easing the power struggle between succession and partner compensation.
by jody padar
from success to significance: the radical cpa guide
i’m going to address the elephant in the room. ready? it’s succession and how it relates to partner compensation.
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i can give you many reasons why time and billing is no longer relevant. i can give you the reasons why customers want fixed or value-based prices.
however, until i tell you how your partner compensation is going to be impacted, you will not change.
if i were sitting in the retiring partner seat, i’m not sure how i would feel about all these transformative changes happening to today’s firm. i have my own experience because i’ve been through a succession. but it was from the other side. it was about taking over my dad’s firm. however, his firm was relatively small. most of our substantial growth came from new business i created, not from his legacy customers.
believe me when i tell you that we had many power struggles over how to change things or why not to change. but because of my strong personality and his willingness to let me make my own mistakes, the succession was successful. yet, it was not easy. so, i’ve been there. i know what it’s like to be on one side of the table. and i would like to think that i have compassion and empathy for what it must be like sitting on the other side of the table.
that said, for firms to be sustainable, changes must occur. young partners absolutely want to invest in growth and r&d and in doing things differently. growth takes money because it involves risk. it takes an investment of both energy and cash. the partner who is retiring is thinking, “i just want to maintain the status quo so i can get my payout; i’ve been here long enough, and i want to retire because growth is not important to me anymore.”
ouch.
i know that sounds harsh, but we all know this is happening. it’s the state of our aging profession.
yet the young partner sees the future and wants to invest. they know they will have to be working for at least another 20 years. it’s exciting. they see opportunity. they want to be given a chance to be creative and to make a difference in the lives of both their customers and their teams.
there’s the power struggle. one might say that both parties are on equal footing.
i’m going to break it to you. they aren’t. who do you think i’m going to pick?
it’s a fact that it’s very easy to start a new firm today. and customers who want to work differently are looking for other alternatives. so, i believe that ultimately, the retirees are going to have to make an adjustment. there seems to be a common theme that there’s no talent. i think there is talent. the talent has not been given an opportunity to lead.
the big firms will get bigger, and there will always be solo practitioners, but the people who have the most to lose are the midsized firms in the middle. the firms with seven to 100 partners who can’t agree on how or why they should change.
we need new ways of measuring profitability.
if you look at the 2016 aicpa map survey, it explains partner compensation and how firms are profitable overall, using a set of kpis. it also states that median growth was 5.9 percent.
according to the survey, a firm owner in my gross revenue range states net remaining and owner compensation as $182,294. the biggest issue i have with this survey is that it talks about owner compensation without considering how cloud firm owners are doing it differently.
for example, my firm falls into the $500k – $750k category; however, i have almost no billable hours. only 30 percent of my time (612 billable hours versus 1307 for a firm my size) would be considered technical in nature, and i have almost no administrative time, as we price and automatically invoice everything up front. i spend my time doing outside things that are not included in my firm compensation. i do spend time doing content creation, marketing and sales, which allowed our firm to grow 30 percent last year.
as a new firm owner, none of the questions they asked in the survey are relevant to my firm style or the way i work. so, i stopped in the middle. i believe the survey is inherently flawed and can’t collect the data that indicates what new firms look like.
while the survey offers some compelling questions, ultimately it cannot measure profitability in new firm models.
here’s what i mean:
revenue minus expenses is profit, right? yes, but … to build a long-term sustainable enterprise, firms should look at additional factors, such as:
- which investments in technology should we make this year to meet future demands?
- what investment in people and processes do we need to make to plan for and create growth?
- which new services or niches can we invest in to bring to our current and future client base?
- how much should owners be taking out of the business (in terms of compensation of all kinds) versus reinvesting in the future?
all of the above investments negatively affect current-year profits (fees less expenses) but ultimately should lead to higher profitability for the future. also, when looking at profitability, another key question arises: is there a cost to owner labor and, if so, how does that get factored into a profitability model?
what is the cost to owner labor? that is probably the best question – yet one that cannot be answered by the old firm model.
sequel cfo david boyar says, “for the investment a firm makes in their future, they should also invest time in targeted increased revenue; whilst there is almost no benchmarking on this, owners need to have a targeted revenue figure. if their time is no longer spent on billing, and if it is now spent on content writing, business development or brand awareness, then a corresponding kpi relates to sales targets.”
armed with sales targets, and an increasing understanding on new firm profitability (which you can truly only get by doing it, but again, can be targeted) a firm can determine their roi, rci and yield kpis. these numbers can determine how much should be taken out from the business.
they also help succession because there is a financial goalpost a prospective buyer can benchmark against.
for example, let’s look at a junior partner or manager who has the chance to make two investments. one possibility is working in a firm generating a 24 percent roi, and the other is buying into a client’s business to work in it as a cfo where the roi is 34 percent. what would the person do? what can you do to make your roi more attractive?
why is this model key for the future of firm survival and succession? recurring revenue!
when you talk about succession planning, the biggest concern is: will customers leave the firm?
if they are only annual customers, the probability that they will leave for another cpa firm is high. if you have a subscription-based model, the likelihood of them staying is greater. it’s more valuable. buyers will pay more for a firm that has recurring revenue streams built in. new firms don’t seem to have a problem getting purchased with price tags multiple times their revenue.
the key with the investment of your firm’s transformation is in building a recurring revenue model. subscription-based pricing has inherently more value as a viable business model for continuation.
hello, valuation cpas, where have you been?
the subscription model also offers the cash flow opportunity to fuel unparalleled growth. firm investments should be focused on creating more recurring revenue. it is the ultimate measurement of a current firm’s value.
a fun challenge is to identify your current non-recurring revenue and figure out a way to make it keep going. to ask yourself, “what valuable insight can i add to be able to charge for it all year long?” why did all the individual tax firms add wealth management when turbotax came out?
the two most important questions we should be asking are:
- what portion of our growth is based in monthly recurring revenue?
- what does it cost to acquire a recurring revenue customer?
basically, we need a new map survey.
new firm owners don’t do a lot of technical work. they leverage their staff better and use technology effectively. with a better survey, we might have a stronger position as to why going through the difficult work of transforming the actual firm business model is worth it.
also, there’s a statistic that says midsized firm partners make $400k a year. they also work a lot of hours.
today’s generation is not money-driven.
if it is possible to make $200k and work 50 percent of the time, is that a reasonable expectation for a new firm owner? it is and in a much smaller firm.
is that potentially a door that could open for women to keep them in public accounting?
could results matter as opposed to just face time?
would there be an option for partners to work less and still have the same profitability? if partners can be more profitable by leveraging technology and not utilizing a billable hour methodology, who cares how many hours they work if they bring in revenue? people should be judged on results, not on time spent.