will new taxes push you to cash out?

it might be time to implement plan b.

by domenick j. esposito
8 steps to great

the new administration faces global uncertainties. biden officials have set the stage for higher corporate and individual tax increases.

more from dom esposito: keep your firm from biting the dust | the six ingredients for firm value | four ways to add $100,000 in new business fees every year | eight steps to small firm survival | no partner candidates? whose fault is that? | prune your firm: ‘rightsize’ managers and partners | how partners fail | ineffective management is hazardous to your firm’s health | profitability requires discipline |

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at the same time, if your midsized cpa firm has not at least started to move away from a general “compliance shop” to either:

a specialized niche firm that has established a brand in the marketplace that transcends size and locations, or
a professional services firm that provides advisory/consulting, accounting, tax and assurance services to marquee clients in specialized industries,

its worth or valuation in the marketplace continues to diminish from the historical one times revenue payable upon individual partner retirements over 10 to 12 years.

it’s time to pause and take a look around you. the year 2021, a period of fiscal and general economic uncertainties, might be an opportune time for you to do a self-assessment of your strategy.

is it time to move away from “plan a” – staying independent for as long as you can – or pivot to “plan b,” cashing out and merging up before the inevitable enhanced tax rates kick in and your general compliance shop’s worth or valuation continues to diminish?

in addition to the fiscal and general economic uncertainties impacting your decision, some other factors that you should consider in your plan a/plan b strategy include the following:

your market share: if you have a specialized niche firm such as a bankruptcy/restructuring practice or a litigation support/forensics practice, published material usually makes it easy for you to calculate your share of the consulting fees spent by the consumer. if you have a professional services firm that serves marquee clients in specialized industries, while more difficult to calculate market share, in many cases, you can come up with a reasonable range for your market share.

if your market share is “de minimis” with no reason to believe it will improve in the foreseeable future, it might be time to move to plan b.

the profitability of your practice: the gold standard used to be 1/3 of the firm’s profits would get distributed to the firm equity partners. how much has your firm moved from this gold standard? obviously, the further and further away you move away from 1/3 of the firm’s profits distributed to the firm equity partners, the less you will receive in your business valuation. the trend line can also be a meaningful bit of data.

the ages of your partners: if the median age of your partner group exceeds, say, 52, and a good number of your partners are nearing retirement, there is a high likelihood that your talent asset is diminishing in value. this would be particularly true if you have been unsuccessful in grooming the next generation of young partner stars who can attract and retain marquee clients. this would have a significant negative impact on the business valuation of your firm.

a meaningful succession plan: if you are like many midsized cpa firms, you do not have the confidence in your younger partner group’s abilities to lead the firm as the senior partners retire and get paid out. you have been disappointed in your ability to develop the next generation and it’s too late for you to attract a lateral who would be accepted by the partner group. this scenario is not a healthy one when it comes times to value the business.

your partner compensation: it’s problematic if your superstar partners are not getting paid market value. you run the risk of them leaving the firm. here again, this scenario does not bode well for the future of your firm and for valuation purposes.

it might be time for you to pivot to plan b (cashing out and merging up before the inevitable enhanced tax rates kick in and your general compliance shop worth or valuation continues to diminish) if this scenario mirrors your firm. it would be wise to retain an outside consultant with considerable experience in navigating the “merging up or not” decision. the outside consultant can benchmark your firm against others and provide you with recommendations on how to move forward. a consultant who has considerable relationships with acquirers of midsized and small cpa firms can also be very helpful in identifying the right potential acquirers for your firm.

in conclusion

there are 14,000 cpa firms in the united states. most of them are sole practitioners. a large slice of them (firms generating annual revenues between $12 million and $20 million) is referred to as midsized cpa firms. if you are in that universe, your world has changed.

in many ways, covid-19 accelerated the change. the world of public accounting has become a rapidly moving profession that is now providing untraditional services such as data analytics, cybersecurity, managed services and outsourced cfo services. it’s an exciting time in the profession but a time full of fiscal and economic uncertainties. do the self-assessment i have laid out above and, with the guidance of an outside consultant, decide if it is time to pivot to plan b.

posted on april 7, 2021

dom esposito

about the author

domenick j. esposito was the ceo of grant thornton, vice-chair of bdo, and national growth director at cohnreznick.

he is the author of "8 steps to great: the eight essential strategies driving success at the world's largest cpa firms. and how to apply the lessons at firms of all sizes," published by 卡塔尔世界杯常规比赛时间.

a life in public accounting

in 2016, esposito, then a former ceo of bdo, moved from a 46-year career in public accounting into the next phase of his professional life – consulting to cpa firms, launching a boutique advisory firm, esposito ceo2ceo, that provides advice to ceos, managing partners and other senior partners of cpa firms focused on the mid-market throughout the u.s.

with the launch, esposito authored “8 steps to great," a guide for ceos, managing partners, and other senior partners on how to move their firm to the next level.

cohnreznick national growth director

esposito was one of the most qualified individuals in the country to advise cpa firms on growth and profitability. through 2015, he was national practice & growth director and an executive board member of cohnreznick, llp, a mid-market sustainable brand and the tenth-largest cpa firm in the united states. he oversaw cohnreznick’s go-to-market industry specialization and consulting and advisory service lines. he was also intimately involved in the firm’s mergers and acquisitions and strategic and tactical activities for its public company and capital markets initiatives. dom joined the predecessor firm of j.h. cohn in 2002 as the chief operating officer and executive board member.

dom was also an independent director of ethan allen interiors inc. for several years (through 2014), dom was a member of the nasdaq listing and qualifications committee to the organization’s board of directors. he formerly served as the leader of the new york state society of cpas committee for large and medium-sized firms practice management. he also was an adjunct accounting professor at c.w. post/long island university.

bdo and grant thornton

through october 2002, dom was vice chairman at bdo, a mid-market sustainable brand and the seventh-largest international accounting and consulting firm in the u.s., with almost 50 offices and 3,400 employees. during his brief time with bdo, he was responsible for the alliance distribution network (at the time consisting of over 80 cpa firms, 10 law firms, and 25 consulting firms). he was also responsible for attracting and servicing a number of clients.

from 1979 through 2001, dom was with grant thornton, another mid-market sustainable brand and the sixth-largest international accounting and consulting firm in the u.s., with over 50 offices and 4,500 employees. he joined grant as an audit manager, became a partner in 1981, led the long island office from 1984 to 1986, became assistant managing partner of the new york office in 1986, and from 1988 to 1999, led the new york office. in 1999, esposito became a regional managing partner and for two years, through 2001, was the firm’s chief executive officer.

cpa, partner, mba, leader, influencer, media celebrity

between 1996 and 1998, and while he was ceo, esposito was on the partner board and was also on the board of grant thornton international – the worldwide umbrella organization. in these capacities, he developed strong experience in strategic thinking and execution, international relationships, corporate governance, partnership matters, branding, expense control, client relationships, and new business development.

as ceo, he took grant thornton to record earnings, consummated the largest line-of-business sale in the firm’s history, developed a major joint venture with axa financial, and made the largest practice acquisition in the firm’s history. from 1969 to 1979, esposito was with price waterhouse (now pwc), servicing ibm when he was promoted to manager in 1976.

dom was a cpa, has been quoted in national and local media, and has appeared on radio and cable tv.

esposito also testified before the securities and exchange commission.

he received his m.b.a. from st. john’s university and his b.s. from ferris state university. accountingtoday, one of the leading trade journals for the accounting profession, named esposito one of the most influential people in the profession for two consecutive years.

he passed away in 2021 at the age of 74.

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