Case Study in Transitioning the Firm

Source: Public Practice

To read the first article in this series, “Bill Reeb Series on Succession Planning,” click here.

In the previous article Bill Reeb discussed “Modes of Operation: Survival, Safety Net, Success, and Continuation.” Following is how Reeb sees these modes impacting the firms’ approach to leadership development and operational objectives:

Survival: Cingoranelli and Reeb started in the 80’s and operated out of an apartment attached to Cingoranelli’s home. They took any work they could get.

Safety Net: When the firm began to thrive, it became selective in accepting clients and terminated difficult clients. As they became profitable they added employees and moved into an office.

Success: Successful team members were made partners, not because they were entrepreneurial, but because they were needed to get the work done right.

Within six years the firm had six partners. Cingoranelli and Reeb each owned 35 percent. The others owned seven and one-half percent each. The firm did well, and C and R made a lot more money than the others.

Continuation: When C and R want to leave there is no one who has been developed as a leader. None of the junior partners had a marketing network. C and R essentially made all the decisions. While the firm was a cash cow, it didn’t have much value.

Here are the problems of moving from “Success” to “Continuation” mode:

• Ownership—who gets what equity after C and R retire?
• Would the remaining owners all be equal?
• Who would be MP?
• Would the new MP be supported by the other partners and be held accountable? 

Solutions:

• C and R should have put the new MP in place long before retirement and have the power to hold everyone accountable.
• Ownership would not be equal, but would be based on performance metrics.
• The torch has to be passed to partners who can manage clients, train staff, and retain happy people. Technical partners are likely to:
  • Push themselves to work harder, do all the work themselves and fail to develop anyone else.
  • Create a negative environment because they place a premium on people like themselves.
  • Compensate on the bases of charge hours and billings.
  • Take good care of clients only when they call.

Other problems:

• Junior partners may not respect each other, having never really had much chance to work together. C and R should have eliminated the weak or incompatible partners long ago. But they wouldn’t do this because they were trying to take as much money out as they could before they left.
• Many small- to mid-size firms ($2 million to $20 million) are like founding fathers, who tend to leave the firm equally to all their sons, instead of to the one who is most able to run the company. Other ways can be found to compensate the others.

For the complete article, click here.

From Texas Society of CPAs, Public Practice, September/October 2008, www.tscpa.org.

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