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A 2009 tuneup for your firm's succession planning.


* Does your firm need a succession planning tuneup? A strategic plan that effectively includes succession planning is critical to every firm's success.

* Host a partner brainstorming retreat to ponder key questions surrounding your firm's plan and identify a course of action that will be supported by all.

* Make long-term plans for the firm. Firm expansion will require human capital and leadership to support growth. Re-evaluate client acceptance and retention policies. Consider that the future health of your firm depends on how you develop young leaders who are capable of protecting and maintaining valuable client relationships when partners retire.

* Establish partner group accountability through clearly defined roles and responsibilities, and your compensation plan. Help owners develop an inherent understanding of their job expectations and how their roles relate to others. Don't wait for the senior owner to leave to develop a firm strategy.

* Nurture future leaders. Leverage your practice for posterity by developing talented professionals who will contribute to the longevity of the business after you are gone. Failing to invest in this area will reduce the value of your practice. Remember that you are selling a residual revenue stream, and the easier it is for existing partners or another firm to continue without you, the more value you have to offer.

* Update partner retirement agreements. Of responding firms surveyed in The 2008 PCPS Succession Survey, a large number of partner retirements are anticipated in the next five years, emphasizing the need for formalized partner agreements.

* Establish a clearly defined compensation plan that supports your firm's strategic and succession goals. A compensation plan should be performance-based, flexible and provide incentives that will motivate staff to become potential future leaders.



The pending retirement of the baby boomer generation and the unrelenting challenge of finding and keeping talented staff can have grave consequences for firms that fail to develop a succession strategy. With the AICPA's 2008 PCPS Succession Survey showing that only 35% of multiowner firms had a written succession plan, now is the time to examine the state of your firm's succession strategy.

Succession planning is not limited to a single course of action. It involves evaluating different aspects of the firm and identifying systems, processes and policies that need improvement in order to position your firm for succession regardless of your exit strategy Options for succession include selling or merging the firm, internal transition, practice continuation with other firms, or turning out the lights when it's time to retire.

Even firms that have a plan in place, however, sometimes neglect to update it to reflect changes affecting their business. Some firm owners who are looking to sell in the foreseeable future are finding that their practice is not as saleable as they'd hoped it would be. If your firm's plan is not all that it could be, The 2008 PCPS Succession Survey ( Succession+Planning) provides valuable insights into the state of succession planning among firms today. Consider the following information to help determine if your firm's succession plan needs a tuneup.


As noted, little more than one-third of multiowner firms have a written succession plan. But that's actually an increase from 25% the last time the PCPS conducted a similar survey in 2004. More firms are aware of the need to plan, but have not yet accomplished the goal.

Strategic planning is critical to every firm's future success, and succession planning is a key component of any strategic plan. As a starting point, conduct a partner brainstorming meeting or retreat to consider some of the following key questions. This will assist the group in identifying differences and help to choose a course of action that everyone can support.


A succession planning brainstorming meeting should consider these critical issues:

Where is the firm headed in the long term? This is a big question, but it's fundamental to make a basic decision about what size the partners expect the firm to be in five years and 10 years. If the firm is going to grow, will it do so by expanding its current practice areas, adding new specializations or merging with another firm? In either case, does the firm have the human capital needed to service this expansion? Most important, what kind of leadership will the firm need to run a larger organization? What processes are in place to groom your people for leadership positions? How will the firm transition clients to new leadership? What is the estimated time frame for these transitions?

The answers--and in some cases the questions--are different for every firm. Brainstorming about the challenges ahead is a critical first step, however.

Firm owners may also conclude that the business might shrink in the short or long term, either due to economic conditions or planned partner retirements and downsizing. If that is the case, it's a good idea to revisit the firm's current client acceptance criteria and decide whether they need to be revised to reflect this assessment (see "Letting Go: Evaluating and Firing Clients," JofA, Jan. 08, page 54). A key consideration is which clients are the most valuable if the firm will be downsizing in the future. In that case, it's particularly important to have capable young leaders in place who can hold on to valuable clients when the current partners retire. However, don't just look at evaluating clients in tough times or for downsizing purposes. All firms should continually evaluate clients for fit and desirability no matter what their growth strategy.

Developing a timetable that outlines when owners will be retiring and a grooming schedule for new leaders is a must. You need to start grooming young leaders while the current partners are still working. Don't underestimate the time it can take to groom a new partner. It can take up to five years to develop a new leader. The successor needs enough time to qualify for and grow into a leadership role and the responsibilities that go with it. Once again, the firm should examine its leadership development process and decide whether it is up to the task.

Are roles clearly defined with assigned responsibilities as well as specific powers and limitations in the board and managing partner roles? This governance structure is important to create sustainability and to enable the firm and its successor owners to remain successful when partners retire. If senior partners retire without addressing ownership control, governance structure and decision-making processes before they leave, their retirement payout may be at risk. In a healthy firm, control must rest with client service partners who have the entrepreneurial savvy to run the business like a business. It's important, too, to identify and clarify the roles and responsibilities of:

* The partner group, acting in effect as the board of directors.

* The managing partner reporting to the board.

* The individual partners reporting to the managing partner.

Defining these roles and responsibilities provides a clear understanding of expectations and how each owner's role and responsibilities relate to others. It also sets boundaries for the developing leaders and helps them learn to function in an operating culture that is formalized so everyone knows what is expected, what is outside of their authority, and what is within their powers.

The partner group should agree and vote on strategy and policy. Some firms never take this step, relying instead on ineffective meetings in which the managing partner makes final decisions. It is important that all partners learn the art of governance through the discussion and (respectful) debate of issues, calling for a vote on the questions at hand, and moving on. As a result, the firm's governance can remain strong and effective even when new owners take over leadership roles from retiring partners. Waiting until the senior owner leaves to decide on strategy, control and governance is poor planning.

The managing partner does have an important role, though. He or she must be held responsible for the implementation of strategy and policy, and for holding partners accountable for results in their roles as line partners. That means, in part, that the managing partner should not be chosen based solely on seniority. Rather, the choice must be based on his or her leadership abilities, management skills and ability to represent the firm.

Seniority alone should not be a major qualification for any leadership role in the firm. The managing partner's role includes holding partners accountable. Partners need to be held accountable for carrying out the firm's strategy and decisions reached by the partner board. Compensation systems should reward behaviors that advance the firm's strategy, and they should sanction behaviors that don't. With that in mind, the firm should be ready to fire anyone, partners included, who doesn't step up to do what is required after the board makes a decision. In fact, senior owners who want to create a smooth internal ownership transition should get rid of partners who are essentially dead weight before they leave to avoid overburdening the partners who remain.

How are we nurturing our future leaders? At 38% of the multiowner firms in the PCPS survey, senior owners did not think younger owners were ready to step into leadership positions. Amazingly 27% of multiowner firms were not actively grooming or formally training anyone for a leadership role (see Exhibits 1 and 2). Because of their lack of leadership development, and people development in general, some firm owners are finding their practices are less valuable than they'd hoped.
Exhibit 1
Creating an Environment
That Facilitates Succession

According to The 2008 PCPS Succession Survey, firms are taking the
following steps to effect a smooth transition to younger leaders:

* Making it a priority of the firm to develop people so that work can
be pushed down at every level (69%)

* Requiring the partners to push work down in order to create more
leverage (43%)

* Changing the way you operate so that the firm is not built around
the expectation that everyone, including partners, should work
excessive hours (43%)

* Moving away from the "eat what you kill" model of operation (38%)

* Recently updated or in process of updating partner/retirement
agreements (36%)

* Requiring partners to spend more time managing client relationships
and less time processing the work in the office (33%)

* Focusing on training to reverse the staffing pyramid (29%)

* Holding partners accountable to written operating policies and
procedures (27%)

* Creating clear powers and limitations in the board, executive
committee (if you have one) and managing partner roles (25%)

* Updating partner compensation system so the managing partner can
hold partners accountable to achieving annual specific goals (20%)

* Implementing a formal partner-in-training program (17%)

* Appointing a partner with leadership skills as managing partner,
rather than by seniority (12%)

* Other (6%)

Source: The 2008 PCPS Succession Survey

Exhibit 2
Nurturing Future Leaders

According to The 2008 PCPS Succession Survey, multiowner firms are
taking the following steps to groom promising talent:

* Identification of and/or training for specific competencies (75%)

* Informal coaching by an assigned partner or owner (56%)

* Formal training or education in delegation and supervision (44%)

* Formal training or education in interpersonal skills (36%)

* Experiential assignments chosen to develop competencies (25%)

* Formal mentoring program (24%)

* AICPA/CPA association formal leadership development program (17%)

* Other formal partner-in-training program (15%)

* Coaching by an outside consultant (14%)

Source: The 2008 PCPS Succession Survey.

The days of selling a client list are over. Your firm's value lies in its residual revenue stream, and the easier it is for your existing partners or another firm to continue to service that revenue stream without you, the more value you have to offer. This means that your practice needs to be leveraged through talented professionals other than yourself to allow you to leave and the clients to stay If your business is just about you with no support or backup, you have a serious flaw that must be reckoned with.

To ensure a smooth transition, firms must focus on a training and development culture that applies to all of their people--not just partners. Given the current demographic trends, it's likely that even in an uncertain economy everyone will continue to want to hire professionals with six to 10 years of experience. Rather than competing for those candidates, hire interns today and start developing them on an accelerated schedule so they end up with the equivalent of six to 10 years of experience in four to six years' time.
Exhibit 3
Key Elements of Partner
Retirement Agreements

According to The 2008 PCPS Succession Survey, multiowner firms include
these elements in their retirement agreements:

* Mandatory retirement age (48%)

* Allowable activity with clients after retirement to ensure retention

* Acceptable arrangements/situations allowing retiring owners to
continue working for the firm (46%)

* Personal liability of remaining owners for retired owners' full
payout (27%)

* Specific recourse or cures should a retired owner not be paid in
full (20%)

* Ability of retired owners to block mergers or total sale of the
business unless retirement obligation is paid in full prior to
transaction (11%)

* Ability of retired owners to block the sale of a line of business
unless retirement obligation is paid in full prior to transaction (6%)

* Ability of existing partners to change the retirement benefit of
retiring partners due to improper client transition (18%)

* Key person insurance to cover outstanding obligations of retirement
payment obligations (54%)

* Acts that can trigger forced retirement of an owner (illegal
activities) (62%)

* Acts that can trigger forced retirement of an owner (misconduct such
as sexual harassment, public embarrassment of the firm, etc.) (57%)

* Acts that can trigger forced retirement of an owner (lack of
performance) (31%)

* Acts that can trigger forced retirement of an owner (owner
disability) (52%)

* Other (5%)

Source: The 2008 PCPS Succession Survey.

As part of this process, firms must invest in the future development of their people by dedicating sufficient resources to training, information technology and marketing. Investing in your firm now can ensure successful succession planning and transition to new leaders when existing partners retire. Firms need to:

* Continue to develop strong technical accounting skills at every level within their organizations.

* Develop managerial leadership skills throughout the organization.

* Use technology to make the most of every hour their people work.

* Invest in creating and maintaining a firmwide marketing engine that generates referrals of new clients and new work from existing clients.

Without nurturing these types of talents and skills, a firm may find itself at the mercy of one person. It will be held hostage by a rainmaker, an exceptional technician or a workaholic, instead of being a healthy organization of well-trained professionals.

Have partner/retirement agreements recently been updated? The survey confirmed that this is a critical issue for firms--63% of respondents expect at least one owner to retire in five years. More troubling, 32% of these firms will have retiring partners leaving in the next five years. Of these retiring partners, more than half of those characterized as the "most senior owner" are 60 or older. These figures indicate the sheer magnitude of the number of partners retiring over the next several years and the need for firms to formalize agreements. Further, to promote new leaders, an effective retirement process must be in place.

Exhibit 3 shows some of the key elements of a partner retirement agreement, along with data on the percentage of firms that actually incorporate them into their own agreements. The necessary components of an agreement will vary by firm, but CPAs should at least consider all of these possible elements when creating their own agreements. The retirement agreement should be updated whenever there is a significant change in the firm (such as the admission of new partners or a merger or acquisition). Absent significant change, agreements should be reviewed annually to ensure they are up to date and reflect the firm's changing demographics.

Does your compensation plan support your strategic and succession goals? Firms can use a clear compensation plan to provide incentives that motivate staff to grow into future leaders. Specifically, the plan should reward people for taking on new responsibilities, developing others, driving the firm's strategy and demonstrating leadership. Compensation systems should be performance-based and include both objective and subjective factors to allow the greatest flexibility.

As mentioned earlier, partner accountability is established through a partner compensation plan that rewards them for doing what is required under the firm's strategy and punishes them for not doing what is required. Compensation might be based on new business developed, the profitability of a partner's business, successful cross-selling efforts and the growth of a current client's business. The system should also be designed to reward partners for functioning as client relationship managers and successfully delegating work to their staff. For retiring partners, the compensation system needs to get them to focus on the transitioning aspects of their roles as well. See Exhibit 4 for some common elements of a partner compensation system.

An effective compensation plan can help firms accomplish their strategic goals and meet succession planning objectives.
Exhibit 4
Elements of Successful
Compensation Systems

According to The 2008 PCPS Succession Survey, multiowner firms
include the following elements in their partner compensation

* Salary or base draw (82%)

* Ownership percentage (48%)

* Size of the owner's client book or fees managed (34%)

* New business developed (34%)

* Billable/collectible hours (32%)

* Profitability of book (30%)

* Performing certain identified firm functions (29%)

* Growing the business with a current client (21%)

* Capital accounts (20%)

* Training/development of staff (19%)

* Cross-selling other services into your client base (14%)

* Business transferred to other partners/managers (13%)

* Profitability of department (11%)

* Leverage of work being done (ratio of partner to staff work) (10%)

* Client satisfaction goals (9%)

* Other (9%)

Source: The 2008 PCPS Succession Survey.


Has your firm been proactive in making strategic decisions about succession, or will you be playing catch-up when partners begin to retire? The good news is that even if you haven't created a workable plan, it's not too late to begin. Get started now with a planning session on key issues such as long-term strategy, partner roles and responsibilities, leadership development, compensation and retirement. The steps you take today can help to accomplish a successful transition down the road.

About the Survey

The AICPA Private Companies Practice Section (PCPS) conducted The 2008 PCPS Succession Survey to gauge how firms are handling succession planning. The survey, administered by the Succession Institute LLC, was distributed to more than 6,000 PCPS member firms nationwide using a Web-based survey tool. Approximately 500 member firms participated. Of the participating firms, sole proprietors' annual revenues ranged from $44,000 to $1.9 million, while multiowner firms reported annual revenues ranging from $100,000 to $120 million. Sixty-five percent of sole proprietors answering the survey were 55 or older; 60 was the average age of the most senior partner at multiowner firms. The survey results were released in March 2008 and confirmed that given the number of owners from the baby boomer generation who will retire within the next 10 years, it is critical that practitioners begin succession planning now to secure their firm's future.


JofA article

"Letting Go: Evaluating and Firing Clients," Jan. 08, page 54


* Compensation as a Strategic Asset: The New Paradigm (#090493)

* Securing the Future: Building a Succession Plan for Your Firm (-#090486)


Succession Planning: Strategies to Protect the Value of Your Firm, a CPE self-study course (#180321)

For more information or to place an order, go to or call the Institute at 888-777-7077.

Private Companies Practice Section

The Private Companies Practice Section (PCPS) is a voluntary firm membership section for CPAs that provides member firms with targeted practice management tools and resources, as well as a strong, collective voice within the CPA profession. Visit the PCPS Firm Practice Center at PCPS members will find information relating to succession including: selling or merging a firm, grooming future leaders for internal transition, or turning out the lights at retirement. For more information on these issues and to read The 2008 POPS Succession Survey, go to Succession+Planning.



* At the Crossroads: The Remarkable CPA Firm That Nearly Crashed, Then Soared, by Gale Crosley, CPA, and Debbie Stover, John Wiley & Sons Inc., 2008

* Exiting Your Business, Protecting Your Wealth: A Strategic Guide for Owners and Their Advisors, by John M. Leonetti, John Wiley & Sons Inc., 2008

Dominic Cingoranelli, CPA, CMC, is executive vice president of consulting services at the Succession Institute LLC, of which he is a cofounder. He co-authored the material in the PCPS Succession Resource Center. His e-mail address is Anita Dennis, a freelance writer, and Natasha V. Schamberger, CPA, a project manager for the AICPA, contributed to this article.
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Author:Cingoranelli, Dominic
Publication:Journal of Accountancy
Date:Mar 1, 2009
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