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A Management of an Accounting Practice Publication issued by the Private Companies Practice Section Executive Committee
Succession planning continues to be a perennial top-five practice management issue for CPAs in firms of all sizes. Until now, a practitioner was essentially on his or her own to create and execute a succession plan for the firm. This new product has been developed under the guidance of the PCPS Executive Committee and is devoted to demonstrating that succession planning makes money for your firm today.
In developing Securing the Future, Bill Reeb surveyed over 500 CPA firms and conducted in-depth interviews with 30 managing partners representing firms in transition or about to grapple with succession. This intelligence has been distilled into a hands-on, tactical guidebook for CPAs wishing to develop a successful practice transition plan. Its unique content shows you how to best position the firm for succession or transition, advises you on avoiding common pitfalls, and guides you through the development and execution process.
Details in this guide include:
Included with this book is a 2-hour DVD containing expert-panel discussions on topics covered in this guide plus checklists, templates, and a test for gauging your readiness for succession. The book and DVD combination make a great tool to facilitate partner retreats or succession planning discussions with partners.
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Also available in CPE self-study format: Succession Planning: Strategies to Protect the Value of Your Firm |
INTRODUCTION
The objectives of this introduction are to:
For many who first pick up this text, they will expect the first chapter to get right into the meat of this book. Suggestions included providing:
I will get to all of this and much more, but, in order for this book to be helpful, succession must be put into a much broader context. By analogy, think of succession as the roof of a house. To serve its purpose and provide value, it has to be supported by a strong foundation and load-bearing walls. Similarly, it is difficult to put succession into perspective without considering the strengths and weaknesses of a firm’s foundation and supporting infrastructure.
Based on my experience with CPA firms, I can tell you that, although addressing the questions above is essential, the first step is to understand the root causes of the problems and critical success factors. For example, having confidence in the incoming leadership is less about finding the right people and more about the structure these new leaders will inhabit. Another example is the danger of overemphasizing the terms of the retirement agreement and the agreed-to payout rather than building a strong foundation that can endure the stress of transition. Although the terms and conditions are critical, if the firm splits up and every owner goes his or her separate way as a result of disagreements about strategic direction or core values, the retired owners are likely going to have to work hard to get their full payout.
Based on what I have seen, a successful firm succession is less about the legal agreements and more about the entire business strategy. Think of it this way … the more dependent a firm is on individuals rather than infrastructure, the more likely the transition will fail. For example, if you are sitting on the board of a public company, you would take hiring a new chief executive officer (CEO) very seriously. At the same time, you would not assume that the company was totally dependent on this person’s personal performance. A CEO’s poor performance might result in less than the desired success, but the board would assume that the real assets of the business, such as its customer base, employees, products or services, marketing programs, and quality control processes, would drive the company’s future.
So, if you are serious about succession planning, please read this book from cover to cover to get the most out of it. Give me a chance to make my case if I take a position that is controversial or antagonistic to your view. I am just trying to share my experiences and those of many firms around the country. I am not guaranteeing that the approaches I cover will work for you, just as I am not telling you that your approach—if it is different—will not work. I am suggesting that if you read the entire book, I am confident that the discussions will spark ideas that will help you and your firm operate more successfully and profitably.
I want you to take one more point under consideration. As I introduce stories of how other firms work through these situations, as well as survey data, keep an open mind. When working with firms, I frequently hear comments like, “Our firm is different because we operate in a small community,” or “The norms don’t apply to us because of our firm size,” or “Our problems are unique because of the part of the country we’re in.” Generally speaking, most CPA firms, regardless of where they are located, are facing the same problems. Yes, a firm in a small town might be able to pay a CPA with five years of experience $40,000 a year, while an accountant with the same skills might cost $65,000 in a metropolitan area, but the issues are still the same. Yes, the average owner’s billing rate in a Midwestern firm might be $150 per hour, while an owner with similar skills might bill at $225 per hour on the West Coast. However, in the final analysis, all firms share big picture issues, such as:
So, as you consider the experiences of other firms and read my recommendations, please start your analysis from the assumption that CPA firms, regardless of their locations, and in all shapes and sizes, are far more similar than they are different.
Two concepts are fundamental to this book. First, there are two basic models used to build a firm, namely, the superstar model and the operator model. Second, there is the concept of planning for firm succession. These concepts are discussed below and are followed by a guide on how to use this book.
SUPERSTAR MODEL VERSUS OPERATOR MODEL
CPA firms, generally speaking, look to one of two strategies to build and operate their firm. The first of these is what I call the superstar model, and the second is the operator model. CPA firms usually start out using the superstar model, which can be defined as a model that places a premium on the “extraordinary capability, commitment, aggressiveness, entrepreneurship, and stamina of a few people for its success.” When you are just starting out, or if you are a small operation, this model not only makes sense, but it is very efficient, effective, and profitable.
The second model, the operator model, is the opposite. It can be defined as a model that places a premium on “the extraordinary systems, processes, procedures, and methodology (the infrastructure) of a firm to maximize the potential of the people that work within it.” Here are a couple differences I see between the two:
Both profiles are important to building and developing a successful service operation, but the optimum profile differs depending on the maturity of the firm. Consider a continuum, with the left-most point being a superstar and the right-most point being an operator. Start-up CPA firms are usually founded on the superstar philosophy, which relies on an individual or two to find the clients, service them, bill and collect, and, in their spare time, run the business. Without these entrepreneurs, there would be no business to transition. But because the superstar strategy is so dependent on these individuals, successful transition is tricky. As a firm matures and the demand for services shifts from exponential growth to a more methodical and predictable level, firms usually shift to an operator strategy of management, in order to build a firm that can continue through generations of leaders. This operator mentality shifts the firm’s philosophies away from catering to irreplaceable people to developing an infrastructure that creates irreplaceable positions (that a variety of people can successfully fill). A few basic principles of an operator model are:
First of all, I want to clarify one point … both models work, and there are successful examples of each all over the country. But, as you can tell from the above narrative, far more money is invested in the firm’s infrastructure in the operator model than in the superstar model. However, that tends to be a short-term difference because I find that, over the long term, the operator-driven firms deliver higher incomes to owners than the superstar-driven firms. Also, my experience shows that the easiest path for successful succession is in the operator model. Although success may flourish in the superstar model, its succession strategy is dependent on finding incoming superstars to take over. This model can be very limiting. It is hard for a firm to grow beyond about $2 million to $4 million in revenues because firms in this size range grow to the point that there are too many superstars. Inevitably, each superstar:
It shouldn’t surprise anyone by now that this book is about how to bridge the gaps between the superstar and operator models.
PLANNING IS THE FIRST STEP
One of the goals of this book is to motivate you to start thinking about where you want to go. Theodore Roosevelt said, “When you aim at nothing, you’ll hit it every time.” A great many firms right now are aiming and firing everyday without agreement as to the target. The best image that describes the typical CPA firm is a sailboat hundreds of miles from any shore, with several equally desired destinations under consideration. Although this firm would be happy to land on any of a multitude of shores, they remain offshore because there is no consensus about the firm’s strategy. Typically, part of the owner group vocalizes a desired destination and the firm starts heading toward it, only to find an owner or two on the back of the boat throwing anchors overboard to impede progress. Then, the group gets together and someone bullies the others into changing course. This results in the sailboat turning toward a different shore, only to find another owner hoisting the sails, while others are at work, again, with the anchors. In reality, the owners would be happier at any of the various destinations than where they are—stranded in the water. But since each owner is entitled to choose a destination, the firm rarely makes significant progress in any direction. Just as the sailboat picks up speed in one direction, it is forced to change course again, causing the boat to spin rather than consistently moving ahead.
This section considers the following issues when planning, namely, when to plan, the time frame for a plan, monitoring a plan, and the purpose of a plan.
When to Create the Plan
A number of firms take the position that they do not want to spend time planning until they can identify near-term addressable obstacles. Well, simply put, a great deal of the time, those “addressable obstacles” are actually behaviors (or lack thereof) of members of the owner group. The most expedient way to overcome these obstacles is to face the issues directly. Although most owner groups are very good at addressing general business matters, they struggle when it comes to conflict among themselves. Therefore, if you can frame a problem area or behavior in a larger context, as a broad owner-agreed-to strategic objective, the alternatives are much less personal and therefore far easier to resolve.
For example, let me give you a common “near-term addressable obstacle.” Consider a senior owner who is ready to retire. The retiring owner often wants nothing to really change during his or her last few years … and, often, these same people want to put restrictions on the firm regarding the changes allowed through their payoff. Since these owners often control a significant block of voting rights, they are able to strong-arm younger owners. For instance, older owners can argue, “If you don’t agree, I will sell the firm,” or, “If you don’t accept my offer, I won’t retire.” It should come as no surprise that the younger owners often feel that they have been backed into a corner with no alternative but to agree because both options, i.e., selling the firm or the retiring owner deciding not to retire, are even more unacceptable. If these conversations turn from the issues at hand, and become matters of principle to the owners, the situation can unravel very quickly, leading to the fragmenting of the firm. The point is that the extreme positions taken in these situations may be in the best interests of an individual, but are rarely in the best interests of the firm. In reality, although a majority owner might be able to sell or merge the firm without the other owners’ consent, he or she will probably not be better off for doing this. The buying or merging firm will lose interest quickly if they see a fragmenting of the owner group. Typically, existing owners are almost always willing to pay the highest market price for a firm when it is time for an owner to retire. Over and over, I see situations in which everyone has something to gain by sitting down and airing critical and sensitive issues. Through planning, the focus is shifted away from personalities and placed instead on creating a path for the future.
Time Frame for the Plan
Most people think that you conduct firm planning sessions when everything is running smoothly and you want to figure out a five-year plan. However, most planning starts when the firm is in chaos and evolves from there. The first plan, when chaos is the driver, will likely cover a six-month period. The second plan might cover an 18-month period. By the third planning session, the firm might actually get around to considering the horizon for the organization rather than just reacting to tactical issues. Planning is dynamic. Today’s plans affect tomorrow’s reality; tomorrow’s reality influences tomorrow’s plans; tomorrow’s plans affect the future’s reality, and so on.
Monitor the Plan
In a perfect world, planning and reality pictorially could be illustrated as two straight lines overlapping each other. But in our world, which is mostly out of control, both plans and reality are moving targets. So, our expectations need to be put into perspective. First, don’t expect reality to emulate the plan. The best we can hope for is that the two begin to parallel each other at some point in the future.
Key Point: Plans continually need to be monitored and adjusted so that they are consistent with the resources available. Operations need to be continually monitored and adjusted so that outcomes approximate the plan.
In the absence of planning and plan monitoring, your firm is likely to zig and zag too often … and for too long … wasting resources and losing competitive advantage by missing market opportunities. The purpose of planning is not to eliminate missteps (as they will always occur in any business), but to minimize the duration and extent of those deviations. Consider the sailboat analogy earlier. Sailboats do not travel in a straight line towards their designated target. The key is to keep adjusting the boats’ path so that the variations from the straight line are kept to a minimum. All too often, scarce resources such as money and owner time are wasted on efforts that do not contribute to the organization’s long-term survival and profitability.
So, the question of success often boils down to whether management can remain focused on its goals. Every time your firm veers off course, it can take months and even years to reverse the momentum. Long recovery cycles (like services that never should have been launched or mergers that never should have been approved), in many circumstances, are too much for an operation to support. Therefore, by planning, and planning often, although you may not avoid making bad decisions, you can see the misdirections earlier and make course corrections more often. This minimizes the mistake and recovery cycle, the zigzag effect, thereby making a significant contribution to your bottom line.
Purpose of the Plan
In order for an operation to continuously improve performance, workers need to have a clear sense of direction or mission. The theory is simple:
Key Point: The more people working towards a common goal, the greater the likelihood of its achievement.
By formalizing the planning process, you can more easily create synergy among the owner group. The plan in turn drives the development of targets and the actions required to reach them. With this definition in place, roles and responsibilities can be better developed to support the attainment of the overall strategy. This understanding can be used to develop and communicate individual expectations that synchronize with the firm’s objectives, culminating in the accomplishment of the firm’s goals. Planning is the foundation on which firms define and build their future success. And, given our profession’s landscape, there has never been more at stake (either to win or to lose).
HOW TO USE THIS BOOK
The preceding introduces two concepts on which the following chapters will be based:
Chapter 1, “The Environment and Strategy: Managing Resources, Maximizing Reward,” outlines the present business environment and includes insights gathered from two recent surveys. Chapter 2, “Structure and Leadership: Establishing a Foundation and Consistency;” Chapter 3, “Management and Operations: Extending the Life and Culture of the Firm;” and Chapter 4, “Growth and Transition: Increasing the Value of the Firm,” reveal underlying support systems, foundation principles, and processes that firms should consider to develop and enhance the performance of their employees at all levels of the organization. Then, once this framework has been constructed, Chapter 5, “Succession Strategies: Passing the Torch,” addresses succession. Chapter 5 will also offer anecdotal evidence about how firms have approached succession, both successfully and unsuccessfully, connecting those experiences to the fundamentals covered in the earlier chapters.
But if you just skip to Chapter 5 now, be warned that the principles covered in the earlier chapters will constantly be used to tie concepts together by describing either options to consider or pitfalls to avoid.
A variety of firms have generously shared materials that were used in the preparation of this book. The majority of these materials are presented as exhibits on the DVD that accompanies this book. These samples are presented for your review. These samples have not been reviewed for legal acceptability or viability. Should your firm decide to use any of this material, you do so at your own risk; it is up to you to get proper legal assistance and advice to ensure that all documents are adequate and suited to your needs. Given the equally wide range of firms for whom this book is intended, readers are urged not to focus on the specific details of the samples described herein. The best focus is on the intent and general guidance provided. Each firm is well advised to hammer out its own best approaches.
Also included with the book is a DVD, found in the pocket on the inside of the back cover. This DVD has two parts. First, it contains all exhibits in Word format. Second, it is a series of video presentations. The material presented in these video presentations supplements the concepts covered in this book. There are five presentations in all—five 30-minute (roughly) segments with discussion, each related to one of the chapters. Both readers and anyone with an interest in succession planning should take the time to view all five segments. If your firm is wrestling with succession planning or any of the other topics touched on in the book, the DVD could be beneficial at an owner retreat.
But before you get together for your next planning retreat, have every owner and manager in your firm read this book. If you do, I can assure you that your dialogue will change forever because this book can impart:
NOTE TO SOLE PROPRIETORS
As you can tell, this book will dedicate a great deal of its subject matter to how to create an infrastructure that allows a firm to organize its processes and policies in order to increase its value and ability to smoothly transition to new owners. A firm with one employee has a far simpler road to travel than one with 50 employees. Obviously, the higher the number of people affected by the process, the higher the number of exceptions that will have to be addressed and the more difficult the implementation will be. Take, for example, a compensation plan. If your firm has two employees in addition to you, a fair, objective incentive plan might take you an hour to devise, and a monitoring system might take an extra couple of hours to put in place. For a 50-person firm, a similar system is likely to take two weeks to devise and months to implement. When we discuss this in Chapter 3, I go into detail about the issues that should be considered so that, regardless of the size of the firm, enough information has been provided to construct a foundation for moving forward. However, if you look at the fundamentals addressed (billing rates, fair multiples for performance, rewarding exceptional service, monitoring performance objectively, and reporting), it becomes clear that those same principles apply to everyone. Thus, I am suggesting that if you wade through the more complex multiemployee discussions, the dialogue will likely spark ideas that should be valuable as you design your less complicated versions.
Second, being a sole owner or running a small firm does not stop you from applying the kind of infrastructure (albeit far more simplified) typically found in larger firms. For example, in Chapter 2, I refer to the value of delineating the oversight roles of management and a board of directors. Although these are one-and-the-same for a small firm, setting up an advisory board to generate a broader discussion regarding strategy might be a viable substitute. Once again, I am asking that you look at the underling philosophy to determine ways to improve the value and operating effectiveness of your firm.
If your strategy is to sell or merge your practice, this book should give you insight into the attitudes and obstacles of firms a little larger than yours, which are potential suitors. By understanding their priorities, it is far easier for you to take steps in the coming years to position your firm to integrate more seamlessly with theirs. This might include looking for ways to make yourself less indispensable (so that someone can more easily step in) as well as establishing client relationships that would be deemed valuable to them. For example, if you charge rates that are so low that a purchasing firm could not service your clients profitably without raising fees to the point of losing those clients, then you are not positioning your firm to have value. If you are the only person in your firm who has a relationship with your clients, then it will be more difficult to transition them.
Key Point: Knowing more about your likely buyer helps you identify steps to drive up the value of your firm.
So, as you go through the book, many of the sections may describe solutions that exceed your needs. Nevertheless, I am confident that the time spent with this material will pay large dividends if your outlook is, “How can I apply the concepts to my situation?” I can assure you that I have consulted with practices as small as $200,000 to larger than $50 million and have successfully applied versions of the concepts in this book to all of them. I can also tell you, as an owner of my own small firm, the effort to codify these ideas has helped me make different decisions about how I plan to operate my firm in the future. So, as one small firm owner to another, if you feel mired in the detail, keep in mind that there is “a pony in there somewhere.”
CONCLUSION
As I stated in the beginning, succession is about business strategy. What you will find is that almost every aspect of succession is influenced by multiple areas within the business. For example, firms often cannot address simple changes in a retirement agreement without having to revisit the compensation formula, which cannot be adjusted without considering ownership percentages, which then have to consider the impact on management and voting privileges. This kind of integration continues until it comes full circle, back to the issue that started the conversation. In order to successfully address succession, you have to holistically look at the firm and its processes to find a viable solution. For example, rather than the firm needing to find an entrepreneurial business developer to take over as managing partner, maybe a strong firmwide budgeted marketing plan and foundation will create a path for a variety of other personalities to be successful in that key position. Or, rather than trying to promote everyone to an owner position in order to keep key people happy, maybe a compensation system and a career path for nonowners will take the heat out of this transition. Because of the holistic, integrated nature of many of the problems succession reveals, your firm is only as strong as its weakest link. Hopefully, this text will not only help you identify what those areas might be within your firm, but also describe integrated solutions to address them.
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