In the third segment of our five-part monthly series on the top priorities for CPA firm management, Ira Rosenbloom of Optimum Strategies in Spring House, Pa., explores the musts in the area of succession planning. Among the aspects he discusses are team composition, organizational vision, and timeline concerns.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Podcast Transcript

Welcome to the third of our five-part series of podcasts with Ira Rosenbloom of Optimum Strategies on the top management priorities for CPA firms. In March, we discussed the top five metric categories to make a priority. In April, we'd covered the top five client service system must-haves. This month, we are looking at the top five priorities CPA firms need to keep in mind in the area of succession.

The top five today as we look at succession team priorities for your firm are compromise, vision, team composition, perspective, and timeline. Let's start with timeline. Why is it so important to have a timeline in mind as you start planning for succession?

[Rosenbloom] As we know, we are in a time period of tremendous uncertainty. The more lead time somebody has, the more they're going to be able to work their way through the fluidity, not only within their practice but within the economy and within what's going on in our world. We hope that certainly the conditions will improve quickly, but there are so many things that impact the transition of a leader's practice that the more time you have, the better. As a matter of fact, prior to the corona outbreak, my recommendation was that if you thought you were going to want a succession to start two years from today, you should start three years from today because the options are becoming much more limited, because the successor community was becoming much more picky. The sooner you would be in front of somebody, the better.

Now I think I would recommend that somebody tack on another year ahead of that. By the way, there's certainly a school of thought that is going to take you down the path of thinking that succession internally may become more realistic than it was prior to the corona outbreak. I'm not sure that that is something to hang your hat on, but there's certainly…unfortunately, there will be people who will be dislocated from their position and may be available to join your team, which is a concept we'll talk about later. But you need to have ample opportunity to comfortably empower successors to take the right steps with your client base and to have your clients comfortable with them.

Even if you're doing it internally and somebody has been handling the account for many years along with you, there has always been the idea that that client at the end of the day would turn to the individual looking for succession as the final word. The sooner you can empower somebody else to be the final word, and some of those situations do take time and do take different types of circumstances, the more likely you'll have a successful transition.

Perspective is number two. Whose perspective are we talking about here? Is it the business owner? Is it several perspectives? Is it a team's?

[Rosenbloom] The answer is all of the above. Again, we need to be focused in how we look at the concept and the process of succession. If the fellow or person is going to be aligning with a different firm, then you are looking at joining different cultures and joining different priorities. It's more likely that the smaller firm is going to have to rapidly accept things that were not customary to that particular practitioner and their team. Having a perspective on what the priorities are in terms of client service, in terms of billings and collections, in terms of selectivity and acceptance of clients, and having a common perspective or enough comfort around that, is something that may be more challenging when you're talking with an outsider.

When it comes to an insider, certainly those people are familiar with what has been the current status, but they are going to have their own view. It often is the case that change is for the better. The perspective of that other party who is going to be happy to become the successor needs to become part of the routine operation of the business ahead of time so that everybody's comfortable that we can convert and rally around perspective. That's critically important as well as the perspective of the client. If it's an older person who's going to be looking for their exit strategy, clients are very well aware of how long they've been working with somebody and they are pretty comfortable with figuring out how old that person is. They are going to have on their mind, what will this person do about transition? What is the plan?

The perspective of the client is going to be relevant here, too. The clients have certain comforts and that's not to be ignored. At the same token, the clients have certain priorities which can't be ignored. The perspective is really all across the lot. It requires a lot of coordination. It's essential towards figuring out the path that you're going to go down when you have options in front of you.

Let's talk about team composition. What's the focus there? Is it making sure you have the right team to plan the composition, the right team when a successor takes over?

[Rosenbloom] We're looking, again, at all of the above. It's really a “facts and circumstances” type of situation. What we know is that when it comes to a practitioner who's looking to build their exit program, their preference routinely is to keep the practice internal. They tend to be less enthusiastic about joining forces with somebody else in many cases because they feel that they're really not going to be a partner in that other firm. They're going to be a high-level employee. They exaggerate that particular issue. But nonetheless, it would weigh heavily in their mind.

It's important to, number one, if you can build a team internally, which in today's world has to be somewhat more out-of-the-box so that it's not just about do I have enough CPAs, but do I have enough leadership? That leadership could come from advisory. That leadership can come from administrative. That leadership can come from organizational. That leadership can come from HR so that you have a crew of people who will be taking over and you can perpetuate the firm internally in that way. You need to have particular types of expertise in your organization, which may or may not be attainable. It may also mean that people have to be redeployed where somebody who really has that talent needs to be freed up to be able to exercise that talent.

The team’s top position, if you want to stay independent, is something to focus on. If you're looking at potentially aligning with somebody else, then your team has to blend into their team. The other side is going to have their own particular profile of employees and team members that they're looking for. Sometimes, they are looking very much to bring expertise that you have that they don't have. Other times, they're looking to bolster their expertise. Other times, they're looking to trim the personnel to be more compatible with what they have. The team is essential in that regard. If you are doing an internal transition, whoever may be the right candidates are going to have their own view on how they want to see the firm run. They may have their own wish list, which is going to be essential toward having them be comfortable taking a bite at the apple and moving forward. The team plays a huge role in how the succession process unfolds.

What's the importance of vision and who is ultimately responsible for that vision? Does it require insight from multiple people?

[Rosenbloom] Let's look at this in two parts. If this is an internal succession, it's likely that the vision of the firm as it stands is going to be morphed in some way, but a good component is likely to be retained. In terms of the mission and the type of client and the approach to the market, it could be enhanced but it's very unusual for it to change radically.

If you're now talking about a transition or succession that will require joining forces with a different firm, then the vision of what the practice is going to be like two years down the road, why that successor is so interested in your client base and what they expect to do with it will influence the comfort zone as it relates to proceeding with that particular forum. Because in the large majority of transactions so far, the terms have been based on retention. While we don't have a crystal ball, it's likely that some element of retention will continue in deal transactions. If there's not comfort in the vision, then the person seeking their exit is going to feel that the terms might be very appealing, but, in practice, don't ever come to fruition.

The vision is a common conversation. Not to say that the smaller firm should be dictating anything. That's not the case. It's got to be a common cooperative support system so that there is an effective integration and continuity of the clientele to the extent that they agree that this is the right mix.

We'll close the list here with compromise. Nobody's ever going to get exactly what they want in a succession, so you have to be ready to compromise, right?

[Rosenbloom] There's no question. You have to know what your line in the sand issues are. It's not unusual for people to enter a conversation with one view of their line in the sand issues and, as the conversations unfold, have a different view so that either they become more rigid about what they're prepared to compromise about or they become less rigid as they become more comfortable. Nobody expects to get everything they want. But, the relationship that is built during the dialogue is critical toward being able to protect the core issues and better define those core issues, which is a reasonable approach.

When it comes to an internal succession, that is a very challenging conversation as it relates to compromise. Because, for a period of time, whoever the internal successor has been, they have been an employee or they have had a minority ownership interest. Perhaps they were looking for compromise that they didn't see at that time and they may become more demanding now almost from the standpoint of taking revenge on that particular issue. Certainly, we hope that's not the case. But sometimes, doing it internally does require a different element of compromise. Many practitioners understand that it is much more comfortable to work with someone you know than someone you don't know.

Despite the fact that the outside organization may have deeper resources and a larger wallet, there is a tremendous unknown there. You're going in looking to build relationships where, in that firm that you have currently, if you're fortunate to have options for succession, you have a better sense of where the boundaries will ultimately end up and how much they will stand strong once the deal is in place. Question of compromise: every deal requires compromise. The question becomes how far do you go before you say no?