By Dom Cingoranelli, Bill Reeb and Michaelle Cameron – Founders of the Succession Institute

In May 2014, the Global Accounting Alliance, a federation comprising 11 of the world’s leading professional accounting organizations that represent approximately 800,000 members in over 180 countries worldwide, retained Harris Decima of Canada, a Nielsen Company, to conduct an online global survey on the current state of succession planning among firms that belong to the 11 member bodies. Of the 4,547 respondents, all worked in Public Practice and classified themselves as either a sole practitioner, managing partner/owner, partner, employee or consultant. After dissecting the information by groups, as well as looking at the data by country, the survey revealed some important insights regarding the landscape of succession management in the public accounting space.

Employees’ Level of Interest in Ownership and Entrepreneurship

Professional accounting firm owners/employers should find it interesting that:

  • 52% of the employees or consultants responding to this survey indicated that they are looking for advancement opportunities at their current firms, either wanting to become owners (33%) or interested in earning more senior positions (19%) in the firm.
  • Over half (56%) said they would be more likely to stay with their firm if they knew they would be offered ownership in the future
  • Nearly half (49%) are interested in becoming an owner in their current firm
  • More than a quarter (26%) of the respondents, indicated the following:
    – Owners of their current firm have talked with them about becoming owners
    – They are interested in becoming an owner in another firm, and/or
    – They’re interested in starting their own practice

This is very interesting data. In our current landscape firms across the world are looking for potential new owners to step up and take over the firm. Senior partners at those same firms however, routinely state that there is a dearth of people in their organization willing or interested in filling that role. The survey results should be cause for concern because 49% of the employees responding say they are not only interested in being owners, but one conclusion that might be drawn is that if they are not made owners, they are interested in joining a competitive firm as an owner (26%) or start their own practice (26%). This is definitely something firms need to get a better grasp on as they look into their succession opportunities. If firms don’t address this communication gap head on, they are likely to find themselves with critical turnover as their experienced people leave them which will not only impact the value of the firm, but limit the number of potential buyers for an internal transfer of ownership.

We believe that the employees responding to this survey were the more experienced people in the firm because it is unusual for firms to talk with employees about ownership opportunities until those people have performed well at sustained levels. With 26% of the respondents stating that future ownership had already been discussed with them, it indicates that a large number of respondents likely are already in non-owner leadership positions.

These responses also give rise to a significant threat to the long-term viability and profitability of the firm. With 26% of the respondents likely to go elsewhere if suitable career opportunities are not presented to them (either joining another firm or starting their own firm), this definitely points out the need for these firms to protect the value of the firm by creating employment contracts with those people who work directly with firm clients. It is important that provisions in agreements stipulate that those people can’t just leave and take the firm clients and talented employees without paying some form of damages. The accounting profession is made up of many small to medium-sized businesses that have an abundance of people with an entrepreneurial spirit. Because of this it is critical that firms not set themselves up as an incubator for spinning off competitors. In other words, firm owners need to find a way to harness the interest of their employees so they stay with the firm and carry it on into the next generation rather than be overlooked for ownership positions and forced to spin off and compete.

Many of the employees participating in the survey worked for firms that are sole proprietorships. Those employees whose firms are part of SAICA, ICAA and HKICPA indicated a strong interest in starting their own practice. At the same time, those same member bodies had relatively higher representation among sole proprietor owners responding to the survey than did firms from the other institutes. One conclusion here could be that employees of sole proprietors may see less opportunity for long-term growth and advancement at single-owner firms than when working in multi-owner firms. Therefore, this group could see moving elsewhere or heading out on their own as prominent paths in their career progression. This highlights a potential opportunity and risk for sole proprietors. The opportunity is to make sure their people are very aware of advancement possibilities and how they fit into that picture. The risk is that if they don’t do this, they will likely be training many of their people to the point of becoming fully competent owners, but rather than reap the reward of this development, those talented people will spin off, taking key clients as well as the firm’s best staff to a competitive organization. It is not a surprise that so many employees want to work in a place where they have opportunities for advancement, but these results show a chasm between the number of employees that want to be owners versus the number of owners that think they have people in the queue to become owners.

Retirement Planning Among Sole Proprietors

When asked when they expected to retire, sole practitioners were approximately evenly divided into four groupings:

  • On or before the age of 65 (25%)
  • Between 66 and 70 (24%)
  • After 70 years of age (25%)
  • Haven’t thought about it or have thought about it and made no plans for it (26%)

These statistics are concerning from a succession management perspective. With 75% of the respondents either not having any plans, or wanting to retire after age 66, and one-third of this group wanting to retire after age 70, that creates a difficult scenario for succession planning. The fact is that many sole proprietors, based on our experience, although they may hope to work that long, find it difficult to sustain their health, stamina and technical acuity to continue as full time leaders of their firm for those extended periods of time. But this lack of a firm retirement timetable is typically less about these factors and more about the reality that as the sole owner, no one is pushing them to pin down a date for this transition to occur other than possibly their spouse. To the extent that the sole practitioner has developed quality professional staff, continually pushing out his or her retirement date can be seamless as the sole practitioner works a little less and has his/her staff do a little more, making this option both financially lucrative and easy, given the constant reduction of hours. However, if those employees of the sole proprietor are interested in becoming an owner, continuing on without clarity as to when that transition will occur will often result in more senior staff turnover when the staff decide to move on as the owner’s targeted retirement date continues to shift.

However, many sole practitioners’ practices are not highly leveraged through the use of accounting professionals. For these practitioners, the longer they wait to bring someone on board for an internal sale of ownership, the less likely it will be that the internal sale of ownership will be successful. At some point, after an owner has been in business for two or more decades, it becomes increasingly difficult for the owner to be an effective trainer of less experienced staff. The owner simply will have become too far removed from the days when he or she was working at that level of experience, so it becomes more difficult to be an effective trainer or coach for anyone with limited experience practicing accounting. Bringing in a more experienced person also may be a difficult hurdle for a small firm. First of all, the cost of that person is high, so this is not the usual level of experience at which sole practitioners try to hire. And second, for those who do want to bring in this level of competency immediately, those people simply are in very short supply. Everywhere we go, at every size firm we work with, firms are looking to hire experienced personnel. Therefore the competition for good people is fierce and the supply of such professionals is usually demographically limited. So, given these circumstances, firms are quickly coming to the conclusion that if they want a reasonable chance that someone will be ready to take over their firm, they need some running room (time) to develop these people.

Another issue exists with succession that has to be factored in as well. As a practitioner ages, his or her client base, usually made up predominantly of contemporaries, ages as well. The book of business normally decreases over time, often as the result of an intentional effort to work less. As a result, the residual value of the practice gradually decreases over time as well. This is not all bad — by using this strategy, as long as a practitioner’s health holds up, he or she can actually earn a greater financial reward by taking this approach as compared to an earlier outright sale. But with this this option, the premise that the practitioner will maintain his/her health AND continue to be capable of doing the work until his or her targeted exit is a very risky assumption. Practitioners need to be clear when they employ this strategy that it is highly likely that their desired plan to work long into their 70’s can easily be derailed for heath or skill reasons, requiring them to quickly try to salvage an asset (the value remaining in their firm) that will decline rapidly if a suitable buyer is not found in very short order.

Succession and Continuation Plans for Sole Practitioners

The survey shows that only a minute proportion of sole practitioners have a formal business succession plan.

  • Specifically, fewer than one-in-twenty (3%) of sole practitioners have a written or formal business succession plan at their firm. In fact, only one per cent of sole practitioners under the age of 55 have a written or formal business succession plan drafted.
  • From a regional perspective, sole practitioners who are members of the ICAEW, IDW and SAICA are the most likely to have a succession plan. However, the incidence is still low in these regions with fewer than one in ten having a business succession plan (8%, 9% and 9%, respectively).

These results are consistent with what we have seen. The most common option for the transition of a sole practitioner’s firm is to merge or sell the practice. That is, some other unknown firm is their succession plan. While the market has been good for these transactions for a long time, for a sole practitioner to assume that this will be the case when his or her time comes to transition out of the firm, especially when you consider that for many accountants their ownership in their firm is one of their largest financial assets, this strategy can be risky. In fact, when you consider the relatively high risk it presents to a group of people that are unusually conservative in their decision making, it seems to be an odd choice.

Comprehensive Business Continuation Plans for Sole Owner Firms

On another level, especially based on how long many owners plan to work, for many sole proprietors, their succession plan is less about succession and more about practice continuatuion. This is likely the reason why so many more sole practitioners (16% versus 3%) had developed practice continuation agreements rather than succession plans. This is simply an agreement with another firm or person to step in and take over the practice if they decide to retire, but typically it is really about having a backup plan should something devastating happen to the sole practitioner, such as debilitating health issues either with themselves or a familly member, partial or full disability, or death. Besides the need to have a documented emeregency plan (in other words, when a crisis occurs and someone is no longer available, information needs to be available as to how to get access to client files, computers, etc. to be able to continue day-to-day operations), we recommend that these agreements include provisions for all of the following:

  • Identifications of the party (a firm or individual) responsible to buy your firm
  • Conditions that will trigger the agreement (e.g., retirement, death, disability after a specific period of time, etc.)
  • Definition of disability required to trigger agreement
  • Provisions for short-term disability (does the agreement have a provision outlining the terms should the disability be temporary?)
  • Provision for the buy-back of the practice should the practitioner recover from the disability
  • Outline of payment terms to the firm or person stepping in to keep the firm operating in case of short-term disability (e.g., percentage of billings, price per hour etc.)
  • Non-compete clause in place for disabled or retired owner (How the individual or firm taking over is protected in cases where the disabled or retired partner decides to compete or lure back old clients.)
  • In case of short-term disability, are there quality controls in place to ensure acceptable standards of work during this period?
  • Upon notice of a triggering event (e.g., retirement, death, disability), how soon the responsible party is required to take over the firm
  • A clear formula for calculation of the sales price of the firm (e.g., clients to be included or excluded, method for determining value of clients, etc.). Typically the sales price under these circumstances is determined based on a combination of client retention and a formula, rather than a fixed price.
  • Payment period and terms
  • Plans for existing employees (is there an obligation to retain the employee(s) for a certain period?)
  • Client transition requirements (for the retiring owner in the case of retirement)

Some of the items referred to above showed up in various ways in the survey as "challenges firms were facing," although this list represents a more extensive listing of necessary provisions. When you consider that when a sole practitioner encounters health problems, without such emergency documentation and an agreement in place that instantly kicks in, the value of the practice can dissipate quickly as both the clients and staff run to find organizations that can take care of them. Natually, your agreement needs to be designed around your country’s legal process with each country likely having it’s own unique challenges. For example, in the UK, a special executor would need to be appointed in the accountant’s will if he or she wanted the practice continuation plan to be executable upon death.

Multi-Owner Firm Size

Sixty percent of the respondents to the survey from multi-owner firms were from firms with two to five owners, while 17% were from larger firms with more than twenty owners, and roughly one-fourth of the respondents were from firms with from 6 to 20 owners.

CAI, SAICA, ICAA and NZICA had the highest percentages of members from 2-5 partner/principal firms, while the ICAS, HKICPA, Canada and IDW had the highest percentages of firms with more than 20 partners/principles responding to this survey.

Expected Retirements at Multi-Owner Firms

Over half (52%) expect one or more owners to retire within the next five years, and at 30% of the firms, ownership is expected to change hands within the next year or two. This represents significant opportunities and challenges for those firms with owners who are expected to retire soon. If a firm has the better part of five years to prepare for the departure of an owner, it has the opportunity to put in place more robust decision-making infrastructure and leadership development activities to better prepare for the departure.

For reference, we suggest a minimum of two years required for transition of client and referral source relationships. This assumes we already have the people in place to do the work, and if new leadership is part of the solution, they are ready to step in and take over. This final two years is necessary for the retiring owner to adequately transfer the client and referral relationships he or she has built up over the years to whoever is taking over client account responsibility. This is the single biggest area in accounting firms for abuse as it is all too common for owners to retire and receive a retirement benefit, even though the retiring partner still has control over the client relationships his partners are theoretically paying for as the value left in the firm.

For this reason, for those firms with a closer horizon for departing partners (14% are expecting a departure within the next 12 months and 16% in one to two years), transitioning and client retention are likely going to be significant issues if transition of both the work and the relationships are not well underway already by this time.

Selling Ownership and Remaining as Consultants

Among multi-owner firms, 78% of respondents may or will consider remaining as a consultant to the firm after transferring ownership. For sole practitioners, 63% indicated that they may or will consider this option as well. This option could be viable under certain conditions. However, as we stated above, we recommend that during the final two years prior to the transfer of ownership, the retiring owner transfer ALL client and referral source relationships to the new or remaining owner(s).

After the transition of clients and referral sources has occurred, if the remaining owner(s) wish to have the retired partner continue to work for the practice, the retired partner should be placed on a one-year contract, renewable at the sole discretion of the firm, with specified duties and remuneration for that work spelled out in the contract. These duties would not include client relationship management. The reason anyone would be willing to pay a practitioner for his or her share of the business is because the remaining owners expect to retain the client relationships and to keep those clients in order to pay off the withdrawing owner.

Allowing a "retired" owner to continue in a client relationship role means that the firm or remaining owners will be paying for clients for which they won’t have a controlling relationship. Based on years of experience seeing this type of situation and the related outcomes, the remaining partners are often asked to pay above-market benefits (we call that being held hostage) by the time the part-time retired owners actually fully retire through either additional perks or financial incentives for the actual transition of those clients.

In our experience, the most common thinking from the retiring owner or "consultant" is that he or she wants to reduce the amount of client book managed and continue to take care of the remaining clients on a part-time basis. There are at least a couple of problems with this approach. First, the "consultant" usually wants to keep working on the larger, more lucrative clients in his or her client book. So now you have a retired owner, someone no longer part of the firm leadership or management of the firm, making decisions about client work for large clients of the firm. Second, one of the ways firms can afford to pay retirement benefits is to put less expensive partners in place of the retiring partner to manage those larger more lucrative clients. If those relationships are being maintained by the retired partner, then the firm will not only be paying retirement benefits, but also paying too much in current compensation to the retired partner to manage a relationship that someone else should be managing.

In our opinion, the numbers of existing owners wanting to stay on after retirement is very troubling. While this absolutely can work, it is imperative for firms to put policies and processes in place right now to lay out the exact conditions and circumstances under which retired partners will be allowed to continue to work for the firm as well as the types of roles and responsibilities they will be allowed to fill.

The Tip of the Iceberg

Considering the number of firms expecting owners to retire within the next five years, and the fact that only 31% of firms have a written or formal succession plan, firms have a great deal of work to do to get ready for the challenges succession will bring in the near term. While there is clear interest in succession when you consider many of its component parts (value of the firm, people development, identification of future leaders, partnership agreements, and many more examples included in the details of our white paper on this topic), it is surprising how many firms resist developing a robust succession plan. It is our belief that for many, succession is only about the identification of who is leaving and when, who will replace them, and what will be paid to the retiring partner. These issues represent just the tip of the iceberg when it comes to Succession Management.

Comprehensive Succession Plans for Multi-Owner Firms

Less than five in 100 firms, based on our work with accounting practices over the past 20 years, actually have developed a comprehensive succession plan. Here is an abbreviated list of issues that need to be included in such a document:

  • Who is going to fill the technical ability gap of the retiring partner?
  • Who is going to fill the client service gap of the retiring partner?
  • What is the client transition plan that we will require the retiring partner to complete, and what are the consequences if he/she doesn’t carry through with it?
  • As part of the transition plan for the retiring partner, how many other transition plans will need to be created to accommodate the transition of clients (existing partners taking on clients of the retiring partner so they need to transition some of their work to managers, and those mangers need to transition some of their work to staff to be able to take on the work given to them by the partner and so on):
  • What competencies are we expecting from every new partner and how are we fairly evaluating who is measuring up?
  • If a new partner is going to be brought into the firm, how are they going to buy in, at what ownership level and dollar amount, and when will they vest for retirement benefits?
  • Who is going to fill the role of the person being promoted to partner? And who is going to fill each roll vacated below them due to the ripple effect created by promoting one person in the firm?
  • What are we doing to develop people and create the capacity we need within the firm to do the work that is already in-house?
  • What are we doing to close the competency gaps that currently exist in the firm among our existing people?
  • Under what circumstances will a retired partner allowed to work in some part-time capacity within the firm after he or she sells their ownership?
  • Have we created a culture that focuses on leveraging work through others so partners can retire seamlessly and do it in a way that is highly leveraged (leverage being people other than partners are doing the technical and detail work)?

As you can see, succession management is not just about how and when a firm will pay off retiring partners, but rather, how it is going to run the business more effectively without them. Succession management is the spot light that shines on a firm, showing all of its weaknesses, including those aspects of the firm that everyone knows need attention that don’t get addressed because the partners always have something more important to do. When firms focus on running their businesses using best practices, succession is just a natural and seamless evolution of its success. If there is one theme we gleaned from the results of the succession survey, it is as follows:

Generally, firms are not planning for succession; they are planning to position an owner or two to be able to slow down. This statement is backed up by statistics such as 3% of the sole proprietors and 31% of multi-owner firms currently having a succession plan in place, over half of the multi-owner firms planning to retire an owner within the next five years, and owners in 63% of sole practitioner and 78% of multi-owner firms wanting to stay around after retirement to work as consultants. As additional proof, on the other end of the spectrum, firms have employees interested in becoming owners who are not getting the training they need (49% of multi-owner firms have not offered leadership training) to step into the shoes of those getting ready to slow down or retire. However, based on the responses, when the time really comes for the owner to step away from the practice, rather than build a robust succession plan to transfer what usually is an owner’s largest single financial asset (their ownership in the firm) to the next generation of leaders, it appears that their real succession strategy is simply to sell or merge their practice. As we stated earlier in this article, this seems like an odd choice to us, given the riskiness of this strategy (the market could easily weaken), the importance of this financial asset, and a normally conservative decision making of our profession.

In conclusion, the survey points out that there is still a lot of work to be done to prepare firms around the globe for succession. But the great news is that the 11 member bodies of the GAA are well positioned to help their members, within the constraints of the respective resources of each, prepare for succession and protect the value of the assets they have worked so hard to build. And the best news of all is that good succession management is very achievable; it just requires specific focus and some time to put it in place. While there is still time to get this done, there isn’t any time left to waste.