Succession fundamentals – Part 1

Written on Feb 28, 2014


BY BILL REEB, CPA, CITP, CGMA

Misdirection in succession management

You can’t go a week without seeing some article or blog focused on succession management and everyone seems to have a different opinion as to what is important when addressing succession. So, I thought it was time we challenged some of the more common misdirection that we have read in recent advice columns.

The first thing most authors want to focus on with succession is the development of future leaders. Then the dialogue will shift quickly to mentoring programs, leadership training and more. It would be hypocritical for us to disagree with this because we actually develop and conduct these kinds of programs. However, this type of training is only valuable after many other issues are addressed first. So, while it is important, I guess the best phrase to describe this is “first things first,” and this is not first by any stretch of the imagination.

An issue at the top of the list for many is finding replacements for the current senior partners. The question is often stated as, “How can we find people with the same technical skills, management ability, client service capacity, and vision for the firm’s future as those who are leaving?” How could anyone argue that this question shouldn’t be a key factor in succession management? While we also believe this is a priority, it ranks further down the list in our opinion.

Another common focus often centers on buying out the senior owners and the incredible financial burden the purchase creates for the younger partners. The question raised in this area is, “Can the remaining partners handle the payment demands, and do they have the integrity and commitment to make them?” Certainly, anytime someone is transitioning a business from one generation of owners to another, feeling confident about the answers to these questions seems like a more than fair request to make. The buyout price is always a touchy issue, and the seller’s feeling comfortable that he or she will get paid is equally sensitive. However, assuming we have two reasonable parties involved, we rarely find that these topics end up blowing up the deal. So like the other issues mentioned above, while price and ability to pay absolutely belong on the succession management list, they are not nearly the hurdle people make them out to be.

Yet another one of our favorite issues that people make a fuss over is, “Who should manage the firm?” Who should be selected as the new managing partner? Does the managing partner need to be a CPA or have worked in public accounting? There are certainly a lot of questions and suggestions for determining the next leader, and you would think that there would be a multitude of good answers, but our view is that most of the suggestions we read and hear about are marginally effective to ineffective.

The most commonly discussed issue we see regarding succession pertains to client transition. There are lots of opinions on this, too. The focus all too often is on the retiring partner making the necessary introductions when in fact this single issue is hardly what is undermining the succession and retention process.

One of the most emotional issues to pin down in succession is when a partner should or can retire. This topic addresses the period with a starting point defined by when a partner can first decide to retire with benefits and an ending point defined by when that same partner will be forced to sell his/her ownership with benefits. The focus of this issue when we see it covered in the media seems to always be about the specific interests of a partner.The problem is that, while “what a partner wants” should be considered, it is a secondary concern in succession management and certainly not the primary one.

One area or question that creates a great deal of frustration is, “What arrangements for continued work should be made to accommodate the retiring or MSO (mandatory sale of ownership) partner?” The concerns raised under this heading mostly center around creating a compensation arrangement for retired owners. While there are some commonly discussed best practices in this area, what to pay them should almost always be secondary to a number of other more important, and often more financially damaging, issues to address.

While we could go on listing commonly discussed succession issues, and the frequently shared, misdirected advice we’ve seen in these areas, we would rather shift gears here, stop focusing on symptoms and start focusing on resolving the root cause issues that a good succession plan should address.

The Robust Succession Framework™

First and foremost, good succession management is a function of good business operating practices. Over and over, we find successful firms, including many that have even effectively retired partners in the past that are overlooking some very important best practices.

So, before we move on from here (with our next article), let’s take a look at the laundry list of issues that a good CPA firm business model (and therefore a good succession plan) should be built upon. You might recognize many of the statements and comments below from questions we asked in the 2012 PCPS/Succession Institute Succession Survey (if you want to get the actual detail of Succession Survey, contact AICPA/PCPS and download the free overview report. PCPS members [if you are not already a member, you can become a member at a nominal cost] also have access to the full report with the detailed statistical data included in it). The Robust Succession Framework™ is built from best practices used to address issues that any firm should be working through in their succession management process. If you have 30 or more people, you should be able to answer “yes” to, or have a specified approach for addressing, each issue covered below.

But before you start going through the list, recognize that there is a hierarchy. Some items on the list are more foundational than others, with some more effective when built on others. From this list, and in our continuation of columns on this topic, we will take you through what to focus on first, and based on your resources, what is a “need to address now” versus a “like to have later” issue:

The firm has a current written, approved succession plan in place, which includes the following:

Planning
  • We always work from a firm strategy and hold people accountable to achieving it
  • We have a strategic plan covering the next 3 to 4 years
  • We have a tactical plan focused at the next 18 months
  • We have budgets focused at the next 12 months (financial, staffing, capital, backlog, etc.)
  • We have an infrastructure plan focused on the internal changes that need to take place in order to have a reasonable chance of achieving the strategic plan
Compensation System
  • We have a partner and manager compensation plan that changes each time the firm strategy changes so that we can ensure the partners are committed to achieving the individual strategies within the plan. Our compensation system is designed:
    • with a portion of salary set as base pay, and with the rest awarded on incentives using both subjective criteria and objective formulas determined annually
    • to allow the managing partner to set goals for each partner based on the strategic plan and the managing partner has a discretionary compensation stick to hold partners accountable for achieving their goals
    • to make sure we are training to strengthen people at all levels below the owners throughout the firm
    • to require partners to push work down in order to create more leverage
    • to require partners to spend more time managing client relationships and less time processing the work in the office
    • to make it is a priority for managers and staff to push work down at every level, with manager and staff goals identified annually
    • to change the way we operate so that the firm is not built around the expectation that everyone, including partners, should work excessively long hours, but rather around creating a very profitable firm through following good business practices
    • to hold partners accountable to written operating policies and procedures
Governance, Compliance, Roles and Responsibilities
  • We have governance in place that focuses on the roles and responsibilities of each position, and we don’t build the role around each new individual filling that position.

    Our policies cover:
    • Termination of a partner
    • Admission of partners
    • Partner voting rights and process (how various policies are voted on – one person one vote, equity ownership, etc.)
    • Maximum payout of guaranteed payments for partners that have retired or sold their interest in the firm (this is a cap on total payouts to all partners receiving benefits)
    • Voting thresholds and requirements that must be met to approve the sale/upstream merger of the entire firm
    • Partner goals by partner identified each year
    • Board of Partners roles and responsibilities
    • Executive committee (if you have one, or better yet, if you need one) roles and responsibilities 
    • Chair of the Board roles and responsibilities
    • Managing partner’s roles and responsibilities
    • Partner (client service partners, technical partners, practice leaders, etc.) roles and responsibilities
    • Manager and staff roles and responsibilities
    • Retired partner’s roles and responsibilities
Succession
  • We have a Succession process that we follow
  • We keep a listing of each partner’s currently planned retirement dates
  • We have identified successors for each of those retiring partners
  • We have identified successors for each person who will be a partner’s successor so that the successor partner can move into his/her new role unencumbered by their previous responsibilities
  • We have run models showing our projected revenue volumes at the point each partner is assumed to retire in the next 7 years, along with the projected average book size to be managed per partner, and have people identified to fill the necessary positions (For example, if average book size is expected to be $1.25 million per partner, your projected volume is $9 million, and you will have 6 partners at the time of the next retirement [including new partners], you either don’t have enough partners, or more likely, you don’t have an infrastructure that supports each partner managing an appropriated sized book)
  • We have run models showing we will have the right level of staffing for the projected revenues at the point each partner is assumed to retire in the next 7 years (for example, if you average $140,000 per FTE, your projected level of volume is $9 million, and you have 55 people, you either don’t have enough people for the production required, or more likely, you haven’t adequately trained your people to create the leverage needed for this level of production)
People Development
  • We have a people development plan in place that supports our projected business growth, increasing the size of book each partner can manage, and improving the volume of production per FTE
  • We have competency models in place for every position and have a system (not for HR compliance, but actually a developmental, career pathing system) to improve performance and hold staff and partners accountable to their expected competencies
  • We have roles and responsibilities identified for multiple partner levels (from client service partner, technical partner, practice leaders, niche service line leader, etc.) and well as manager levels (supervisory manager, technical manager, etc.) to hold them accountable through compensation to always work at levels above their minimum competencies and to at least meet their responsibilities
  • We have embraced a culture of training and coaching:
  • We ensure that our people know how to manage, delegate and develop others
  • We have a process to identify, and train for, the specific competencies expected in our competency model
  • Experiential assignments are used to develop competencies
  • Formal coaching or mentoring programs are in place
  • We send our soon-to-be partners through a formal leadership (partner-in-training) development program
  • We have a culture of improving production not by increasing work hours or greater work/life imbalance, but rather though leveraging people at all levels below them
  • We don’t keep people around who are marginal performers or who are clearly just out for themselves rather than the firm.  We recognize the burden and disrespect this puts on those partners and employees pulling their fair share of the load
New Owners
  • We have identified and formalized requirements for new owners
  • We have created a non-equity partner track to make sure new partners fit culturally with the firm before becoming equity owners
  • We have identified a “net revenue per partner” requirement for the firm, so partner slots only open up as the firm reaches revenue thresholds
  • We have an identified and documented minimum “client book” size for potential owners to meet in order to be considered for ownership
  • We have an identified and documented minimum “new business development” amount for potential owners to meet in order to be considered for ownership
  • We have a competency model in place that documents both objective and subjective qualities that must be met in order for a person to be considered for ownership
  • We have identified and formalized the requirements to move from non-equity partner to equity partner
Standard Operating Policies and Procedures
We have an executed partner agreement which everyone has signed that we regularly update based on our current business practices, and which includes the following standard operating policies/procedures to which we hold everyone accountable:

Retirement Benefits
  • Buy-Sell policy for partner leaving due to death
  • Buy-Sell policy for partner leaving and taking clients or employees
  • Buy-Sell policy for partner leaving and not taking clients or employees
  • Buy-Sell policy establishing valuation of partner’s retirement benefit
  • Terms and conditions for sale (retirement) of ownership interest
  • Buy-Sell policy for partner leaving due to total disability
Operating Policies and Procedures, like:
  • Buy-Sell policy for partner leaving due to partial disability
  • Partner compensation plan tied to strategic plan
  • Capital requirements for a partner
  • New client acceptance
  • Billing and collection policies
  • Existing client new project acceptance
  • And many more issues and policies regarding partner accountability and retiring partners which we will cover in future columns in this series
Our next column will pick up by identifying foundational issues of a good succession plan, what is at the core of making one effective, and we will continue to build from there. And we will explain why and how the initiatives identified at the beginning of this column need to be redirected or refocused to be part of an effective succession plan.

The Ohio Society of CPAs has established a collaborative effort with the Succession Institute to provide small firms with the tools they need to manage their practices and seamlessly transition to new leadership. The Succession Institute is lead by its owners Bill Reeb, CPA, CITP, CGMA and Dom Cingoranelli, CPA, CGMA, CMC®, who have each been working with CPA firms and family businesses to help them improve their performance for over 30 years. Visit their page now to learn how you can save on the solutions right for you.

Leave a comment