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.