EXECUTIVE SUMMARY

SENIOR PARTNERS AT CPA FIRMS NEED TO PLAN how they will cash out of their practices. A firm’s revenues greatly depend on clients’ repeat business, so however partners choose to exit, maximizing value when they leave requires having knowledgeable, prepared successors who can keep clients during a transition. FIRMS OF ALL TYPES AND SIZES NEED a strong operation to ensure a profitable, stable transfer of leadership. A “standard operating procedure” (SOP) management foundation is about putting in support systems, procedures and policies to help staff and partners produce at a high level and to make “doing what is best for the firm” the natural choice. TO SECURE THE FUTURE, A FIRM NEEDS a marketing plan for developing business, sound management and satisfied, skillful staff. Small to midsize firms that don’t recognize this likely will find their long-term plans at risk. FOR MANY FIRMS SUCCESSION PLANNING SHINES a spotlight on operational weaknesses and is an important catalyst for bringing partners together and getting them to deal with a firm’s entire business strategy. WHEN PLANNING A LEADERSHIP CHANGE, some issues come up: Who is going to take over and what skills do they need to develop? How will the firm best use the people who have extraordinary business development capability as well as those with comparable technical skill? What are the roles, responsibilities and expectations of partners, managers and staff? ONE TOP MOTIVATOR A FIRM HAS at its disposal is an environment where people can feel good about what they accomplish. Leaders should support employees through the learning curve and be intolerant of managers who engage in harsh and humiliating criticism.

WILLIAM L. REEB, CPA, is a shareholder in the CPA/consulting firm of Winters, Winters and Reeb. An award-winning author and lecturer, he also is vice-president of CPA Network at CPA2biz, chairman of the AICPA’s consulting services team, a member of the AICPA’s Strategic Planning Committee, chairman of the TSCPA’s Technology Oversight Committee and a member of its Strategic Planning Committee.

enior partners at CPA firms of all types and sizes urgently need to plan how they will cash out of their practices. A partner’s exit can take many forms: He or she can retire with an ownership buyout over time, sell or merge with another firm, or even continue to run the firm and earn income while the workload gradually winds down through client attrition. A firm’s revenues greatly depend on clients’ repeat business, so however partners choose to exit, maximizing value when they leave requires having knowledgeable, prepared successors who can keep clients during the transition. That means your firm needs a plan for developing sound management and satisfied, skillful staff in addition to new business. Small to midsize firms that don’t recognize this likely will find their long-term plans at risk. The partner succession issues, recommendations and case study presented in this article are from the new AICPA publication Securing the Future: Building a Succession Plan for Your Firm.

Aging AICPA Membership The profession is advancing in age. Note: Due to rounding, figures may not add up to 100%. Source: AICPA.

TAKE A GOOD LOOK
For many firms succession planning shines a spotlight on overlooked day-to-day operational weaknesses. Thus it can be an important catalyst for getting partners to step up and deal with the firm’s entire business strategy. A good plan inspires partners to make changes they have batted around forever and brings them together like nothing else before. Partners at different age and experience levels exchange privileges and responsibilities as they reconfigure their roles for the firm’s imminent transition to the next group of leaders.

Some of the many issues that come up when planning for a change in leadership are

Who is going to take over and what skills do they need to develop?

How do we establish a decision-making process that creates a viable and enduring chain of command?

What procedures do we need to ensure consistency of operations between leadership groups?

What systems should we adopt to reward and promote the behaviors the firm desires?

How will we hold each other accountable for our actions and inactions?

How will we best use those people who have extraordinary business development capability as well as those with comparable technical competence?

What are the roles, responsibilities and expectations of partners, managers and staff?

How can we shift from operating like a group of vying individuals to putting the firm first?

How do we transition our clients?

What and when should we communicate about our transition plan to our employees and our clients?

What roles, responsibilities and expectations, as well as corresponding benefits and privileges, have we identified for our retiring partners?

To organize a successful changeover partners must determine the answers to those and many other questions. (For more information, see “Succession Planning Dos and Don’ts,” Feb.05, JofA, page 47.)

YOUR PEOPLE ARE THE FOUNDATION
Firms of all types and sizes need a strong operation to maximize their value and ensure a profitable, stable transfer of leadership. A “standard operating procedure” (SOP) management foundation is about putting in support systems, procedures and policies to help staff and partners produce at a high level and to make “doing what is best for the firm” the natural choice. An SOP foundation includes techniques to synchronize the growth objectives of all employees with the firm’s management goals, including staff accountability, the role of managers and effective compensation systems.

A quote attributed to Socrates says young people “love luxury, hate authority…are bored and ill-mannered and lack respect for adults.” Then and now those in power often see the younger generation as lacking. Still, how you motivate and train your successors has a big impact on your firm. It’s time to take a clear-eyed look at younger staff and your expectations of them and make an effort to close the generation gap.

There are three parts to intergenerational misunderstanding: environment, revisionism and realism. In the environment, consider how much family life has changed in two generations. For a 30-something professional couple, a typical work day often runs from 6:30 a.m. to 6:30 p.m. Family and household issues and chores are at the forefront until about 9:30 p.m., leaving the couple just 30 minutes to decompress before it’s time to go to bed and start over again.

The second factor contributing to the generation gap is how we unconsciously rewrite our own past. We forget that most of today’s partners once were viewed by their supervisors as having a questionable ability to earn their current position.

The final complication stems from re-creating our job descriptions to match our comfort zones. We assume the strengths we already possess are the only ones that matter, and we lack perspective on new workplace pressures and skills. But today’s environment is more difficult and more competitive. Partners need to evolve and keep pace with market expectation.

AICPA RESOURCES

Conferences Succession Planning: Mergers and Acquisitions July 21–22, 2005 AICPA Boardroom, New York A Real-World Look at Accounting Firm Mergers September 15–16, 2005 W Hotel, Chicago CPE Succession Planning: Strategies to Protect the Value of Your Firm, self-study DVD/manual (# 180321JA). This course also is available for workplace group study; additional manual (# 350320JA). Succession Planning: Positioning Your Firm for Successful Transition, CD-ROM of webcast. For more information about this and related webcasts, go to www.cpa2biz.com. Publications Practice Continuation Agreements: A Practice Survival Kit by John A. Eads, paperback (# 090210JA). Securing the Future: Building a Succession Plan for Your Firm by William L. Reeb, AICPA, paperback with DVD (# 090486JA). Management of an Accounting Practice Handbook, loose-leaf version (# 090407JA); e-MAP, online subscription (# MAP-XXJA). For more information about the above products or to place an order, go to www.cpa2biz.com or call the Institute at 888-777-7077. Privte Companies Practice Section The Institute and its firm membership section, PCPS, have launched an extensive initiative to provide resources on succession planning for CPA firms. PCPS represents almost 6,000 local and regional CPA firm members. For more information, visit the section’s Web site at www.pcps.org or call 800-CPA-FIRM.

SECURE THE GOODWILL OF STAFF
One of the best motivators is an environment where people feel good about what they accomplish. Most managers surveyed over the past 15 years ranked money as their no. 1 carrot, while employees usually cited “feeling good about the work” and “feeling like the work makes a difference.” How can management be so wrong about something so important? It’s easy when senior partners don’t pay enough attention to the people who work for them. Talk to your staff more. Motivating people to step up to a challenge begins with finding out what they want and need.

Another problem is that though we often say we want younger staff to take the initiative, management sometimes mistreats them when they make mistakes. Of course you have to correct a mistake so it isn’t repeated, but you have to do it in a way that maintains the dignity of the employee. If you want people to be motivated to go into battle with you every day, support them through the learning curve. Be intolerant of managers who burden the firm through harsh and humiliating criticism.

Another way to motivate young staff is to be flexible about giving them time to attend to family matters during the day. About 71% of respondents to a recent PCPS survey offered flexible work schedules for full-time employees; 61% did so for part-time employees and a smaller portion granted leave for dependent illness, telecommuting opportunities, extra vacation and extra sick days.

USE WORK FLOW TO TRAIN
Over the past few decades, CPA firms have greatly expanded the client niches they serve (auto dealerships and health-care providers, for example) and the skill sets they offer (business valuation and fraud detection, for instance). Because new services may have sporadic demand or require a high level of expertise, a partner or someone high up in the organization typically champions them and does most of the work.

Partners and managers who generate the lion’s share of the firm’s income and are involved in the details of client projects usually do the bulk of the technical work—until they’ve worked all the hours they can stand. Then they let the overflow trickle down to the managers. The managers, in turn, delegate what they don’t want to handle to the staff pool. At each level, keeping lower-level employees busy—let alone preparing them to move up—is an afterthought. In this type of top-heavy operating environment, partners and managers are overworked and staff members are underused and poorly trained (see exhibit, below).

The Upside-Down Pyramid Work-Flow Process

The best investment for building value in your firm is to spend the time and money to develop your current employees and future leaders. Doing this may require a significant change in philosophy. Those whose responsibility it is to manage people might need a personal mission statement that says something like this: “My job is not to do the work myself, but to grow my people so they are ready and prepared. They need an opportunity to learn with a safety net underneath them. If they are not ready, it is because I have failed in my job as their leader.” A viable and enduring chain of command will depend on consistent operating procedures, clearly delineated roles, responsibilities and expectations among partners, managers and staff, individual accountability and putting the firm first.

The situation. Winter, Winter and Summer (WWS) is a $9-million-dollar firm founded by Jeb Winter, CPA. Ten years ago he merged his $3 million practice with his brother Gerald’s firm, then worth about $1 million. Two years later Don Summer merged his $1 million practice with the brothers’. Since then, the enterprise has grown to a seven-partner firm, including two $500,000-firm mergers.

Jeb is 62, Gerald is 60 and Don is 59; two other partners are in their early fifties and two are in their late forties. Each firm had been built around one individual superstar—but, to make the mergers attractive, Jeb and Gerald created a “one person, one vote” organization. Salaries for Jeb, Gerald and Don are about twice those of the other partners, with Jeb making the most and Don a close second. Jeb is a democratic managing partner, but Don bullies everyone. Jeb, Gerald and Don control about 70% of the firm’s business, with Jeb responsible for about $3.6 million, Gerald $550,000 (down from $1 million) and Don $2.25 million.

Jeb and Don don’t think the “one person, one vote” model is working well, as it gives a partner bringing in a couple hundred thousand dollars in business the same vote each of them has. For years Jeb and Don agreed on everything, but Don has more than doubled his business since he joined and has become more demanding. Don has been pushing the partners to adopt his strategies by threatening to take his clients and leave.

Now Jeb is starting to worry about his retirement. Don’s departure would put almost $5.85 million in client volume at risk—Jeb’s $3.6 million that has to be transitioned to another partner and Don’s $2.25 million. Gerald is financially comfortable and doesn’t do much except during tax season; only the two youngest partners have a smaller book of business than Gerald’s. Jeb and Don hoard their clients to maintain their power base and get their way.

Lessons learned. This firm operates as a bunch of individuals sharing overhead, and conflict is starting to fracture its foundation. Only greed is holding the partners together. Jeb knows the firm would be better off if Don was forced out, but he is confident Don will run the firm profitably and ensure Jeb’s retirement payout. Don knows he’ll be able to do whatever he wants once Jeb retires, especially take home a lot more money. Gerald doesn’t protest much, although he is a little concerned about what will happen when his brother leaves. The younger partners see the next five or six years as a potential horror, but the goal of being in charge of a $9-million-and-growing firm seems worth the inevitable stress and chaos.

What needs to happen. Jeb needs to pull the partners together and develop a strategy with a succession plan that focuses on the transition of the client relationships to the four younger partners and managers as the top priority. This likely will require redefining positions within the firm to give the younger partners and managers ample time to acclimate to the new client relationships. To get ready to retire at 65, Jeb needs to turn over clients at a rate of about $1 million a year, beginning with his biggest clients. Don needs to start now, too, at a pace of $500,000 a year.

To induce Jeb and Don to turn over their client relationships, the partners need to make their retirement agreements final immediately, freezing their calculations and terms. To offset the risk Jeb and Don are taking by relinquishing clients, the remaining partners need to sign a noncompete agreement, promising a large premium if they leave and take clients with them. The agreements should include mandatory retirement dates, identify all retirement benefits and settle details about ongoing relationships.

Jeb and Don need those safeguards because their position will weaken as soon as they give up control of their clients. They will gain retirement benefits and financial protection. To ensure their compliance in the transition, they should agree that if either of them does not act in accordance with the plan, the annual fees of any clients lost within 18 months after their retirement will be deducted from their payout.

While the WWS partner agreements already specify retirement payout details, the principals have not discussed them in years. Jeb and Don felt the payout formula worked for the others but always assumed they would negotiate special deals for themselves when the time came—another reason they hoarded their clients. (This position is a common one for senior partners to take, which is one reason to make sure legal agreements cover all the issues.)

Next the firm needs to restructure decision-making authority, separating board and CEO/managing partner (MP) functions. It will need to set strategy and a budget and give the CEO authority to implement them. Because of the near-term retirement of Jeb, Gerald and Don, the new CEO/MP should be one of the younger partners. This will give the “big three” a chance to coach and mentor that person so all are confident the firm’s future is in good hands.

The goal should be to create policies and procedures that will endure long after Jeb, Gerald and Don leave. Partners and managers with increased relationship responsibility for transferred clients need to organize a program to maintain regular visibility. They should develop a quarterly contact schedule for A-list and B-list clients and discuss at monthly marketing committee meetings how to better serve those clients. Clients that use the firm for one service only (tax, for example) could be targeted for other services. CPAs who promote only a service in which they specialize would forfeit client relationship management. All marketing processes need to be tied into the compensation system.

A solution that Jeb, Don and Gerald will be able to live with rests in the accomplishment and integration of all of those steps, not just one or two of them.