Jeremy Kitchin has over 30 years' experience as a leading expert in the field of ccountancy practice mergers and acquisitions, consolidation and the valuation of goodwill. his firm, APMA, was instrumental in the creation of Vantis plc in 2002. This is the first in a series of articles in which he explains how practitioners achieve a successful exit strategy.
Succession planning should not be looked on as something that happens on a particular date in time. It is a life long process. It has two main goals. Primarily, its aim is to ensure the continuity of the practice from one generation to the next, and secondly, it should provide for a secure retirement for the owner(s).
Know when and how to pass the baton
Whilst change in general is hard for all of us, perhaps the biggest change that an owner will ever make is the one that requires him to leave the firm he has built up over his working life. Knowing when and how to pass the baton are decisions that all practice owners will have to arrive at sooner or later. It is incumbent on the firm, as well as the individual owners, to lay out their plans. The sooner the plan is put in writing, the easier it will be for all involved to implement it. Not having a succession plan is like not having a will - you are going to let someone else determine what will happen.
Whilst the following checklist is not exhaustive, it will get you started down the succession planning path. Don’t be afraid to add questions that pertain to your particular situation. There are a number of key areas for any successful succession plan which will be expanded upon in this series of articles:
- What happens to the practice?
- How is a buy-out structured?
- How are clients going to be informed?
- How shall we implement the plan?
Practice Continuation
The main goal for any succession plan should be the continuation of the practice after the retirement or death of the current owner(s). Have a plan prepared and stick with it to avoid being forced to sell the practice from a position of weakness. Practice continuation varies from firm to firm, but here are some key questions to which you should have answers.
- Does the partnership or shareholder’s agreement state a specific age when owners sell or pass on their equity? Depending on the size of the firm, the most common ages are between 60 and 65 years of age.
- Has a successor been identified? If not, what will the firm do in an emergency situation, or when the owner(s) wishes to retire?
- When and how will the clients be transferred to the successor?
- What type of successor development plan does the practice have? Most successors just inherit the position or Client List with little or no preparation.
- Will the retiring owner(s) continue to work full or part time at the firm?
- How strong is the next tier of management? Larger firms need to have succession plans for key departments and individual specialists.
- If you are a sole practitioner, do you have a practice continuation agreement to protect the value of your practice in case of sudden death or disability?
Getting started
So where and when should business succession planning begin? Too often, many practice owners wait until the last minute when important options, including, for example, the inability to insure a principal or key employee, have closed.
Generally, setting up a successful business succession plan involves seven stages.
1. Survival -- Once the business has survived the start-up stage, you should consider a business succession plan.
2. Commitment -- You must be committed to the concept that the business must continue to create opportunity for those to come. This commitment must be communicated clearly, extensively, and often.
3. Recruitment -- Recruiting good people always pays dividends and is a key area of importance in succession planning.
4. Development -- Investing time in developing family members, key employees, and management team members, and allowing them to exercise authority and control, will be vital to your success.
5. Selection -- Having developed a transition plan and recruited the right people, selecting a successor or successors becomes easier. By empowering a broad range of key people, the selection process is simplified and your options are enhanced.
6. Announcement -- Once a succession plan is in place, you should normally communicate that plan. Such communication gives key management people and/or family successors a clear understanding of the path to the future, as well as any role they may play in that path. It also allows them to begin setting future goals and objectives for themselves.
7. Implementation -- In implementing the succession plan, you must be ready to step aside and allow the successor(s) to take over. You must be prepared to take on new challenges in retirement, knowing that your financial future is secure.
But be aware! If you are a sole practitioner you should at a minimum have a practice continuation plan agreement with one of the firms local to you. This will protect your spouse and family in case of a sudden illness or death.
While not one of the seven steps, selecting qualified advisors, such as an accountant, lawyer, insurance agent and financial planner, can help ensure that your plan legally, profitably, and affordably takes into account your needs and objectives.
If seeing your business continue into the future, without compromising your own retirement needs, is important to you this last step may be the most important of all.
In next week's article, Jeremy Kitchin looks at the financial aspects of succession, such as valuation, goodwill, and dealing with rainmakers (especially if that rainmaker is you).
