Planning for succession in your accounting firm may seem like a monumental task. But with the average age of public practitioners now well over 50, the challenge is here and now. Since nearly 80 per cent of public accountants practice either solo or in two-person partnerships, the issue is also personal.
Perhaps the best place to begin is with a timeline and an appreciation of the range of options for succession. Thereafter, the specific tasks required for an orderly (and profitable) exit may fall more easily into place.
When to start?
Yesterday, of course. Exit planning should begin with the formation of a business – succession options are often defined in partnership documents, where the practice is being conducted in that form. Failing that consider that the steps to position a practice or a part of the portfolio for a profitable sale often take upwards of five years.
A range of exit strategies
Not all will be equally appropriate in any given situation, but the widest range of possible choices generally includes the following six options.
Sale of the firm
This is currently the most common succession option. The purchase of an existing practice may be attractive to a larger firm looking to increase the size of its client base quickly.
Generally, the sale of a practice is a sale of business assets, rather than the underlying entity structure. Typically a buyer will purchase the plant, equipment and goodwill. Debts, collections and work in progress, unless otherwise agreed, tend to remain the responsibility of the seller. The timing of a sale may be tricky, since it will depend on the appearance of a buyer at the right price, so it may be wise to look to a window of one or two years. The wind-up of work in progress and paying o existing obligations may also create a trailing period.
Sale of a fee parcel
Alternatively, a practitioner may want to sell only a portion of his or her book of business, a segment of the client base or a segment of the practice for an overall client base. For some, this may be a way to ease into retirement with a less demanding workload. It may also be the approach when existing partners do not want to take over a portion of the exiting partner’s business.
A typical buyer will look for complete records, which provide clear client details, historical fee levels over the past three years, the range of services being provided and tax invoices.
Buyout by existing partners
The details of this option are often governed by the terms of the partnership agreement. It may include all partners remaining in the firm or allow for pre-emptive rights. The partnership agreement may allow remaining partners to “call” a partner’s share of the business in the event of death or disability or it may allow an exiting partner to “put” his interest under some price formula, which may be useful in the event of a retirement or other career changing decision.
If these terms can be agreed upon long before a succession event is at hand, it can reduce tensions around immediate interests
Internal succession
Building an internal succession program may have the longest timeline of the available options because it anticipates that senior sta ff will be ready to move into partnership and that partner retirement will be managed in part through the appointment of new partners.
Effective internal succession requires:
- growth within the practice
- conscious recruitment of those who are
- capable of and interested in being partners
- formal training and development program
- for aspiring partners
- in some cases, capital funding
- arrangements that assist incoming
- partners to buy equity in the firm.
Introduction of new partners
As an alternative to new home-grown partners, firms may choose to look to lateral partnership hires. It will, however, require careful management of both the exit of the departing partner and the introduction of the new one. This option may be attractive if the existing partner group does not want to acquire the retiring partner’s fee parcel. The option may be handled as a gradual transition where the incoming partner is introduced as much as a year before the transition, perhaps first as a salaried partner.
Merger
A merger may be the most complex of succession strategies with the greatest impact on the principals in both firms.
It is essentially a two-step approach: step one being the merger of firms and step two being the exit of the partner. The value of the exiting partner’s share will generally depend on the business success of the merger. His or her exit, therefore, should not take place before the merger has begun to demonstrate increased profitability.
It is essential that all partners in the merged firm have a clear and common understanding of the arrangements. The terms of the partnership agreement have an increased importance under this option.
What to do next?
Whatever the option, an exiting partner will want to get the best value for time and energy spent building the practice over many years.
Maximising the value of a practice to a potential buyer requires careful review and remediation of deficiencies that may exist in profitability, liquidity, growth potential, client mix, service range and staffing. Presumably these issues have been the subject of management attention all along, but a five-year horizon may lend some urgency to tasks that have slid under the radar.
Finally, the partner should use the five- year planning window to:
- ensure that financial matters have been arranged to derive the maximum advantage from existing tax rules
- plan for the legal constraints that follow on the launch of a similar business or other forms of competition
- plan for the personal changes that may come with retirement. For many, leaving behind a familiar routine may be disconcerting. Planning for a personal as well as a professional transition is often time well spent.
Planning for transition is, after all, one of the tasks that accountants do best. Succession planning for an accounting firm may be demanding of time and attention, but is not an insurmountable task for those who look ahead sufficiently.
Rolf Howard is the CEO of Owen Hodge Lawyers.
