Case Study in Succession

Source: Journal of Accountancy

William L. Reeb, CPA and consultant, and award-winning author and lecturer, provides the following case study and comments.

A seven-partner firm has the following age distribution: 62, 60, 59, two in their early 50s, and two in their late 40s. The present-day firm was created by two mergers involving the three oldest partners. The partners have equal votes in all matters. The three oldest partners have salaries about twice those of the younger partners. They control about 70 percent of the business, but the 60-year-old has a much smaller amount than the other two.  The 59-year-old has more than doubled his business since merging in, and he has been threatening to leave and take his clients if the firm doesn’t comply with his demands. If the 62-year-old retires and the 59-year-old leaves, $5.85 million (out of $9 million) in revenue will be at risk.

They need to immediately begin to transition the clients from the three older partners to the four younger partners. The older partners’ retirement terms and amounts need to be set. Since the older partners are taking a big risk by turning over their clients, the partners must sign noncompete agreements with substantial premiums if they take their clients from the firm.

The partnership agreement includes a payout formula, but the older partners always assumed they would make special arrangements for themselves. That is one reason they never wanted to relinquish control of their clients.

To assure the continuation of the firm after these arrangements are made, the firm must pay attention to the following ideas and principles:

v      The exit of a partner can be accomplished by a buyout, as above, by a merger with another firm, or by the gradual attrition of clients.

v      In any event, skilled successors are required.

v      Small firms that don’t institute a sound succession plan are at particular risk.

v      Value of the firm will be enhanced by good operating processes. This should include coordinating the objectives of the individuals with those of the firm.

v      Partners sometimes don’t have confidence in younger people. But these partners were once perceived similarly by their superiors.

v      Job descriptions are often constructed around the existing skills of the partners. But they need to expand their skills to meet the demands of the evolution of the profession and demands of the clients.

v      Partners must understand that money is not always the most important motivation of younger people. Young people want fulfillment from what they do, and want to feel it makes a difference in the growth of the firm.

v      Mistakes should be corrected, but in a supportive way that allows people to maintain their dignity.

v      Flexible work arrangements are extremely important today.

v      Work generally trickles down to the staff through overflow. Partners allow managers to do the work they don’t want to do, and managers do likewise with the staff. This system guarantees staff will not be used effectively, and will be inadequately trained.

From Journal of Accountancy, July 2005. For the complete article, click on the following link: http://www.aicpa.org/pubs/jofa/jul2005/reeb.htm.