Succession Readiness Assessment

Content authored by Joel Sinkin and Terrence Putney, CPA of Transition Advisors LLC.

The goal of this tool is to provide you a guide for:

  • Ascertaining if your firm has the talent on your bench to execute internal succession for your partners
  • Creating an internal succession team
  • Alternatives in the event you decide internal succession is not a viable strategy

Keep in mind your accounting firm is unique. There may be extenuating circumstances for your firm that will require a different approach than this guide will provide. However, we believe this tool will give you valuable information that will assist in evaluating your specific situation. This tool is designed to be used by sole practitioners and multi partner firms.

This analysis should be made either for you or for a specific partner in your firm. If your firm has more than one partner that will be retiring in ten years or less we recommend that you run through this analysis for each partner that has that status. Then aggregate the recommendations to gain an understanding of the global succession plan your firm needs to execute.

Succession Planning Considerations

There are three key factors this tool uses to assess your firm’s level of readiness to provide succession for retiring partners internally:

  • How soon your partners or you will be retiring (or substantially slowing down)
  • How your firm will replace the duties of specific partners nearing retirement
  • The state of readiness partner candidates on your bench have for being promoted to partner status and taking over your duties or those of a retiring partner

This tool is designed to be used to assess how specific partners in your firm nearing retirement affect your firm’s ability to thrive following their exit. The situation a partner that is retiring in 7 or 8 years presents to your firm is a different challenge than a partner that is retiring in 2 years. A partner that needs to be replaced by a new partner (because your firm has insufficient excess capacity at the partner level) creates a different need than a partner whose duties can be reallocated to existing partners.

For you to fully understand how to properly and successfully transition the clients in your firm, you need to understand the nature of the relationship your firm has with them. If you have not done so yet, we highly recommend you first go through the Succession Calculator that accompanies this Succession Readiness Assessment Tool.

Retiring or Slowing Down
When you are determining the timing for your retirement, or that of a partner, consider that many practitioners these days are not going from full-time duties straight to complete retirement. They often transition over time maintaining a decreasing work schedule. So when we ask the question “when will you or a partner be retiring from full-time duties” what we mean is, at what time that person plans to slow down to the extent of relinquishing control of the firm or their duties and client responsibilities? That event generally also coincides with when their buyout or retirement payments will commence.

Detailed information on assessing and developing the talent on your bench can be found in Chapter 6 of the Succession Planning Guide, Developing New Leaders.

Plan B: Alternatives to Internal Succession
If after going through this analysis you decide it isn’t possible to execute succession internally you have several options to consider.

Cull-out Sales involve carving off a portion of the firm’s practice and selling it off so the remaining partners can manage what is left. The portion carved off can be a group of clients, or an area of service, a specific partner’s book of business, or an office location. The two common ways Cull-out Sales are used for succession is either allowing a partner to leave with his or her clients and merge into a firm better equipped to handle their succession or identifying a portion of the practice the firm is willing to jettison which will create the necessary capacity for the firm to take on the portion of the practice that will be left behind by a retiring partner.

Upstream mergers are an approach to dealing with succession needs other than internally that are increasingly being used. Seeking a succession solution is the number one reason behind the wave of mergers in the accounting profession. In a classic merger, the owners of one firm exchange their ownership interest for ownership in a successor firm with the objective of the successor being better equipped to manage succession than their firm could on its own. Normally, in an upstream merger the partners of the merging firm have a long enough professional career horizon that becoming owners in the successor firm makes sense.
Merging Your Firm, Chapter 5 of the Succession Planning Guide covers this option in more detail.

Outright Sales differ from an upstream merger primarily due to the ownership status of the owners in the selling firm following the combination. In a sale, the selling owners may stay on, even in a full time role for a while. However, they will not be owners in the successor firm. The terms for the purchase of their ownership interests are usually established at the time of the combination.

Note: It is more often the case than not, that a combination of two multi-partner firms involves a combination of an upstream merger for some partners and a sale for other partners. The determination of what makes sense for an individual partner is often how long they plan to work full-time following the combination.
Chapter 4 of the Succession Planning Guide provides more details on Selling Your Firm.

Turn out the lights is the final default tactic used especially by sole proprietors and very small multi-partner firms that never want to or can’t successfully execute internal succession and won’t merge upstream or sell. There is always the option of working the practice and allowing it to contract over time to the point where what is left might justify just walking away. Surveys indicate about 20% of sole proprietors plan to manage the end of the professional careers in this manner. Chapter 7 of the Succession Planning Guide covers this option in more detail.

The Journal of Accountancy published as twelve part series from July, 2013 through June, 2014 titled CPA Firm Succession: Solidifying The Future. Links to those articles and others resources can be found on the landing page for the Succession Planning Guide.