Succession Planning
Eases the Mystery of Your Firm's Future
In June 2004, Haskell & White co-founder Steve Haskell met with
our firm’s partners to discuss a number of matters, and succession
planning was at the top of the list. At the time, none of us
realized how quickly we would be facing the issue head on—just three
weeks later, Steve was diagnosed with lung cancer.
Haskell & White, like many businesses, lacked a formal succession
plan. However, we were fortunate enough to have 13 months with my
colleague after he was diagnosed to prepare for a major shift in
leadership and ensure that the company philosophy, vision and growth
remained solid. Now, as I sit at the helm of the firm, I have a
deeper appreciation of Steve’s foresight and the firm’s good fortune
to have time to prepare for a smooth transition.
Succession planning is not a new phenomenon and most CPA firms
understand the need for it. Yet, according to a 2008 AICPA Private
Companies Practice Section survey, only 35 percent of accounting
firms have a written succession plan in place, leaving a whopping 65
percent of firms vulnerable if they were to experience the loss of a
leader.
Starting Early Ensures a Smooth Transition
For most leaders, thoughts of leaving their practice are fairly
distant and succession planning is easily brushed aside to another
day. However, a good succession plan isn’t an intention, it’s an
ongoing process.
It takes time to develop criteria for a desirable successor as
well as to actually select one. Plus, succession planning is not
just about finding the next best leader; it’s also about ensuring
your employees and the organization as a whole is prepared for what
could be extensive change. While a good succession plan grooms
and trains the successor for the top spot, it also assesses the
capacity of team members at all levels so they can expand their
responsibilities and grow with the firm.
Whether or not a formal leadership succession is imminent in your
firm, it is always a good idea to develop younger talent, hire with
an eye for the future and plan several layers deep. You may find
that the right successor is someone who started a career with your
firm, then left, but is now willing to return in a leadership role.
By tracking career paths inside and outside of the firm you increase
the likelihood of a smooth transition when your current leader is
ready to, or is forced to, step aside.
In my own firm’s case, I was not hired under the assumption that
I would become managing partner, nor was it my goal. Rather, the two
founding partners, Steve Haskell and David White, were focused on
looking for talent who could replace them, and over the eight years
I served as an audit partner and worked closely with the firm’s
leadership, I gained the confidence, understanding, loyalty and
support of our partner team, which enabled me to take on the firm’s
managing partner role.
There is No Wrong Way to Plan
Aside from not having a plan at all, there is no right or wrong way
to plan. Thinking about your company’s future is the first step in
the right direction. From there, shape the plan into something that
fits your company’s culture and goals. Let your organization’s
history help guide these important decisions. For example, if your
business is built on a solid foundation of operating values, has
strong employee retention, loyalty and longevity, you may want to
consider looking within your ranks for a successor. Many firms favor
internal candidates because they value their experience.
In contrast, if your organization is powered by mobile
Millennials, who appear to have no interest in running your firm—or
any firm—consider recruiting an individual from the outside who
understands your company’s climate and the changes that are bound to
ensue with any leadership transition.
Since every business is different, one size will not fit all when
it comes to succession planning. Additionally, while an internal
candidate worked for a firm in one instance, circumstances will
invariably be different during the next leadership transition and
the firm might find that an external candidate is a better fit in
that instance. Also, look at business models from other industries
when succession planning and be open to reinventing the wheel.
Regardless of company or firm size, the primary goal when
creating a succession plan is the continuation of a growing and
profitable professional practice. Give prospective leaders a chance
to demonstrate their potential without penalizing them for being
unfamiliar with newfound responsibilities. These opportunities will
make employees who are potential successors more comfortable with
taking on different roles.
A Smooth Succession Does Not Happen Overnight
Successors need time to adjust to ensure a successful transfer of
roles. Before becoming managing partner, I worked closely with Steve
and the other partners to create goals for the next five years,
identifying gaps in staff expertise and anticipating potential
departures and retirements. Setting these goals ultimately helped
strengthen the firm for the next phase of development. These goals
and development plans are reviewed annually–at a minimum–and when
new opportunities are identified.
Even with a lengthy transition, employees and clients need time
to get used to communicating issues to someone new. For a successor
at a company or firm of any size, employees and clients need to know
that you are a dedicated, competent and knowledgeable leader. An
important step in my transition process to help nurture employee
loyalty was meeting personally with each manager to check the pulse
of the company, answer questions and ease any uncertainties.
For clients, who can be hesitant about doing business with a
successor, open communication is vital before the transition occurs.
When the opportunity to ease into succession of roles is available,
it’s best to make introductions of the intended successor to the
clients and to begin working together to make the transition natural
and comfortable. When succession is necessary as the result of a
sudden loss, it is imperative for company leaders to meet with key
clients and vendors as soon as possible.
After losing Steve, I learned that many people assumed our firm’s
finances were unstable. Communication was a key to making sure our
personnel, clients and vendors understood that this was not the case
and in fact the firm’s finances were in fine shape. Being upfront
helped in building trust and stronger relationships with clients.
Stay Current
A succession plan is never complete. As an integral piece of the
overall business plan and strategy for any company, succession plans
should constantly be modified and updated to match changing
environments. For example, when considering growth cycles, you may
need to consider having a different person lead the charge into new
areas of expertise or geographic location. Likewise, if your company
is experiencing a shortfall in business, a different talent may be
required to jump start the company for a new boom period. Either
way, succession planning needs to focus on short-term strategic and
operational decisions as well as long-term leadership issues.
Consider Some Basics
Consider having key personnel in the firm covered by key-man
insurance policies, particularly the partners/owners, key experts
and rainmakers. If locked in over a long period of time, these life
insurance policies can prove to be an inexpensive way to finance
potential shortfalls in the business and other major expenses that
may be incurred during a transition resulting from the sudden loss
of a decision maker.
There are two basic types of key-man life policies: term-life
insurance and universal/whole-life insurance. The type of policy
used depends on the business’ specific needs. Term-life insurance
often is used by startup or small, independent firms because of its
relatively low cost and flexibility. On the other hand, larger
companies or firms typically use universal/whole-life insurance as
these policies build cash value, which is an asset on the company’s
balance sheet and can be accessed anytime at the company’s
discretion.
Another basic is partnership agreements, including buy-sell
arrangements, which help offer tax advantages and promote equitable
and orderly transfer of wealth. Whether a stock redemption, cross
purchase or hybrid plan, a buy-sell agreement should be reviewed
periodically to reflect the changing needs of the owners and values
of the business. As circumstances change, it may be necessary to
amend or replace existing agreements.
Terms of a buy-sell agreement that should be reviewed regularly
include:
• Restrictions on transfer of ownership provisions.
• Profit and loss provisions, based on ownership interest of
the business entity.
• Control and management provisions for voting rights and
procedures.
• Purchase price/valuation and payment terms with agreed-upon
value for the business or a formula method to establish the value.
• Dissolution provisions and how assets are distributed among
the owners.
Even the Best Laid Plans Are Not Perfect
Since the planning process often affects the entire company, it’s
rare that the transition is flawless. Change for anyone can be
exciting, as well as a source of stress and uneasiness.
The leadership change at Haskell & White was a smooth one,
although it was not without hard work. New partners were recruited
to strengthen the management team and procedures were set to reflect
the strategic plans. All the while, our level of service to clients
and employee relationships were never sacrificed. Although the
process was challenging, particularly during the initial years, the
firm sustained continued growth and the hard work has paid off. Now
in its 20th year, Haskell & White operates as one of the largest
independently owned accounting firms in Southern California with two
offices and employs more than 80 professionals.
Wayne R.
Pinnell, CPA is the
managing partner of Haskell & White LLP. He can be reached at
wpinnell@hwcpa.com
or
www.hwcpa.com.
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