The three goals of a healthy succession

For people who have watched "Succession" on HBO, transferring company leadership to the next generation seems like it requires scheming, backbiting and double-dealing. Fortunately, it doesn't have to be that way in real life. A healthy succession plan achieves three main objectives: continuity through client retention, client growth and fair financial treatment of all parties. With careful planning, those objectives can be met, and the Roy family drama can be avoided.

Let's look at maintaining continuity through retention first. Owners who have spent years building a firm want to make sure it will continue to be successful after their departure. Focusing on retention of clients and staff can help achieve that end.

A sound succession plan is years in the making. Focusing on client retention means planning for that ultimate transition. How does a firm owner step back and elevate new leadership? It's a delicate balance over time, but in the end it means there's a seamless transition where new leaders know client histories, goals and needs. 

Reassuring clients starts with building relationships between them and incoming ownership and new staff over time. Trying to do it in a matter of weeks or months just won't work. Letting clients know what's happening through face-to-face meetings, client appreciation events and state-of-the-firm dinners will help them feel they're part of the transition process.

Staff need to be reassured as well, as their livelihoods are involved. They will be concerned about what the firm and their jobs will look like post-succession. Much of this uncertainty can be alleviated by clear communication starting early in the process. There is no such thing as communicating too much or too early.

Continuing growth

Growth is a big component of a firm's valuation. Buyers want to see growth because it improves the likelihood they'll get a good return on their investment. Lenders want growth because the firm's cash flow is collateral for the loan and supports the debt service. When deals include an earnout provision, growth and client retention could be a deal point, which means sellers are rewarded with future payments for continued high performance. 

Growth can come in the form of higher revenues from existing clients, the addition of new clients, or both. If a firm's revenue is too highly bound to one or two clients, that concentration risk may be off-putting to potential buyers or lenders, so working to widen the client base in the years leading up to transition could be a wise move.

While it may be tempting to take one's foot off the gas and coast into retirement, that approach will likely lead to lower valuation of the firm and a smaller takeaway. Planning for continued growth starts with having a team in place that can carry forward the strategies that have built the company. If the firm is being purchased from within, mentorship of the upcoming owner ideally should start years before the transition.

Getting fair financial treatment

The most important step in ensuring that all parties get fair financial treatment is to have detailed plans in writing. Vague promises and handshake deals have no place in succession planning.

Succession deals can be financed in several ways, but some offer financial advantages to both the buyer and the firm itself. Traditional buy-in options usually involve the buyer providing a lump sum of cash (often financed by a large personal loan) or making quarterly or annual payments. These options can put a purchase out of reach for a young CPA starting a family creating financial obstacles that impact their household and its associated assets if they were to pursue SBA financing. The firm may lose the opportunity to bring a promising talent into an ownership role.

A different approach creates a win-win situation for the firm and the buyer. This type of deal involves the firm guaranteeing a business loan from a third-party lender to the second-generation buyer. Because it is a business loan, the buyer's home is not encumbered. With the loan guarantee, the buyer can secure better terms on the loan, and the firm gets an infusion of capital. Traditional lenders may be unfamiliar with this type of financing, so firms considering it may want to look for a specialty lender who is experienced with CPA firm lending. 

Putting it all together

To achieve the big three of healthy succession, owners need to start their planning early, ideally two to five years prior to their expected departure. Clear and frequent communication with clients, staff members and potential buyers will reassure all stakeholders. Advice from a team of trusted advisors including an attorney, a succession consultant and a lender familiar with CPA buyouts will help the process go smoothly.