedures of Wesley’s office. It was overwhelming at times, and after we got through the first tax season with this fragmented system, we began the migration over to the programs that our combined firm would use. This created additional friction because I ultimately chose to stay with the majority of the software programs that we were using prior to the acquisition. I could sense the frustration with the acquired staff because they had to learn a new system. I wonder if it would have been better to have just switched everything over right from the beginning.

Client Transition: Because Wesley and I had a long history we made sure that his clients were aware we had an existing professional relationship. I know this made a huge positive impact on the transition. In fact, client retention was extremely high, especially for that first year. 

What I was not well prepared for was how much grieving his clients, some of whom had been his clients since he started his firm, were going through. I met with as many of his clients as possible and each meeting went longer than expected because we first spent time discussing our mutual shock and sadness over his death. It took an emotional toll on me, but it was also healing to share stories with his clients and laugh and cry over it together. 

I also did not prepare for the toll this transition would have on my existing clients. I put so much energy in helping his clients transition, I did not spend adequate time with my existing clients. Many of them felt abandoned and although they understood what we were going through, we did lose a number of our own clients because they did not feel their needs were being met. This was devastating. I needed to give them as much attention as I normally did. 

Our clients expect consistency from us. I missed that and have had to deal with the consequences. One of the things I could have done better was increase regular communication with my clients to keep them in the loop with the transition timeline.

Budgeting: I was misguided in thinking that combining two successful small firms into one could streamline costs. Because of the increased staff, we had to hire additional administrative support and my firm had to take on debt to acquire his firm, which left us without sufficient reserves to hire additional experienced staff. This meant my staff worked considerable amounts of overtime, which had a significant impact on payroll costs. 

I thought that we would save on software processing costs, but discovered that it cost more than budgeted. I was also shocked to see our professional liability insurance more than double, mainly because the combined firm revenue pushed us out of a small-firm policy and we had to be rated with larger firms. 

Luckily, the increased firm revenue allowed me to qualify for a larger line of credit that gave me a sense of relief in times that I needed some extra financing help. Now that a few years have passed, I finally feel like I have a better handle on our firm budget.

There’s nothing I can share that can convey the stress and emotions that took place during this transition. I mentioned to the MAP Committee that we are always communicating the importance of emergency succession planning, but don’t do an adequate job of explaining all the interpersonal issues that take place during the transition. There are a lot of things I wish I did differently, but I’m glad I answered the call. Hopefully you can learn from my experience and find your own path to a succession plan that works for you. 
Lynda R. Boman, CPA is president of Boman Accounting Group, Inc.

Read more about how one firm handled the death of a partner.

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