Laying a Foundation for Effective Succession Planning -- Continued

Source: Public Practice

In Part 3 of this ongoing series, Bill Reeb discusses client transition – the “single most abused part of the succession process.” The problem, Reeb explains, is that the retiring partners and the remaining partners are “motivated to do the wrong things.” Retiring partners have an incentive to not transition their clients to the firm: It forces the firm to retain them after the mandatory sale of ownership date (MSO) to service those clients, essentially allowing them to “resell” those clients to the firm down the road.

At the same time, the remaining partners, who want to keep their income up and their workload down, have an incentive to allow retiring partners to continue doing the same work. And they're reluctant to pay retiring partners for their client transitioning efforts. This, Reeb asserts, is “an economically terrible choice.” The best uses of retiring partners' time, beginning two to three years before the MSO or early retirement date, include:

• Doing more technical work behind the scenes,
• Working on their client transition plans,
• Introducing others in the firm to their personal contacts,
• Selling new business,
• Training others,
• Serving as firm ambassadors,
• Sitting on local company boards.

Under this approach, retiring partners may be overpaid a bit during their last couple of years. But Reeb believes that the economic benefits to the firm far outweigh any concerns about retiring partners not earning their pay. It ensures that retiring partners “do what is most important to the firm, which is to turn over their clients and take a step back in their visibility to those clients.” If they don't, Reeb warns, the firm might make a little more money during retiring partners' final years, but “you will likely lose many multiples of that amount in the following years to pay for your sins of being unwilling to step up and take on your new leadership roles.”

The remainder of the article outlines a detailed transition process, which includes individual transition plans for each retiring partner, assignment of new partners or managers to take over client relationships, and action plans that detail the turnover process.

For the complete article, read “Managing Succession Fundamentals – Part 3.”

From Public Practice, Texas Society of CPAs, April 2013, www.tscpa.org.