Succession planning is a process by which you prepare your firm to continue to operate and grow after you retire. Many small businesses and accounting firms fail when the original founder retires or becomes suddenly unable to continue due to health problems or other reasons. In fact, 80% of 1st generation CPA firms never become 2nd generation firms due to a lack of effective succession planning. Create a succession plan now so that this isn’t the case for your accounting firm. Also, make sure your small business clients have succession plans. If they don’t, they will need your expertise to develop one.
Accounting Firm Succession Planning
When accounting firm owners are ready to retire, they usually either sell the firm or pass it on to another accountant or partner in the practice. Preparing several staff members for succession is a safer, easier, and potentially more stable way to ensure the continuation of the firm you built than selling the firm is. But it requires a commitment to practice management.
Accounting practice management requires that you mentor your best and brightest accounting staff to become partners with the potential to take over the practice or firm one day. If they have no expectation of growing and taking a seat at the big table, you will lose them.
Have an honest conversation with each core member of your team to discuss their future goals, both within the firm and with respect to their long-term career progression. This will help you assess their commitment and their potential as possible successors.
Small Business Succession Planning
Small business succession planning is similar to accounting firm succession planning, except that they have a few more options. While it’s possible a firm has several family members who are also accountants, it is more common that several members of the family work for the “family business.” Often, the business is passed on to one or more family members. But as with an accounting firm, real effort needs to be made to mentor possible successors to take over the firm and help it grow.
Hold serious family discussions to determine who is really committed to keeping the company going (and to prevent a family feud.) If several family members are really interested, a plan can be developed ahead of time to give each person a position that works with their individual strengths and interests.
Additionally, a company can sell to a significant employee, or to a client who wants to acquire part of their supply chain or broaden their business footprint.
Steps to Begin Planning
An emergency succession plan should be developed as soon as possible, but with great care. While we all hope we will live forever in good health, an accident, sudden decline in health, or a family emergency can cause the company or firm leader to be suddenly unable to complete his or her duties. Who will take over? Who will do what? Who will be the “boss” temporarily? And what will be the method of transition, should the temporary situation become permanent?
These are all critical questions to determine with your key stakeholders. This could be part of your “Business Continuity Plan” which also covers the possibility of natural disasters or emergency situations that cause business interruption.
Once you have your emergency plan in place, begin to develop your long-term succession plan.
- Assemble a planning team, including diverse stakeholders and experts, such as members of your staff, family members, legal experts, financial advisors, etc. These people will help you develop and implement the plan.
- Analyze future trends and the outlook of the industry to guide you in the right direction when choosing the qualities and skills of a successor.
- Develop a shortlist of possible successors based on the previous step. Develop a plan to discuss the possibility of succession with these individuals and a method of mentorship to get them up to speed in areas of leadership and management.
- Do a valuation of the company or firm to determine a fair buyout that won’t break the back of the firm or new partner(s) or owner(s). You can also consider a long-term profit-sharing arrangement as part of the terms.
- Set a timeline for all these steps to be put into practice and consider a likely time for your retirement. Your potential successor will want to know when he or she will take over the reins. Saying you want to work until you can’t work anymore is not an incentive for your brightest team members to stick around. You may arrange to continue to work part-time but provide a reasonable window of time during which you plan to retire.
These are some basic steps to help you develop a succession plan that will keep your firm operational and growing after you’ve retired. Advise your business clients to develop their own business succession plans, and offer them your expertise in order to grow your practice into other areas.