Succession Planning

Source:  Journal of Accountancy

Succession planning for many CPAs relies on a future merger or sale of the practice. But with the coming retirement of baby boomers, the value of their firms could very well plummet. Buyers of practices will be selective in the kinds of niches and the quality of clients they want to acquire. Rather than rely on a sale of the practice to an outsider, firms should groom successor management.

Young partners should be identified and developed into leaders. Senior partners should help them learn how to deal simultaneously with many clients and expose them to the most difficult and complicated matters.

Founding partners are often rainmakers and the firm relies on their ability to generate new business. Young partners must also cultivate those talents and one way to do so is to accompany the rainmakers on client visits.

It may take five years to groom a successor, and the right people must be selected. Entrepreneurial qualities are crucial. Entrepreneurs care about clients, concentrate on quality, exploit opportunities, expect to be compensated on performance, and demand good outcomes.

Current leadership must phase out and allow new leaders to make decisions, and be perceived as leaders.

Avoid the tendency to allow the firm to be managed by committee after the retirement of the leaders.

Few firms have funded retirement plans. It is going to be difficult to institute a practice continuation plan without funded plans or some alternative. Some firms earmark earnings from a particular niche (e.g. an in-house payroll service) to be used to fund retirement payments.

Sole practitioners sometimes form groups that agree to buy out firms if a practitioner dies. These agreements are best when they include details such as who will buy and how much will be paid. Some reciprocal agreements give a practitioner right of first refusal with an agreement that this practitioner will manage the sale if it is to a third party.

For the complete article, see Journal of Accountancy, February 2005, p. 47, or go to

http://www.aicpa.org/pubs/jofa/feb2005/dennis.htm