Succession planning: Plan your exit
Succession planning has two main goals - ensuring the continuity of the practice from one generation to the next, and provide for a secure retirement for the owners, explains Jeremy Kitchin.
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?
So where and when should business succession planning start? 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 the following seven stages:
- Survival - Once the business has survived the start-up stage, you should consider a business succession plan
- 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
- Recruitment - Recruiting good people always pays dividends and is a key area of importance in succession planning
- 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
- 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
- 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
- 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 advisers, 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.
Your succession plan
Many smaller practices are facing serious succession problems, one of which is their inability to attract high calibre individuals into the practice. Becoming a limited liability partnership (LLP) will make the firm considerably more attractive to potential partners, as incoming members of an LLP are not responsible for practice debts or financial liabilities that were sustained before their arrival.
If you have considered the above points, you are ready to start putting your action plan together.
The transitions of ownership can be difficult. How to prepare for and maintain continuity, especially when egos as well as pounds are at risk, requires careful thought.
Stepping down does not necessarily mean stepping out of the practice. You can still be an active practitioner and contributor to the firm. You will know when you are ready to let go of the reins when you can answer ‘yes’ to each of the following questions.
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- Will I be financially secure after I step down?
- Have I identified a successor or another firm to take over?
- Am I committed to an effective succession plan?
- Have I announced a firm date for when the transition will take place?
If you are the rainmaker
Make sure that you learn to separate your personal identify from that of the practice. You might think that the firm would be nothing without you, but if that were true then your firm would have no value. If you are the person who makes it all happen, you need to start thinking about how you can pass on your skills, business and client relationships to others in the firm. And you will have to learn to start taking a secondary role. All transitions should be done over a period of time, perhaps two to five years. But you should start thinking about it between the ages of 45 and 50. This provides you with a window of 15 years if you are planning to step down at 60 or 65.
Don't wait until it's too late!
Many accounting firm owners with only five years to retirement have not yet established a successor, either within or outside the organisation. A successful transition is often expected to be your source of income in retirement years, either through the form of periodic payments or as a lump sum. In any event, maximising the benefit from your practice will depend upon the successful transfer of clients to the new owner - either future partners within the firm or an external purchaser of the practice. Both the vendor and the new owner will want a successful transition. Clients that are lost during the transition will usually result in a reduced payout to the retiring party - this is effected via the claw back clause in the sale agreement.
The downside of not planning your exit
An ageing partnership profile; shrinking pensions; insufficient capital in the practice to pay out retiring partners; a dearth of high-calibre new partners prepared to invest in the business; problems with client retention as partners retire; no hope of early retirement; and no possibility of continuing independence. For many this may eventually prove insurmountable.
What's my firm worth?
Try to find out what similar size firms have been sold for in your area. If you are a multi-partner/director firm, does your partnership/shareholder agreement provide a formula? Is this formula based on reality? And do you think your fellow owners will actually pay you? Make sure you obtain an independent valuation of your business from a professional valuation expert who has worked with accounting firms before. Don't believe the multiples you hear on the street.
Developing other interests
After 30, 40 or more years in a practice, stepping down can be the ultimate challenge. It moves us into a new chapter of our lives. It addresses our own mortality and at the same time it's a deeply emotional event. You start thinking about your dreams; those you have accomplished and those that are still out there, your lifelong ambitions, your relationships with your co-workers and family. And last but not least, your own mortality. Who really wants to think about these things? If you try to ignore your emotions and feelings, you may think you are spared from making a difficult decision, but you are only fooling yourself. It is no fun living with ambiguity in your life.
How can we crystallise the firm’s goodwill?
A first step in beginning your succession plan is to determine what you want to do with the firm. There aren't too many choices here. You can do nothing and just ‘shut up shop’ one day. You can transfer the business to an internal group of owners or managers via a management buy-out. You can offer the practice to someone from outside to buy you out. You can merge your practice with another public accounting firm. Finally, you might be able to sell your practice to one of the consolidators. You will need to decide what the best choice is for you and your firm.
If no plans have previously been made, in many cases the pending retirement of the owner(s) will trigger a desire for a sale or merger. A significant number of smaller practice owners see these two choices as the only way of solving their succession problems. The owner(s) may well have worked for most of their careers in the practice and now the firm is faced with their pending retirement within a relatively short time scale. This disruption may be coupled with succession issues as the junior partners do not have the requisite experience for managing the practice, or indeed the desire to take on debt. This should have been identified when producing the succession plan.
Implementation of the succession plan
As with any plan, the proof is in the execution. If your firm cannot implement the plan, it is not worth the paper it is written on. To make sure the plan is implemented, you should:
- Update the plan annually, with the approval of all owners
- Develop a three-to-five-year timetable of what needs to happen to make a smooth transition
- Focus on accomplishing two or three major activities each year
- Hold key players responsible for fulfilling and completing the steps outlined in the timetable
It is never easy giving up something that has been your entire life’s work. Every succession plan needs to be a win for both parties, otherwise the chances of it working become very slim. Succession planning often becomes as much an emotional event as a financial one. Using a neutral outside adviser is an excellent way to keep the emotions under control and clarify or develop the proper transition format.
Don’t forget to include clients in the succession plan. The personal relationships that develop over the course of years is the glue that holds the clients to the firm. Clients need to be aware of any changes taking place in the firm. The sooner the better. If clients are not aware of impending changes which affect them they may move to more caring firms.
- When do owners need to give notice of retirement?
- How will clients be informed of any major relationship changes in the firm?
- When will they be informed?
- How will the new contact be introduced?
- Do major client accounts already have a second relationship manager assigned?
- What is the firm doing to ensure that the clients are clients of the firm rather than of individual owners?
Also see the second part of Jeremy Kitchin’s exit planning series, What kind of exit do you want?
With his daughter Lucinda, Jeremy Kitchin runs Jeremy Kitchin Practice M&A, a specialst broker that trades as APMA.