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Succession: Why it should be on accountants’ minds

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Passing your practice on to the next generation sounds easy, but far too often, accountants bury their heads in the sand rather than planning for the future of their firm and their colleagues.

15th Jun 2023
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I hate to disappoint you guys but this is not going to be yet another rehash of TV’s favourite upmarket soap opera.

Having said that, in this accountant’s experience, the machinations behind transfers of control in mid-size firms of accountants can be equally gory and sometimes as Machiavellian.

It is a harsh and indisputable fact of life that we all get older, though with very good reason some are loath to accept such a brutal proposition.

This is not good news if you happen to be running a successful firm of accountants or aspire to do so.

Plan for the future

In an ideal world, as soon as those managing a practice hit 50 or so, they should be taking active steps to plan for the future. Far more often, they stick their heads in the sand and put off any practical decision-making for another 10 years by which time the young, thrusting managers and partners have moved to pastures new, where they are not only making big money but all too often attempting to steal your best clients.

By that point, the incumbents tend to be a self-important cabal that have collectively been partners for 30 years and managing the practice for half of that time. In most cases they will be independently wealthy, but a touch too greedy and very much set in their ways.

Succession planning

When it comes to succession planning, those in power have a number of choices as they begin to think about winding down and easing into retirement.

They could:

  1. sell the business to a larger practice
  2. sell the business to an aggregator
  3. sell the most valuable clients
  4. retire and close the practice down
  5. achieve genuine succession by passing the business down to a new generation.

Unfortunately, in many cases, even if there is a group of well qualified and trusted individuals in the second tier who would be happy to take over, the final option may not seem as attractive as any of the first three and sometimes even the fourth.

The chances that those within the business will have the millions that you desire as recompense for a lifetime of hard work sitting in the bank waiting to be handed over are minimal. Contrast that with an aggregator or large practice that may well be able to buy you out overnight, albeit for what might theoretically be a smaller amount.

To compound the issue, rather than taking on all of the advantages and experience of an existing practice, those looking to run firms in the future often prefer to start afresh, either on their own or with a small, like-minded group that can do things its own way.

Money matters

Even if you can actually agree that a potential sale to colleagues is a viable option, the next obstacle is money.

The only realistic way to achieve succession is likely to involve a relatively small upfront capital payment funded by expensive bank loans and supplemented by an earnout that could last for many years and may never come to pass if the successors fail either through their own lack of ability or an economic downturn.

Some generous principals might believe that they are willing to forego the guaranteed riches of a quick sale in order to support and propagate the future of the business and all of those who have helped them to build up a successful practice, but somehow most shy away when they realise what they could be losing.

Even if they plough on, life in the 21st century is far from easy. There has been a noticeable change in attitude in recent years, where far fewer budding accountants see partnership as their ultimate goal, with many looking at the profession as a job rather than a vocation – a way to make money but not necessarily build a career.

This means that the pool of prospective partners across the profession is smaller and, in turn, once large firms and those at the top of the mid-tier have taken their pick, others may struggle to find and keep the rising superstars.

In denial

This issue is compounded by the aforementioned natural denial of the ageing process. Partners who are withering faster than they would like may attempt to ignore the reality that they should be helping a new generation. Even worse, they often feel threatened by talented (relative) youngsters and, rather than offering encouragement, scare them off, either actively or through subconscious behaviour.

Putting all of this together could herald bad news for accountancy. If increasing numbers of smaller firms die, are sucked up by larger operations or sell blocks of their best clients then our profession will shrink, meaning less choice for clients and also those looking to enter the business in future.

It doesn’t have to be like this. Forward-thinking partners should identify those who might be able and willing to follow in their footsteps, nurture them and then look forward to a healthy, happy and prosperous retirement.

Replies (1)

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paddle steamer
By DJKL
19th Jun 2023 10:30

"Putting all of this together could herald bad news for accountancy. If increasing numbers of smaller firms die, are sucked up by larger operations or sell blocks of their best clients then our profession will shrink, meaning less choice for clients and also those looking to enter the business in future."

Philip

Does this in the long term happen? Yes you get consolidation but there always seem to be youngsters creating their own more start up firms, stealing clients from the larger firms and eventually some (a few) of the new firms grow and themselves become established-Circle of Life.

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