Exclusive survey: Succession planning a global challenge for accounting firms

4 December 2014 by Vincent Huck

The Global Accounting Alliance (GAA) and the Succession Institute have given The Accountant exclusive access to a global survey which found that many accounting firms are still oblivious to the necessity of having succession plans in place.

The online survey was conducted by Harris Decima of Canada, a Nielsen Company, among firms belonging to GAA's 11 member bodies, while the Succession Institute provided the analysis of the results which will be published on Monday 8 December.

Succession Institute founders Dom Cingoranelli and Bill Reeb told The Accountant why succession planning is an increasingly hot topic for accounting firms and what firms should start to work on.

TA: Why is succession planning becoming such a big topic, and why accounting firms are more and more concerned about it?

Reeb: From our work with organisations where people are represented all over the world, we saw that regardless of what country you're in, there are baby boomers. There is a group of people that are now coming into their 50s and 60s and are starting to get ready to retire. When you take a large group of people that want to retire, the question is who can take over for them, and are organisations set up to ensure succession.

One of the things that I don't think a lot of people know is that the accounting profession represents small businesses. And because they are representative of the small businesses arena, it's very common for them not to have gone through the trouble to make sure that they have somebody lined up to take over.

The second thing is, accountants really, really, care about their clients. So making sure that they have a home for their clients after they decide to retire becomes very important.

TA: So there are two levels here: the clients themselves who are small businesses, who don't necessarily think of succession, and the firms who advise but also don't apply it to themselves, am I following you correctly?

Reeb: Well I'm not sure I'd quite say it that way. I would say that the firms have clients that they care about, and they want to make sure that somebody is going to take over and take care of them. They don't want to just abandon them.

On the other side firms are creating succession plans, but they are not doing it nearly as fast as we believe is necessary. Part of that is because so many accountants believe they are going to work into their late 60s and 70s, so they don't feel the necessity of getting this done. The reason that makes them feel they don't have the necessity is typically because the M&A market is so strong that they don't feel like they need to internally prepare to have someone ready to take over.

We believe, and this is why we make such a big deal about succession, we believe that it's smart to have more than one option. So if the M&A market is good, then it might be the best alternative to take care of your clients. But what happens if the M&A market goes away? Because there's a whole bunch of baby boomers who are trying to sell their businesses or merge their practices at the same time, you'd see a potential decline in that value.

Therefore it's our belief that firms need to do a better job of creating an internal option for them to make sure they have a good plan in case the market itself is not something that works for them.

Cingoranelli: I would also say that we're already starting to see the acquiring firms becoming more selective in looking at merger targets, getting a little more picky about the kinds of firms that they want to bring onboard.

Reeb: Yes that's an excellent point, that's why when we talk about having a succession plan, it's about creating the kind of firm that not only is profitable and sustainable, but something that someone will see value in if you decide to merge or sell.

If I'm being more picky about how many firms and which ones I'm willing to take, then I'm going to start becoming more picky about what it is I'm looking for in those firms. Are they well run, do they take care of their clients, have they trained their people well, do they have people that want to stay, all those things start to make a big difference.

TA: And one of the main issues raised in the survey is that there is a gap between the employees' expectations and the owners' perceptions?

Reeb:
Yes I would say that there are quite a few people who are interested in being an owner, and what we see is that the firms aren't taking the necessary steps in training.
Which goes to one of our premises, because firms are small businesses, owners tend to say: 'well nobody trained me, and so if you step up on your own then you'll have a place here'. Owners haven't accepted the idea that part of making a stronger firm is for them to take on more of the challenge to make sure their people are ready and developed.

Cingoranelli: The actual statistics from the survey are: only less than half, 49%, of the owners provided leadership training for their people. While 56% of employees said that they would be interested in sticking around if they knew there was an opportunity.

Reeb: So there is a disconnect, but even more so, the disconnect is in the fact that the firms aren't necessarily training and developing their people, they're just expecting their people to kind of figure it out on their own. Often, as the small business owners did. And that's part of the issue which is kind of a mentality issues.

TA: So there is the question of mentality, there is the question of training, what other points should firm improve?

Reeb: On one side you have the sole proprietor firms. Those are small firms and they either don't have any people to develop or they only have one or two people who have no interest in taking over the firm.
In this case, firms should put in place a practice continuation agreement. This type of agreement sets out the terms with another accounting firm that if something happens to the owner, he or she dies or becomes disabled, or if he decides very quickly to retire, there is another firm ready to take over that business and continue it.
For the smallest of the accounting firms it is really critical for them to put together an agreement with another firm, so that they have that relationship already established.

And then you've got the multi owner firms, and there are numerous things they should be doing to position the firm for succession. One of those is to do a better job of training their people based on competency in order to have people at every level of skill and they can pass work down when a partner retires.

What we recommend is that you need to make the firm strong so that each person in the firm is strong, not that you build around a single individual.

Because the more you build around one individual, when that individual leaves, the firm is weakened because it was reliant on the specific skills of that individual, rather than people filling roles within the firm that can be interchangeable if somebody leaves.

TA: The survey covered 11 countries, was there any difference from one country to another?

Reeb: There were differences between countries, but they weren't dramatic. In many cases what was surprising for everybody was how similar all the countries were. For example, in some countries people were more interested in working longer than other countries. But when we started to really look at the numbers, we saw a range of differences, but surprisingly not nearly as radical as we thought.

Cingoranelli: I agree, there were some differences here and there. For example, we found that in the countries with the most sole proprietors represented, the employees seemed to have a higher incidence of responses that they might be looking to go someplace else or start their own firm. But for the most part I didn't see any earth shattering differences.

One of the big things that is really a key issue whether it is sole proprietors, whether its multi-owner firms is that it takes a while to get people prepared, it takes a while to prepare your firm for succession planning, it takes a while to transition client relationships over to the new owners, so the new owners will have a continuing income stream out of which to pay the retiring owners. And we found across the board that people need to really start to look at that, in both the cases of sole proprietors and multi-owner firms.

Reeb: The other thing that I think it's really important to say, is that while we are definitely outspoken on the fact that businesses need to have succession plans, accountants need to have succession plans as well. I don't want it to come across like accounting firms are not doing what they advise their clients to do. Because the fact that we have 31% of firms saying that they already have a succession plan and others saying that they're working on that shows a high degree of them doing it. Whereas you might find that percentage to be hardly any if you just pulled small businesses.

But we hold accountants to a higher expectation, so I want to at least put it in that frame: the percentage of firms who are thinking about succession is not as high as it should be.

TA: What is the risk if you leave it too late or if you just don't think about it?

Reeb: Well the risk is, we're in the client service business, and those clients need to be serviced. So if I don't take care of the client and give them a place to go and somebody to take care of them, they're just going to go out and find somebody on their own.
We inconvenience our clients because we have a lot of their information that we would pass on to whoever is taking over their account.

But probably the biggest issue is that we have a small business owner that has not done the job to make sure that their clients have a home. We just feel like there is a higher standard that accountants should follow. And if you'd compare the accounting profession to attorney or engineers, or the typical small businesses, I would say that our statistics are very high. But for us they are not high enough.

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Comment: Global succession survey unveils accounting firms have work to do

Survey results will be published on the GAA website