Put the ‘Success’ in Succession

Reprinted with permission from the Virginia Society of CPAs.

Firms need to define the succession plan that best suits their needs and then live that plan well.

By Ira Rosenbloom, CPA

CPA firms are constantly changing. Technology advances. Legislation gets rewritten. Client services are added or removed. And, of course, team members join and leave.

With all of the change, the dependence on quality talent to lead and sustain the firm remains. Hiring and retaining quality staff members usually ranks as one of the top 10 critical factors firm leaders face when they are asked about challenges.

That’s why perpetuating the success and continuity of a CPA firm requires a plan and process to create and replenish leaders if the firm wants to continue to stand strong.

Succession planning is critical for firms of all sizes — and that need is the same whether or not the firm is looking toward a merger. With a deep bench of talent and varied skills, a practice can be better positioned to continue independently and can be more desirable to a potential external partner.

The optimal approach for transition is to have in place a real-time written, approved succession plan that includes a process for periodically reviewing and updating it.

Depending on the size of the firm, a succession plan may need to address a varied landscape of players, including line partners, managing partners, niche leaders, department heads or operations leaders.

What is most important? Think through and strengthen some essential elements at your firm to make sure you’re ready to facilitate leadership change — no matter the internal or external conditions. The following are some points to consider.

Data and changing demographics

In the 2020 Succession Survey from the American Institute of CPAs (AICPA) and Succession Institute, more than half of multi-owner firms said they were currently experiencing succession challenges, up drastically from 26% in 2016. Based on other data, the AICPA posited in 2018 that about 75% of all CPAs would retire in the next 15 years (26% of firms with single owners and sole practitioners said they planned to retire in five years).

According to the 2020 Rosenberg Survey, despite the aging profession and the succession challenges firms say they are facing, only about 56% of all firms surveyed say they had a written, approved succession plan in place — and that number dwindled in smaller firms, which may not have the talent, resources or time to focus on it.

While most firms have an idea about how to manage an expected retirement of a line partner, few have a formal plan. Fewer have a process for a managing partner transition. And only an elite few have plans in place for an uncontrollable event, such as death or long-term disability.

Getting started

Succession planning efforts should start with understanding your firm. Knowing more about your own values and culture — and the client services you deliver and have become known for — is a great first step in identifying the future leaders of your practice.

Are you open to particular vulnerabilities, such as a high percentage of leaders reaching retirement age or strong players in danger of being recruited by competitors? This will help you build your succession strategy, which should also be tied to or echo your business strategy.

Decide how deep you want your succession plan to go. Do you want to create a structure for everyone in the firm, or just for top leadership positions and other key roles?

Put together a formal succession planning team with responsibilities, targets and deadlines. Enlist the help of counselors, including mentors, retired/retiring leaders and/or external consultants to be part of the planning team.

Develop a progressive culture

Ownership and management have to be driven to create a culture that promotes growth in knowledge, responsibility, ingenuity and leadership. Job descriptions should exist for every level of team member, and they should be clear as to how people will evolve and grow as they move from level to level.

Starting with the first-year anniversary at your firm, entry-level and less-experienced people should be groomed for partner responsibilities. Experienced people (four years or more) should start grooming for partner responsibilities within six months of their hire. The job descriptions for partners and leaders should be common knowledge. Partners should be transparent as to the highs and lows of being an owner/partner, and should be in direct contact with the team members routinely. Delegation is relevant for tasks but not for grooming talent, relationships and teamwork.

Every team member should have a professional development plan that includes what it would take to reach partner — whether or not that is a common goal. While building owners internally is a necessity, not all people are cut out for those roles. Therefore, the sooner the desired status is determined, the better management can direct the needs and progress of the leadership channel.

Firms that have an operational leader, such as a firm manager/administrator or chief operating officer, must be sure to update the job description every two to three years for those leaders. They must be motivated to continue to grow and adapt to changing circumstances. Financial incentives may be very relevant for their performance success. The less that line partners need to cover operationally, the stronger the firm will be — and the happier the clients and staff.

Marketplace intelligence

Awareness of the needs and concerns of clients and potential clients will allow for better client continuity and better comprehension of the kind of team that needs to be available. Traditional CPA firms generate the majority of their revenue from compliance, but even the clients who are compliance oriented expect certain value, protection, security and intelligence from the compliance.

The expectations of your clientele will impact the professional profile and skills you need to deliver on client service. Survey your clients formally and informally. Mine data and be ready to evaluate trends and project needs.

Armed with that intelligence, evaluate your staff for the personality and skills needed to be resourceful to clients. Conduct evaluations with standard and customized testing administered by experts. The testing will likely impact the timing and readiness factors for a viable succession of leaders.

Understanding the competitive forces in your market is also crucial for strong continuity. Are there firms at risk and, therefore, talent ready to flee? Are there firms that could be more compelling to your current staff and clients and, therefore, may require a pivot to keep your firm stronger?

Traditional retirement

Clients place a high level of trust in their accountant. When those accountants retire, it is imperative that it be handled strategically and thoughtfully. A potential successor to the retiring team member has to be able to earn and enjoy client trust. Greater lead time for successors to build those relationships translates to better outcomes. Having the ability to broaden the client service team as much as three to five years ahead of the projected retirement will be beneficial.

Top clients (above a certain dollar level of billings) should be contacted personally by the successor, ideally with the introduction of the retiring team member. The conversations — which should include an agreed-upon number of independent client exchanges — must be guided by an agenda, agreed upon by management. Document results. Create follow-up actions. Put an impact plan in place. Invite and record feedback.

The client’s billing structure should continue in the same fashion as before to minimize impact. Of course, over time billing may change.

In all, the role of the successor should be understood and sketched out well in advance (sometimes years) of the retirement date.

Managing partner turnover

Firms typically have a plan and process to elect a managing partner, but few plan for the turnover in this role. If it’s not already in place, create a job description for the managing partner and make sure to update it at least every two years. Analyze the actual functions performed by the role and discuss whether or not they’re viable at least two years ahead of a turnover.

It’s important that the role of the managing partner be transparent and accountable, if for no other reason than the firm can more effectively handle an unexpected transition of the role.

Make sure your firm has consensus on what it takes to lead the firm and how the change in leadership will impact operations moving forward. A committee may be appropriate to develop the process for turnover, including the timing and the transparency. Alternately, an outside expert may be the right choice to guide the process.

Certain skills are necessary for leadership, and they may require coaching and mentoring. Dedicate sufficient time in advance to have worthy candidates and to have the current managing partner get comfortable navigating away — if the luxury of that time to plan is present.

Sudden and unexpected transition

Many businesses create contingency plans for how they will handle an interruption in business in which safety and continuity must be maintained for clients and team members. Most of the time, business leaders plan for natural disasters or other severe external events that demand an alternate way to do business in that crisis. But what about when there’s a critical internal event, such as the death or disability of key leaders in your firm?

A practice continuation agreement (PCA) should be developed to help the practice continue operating in the event of an illness, disability or death of a firm principal. While some large CPA firms do this, PCAs are extremely impactful in small- to mid-sized firms where there aren’t enough people or skills to cover for an absent leader.

A PCA is an arrangement through which another firm — or another leader — steps in to ensure there is service consistency and competency. Sometimes the change in leadership is temporary; sometimes it’s longer term, as is the case when a leader will not be returning. Typically created by a consultant and documented by an attorney, a PCA helps maintain service continuity in unsettling times.

It is important that all parties are comfortable in the agreement. After all, there are risks and rewards —and often high emotions — for everyone involved.

A PCA should be tested periodically, much like a fire drill or burglar alarm. Firms should check in to make sure both (or all) parties are still interested, are still comparable in their perspectives, and can provide the services necessary to meet the firm’s current client needs.

Live the succession process

The results of any succession plan will be optimized by a vigorous and disciplined approach. Initiatives that will be part of your approach need to be monitored quarterly and the overall plan should be reviewed every two years at a minimum. Feedback should be gathered from internal and external centers of influence.

An effective succession process must be integrated with a strategic plan and a business plan. Firms of all sizes will be best positioned to perpetuate the firm by emulating the best practices of businesses, and that means being much more structured and more open to perspectives. Solo practitioners have to be ready to move up to being a small firm by adding a partner or adding management roles so as to be stronger and deeper. All firms must continue to pivot and study trends and to recalibrate their team and service offerings.

Success at succession is not about mapping out a solution to every what-if scenario. It is about being prepared to handle situations and navigating the unknown and the predictable.

There are practical and powerful steps practices can take to handle the most common kinds of transitions through both anticipated and unanticipated events. You can always anticipate that leadership will need to change—and that the firm needs to be prepared for change no matter the conditions.

If your firm is as important as you would like your clients and staff to believe, then perpetuating it is top priority. Firms have common succession concerns, and each firm will have its own path. Define your process and live it well. You, your clients and staff deserve it.

Ira S. Rosenbloom, CPA (LR), is the chief operating executive (COE) of Optimum Strategies, LLC, a niche CPA practice management advisory firm that specializes in guiding firms to greater success with methods that include viable practice combination efforts such as mergers and acquisitions (M&A), profit enhancement programs, and helping firm owners create the right leadership engagement and succession plans for long-term business continuity and success. A well-known and respected leader in the accounting community across the Mid-Atlantic region, Ira works with dozens of clients each year to help them build stronger CPA firms designed to improve profitability, accountability, and client satisfaction. He is known for his ability to motivate internally and externally for strong bottom-line results. Contact

him at ira@optimumstrategies.com and visit his website, optimumstrategies.com.