Newsletters - Accounting Office Management & Administration Report

May 2005

Nitty-Gritty Ideas for Succession Planning

Everyone is talking about succession. However, few firms really understand what they need to do to develop a workable plan that is acceptable to all owners and can attract and develop the next generation of leadership—and the one after that.

It’s hard to blame CPA firms for their reluctance to tackle this difficult issue. After all, they are still recovering from several harsh years of scandals, unpleasant PR, and a bad economy. Just getting through the short term has been the central focus of many firms. Nonetheless, your partners are aging and the need to obtain and retain enough professional staff so your firm can prosper and grow should be nudging you to begin the succession planning process if you haven’t done so already. The bad news is that it’s a difficult process. But there is good news, too: There are steps you can take to make it easier.AOMAR has reviewed the ideas on this topic from leading consultants who are working regularly with CPA firms to develop and implement succession plans. These ideas should help your firm make progress with this important issue.

AOMAR has reviewed the ideas on this topic from leading consultants who are working regularly with CPA firms to develop and implement succession plans. These ideas should help your firm make progress with this important issue.

It’s about more than succession. A major theme in consultant William Reeb’s (Winters and Reeb, PLLC, San Antonio; bill@billreeb.com) book to be published this year by the AICPA’s PCPS, is that without a sensible strategic plan and operational structure, CPA firms will find it almost impossible to develop a succession plan. Why? Reeb argues that succession planning is a part of the strategic plan and operations of the firm, and you must have both—and do well at both—for the firm to succeed.

In a commentary prepared by Reeb that accompanies the most recent AICPA PCPS Management of an Accounting Practice Survey results, he observes, "The horizon does not look promising for practices expecting their successor firms to solve the issues they refused to address."

He noted the results of a succession survey done last year by the PCPS that revealed that many owners who plan to retire in five to 10 years see a sale or merger as the firm’s "succession plan." However, Reeb cautions that there may be a surplus of small to midsize firms seeking to be acquired—which means owners are unlikely to get the prices they will seek.

If a sale or merger is your firm’s strategy, he said, "Firms that are best able to operate without their majority owners in a consistent, reliable, and profitable manner will be more attractive to potential buyers, will generate more money when sold, and because of their internal development focus, will likely be cultivating the firm’s future buyer.

"Other benefits to a succession plan. Whether or not your owners want to sell down the road, a succession plan is a necessity, contended consultant Jay Nisberg during a recent audio conference sponsored by The Advisory Board (www. theadvisoryboard.net). "This is not elective surgery," he said. "It’s become very clear that firms must have an effective succession management strategy" that is finely tuned and well executed.

In addition, firms must do more than decide on the identity of the next managing partner: Although that is, indeed, a key decision, current thinking is that firms must plan for successors to every major leader, Nisberg said. He advocates having what he calls "ready one" backup "players" who can step in for all owners and other crucial managerial and administration personnel such as the firm administrator, marketing director, finance director, MIS manager, office heads, and practice group leaders. And this process involves more than naming the people—the ready one backups must be trained for the roles they will someday assume.

You need a succession plan to compete, and succession is no longer simply about partner exit strategies, Nisberg emphasized. He agrees with Reeb’s conclusion that a good succession plan is part of a well-run firm—and well-run firms are better able to compete. Succession is also a form of insurance—and reassurance—to your clients, staff, and shareholders that the firm is secure and its future is safe when people retire or you face an unexpected setback.

Getting started. As with your strategic plan, your succession plan involves re-evaluating and re-assessing positions within the firm so you fully understand who is responsible for what. From this vantage point, you can define the roles for which your firm must name and train backup leaders.

A number of firms are now exploring and instituting leadership programs to prepare the next generation, Nisberg noted. From these programs’ ranks, you can find your backups. Other firms are going outside to obtain the necessary leadership expertise when they can’t find it at home.

Be prepared for your firm to have to spend much time and money on this process, and demand that all owners and leaders participate. Nisberg believes that every leader is responsible for identifying and developing his or her own successor and for sharing information about the process. This takes increased communication. The process should be discussed at monthly partner meetings and perhaps during a separate retreat, not at just the traditional annual one.

Another advocate of the approach that combines strategic and succession planning is consultant Steve Erickson (Las Cruces, N.M., www.SteveEricksonCPA.com). In a presentation at last year’s AICPA Practitioners Symposium in Las Vegas, he noted that, like strategic planning, "succession is a process, not an event," but "most firms see it as an event."

Erickson recommends addressing the following five elements in your written plan and possibly adding its terms to your partnership agreement:

1. Economics. Be realistic as you assess your firm’s current position in terms of retirement demands and available talent in leadership and technical skills. Consider all leaders in this analysis, including the MP, service department heads, key client servers, and the top technical positions.

When it comes to handling the succession money—retirement funding and buy-outs—you have many choices. But your decision must be based on whether your firm can meet the financial obligation of payouts based on books of business or managed business, or other "past" events. Succession plans can’t merely be "wish lists."

Most of the economics come down to deferred compensation, which Erickson believes should be accrued, although few firms choose this approach.

2. Timing. You need sufficient time to plan the succession process, Erickson cautioned. Timing will tie into the services your firm presently offers as well as those you may be planning to offer in the future, he explained, since a partner-relationship-based practice won’t offer the residual value of a service-based practice.

If you begin early, you have the benefit of adding customized retirement planning options such as paying out earlier to relationship-based partners so the payouts are effectively completed when the partner actually leaves the firm.

3. Expertise. Do whatever it takes to ensure that your firm retains and expands its expertise, Erickson urged. "It’s very hard to replace specific expertise."

The option of being a part-time partner appeals to a broad range of people and gives you a bigger pool of future owners from which to choose, Erickson said. Non-equity partnership can also help the firm develop and retain specific talent.

4. Strategy. Having acknowledged that succession planning is a key part of the firm’s overall strategic plan, Erickson observed that "the succession plan must support the client service strategy of each partner and the firm."

5. A market for the successors. You must ready clients (as well as staff) for the transition from outgoing partners to incoming ones.

Training the next generation. Once a written plan is in place, the next step is to prepare future leaders for their roles. Executive coaching and training by the person they will succeed are helpful. Review your firm’s operating agreement to make sure the terms reflect any changes in operations that would come about under the new succession plan.

As your firm develops its future leaders, introduce them to its bankers, lawyers, and other influential people, Nisberg suggests. They also need leadership training in key areas such as administration, marketing, sales, and especially interpersonal skills-building.

Also helpful are mentoring and involving future leaders in key committees, steps that SS&G Financial Services (Cleveland; www.ssandg.com) is taking, noted Gary Shamis, managing partner and member of The Advisory Board. Although SS&G is devoted to training up-and-coming staff, the shortage of raw talent for future leadership is an issue that he admits "keeps me up nights."

His focus is on replacements for the firm’s 20 partners, not just his own successor, and he’s concerned about whether SS&G will find qualified people to provide the leadership. The biggest challenge, however, is "convincing the other partners that this is a problem and that we have to do something about it," he said.

The art of letting go. Perhaps the greatest succession challenge is making the move to a new MP when the current MP wants to stay active in the firm. Jack Kreischer, director and founder of 90-person Kreischer Miller (Horsham, Pa.; www.kmco. com/home/home.asp), went through such a transition and shared his insights into the process during an audio conference.

His firm’s attitude toward development is that "everyone is to be continually working himself [or herself] out of a job" so the firm can grow. This concept eventually included Kreischer himself, who had founded the firm and always served as its MP.

The firm was having problems with communications, and it seemed time for a fresh perspective. "We did this when I was 58," Kreischer explained. "I got out in the nick of time—you run out of speed [and] ideas, and start having some issues with the different generations."

A nine-month process to select a successor addressed these concerns and provided Kreischer with new responsibilities, about which he is excited. "I’m enjoying it a lot more" than the later years of managing partnership, he admitted, and "the firm is stronger now and prospering as never before."

While the transition can be difficult—especially for the MP who is moving out of that position—Kreischer said his firm experienced a number of positive results, including:

• Cohesiveness. The owners came together to select and support the new leader.

• Good timing. The moment for the change was not only right for Kreischer; the successor leaders were in their prime, so it was ideal for them, too.

• Independence. The firm has remained independent, as the owners prefer it to be.

The firm also learned these lessons along the way about the succession of MPs and other leaders:

• Transition takes considerable time and effort. Make it your top priority. All owners should participate in the process, and acknowledge the needs of departing leaders.

• Character is important in the up-and-coming staff who may be your firm’s future owners. Bringing on new leaders with character keeps the firm‘s value high.

• The firm and its owners should take advantage of an outgoing leader’s knowledge whenever feasible. Still, successors must be given time to learn and to make their own mistakes.

• "People are our most important asset. Nurture them; don’t abuse them with shoddy leadership," concluded Kreischer.

How one firm addressed succession. For a look at how one CPA firm tackled this issue and secured its future, see the sidebar, "A Case Study in Succession Planning."