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Transition planning, no matter what circumstances

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Transition in CPA firms is a process that has passed the test of time and has been managed in good times and bad. Our current conditions managing through a pandemic only heighten the awareness and need for being well positioned for any adversity. That includes having in place an orderly and intelligent process for the transfer of ownership and responsibility.

Most firms have ideas for managing expected retirements of a line partner. Few have a plan for them. Far fewer have a process for transitioning a managing partner. And, when it comes to small firms, only a few have plans in place for an uncontrollable event.

According to AICPA research, about 75 percent of all CPAs will retire in the next 15 years. However, fewer than half of firms surveyed said they have a written and approved succession plan in place — and that number dwindles in smaller firms, which may not have the talent, resources or time to focus on it.

Some transitions are expected; some are forced by uncontrollable events. The optimal approach for transition is to have a plan and to make sure the plan is updated periodically.

Here are some essentials to incorporate that will help ensure your firm is ready to facilitate leadership change no matter what the conditions internally or externally.

Traditional retirement

The greater your lead time in building relationships, the better the outcome. Clients place a high level of trust in their accountant, and the successor has to be able to earn and enjoy trust. Broadening the service team as much as three to five years ahead of the retirement will be beneficial.

Every “A” client should have a projected action plan of meetings and services, a feedback process and timelines to be handled by the successor.

All clients above a certain dollar level of annual billings should be contacted personally by the transitioning player. The conversations — which should include an agreed upon number of independent client exchanges — must be guided by an agenda. The results should be documented, and there should be a follow-up action and impact plan in place, which should be reviewed by management.

The billing structure should continue in the historical fashion to minimize the impact to clients. Over time, of course, pricing may change.

The economics of being the successor should be well understood years in advance.

Managing partner turnover

While firms will have a process to elect a managing partner, few will have a method for planning for the turnover. A job description for the managing partner should be in place and updated at least every two years. The actual functions performed should be analyzed and discussed at least two years ahead of the turnover.

The greater the transparency and accountability of the managing partner, the more effectively the firm can handle an unexpected transition of the managing partner.

Consensus on the nature of management and the impact of the change in leadership on the supporting group must be vetted and understood. Often, gaining perspective one-on-one from the supporting group ahead of soliciting interest is valuable.

A committee may be appropriate to develop the process for turnover, including the timing and 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 candidates worthy and to have the current managing partner get comfortable navigating away.

Sudden and unexpected transition

Many businesses create contingency plans as a playbook for how to handle different crises, such as a natural disaster or other interruption in business in which safety and continuity must be maintained for clients and team members. Some large CPA firms do this, but it may be harder for the small to mid-sized firms to enact.

One way smaller firms can work to protect their practices in the event of unforeseen circumstances is by formalizing a practice continuation agreement (PCA).

In some situations, a practice transition is generated due to the illness, disability or even death of a firm principal. These are extremely impactful in a smaller firm where there aren’t enough people or interest to cover for a leader who will be absent.

A PCA, typically structured by a consultant and documented by an attorney, is an arrangement through which another firm agrees to step in to ensure there’s a grade of service consistency and competency to maintain and drive the firm forward. Sometimes this kind of leadership transition is temporary, which will be outlined in the PCA. If the leader will not be returning, as in the case of death, the arrangement will be longer term. The risk and reward to all parties needs to be thought through and handled with an eye toward mutual comfort.

Like a fire drill or burglar alarm, a PCA has to be tested periodically after it is agreed upon. Firms must check in to make sure both parties are still interested, are still comparable in their perspectives, and can provide the services necessary to meet the current clients’ needs.

Planning is key

Certainly, not every adverse circumstance can be anticipated and mapped out — and firms would be taking valuable time away from client-facing services if they tried. However, there are practical and powerful steps accounting practices can take to handle the most common kinds of transitions through both controllable and uncontrollable events.

The key is to understand your firm’s situation and needs — and plan out the steps necessary to ensure success and longevity. No one can successfully anticipate health, global tensions or financial factors, but you can anticipate that leadership will need to change and that the firm needs to be prepared for change no matter the conditions at hand.

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Succession planning Practice management Practice structure Partnership agreement Business continuity
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