Three myths of succession planning

Do you expect to sell, merge, or wind down your practice? Are you beginning to plan for retirement? Be sure to put these myths to rest.

October 18, 2012

by Mark Koziel, CPA, CGMA

Sometimes we CPAs are blind to our own advice. We spend hours every day working with clients, steering them toward financial prosperity, helping them prepare for retirement, and ensuring their businesses thrive well into the future. What are we doing for own practices? Not always enough.

Although succession planning is a proven strategy for achieving long-term firm goals, the 2012 PCPS Succession Survey reveals that only 46% of multiowner firms have a written, approved succession plan. In addition, 6% of sole proprietors have a practice continuation agreement. However, that’s only a first step toward developing a full succession plan.

Dispelling the following three common myths may help further grow succession planning’s role in practice management. It may also help CPAs reap a succession plan’s full benefits—client and staff retention, a more comfortable retirement, and the peace of mind that comes from being prepared for the future.

Myth 1: I only need a year to lay out my succession plan.
Reality: Depending on the size of the practice, it can take three to five years to implement the type of change needed for a seamless transition of clients and staff, even for small practices. Responsibilities during the transition period include:

  • Making any necessary changes to the firm’s vision.
  • Deciding when and how management over clients and engagements will be transferred.
  • Identifying future leaders and pinpointing their training, accountabilities, and payment structure.
  • Determining future leaders’ role in their new engagements.

Other key responsibilities range from establishing selling price targets and any new retirement policies to measuring performance and success throughout the transition process.    

Myth 2: Succession planning is not about retirement planning.
Reality: Firm owners contemplating a potential sale of their practice when nearing retirement and who invest time preparing for the continuation of their practice three to five years before retirement are more likely to be competitively positioned when selling their practice even in the strongest of buyer’s markets.

Additionally, the relationship-building effects of a practice continuation agreement can significantly soften the negative impact leadership transitions typically have on the three payout measures valued most by a successor—client roster, staff retention, and billings. As a result, sole proprietors and owners of small firms will not only generally have more encouraging prospects when the time arrives for sale and retirement, but they can also receive a premium price for their practice.

Myth 3: The next generation is not ready to take over for me.
Reality: CPA senior partners’ failure to assume a more proactive role in preparing future leaders to take over the reins of client leadership is one of the greatest challenges to succession planning, especially in smaller firms. According to the 2012 PCPS Succession Survey, a significant 26% of multiowner firms, and an alarming 52% of sole proprietors with employees, are doing nothing to develop future leaders. Current firm leaders need to embrace the generational differences between themselves and those climbing the ranks. When they were first starting out, current firm leaders had their own unique motivations and methods for taking over and leading a firm. But the younger generation looks for learning and guidance to help improve their leadership skills. The younger generation’s approach isn’t wrong. It’s just different.

Failing to train the next generation of leaders in the skills needed to drive client relationships wreaks havoc on client retention levels and, consequently, on the value of the firm and the retiring partner’s payout.

Do you need help practicing what you preach? Practitioners looking for expert advice on creating and implementing a robust succession plan can visit the Private Companies Practice Section (PCPS) website on AICPA.org for more information.

This column originally appeared on the AICPA Insights blog.

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Mark Koziel, CPA, CGMA, is AICPA vice president—Firm Services & Global Alliances.