2014 CPA Firm Industry Trends: What We Saw

As another year comes to a close, I find myself reflecting on the prevailing trends in our industry and looking ahead to how these influences will shape the coming year.

Partner compensation
The exodus from formula comp systems to compensation committees continues. Partners have come to understand that (1) formulas encourage behaviors that are harmful to the firm such as hoarding clients, partners performing staff-level work vs. delegating and partners working as silos vs. working as a team and (2) the comp committee is the best system for balancing the value of traditional production metrics vs. intangibles such as mentoring staff, managing the firm, loyalty and teamwork.

There’s an amazing disconnect between the allocation of partner compensation and what firms need most from their partners. The lion’s share of firm income is and always has been allocated based on two factors: bringing in business and billable hours. The near total emphasis on these and other production factors virtually ignores the importance of developing, training, mentoring and retaining staff, efforts at which most partners agree are just as important as clients.

Partner retirement/buyout
As the average age of CPA firm partners continues to climb, firms are taking a hard look at their existing partner retirement agreements. I reviewed dozens of agreements this year and repeatedly found out-of-date handling of vesting, notice, client transition requirements and how “retired” partners are compensated for working part-time.

Mergers
2014 was our biggest year ever for mergers and 2015 will be even busier. We notice a pattern of three distinct phases firms seem to go through when considering upward mergers. Here’s how it typically shakes out:

Phase 1- Talk to Marc about how mergers work and get his confirmation that larger firms would be interested in us, but delay taking action because it’s too scary.

Phase 2 – Talk to Marc again. This time, actually talk to a couple of potential merger partners. Lo and behold, these firms are quite impressive and show great interest! But the old adage “be careful what you wish for because you might get it” kicks in. Again the smaller firm delays action because a merger still is too scary.

Phase 3 – the merger finally takes place.

I’m convinced that the vast majority of firms need to go through each phase.

My one concern: The number of firms interested in upward mergers is so enormous that, at some point, the buyers will be unable or unwilling to consider every firm, and one or both of the following will occur: Weaker merger terms or fewer interested buyers.

New partners
Aside from merging up, firms’ primary succession planning strategy is bringing in new partners. Probably the biggest change in this area  is the near elimination of the term “ownership percentage” from the CPA firm practice management dictionary. It’s seen as the best way to make the buy-in affordable for new partners while ensuring that compensation is performance-based rather than ownership based.

Rosenberg Associates, would like to thank our consulting clients and Rosenberg Monograph customers, many of whom are one and the same, for making 2014 our best year ever.

Happy Holidays to all of you!