Succession Planning for Small to Midsize Firms—Ensuring a Smooth Transition

June 23, 2010

August AquilaAQUILA 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

For a free consultation please contact:

August J. Aquila952-930-1295aaquila@aquilaadvisors.com

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