In Succession Planning, What Constitutes Success?

Art Kuesel President, Kuesel Consulting
Moving Your Firm Forward

According to a straw poll, nine out of 10 managing partners of independent firms define success for succession planning as an internal succession. That is, the firm remains independent and doesn’t merge into another firm. The client base and revenue stream of the senior retiring partner is “bought” by younger partners, which creates deferred compensation for the retiring partner.

But couldn’t there be another definition of success? What if the senior partners run a lean firm, work past traditional retirement ages to maximize earnings, and then wind down the firm when they’re no longer interested in continuing?

The truth is, both paths constitute success but to different degrees and preferences, depending on the firm. So, if all these paths define success, what defines failure?

In business today, you usually have choices. Of course, you may not like the choices, but they’re always there. It’s my view that succession planning failure is most often the result of not making a choice or waiting so long that there are no better choices left.

As a consultant, I often come across firms that have three high-level choices when it comes to succession planning:

1. INVEST IN BUILDING A BENCH OF FUTURE PARTNERS, REMAIN INDEPENDENT

Investing in developing future partners usually translates into stronger recruiting efforts, talent retention programs, better technology, alternative staffing resources to maintain and build capacity, a sound partner buy-in program, and an attractive partner buy-out program.

According to my straw poll, this is the preferred path for most firms. However, it comes with significant effort and considerable investment. With this option, you need a vision, a plan, and accountability. Additionally, firm leaders need to make a commitment to work on the firm as well as in the firm. Many firms that go this route utilize outside resources and consultants to help. It’s been my experience that while many firms start out on this path, they can ultimately become fatigued and opt for another choice at some point. Either the investment proved too large, or the effort needed proved to be unrealistic. But, after a firm embarks on this path, it’s usually better positioned for the future.

2. MERGE WITH ANOTHER FIRM

This choice is usually the best option when you have a limited appetite for choice No. 1—either in terms of the financial investments or the effort involved. You may also have an aging partner group with a light bench of young or future partners; therefore, merging with another firm is often the best way to preserve deferred compensation for the retiring partners while also providing a bright future for the up-and-coming talent at the firm.

Notably, this option generally preserves staff employment and client relationships, as most, if not all, transition to the new entity.

Of course, there are some undesirable aspects of this choice: loss of control, loss of independence, fear of more accountability, and fear of the buying firm not valuing your clients or staff as much as you did. Though, in my experience, many of these are emotional concerns that don’t pan out to be quite as acute as once feared.

3. MAINTAINING THE STATUS QUO

While it’s easy to understand why a firm may not have the appetite for choice No. 1, some may find it harder to reconcile why they choose to avoid choice No. 2. In some cases, the fear of losing control is front and center, or the firm isn’t attractive to a buyer. It could also be that the firm has few (if any) staff, low rates, no niches, smaller clients, or isn’t particularly profitable. In this case, the best choice (or only choice, depending on how you look at it) is to keep the firm running as is until the partners are ready to close shop.

With this option, the partners can work as long as they want and preserve their annual income to the greatest extent possible. They’re also giving up access to deferred compensation. While that may be seen as a negative, one must remember that the value of deferred compensation ranges greatly based upon the merits of the asset (client base). For example, a practice of mostly 1040s unattached to a business that’s priced below market and heavily concentrated on tax season may only yield deferred compensation equal to or less than one year of income.

In any case, the partner is essentially walking away from the practice, the clients, the team (if there is one), and everything they built with this option—they’re just ready for the next phase in life.

The bottom line—there are pros and cons to each of these succession options. If you want to have the best chance of marking this box as a success, I suggest making sure you understand your options, make a choice, and then follow through with it.

Related Content:

• Avoiding the ‘Retired’ Partner Problem: Here’s how to get CPA firm partners destined to hold on until the bitter end to loosen their grip and successfully hand off their firms to the next generation.
• Selling a CPA Firm or Small Business: These 10 essential steps will prove a handy guide to any M&A transaction, whether you’re a founder looking for an exit strategy or a CPA advising on another deal.