august aquila aquila global advisors, llc. please answer only one of the following ◦ have started...
TRANSCRIPT
Succession Planning for Small to Midsize Firms—Ensuring a Smooth Transition
June 23, 2010
August Aquila
AQUILA Global Advisors, LLC
Introduction
Please answer only one of the following
◦ Have started plan
◦ Will start in next 2 years
◦ Will start in next 5 years
◦ Will start in next 10 years
◦ Plan drafted
◦ No need
Pop Quiz: When will you start?
Multi-Owner Firms◦ Have started plan
35%◦ Will start in next 2
years 32%◦ Will start in next 5
years 10%◦ Will start in next 10
years 3%◦ Plan drafted 9%◦ No need 10%
Sole Practitioners◦ Have started plan 17%◦ Will start in next 2
years 43%◦ Will start in next 5
years 23%◦ Will start in next 10
years 3%◦ Plan drafted 3%◦ No need 10%
Source AICPA 2008 Succession Planning Survey
The Current Succession Landscape
Multi-Owner Firms
◦ Current 20%
◦ Next 1 to 2 years 13%
◦ Next 3 to 5 years 30%
◦ Next 6 to 10 years
17%
◦ More than 10 years
away 3%
◦ No challenges 16%
Sole Practitioners
◦ Current 14%
◦ Next 1 to 2 years 18%
◦ Next 3 to 5 years 33%
◦ Next 6 to 10 years
27%
◦ More than 10 years
away 5%
◦ No challenges 3%
Succession Planning Challenges
Those Were the Days
Welcome to Today!
Future partner shortage Competitive battles Regulatory changes/Standards overload Higher client and staff expectation Lack of desire to engage in business
development activities by many partners Unfunded retirement plans
Major Challenges Today
Retirement seems a long way off, too early to start
We don’t like to think about it We don’t even want to retire The thought of anyone else running the firm
is painful You’re too busy to plan for succession No one can do it better The firm would be nothing without me
Why We Put off Succession Planning
“This firm would be nothing without me.”
Think About This
I’m the key rainmaker Don’t talk to me about succession Next in command is not a threat Younger partners not ready Internal political issues I don’t want to transition clients Senior partners won’t retire What will I do with my life? What will my spouse do with me?
Why We Put off Succession Planning (cont.)
Who will take over when you are readyto retire?
How has the firm changed since the last transition?
What skills will new leaders need to succeed?
Do you have a process to follow?
Questions to Consider
Do you have a succession plan?
Is some or all of your retirement plan
funded?
Do you expect to be bought out?
Do you know who will buy you out?
Do you have a fixed date?
Questions to Consider (cont.)
What are the options?
What do you want to do with the practice? What is the firm doing to plan for management
succession? Who will make the choice for you? What are you doing to ensure that current
management will be replaced by a person able to meeting future challenges in a rapidly changing environment?
Time to Face Some Hard Issues
Do nothing
Split up
Sell
Merge
Internal transition
Bring people in
Practice continuation (sole practitioners)
Succession Planning Options
What could be best for your firm? Select 2 from above)
- Option One
- Option Two
Which Option is Best for You?
“It makes no difference what size practice you have, the primary goal for future management is continuation of a growing profitable professional practice following the retirement or demise of present management.”
72% don’t have funded retirement plans
Senior management stays in place too long
Firm founder is also key rainmaker
Founder/MP wears many hats
Successors come from within
Reality Bites
Safeguard practice
Plan for your own retirement
Install a successor
Let go of the practice
Your Primary Goals
Ultimate management challenge
Addresses your mortality
Touches wide range of emotions
Why can’t we just ignore the topic?
Let’s Just Live with Ambiguity
Liquidity
Provide new owners opportunities
Enhance value of your firm
Release energy of successors
Rewards to Those Who Plan
How to do it
1. Separate personal identify from practice2. Develop 3 prong plan3. Get independent valuation4. Cultivate a team5. Develop other interests6. Create your succession plan
Nine Step Approach
7. Have a partnership agreement8. Choose a successor9. Develop plans for successor
Nine Step Approach (cont.)
1. Separate personal identify from practice
Develop strategic plan for the firm
Develop your own retirement
Develop an estate plan to protect your
assets
2. Develop 3 prong plan
Multipliers – Revenue or Book Size◦ More than $1 on the $1 7%◦ $1 on the $1 42%◦ 95 cents on the $1 2%◦ 90 cents on the $1 3%◦ 85 cents on the $1 2%◦ 80 cents on the $1 7%◦ 75 cents on the $1 14%◦ 70 cents on the $1 3%◦ 65 cents or less on the $1 13%
3. Get independent valuation
Multipliers – Salary◦ Less than one year’s salary 6%◦ One year’s salary 8%◦ One year’s salary x 1.5 3%◦ One year’s salary x 2.0 17%◦ One year’s salary x 2.5 14%◦ One year’s salary x 3.0 38%◦ One year’s salary x 3.5 3%◦ More than one year’s salary x 3.5 5%
Source: AICPA 2008 Succession Survey
Get independent valuation
Accrual basis capital account (ABC)◦ Paid over 5 years◦ Often with interest
Goodwill (computed on cash basis)◦ Larger firms use a multiple of compensation◦ Smaller firms use a calculation base on fees◦ Usually paid out over 10 years◦ No interest◦ Annual cap on payments
Usually 5-10% of revenue
What is a Fair Buyout Amount?
For multi partner firms◦ Learn to delegate
For sole practitioners◦ Trusted advisors◦ Spouse◦ Outside consultant
4. Cultivate a team
What are your outside interests?
◦ Civic, charitable work
◦ Other business interest
◦ Travel
◦ Education
◦ Etc.
5. Develop other interests
It’s All About Options
6. Create Your Succession Plan
Mandatory retirement age from partnership Client transition tied to benefits Total dollars to be paid in any one year Partner termination with or without cause Vesting period Partner disability
7. Have a partnership agreement
What is your process?
◦ Anoint the next leader
◦ Hold an election
◦ Make it a competitive process
8.Choose a successor
Identify specific competencies Provide informal coaching by assigned
partner Give on-the-job training opportunities Offer formal training in interpersonal skills Make available formal training in delegation
and supervision Send future leader to external leadership
training program
9. Have a plan for the successor
Getting Started
Hold a brainstorming meeting
Failure to plan . . .
Getting Started
When you reach mid 50s Gives you a 10+ year window Know when to leave
◦ Sell at the top of your game Tie succession/retirement plan to your
personal wealth accumulation
When Do You Start?
1. Will I be financially secure after retirement?2. Have I identified a successor?3. Have I announced a firm date for my
retirement?4. Do I believe that there is meaning to my life
outside of the practice?5. Do I have new challenges to look forward to
after retirement?6. Am I committed to an effective succession
plan?7. Can I delegate authority to others?
Are you ready to let go?
7 yeses - you didn’t need this webinar 6 yeses - you are almost there 5 yeses - you are more than half way
there 4 yeses - start getting serious 3.yeses - get an outside advisor 2 yeses - at least you are thinking 1 yes - you are either under 40 or
plan to work forever
SCORE
What did I forget to say?
Questions
AQUILA Global Advisors, LLC 952.930.1295 42
Practice Continuation Agreements: A Practice Survival Guide, Second Edition by John A. Eads, AICPA
Compensation as a Strategic Asset by August Aquila and Coral Rice, AICPA
AICPA/PCPS Human Capital Resource Center www/aicpa.org/pcps
Resources
