“Still a Perfect Storm”: Succession Planning

Our consultants have spent their careers working with CPA firms on succession planning. As experienced specialists, we have seen misunderstandings, confusion and complexities that make succession planning a challenge. Many firms simply don’t know how to get started.

I recently sat down with Christyn McHugh, Director of Marketing at Rosenberg Associates. She asked questions that many CPA firms struggle with and that are covered in our recently updated second edition of CPA Firm Succession Planning: Still a Perfect Storm. Here’s our conversation:

CM: In your book, you talk about the development of future leaders as a key to succession planning. In your experience, what are the most effective ways firms can build a culture that supports mentoring and leadership development?

MR: Years ago, I coined a phrase: “As the partners go, so goes the firm.” When the partners “go,” they bring in business, build and maintain great client relationships and deliver service quality, all of which lead to great profitability. Another critically important part of “partners go” is to mentor, train and develop staff. Staff should be advancing under partners’ tutelage. Firms must treat staff as just as important as clients – and not just say it, but act the part. Partners must push work down to staff. The partners’ compensation depends on their success at developing staff.

CM: How does a firm decide on a succession planning strategy?

MR: Many start with strategic planning or a partner retreat, where the partners get serious and emotional about deciding what they want their firm to look like in 5-10 years. Not a dream or wish list, but doable stretch goals. What level of growth: high (10%+) or low (5% or less)? Do they want to stay independent or eventually sell ? Will there be a managing partner who guides the firm through the strategic planning process? When do the partners want to retire? Will there be mandatory retirement, which is a major contributor to succession planning because partner retirements create opportunities for younger people? How will the firm replace partners who retire?

CM: What do great firms tell you about their success in succession planning?

MR: Many firms tell us that the key to succession planning is their culture. The firm and its partners always look to building the firm, not maintaining the status quo. These firms’culture is to expect all supervisory personnel, from partner on down, to be committed to developing people and making the firm a great place to work. Other things MPs tell us:

• Partner accountability for proactively helping to build and maintain the culture.
• Partners should never go on a sales pitch without taking a young staff person to observe.
• Put the succession plan in writing and revisit it continually.
• Make success at succession planning a factor in allocating partner income.

CM: What keys to succession planning are commonly overlooked?

MR: Here are a few:

• Have a partner buyout plan that is affordable and current with CPA firm best practices. We do a ton of work with firms that have an unaffordable or unfair buyout plan; this is a huge turnoff for partner candidates.
• Adopt a mindset that partners do not have an inalienable right to receive their buyouts – which probably sounds like blasphemy to some of you. The firm must tie receiving a buyout to the efforts and success at transitioning clients during the notice period.
• A partner compensation system must have a measure for partners’ efforts and success at developing staff – evidenced by how far staff advance in the firm under their tutelage. Too many partner compensation plans focus on traditional production and ignore intangibles like developing people.
• Many firms want to remain independent rather than sell out. Fine and good. But in our experience, the vast majority of sellers had a philosophy of remaining independent at one time in their history, but various factors and events changed their minds. Firms owe it to themselves to periodically test the waters and meet with larger firms to see what they say about merging with them. See if they will make an offer that you can’t refuse. Maintain relationships with these firms in case the day comes when the firm seeks an upward merger.

CM: Your latest update has a new section on Private Equity. What are the pros and cons of PE as it impacts succession planning?

MR:

• PE is arguably a bigger game-changer to the CPA profession than any other recent development. It has raised the sales value of CPA firms, confirming what I’ve been saying for 20 years – paying one-time fees to acquire a smaller firm is a steal for buyers. PE has proven the validity of this.
• To say that the substantial amount of money paid upfront in PE deals is a windfall is an understatement. PE deals are particularly attractive to (a) firms that have deep concerns about the affordability and viability of their internal buyout plan, and (b) partners who are hungry for cash.
• I caution firms that PE deals are not a free lunch. Offsetting the pile of cash offered are (a) substantial pay cuts the partners will experience, and (b) loss of management control.

Our book, CPA Firm Succession Planning: Still a Perfect Storm, Second Edition, is a must-read for firms that want to focus on keeping the firm independent instead of being forced to merge out of existence due to a lack of successors. Many firms believe that succession planning starts and stops with developing future leaders. Though this is critical, a succession plan has many other important parts. This book addresses: How to assess your existing staff • Leadership development • MP transition • Governance structure needed to remain independent • Client transition • Partner buy-in and buyout plans

Don’t let the lack of a succession plan jeopardize your firm’s future. Order your copy today!

CM: CPA firm partners are extremely busy with critically important activities like business development, serving clients, managing the firm and mentoring staff. This can easily cause firms to put succession planning – and many other initiatives – on the back burner due to lack of time. Can they afford to do this?

MR: Firms need to make a key strategic decision: Is their goal to remain independent for eternity, or is their strategy to build a profitable firm that lasts for decades and pays the partners handsomely – and then, when the partners near retirement, sell out? Will those who choose the latter strategy have the following carved on their tombstone: “Here lies Partner X who failed at succession planning.” Of course not.

If the firm chooses to remain independent, the firm categorically cannot afford to back-burner succession planning. Many things in life and business cause people to opt for short-term vs. long-term thinking. This is a challenge for CPA firms in particular. Short-term is easy and instantly gratifying. Long-term is hard and it takes a while for firms to experience the fruits of their labor.

If CPA firms want to remain independent, they need to find the time to focus on leadership development, strategic planning, growth, and managing the firm like a real business.

CM: Any final thoughts on succession planning?

MR: When I coached my daughter’s traveling softball team, our team motto was “Ya gotta wanna.” It meant that our players had to be passionate about wanting to win instead of merely showing up for games, trying to play well, having fun, and hoping to win. Winston Churchill said, “Attitude is a little thing that makes a big difference.”

Succession planning never happens automatically. It doesn’t happen by wishing for it to come true. It takes focus and commitment, and, in many cases, the willingness to forgo some income in the short term for a bigger payoff later on. The partners have to lead the way. They “gotta wanna.” Leadership is critical.

As Obi-Wan Kenobi of Star Wars fame was training Luke Skywalker to be a Jedi Master, he told him: “You’ve taken your first step into a larger world.”