Robert Gallagher

Succession: Every Client Has a Life

How CPAs can protect client annuity and thereby firm annuity.

June 22, 2009
by Robert Gallagher, CPA

Just like equipment and other “tangibles”, every CPA Firm has a "life." Not only does the firm and the "personnel” within the framework have a life, but the base on which the firm is built — clients — has a "life." Failure to acknowledge this "life" of each client leads to "failure" of the firm itself.

In today's environment, CPAs function as the MDs of their client's fiscal health. Using this perspective, imagine a doctor relying only on existing patients! Over the course of 20 years, the practice would dwindle considerably. In order to sustain the practice, the doctor must obtain additional patients continuously.

CPA firms must function the same way. A client will not be a client indefinitely. Some clients will be lost due to normal business reasons. Therefore, it is of paramount importance that your firm invests in new clients and also protects the "current client annuity" by implementing a formal partner/client succession policy to guarantee firm continuity.

Surprisingly, many firms have an absence of formal plans for succession. Also, as some partners retire, it is necessary that the firm implement a transition plan for retiring partners. Again, this subject is of paramount importance because today, client services can be described as Providing Knowledge and Enhancing Relationships. As a result, the "future annuity" is precarious unless there is an excellent succession plan for a retiring or withdrawing partner. With several businesses in their second and third generation, it is important to plan for future servicing of the client. While a senior partner may have a great rapport with the founder of the company, the second generation that eventually takes over leading the company may not. Similarly a younger CEO may not have anything in common with a senior partner, but a younger CEO can build a relationship with the younger executive and have an excellent communication stream. Therefore, whether a partner or a president of a client retires, succession planning must be a part of every firm’s strategic plan.

Tips on Creating a Good Succession Plan

A good annual exercise is to have each partner list their top 10 clients and indicate who the back-up partner/senior manager would be if the partner had to be on leave for a year due to illness.

Without such planning, there is a greater possibility that sufficient attention will not be paid to the existing client base represented by the retiring partner. Additionally, such a review further illustrates the necessity for the firm to attract and invest in new clients.

During a period of partner transition, time is the best ally your firm possesses. For the most beneficial results, your firm should allow at least two years for the process to be effective.

Specify that the retiring partner must notify the other partners two years prior to their expected retirement date. At this time the retiring partner should suggest prospective successors capable of sustaining the existing client relationships. Do not rule out the possibility of bringing new talent into the firm, if necessary. The plan should be approved by your managing partner.

The following provisions could be included in your firm’s governance agreement:

  • Your managing partner and the retiring partner should develop a reasonable working-client retention/transfer plan within sixty (60) days of the date on which your firm receives notice to retire or the date of any mandated or deemed retirement (e.g. if your retiring partner is 63 and mandatory retirement is 65, then the transition plan should be submitted 60 days before the partner’s 63rd birthday). The partner must fully cooperate with your firm by complying with the terms and conditions of such written plans.
  • If the retiring partner at your firm does not follow the written plan to the satisfaction of the Executive Committee, then the Executive Committee may reduce the Deferred Compensation to which the partner is entitled by up to 15 percent (15%) in addition to any other permitted reduction. (Agreements need to protect your firm.)

Preparing the New Partner

Once notice is given, focus on the transition. The "new partner" should be introduced to the clients at planned meetings and attend client meetings regularly with the retiring partner by the second year into the plan.

Prepare the new partner by informing him/her of recent engagements, history of relationships, business description, etc. Discussions need to be held between the retiring partner and the new partner concerning the client relationship — everything from the client's needs to any existing problem areas.

As the newly assigned partner proceeds through the grooming process, all day‑to‑day communications should be handled by the new partner communicating with the retiring partner as necessary. Finally, the new partner is ready to handle every aspect of the client relationship, while the retiring partner assumes a supervisory position.

The sooner one can transition the accounts, the better for the firm. Today, many businesses are in their second and third generation. Thus, it is extremely important that older partners maintain a relationship with those who will become the future leaders of the organization. These transition issues should be part of every firm's plan for the future.

If a firm protects their annuity and invests in clients of the future, they will certainly extend their life. However, today several firms are married to statistics and they do not invest in the clients of the future (remember those initial clients with nominal billings that now represent a significant portion of your practice?). CPA practices that are changing from compliance - to consultative-type practice present additional problems because each year consultative partners have to replace their book of business. Thus, if individuals with the expertise do not build a team within the firm to carry on the services, once they retire or leave the firm, the annuity is not be available to provide for retirement payments.


The CPA profession is changing so dramatically that your organization must consider these issues in the development of their strategic plan. Yes, clients have a life and so does a firm. Just like a doctor provides a check-up so a patient can live longer, CPA firms must perform their check-up regularly to continue their firm’s independence and maintain their legacy status.

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Robert J. Gallagher, CPA, is currently the president of R.J. Gallagher & Associates, Inc., a management and educational consulting organization for CPA Firms. Gallagher has spent over 40 years in the accounting profession. He was formerly a partner with Deloitte Touché.