Future-Proof Your Business with a Succession Plan

Don’t leave the future to chance.

Succession planning has been an important topic for many years, but it’s become a bigger concern as Baby Boomers retire. Just look at an article published by the American Institute of Certified Public Accountants (AICPA), and you’ll see how widespread this issue has become, with 84% of firms anticipating it’ll be a major issue for them within the next decade.

It’s startling, too, when you think that 80% of first-generation firms never make it to the second generation simply because they have no succession plan. This topic has become so critical that the Private Companies Practice Section (PCPS) survey ranked succession planning among the top five concerns for CPA firms of all sizes.

So, what’s a CPA to do? Get started on a succession plan, of course!

Taking the step to create an effective plan can future-proof your business and assure a smooth progression for both employees and clients, no matter the size of your firm. And the earlier you get started, the better.

Why are the stakes so high?

Unfortunately, far too many accounting firms seem to leave their ledger sheets on the table, with no one left to balance the figures. Perhaps they think everything will fall into place when they are ready or misunderstand how succession planning works. Regardless, if you are a sole practitioner, a multi-owner firm, or a CPA working toward a partnership, this topic is critical to your career’s longevity.

Succession plans are developed for many reasons, but preserving value, maintaining control, assuring profitability, retaining clients, and creating a legacy are a few that might inspire you to take action.

Why do owners procrastinate?

Many invest so much of themselves into building their practice and client relationships that they don’t take the time to plan succession fully… or write it down. Unfortunately, this is a lot like not having a will and only talking about your plans if the unexpected were to happen. But the likelihood is that others will make the decisions for you if you don’t get it in writing.

In the case of an accounting firm’s succession, the results probably won’t work out as you’d hoped either. Instead, a formal plan should be clearly established and communicated to the appropriate people.

Often, owners don’t create a succession plan because they’re not ready to retire yet, and they feel the topic can wait. Unfortunately, no one really knows what the future holds… what happens to the business if an unexpected disability or death occurs? It’s critical to realize succession planning can take several years to unfold and assure a smooth transition. In fact, many believe succession plans take at least five years to implement.

A few years ago, The CPA Consultants’ Alliance surveyed a cross-section of small, medium, and large firms and provided an analysis in “CPA Firms Face Considerable Succession Challenges.” According to the report, “Owners must stop procrastinating and deal with issues that are easy to put off because without an effective and well-thought-out succession plan, too much is left to chance. Planning is the secret to ensuring an outcome that’s positive for everyone concerned—current ownership, future ownership, and the firm’s clients.”

What role do you play?

Of course, there are differences in what’s needed depending on whether you are a sole practitioner, a multi-owner firm, or someone working toward a partnership, but one objective should be the same: longevity. That means helping to determine how the practice will be managed effectively in the future. The details, though, will vary depending on the structure of the practice, the number of employees and clients, the goals for the business, and how it will move forward.

The primary role for sole practitioners and multi-owner firms is to develop a formal retirement plan or exit strategy and to identify, then prepare, future leaders to take care of the business and clients.

If you’re not an owner or partner, what’s your role? Believe it or not, you still have one. If you’re interested in the future of the firm, make sure management knows so they will begin to address your leadership potential. Don’t assume they know your interest—tell them. Your support can help ensure that succession planning takes place.

What are the possibilities for succession?

There are a few options to consider: internal succession, sale, merger, or a personal continuation agreement (PCA).

If you’re the sole owner, the future of the business relies on you. If you want it to continue, you need to identify how this will happen. If you are part of a multi-owner firm, there are key questions to explore with your partners about how you choose to exit the practice.

• Will you focus on internal succession? If so, identify a leader in your firm and groom that person to take over your role.
• Will you sell your clients to another firm? If so, how will you prepare them for this decision?
• Will it be a gradual retirement, or will you have a set date?
• Will you still play a role in the firm—perhaps as a board member or consultant?

Regardless of these decisions, it’s important to consider all the ways your exit will impact the business. Discuss your plans with family, employees, and professional counsel. Clarify and communicate what’s decided to those who will be most affected.

If internal succession or selling the firm won’t work, a merger is a possibility. As the number of owners retiring increases, however, the market may become so glutted that this option could be off the table.

Another option is what the AICPA calls a “survival kit”—a PCA. There are different types of PCAs, but they typically serve as a short-term contract that can help eliminate some of the problems that may contribute to procrastination. Ultimately, the success of a PCA depends on the pre-determined successor.

One type of PCA is implemented in two stages, where an owner can maintain a normal full-time schedule as predetermined, while a successor firm agrees to assume all overhead and administrative tasks. In the second stage, the owner determines an agreed-upon timeline for buyout. This is one way an owner can either reduce hours or retire completely. This method also allows time for leadership development and helps transition clients to new ownership.

Whatever you decide, remember that how your exit is handled affects not only those within your business but your clients as well. Your succession plan can make the difference as to whether clients stay with the firm or move to another one.

What are the key points for consideration?

• It’s important to be realistic about the things you can and can’t do before a retirement or exit.
• Take a serious look at your current staff to identify any potential leaders and allow enough time to develop their skills if you are considering internal succession.
• If you are thinking about a merger, research the market to see if this is a viable option. If it is, get started early. If it’s not, consider what you might do instead.
• If there are younger partners, can they buy you out? Will you continue in some capacity? If so, you need to be clear on what you will (and won’t) do.
• Once you have a plan and decide to retire, be firm on the timing, rather than leaving it for some nebulous date. A PCA might help define the terms.
• Be considerate of employees, other management, and clients.

If the idea of planning your succession seems difficult, the AICPA has tools to help. Whatever you see as your firm’s future, it’s important to envision and communicate the details. Even if the plan evolves, that’s okay, but setting it in motion will help assure your firm survives and thrives.

This article is for informational purposes only.