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Dominic Cingoranelli
Dominic Cingoranelli
 

Internal Ownership Transitions

Use these four key strategies to success.

July 13, 2009
by Dominic Cingoranelli

In all too many small to midsize CPA firms, the founding owners are entrepreneurs who default to building organizations custom tailored to showcase and leverage their personal skills and the organization they built doesn’t work without them, no matter how much training they’ve bought for their junior partners or partners-in-training.

The problem is NOT one of finding new leaders or training your new, up-and-coming leaders; rather the real problem is what the existing leaders have put in place that will derail and handcuff the success of those future leaders. The Succession Institute LLC (Succession Institute) developed the following mental model to clarify this by identifying common modes we have seen utilized in running a CPA firm. While we’re not suggesting this is an all inclusive list or that everyone moves seamlessly from one stage to another, we intend for these definitions to at least loosely describe how your mode of operation could be helping or hindering your ability to execute a successful internal ownership transition at your firm.

There are four modes of operation and we identify them as:

  • Survival
  • Safety Net
  • Success
  • Continuation

These roles fill a continuum between the Eat-What-You-Kill Model and the Building-a-Village modes of operations.

Survival

At the initial stages of being an entrepreneur, there is an instinctive drive by the owners to pay for the roof over their heads and put food on the table. At the Survival level of operating a CPA firm, it’s all about maintaining a firm that will pay the bills, such as providing food and shelter for the families. When you’re just starting your firm, you aren’t thinking about developing leadership. You’re thinking about where the next work will come from, making a living and keeping the doors open. Usually the best way to address these concerns is for the owners to work hard, depending heavily on their individual skills, while building limited infrastructure that supports them in this role.

Safety Net

Once it feels like the business will generate the resources required to cover the owners’ basic needs, the focus turns to building the business in a way to generate enough cash to pay off business debt and build a nest egg to create some financial security for the individual owners.

At this point, your focus shifts to setting aside enough money to avoid the chagrin and anguish of living from paycheck to paycheck. You want to make your organization solid enough to generate even greater financial security. During this operating mode, much as with the Survival mode, the best and easiest way to fulfill these needs is for the owners to work hard, depend heavily on their respective skills and build a support structure that helps them to be better, faster and stronger at what they do.

Success

Once the firm has evolved past the concerns addressed by the Safety and Survival modes, the owners begin thinking about creating an environment that makes the workplace more enjoyable. They now accept the fact that there is more to life than work and money; and they are proud to be a part of their respected organization. They build the firm and its processes around the key people in the organization to improve their efficiency. For many firms, this is the highest mode of operation they achieve because when many owners are ready to go, they simply find someone to buy them out (with backup collateral) and they walk away.
 
During this mode, the firm continues to evolve into a kinder and gentler place to work. Everyday choices are driven by the idea of enhancing the success and profitability of the organization, while promoting the desired culture and living up to the current core values and reputation of the firm. The strategy in this mode is to maximize the talents of people within the organization under the management and control of the founding partners.

Continuation

The Continuation mode presents a significantly different way of doing business than the success mode. Rather than building the organization around the creativity, talents and management skills of the founding partners, this mode requires the founding partners to step back into the shadows and allow others to evolve. This stage often requires an organization to restructure itself, abandoning the mode of operation that has been responsible for much of its current success. This type of change normally creates a fair amount of anxiety, as you might imagine.

The firm’s success, reputation and strengths still are reflective of and synonymous with, those of the owners in this mode. The firm and the owners, while separate legally, have the same identity; no matter how much consideration and effort is given to separating the identity of the firm from the owners and building infrastructure and governance that transcends the founding partners.

This means that the focus now has to shift from the owners’ success (in which they have done well financially and are secure in their own accomplishments) to creating an organization that has its own institutional identity. The owners need to start taking actions that will enable the firm to survive and prosper long after they retire. This is a critical mode of operation to be in place for financial reasons if the acquisition/merger market is soft, which we predict will be the case in the not-too-
distant future.

Succession Institute realizes that their defined modes of operation are somewhat simplified; all CPA firms don’t go through all of these phases and even those that do don’t necessarily go through them in a step by
step manner.

What Happens Next?

Once the founding partners see the need to step back, they can stay involved, but will need to take a much less prominent and dominant role in the firm. They will, however, likely balk at some of the systems that they built because they are not comfortable giving others the power they have taken. This is a key point. The founders built those systems in the Success mode around specific people, rather than organizational roles and responsibilities. When you take the dominant players or controlling interests out of these systems, the systems typically fail.

In the Continuation mode, your objective is to set up systems of governance; operational processes; voting rights and privileges; accountability; compensation; etc. that revolve around interchangeability. For example, you don’t create the job description for the managing partner as if a specific person were filling that position, but rather as if anyone elected would fill that position. If the powers, limitations, expectations, responsibilities and accountability of a position are tailored to a specific individual, then you are likely operating in the Success mode. If they are right for whoever is elected, then you are much closer to operating in the Continuation mode.

In the Success mode, the firm is not thought of as a business entity that is an asset which needs to be protected, nurtured and managed, but simply a conduit for financial gain. Owners treat the entity as insignificant, with all of the value being attributed to specific strong individuals and
their achievements.

To move from the Success mode to Continuation mode, the founding partners have to be visionary enough to realize that the firm’s long-term success after their departure requires that the entity, its governance and processes have all been established in a way that it can shed (terminate) and effectively manage around a few bad or dysfunctional future owners.

Caveats

When a strong, domineering owner moves to a robust system of management and governance, you must do so based on defined roles and responsibilities is a must if you wish to have successful internal ownership transitions at your firm. For this to happen, you must address the following critical factors:

  • Rest control of the firm with client service partners who have the entrepreneurial savvy to run the business like a business.
  • Identify and clarify the roles and responsibilities of the partner group acting in effect as the board of directors, of the managing partner reporting to the board and of the individual partners reporting to the managing partner.
  • Have the partner group acting as the board agree on and vote on strategy and policy.
  • Have the managing partner must be held responsible for the implementation of strategy and policy and hold the rest of the partners accountable for results in their roles as line partners.
  • Fire anyone — partners included — who don’t step up and do what is required after the board makes a decision. Senior owners looking to create an internal ownership transition should get rid of any dead weight partners before they leave so as to not add extra burdens on the remaining partners.
  • Focus on a culture of training and development for all of the firm’s people — not just the partners — after addressing these
    critical issues.
  • Have the firm invest in its future. Partners need to devote enough budget to information technology and marketing. You need to develop technical and managerial capacity at every level.
  • Get rid of your marginal clients and get all of your partners out in front of clients, building client relationships and capitalizing on their role as trusted business advisor.

Conclusion

Identifying needed competencies for partners — and training partners or partners-to-be — for the competencies is important, but what really matters is the condition you leave your firm in with respect to authority and accountability. Without the organizational structure for your incoming leadership to easily govern, execute and hold everyone, including the partners, accountable, all of the leadership skills in the world won’t make
a difference.

The good news is that all of this is fixable. Stop looking at every person as a few extra dollars in your pocket and start looking at your people as the future assets of your firm. Develop your assets, cull the marginal and start the leadership shift while the founding partners are still around and can provide the advice and perspective to make the process go more smoothly. You have time, but it is running out quickly … so do what you’ve always known needs to be done and get started now.

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Dominic Cingoranelli, CPA, CMC, is executive vice-president — consulting services, at Succession Institute, LLC, a firm specializing in succession and practice management for CPA firms. He works with professionals who want to make their business better, faster and stronger. You can reach Cingoranelli at 512-338-1006 or visit www.successioninstitute.com.