So, you failed your succession test. Now what?

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So, you failed your succession test. (Take the test here). Now what do you do?

This is not a comfortable place. You have three options:

  • Ignore the results and proceed as if all is fine. It might work out.
  • Retake the test. Maybe you misread that one question or two or three that made you fail.
  • Try to measure the extent of the potential damage. What is it that you need to fix?

Look at the marketplace. A new firm merger is announced nearly every week. What you see in the press is the tip of the iceberg because most firm transactions never make the news. Why is this occurring? Some deals are for growth, but many are driven by the need for an exit strategy. Here are some alarming facts:

  • Succession plans. A little less than 50 percent of firms have no succession plan. This is a staggering number. We think this number is misleading because many firms with a plan do not have a functioning plan. A functioning plan is one that has every training element in place.
  • Funded retirement plans. Ninety-four percent of firms do not have a funded retirement program. This can significantly impact a firm’s ability to remain independent and retain their legacy. Only 6 percent have a fully funded program, while 21 percent have a partially funded program, and fully 73 percent do not have anything put aside.
  • Growth strategies. There are other elements in the stats below that alter how to read the results. For example, a firm may have one marketing coordinator with no CPA firm experience or a business developer who has never sold in the CPA profession. This overstates the positive appearance of this data. Inexperienced CPA marketing staff or business developers may be hurting a firm because they think they have a growth solution in place. Almost half of firms (48 percent) do not have a strategic plan, while 74 percent do not have anyone in a business development capacity, and 52 percent do not have anyone in a marketing capacity at any level.

Your firm is successful, but how can you safely exit and get paid for the value you built? When pain is not immediate, it is easy to defer a problem and hope it resolves itself. That last question we asked in the first paragraph, “What is it that you need to fix?” might be difficult for each firm to identify. One problem is almost always the inability of succession candidates to bring in business. Any problem identified might have a series of layers to solve. Business development may be an issue or there may be other items such as the inability to manage people or weakness in the administrative functions.

If you failed the test, the first step is to objectively assess the damage. You may not be able to do this if you are too close to the situation. Your perception may be altered based on your relationship with the people or your ability to see their flaws. Remember, just answering no to one of the questions is an overall failure. One hole in the plan can sink it entirely.

Don’t overanalyze this yet. Ignore cash flows for now. Go old school and take out a piece of paper. List your successor candidates and then score, not rank, each of them on these five core areas:
1. Do they have the technical skills? (Likely yes, otherwise they would not be a succession candidate.)
2. Do they have the personality to manage and inspire? Managing is more of an art than a science.
3. Will they do the administrative tasks needed to manage the non-technical details? It’s not fun.
4. Are they bringing in material business? The question isn’t “Can they sell?” It’s, “Are they selling?”
5. Are they willing to take the responsibility of making the payments? They might have the other four skills, but if they are risk adverse, they might not want to assume the debt.

If every succession candidate can do each of the five core areas, then you are set. If you do not have a five-for-five result for every candidate, then you need to begin development plans internally for each candidate’s deficiency or bring in help to make it happen. We strongly advise you to create a Plan B so that you are also prepared to merge upward or sell. Your time will run out, but the succession team has more time than you do, so a sense of urgency is critical. Remember that the average baby boomer is 65 and there are a lot of boomers with firms to transition.

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