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Practices overlooking people contingency

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13th Oct 2009
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It's people, not property, who make the business, so what are you doing to ensure your practice's growth for the future, asks Nicola Draper.

Fires, floods, tempests and terrorists – all are obvious subjects for your list of ‘what if’ disaster scenarios, but it should go much further than that.

Contingency plans should take into account any event that will keep you or any key members of staff out of the office or affect the future of your firm, and that includes retirement, serious ill-health and death.

Succession planning
Retirement planning, on which you have no doubt advised many clients, is a subject accountants sometimes do not think about for themselves until too late. It’s essential to start thinking about it several years before you intend to step down.

If you’re an owner managed practice, is the business sustainable without you? Sometimes firms are so dependent on the qualities of a single individual that succession is not possible, but a sale may be. I have brokered the sale of many one-man practices and there’s no shortage of buyers, regardless of how dependent it has been on one person.

If you want the business to be passed on, to whom will it go? A family member maybe? Do they have the qualifications, aptitude and inclination? If your firm has staff, is there someone within the firm who is a natural successor? Is that person interested in a buy-out? It’s difficult to sound them out without seemingly making promises, but a round-robin letter to appropriate staff asking for expressions of interest might be a start. 

There are many factors to consider:

  • Can they afford to buy you out?
  • Taking their managerial/accounting skills as read, will they get on with clients?
  • How will other, perhaps longer serving staff, feel if X, who has only been with you for a couple of years, becomes the boss?
  • Have you time to groom someone into your role?

Most sale contracts of accountancy firms have a claw back clause, so it’s in your own interests to ensure the right person is chosen, one who will make a go of the firm, keeping existing clients loyal and hopefully, finding new ones or offering new services.

Choosing a successor
If there is no-one suitable within the firm, it might be necessary to bring someone in a year or two ahead of your retirement. A well-worded advert or a judicious bit of head hunting may well turn up an excellent candidate who has the ability to take the firm forward, ensure its continuity and (just as importantly) is willing and able to buy you out. After all, a straight sale of the firm would bring you around £1 to every £1 GRF (maybe more) so a future owner, wherever they come from, should be prepared to pay the same.

“The final test of greatness in a chief executive officer is how well he chooses a successor and whether he can step aside and let his successor run the company”, according to management guru Peter Druker. The partners in an accountancy firm are collectively that CEO, although some may have more seniority than others. A partner meeting where everyone can express their preference for a successor (or maybe even two) will be the starting point. Your partnership agreement should state what percentage of votes can carry appointments.

Whatever the role, recruitment to a senior position needs careful consideration. Quite apart from their qualifications and aptitude, there are other factors to take into account, for example:

  • What can they bring to the party, in terms finding new clients and additional expertise which can help you increase your offering?
  •  Will their personal circumstances affect their length of service?
  • Are they ambitious?
  • Do they have leadership skills?
  • Do they have charm (often overlooked but important when dealing with clients)?

Partnership issues
If you can’t identify anyone in the firm and have to bring in someone from the outside, retiring partners may need a longer handover period to embed the new person and to see your clients through a seamless transition. Otherwise, consider a sale of the firm (if it is yours), or sell your share in it to partners if it is owned collectively.

Your partnership agreement, assuming you have a legally binding one, will determine whether you are paid for goodwill, how much, and when and whether there is any claw back clause. It should also state how much notice you must give, how long the hand over period is and whether you can stay on part-time or as a consultant for a while.

A partnership agreement should also state what happens in the event of a partner being seriously ill or dying. There should be a plan in place as to who takes over that partner’s clients, even in the interim.

A partnership agreement should also determine what, if any, goodwill payment is due, whether interest is to be paid on any loan/investment in the firm and the position on the ownership or any share of property. This can be fraught with difficulties, if there is no agreement in place. It is estimate only 30% of firms have a legal partnership agreement in place.

Planning ahead
Sole practitioners should have an agreement with an alternate who is willing to take on clients if they are unable to work. However, they should preferably be local. I know a sole practitioner whose alternate is more than 100 miles away, which makes you wonder how effective they will be on his behalf. While this is a temporary measure, it might well lead to the alternate buying you out. If it does not, and you are not returning to work, you might consider a sale but you have to decide quickly.

You should ensure your solicitor and family know what to do in the event of your untimely death. I know some sole practitioners who have put a letter with their will instructing the executors to find a buyer as a matter of urgency. I would say that the firm needs to be put up for sale within days, before clients start to leave and staff look for new jobs. It may be that one or more existing members of staff are interested in buying, or it could be offered to the market. However, time lost is value lost. 

Practitioners would be advised to write a list of ‘what if’ questions and answers now, if they have not already done so. As much as leaving a will is vital, so too is contingency planning for all eventualities for your business. For multi-partner firms, the practicalities of disaster planning, recovery and succession plan should be laid down in the partnership agreement. Key man insurance is also wise, yet it is estimated that only 20% of accountancy firms have it.

The whole purpose of any disaster recovery plan is to keep the business going and to put it, at very least, in the position it was before any event occurs. If that doesn’t happen, the firm will lose value and no-one wants that.

Nicola Draper runs Draper Hinks, a broker firm specialising the sale and purchase of accountancy firms of all sizes, across the UK.

www.draperhinks.co.uk

 

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