The long goodbye
If practitioners see a bright future ahead for their practice, then they have to accept that it won’t always be with them in situ. How do you become a custodian of your practice, and create a structure that enables a well-managed succession?
Goodbyes can be tricky for business leaders. There’s knowing when to retire, or switch career, of course; and there’s also the task of creating an orderly succession plan that satisfies partners and your clients, and gives the firm you know and love a bright future.
Should you find an internal candidate and groom them to replace you; recruit someone from outside your firm; or sell your business to a bigger firm?
Financial Accountant has spoken to three experts on succession planning, two of whom organised their own succession.
Peter Gillman is the former managing director of Price Bailey, a ‘Top 30’ UK accounting practice. He left in 2014.
In the year before his departure, he became the firm’s executive chairman. His firm’s partners voted to pick his successor from a small number of internal candidates who submitted manifestos for the job.
“I think it’s a good way to do it as partners feel ‘this is the person we’ve chosen so we’ve got to back them’,” Gillman says.
Internal succession plans don’t always go as smoothly, though. Gillman recalls one medium-sized accounting firm that used a similar succession plan. The vote was tied, with two partners getting the same number of votes.
“They hadn’t thought what they would do if they ended up in a tie,” Gillman says. The firm made them joint managing partner.
“It wasn’t a success,” Gillman says.
“Some partners supported one managing partner and others, the other. You had two factions within the firm. The firm certainly stumbled but it did recover and luckily they are now back to having one managing partner.”
Another option for a succession plan is to recruit a ‘partner designate’ from outside your firm who is trained to replace the partner/owner exiting the firm.
But according to Della Hudson, a consultant to accounting firms, author and former practice owner, this model typically doesn’t work well for small accounting firms because of different expectations about how long the handover will last.
The incoming partner designate usually wants one or two years before taking over the business, Hudson says. The person handing over the business may want longer.
Finding a replacement from within your firm is usually easier to manage, as the person already knows your business and clients.
But then they need to fund the purchase.
“The problem is, can they come up with the cash [for their share of investment in the partnership]?” Hudson says.
Money shouldn’t be a problem with an external buyer, but a poorly thought-through deal can cause a backlash from your customers.
About 20% of an accounting firm’s clients can leave after the new owner takes over, Hudson says.
“If it’s more than 20%, that suggests the new owner and the way they do things is very different from the old owner and the way they did things.”
A client exodus can have serious financial consequences for the firm that’s sold.
“The standard [M&A] deal is a ‘third, a third and a third’ [in terms of ] payments, with the first payment being free of any clawback,” says Ron Goldsmith, practice consultant at Goldsmith Practice Services.
His business advises accounting firms how to sell or merge their practice, and sole practitioners on how to plan for their retirement.
The second and third payments would experience ‘clawback’ if clients were unwilling to transfer to the new practitioner, Goldsmith explains.
A good M&A-based succession plan is focused on personalities, he says.
Buyer and seller should get on well and have a similar attitude towards the clients. How you deal with clients – well before any sale – is also important.
Make sure that a client meets several people from your firm, so that it doesn’t become over-reliant on one partner.
MAKE A SUCCESS OF SUCCESSION
1 Have a strategy and vision. Where do you see your practice in three years or five years? Document your aims and steps to achieve them.
2 Delegate much of your succession plan. Senior partners can find it hard to delegate, Della Hudson says. “A lot of accountants are perfectionists.”
3 Capture data and know-how. Is information about ways of working and clients stored in your practice management software, so that the information is retained in the business when you or another senior partner leaves? This information could be something as simple as recording a client’s quirks (‘the client never answers emails, just call them’).
4 Create documents for career structures/paths to partnership, mentoring and training. These things can help smaller firms appear more professional and compete with larger firms when recruiting partners.
SEAL THE DEAL: M&As AND SUCCESSION PLANS
If you’re a small firm, look for a bigger buyer. You’ll be affordable and the buyer can crosssell services to your bigger clients.
Ideally, start to plan the M&A about five years before you want to retire/leave. Tell people that your firm is on the market.
“Most of the acquisitions we did were through word of mouth, through the firm’s bankers or solicitors,” Gillman says.
Get an agent. Corporate finance firms and executive search firms can help you value and sell your business.
Plan your future: what you will do in retirement, or semi-retirement, and if you’ll make enough money to be comfortable.
“Small practice values (up to about £300k) still run on about once times turnover as a value,” Goldsmith says.
“If a practitioner has been enjoying about £100k a year, the sale of the practice won’t produce anything like that income for continuity of lifestyle.”
Nick Huber is a freelance journalist