Succession planning for accounting firms: Is internal succession the best option?

A lot of practitioners would favour the internal succession route, but you have to get the right person.

With baby boomers retiring, now is the time for all equity-owning practitioners to consider succession planning. Two CPAs reveal their own future-proofing options.

The Accounting Professional and Ethical Standards Board (APESB) dictates that under amendments to APES 325 Risk Management for Firms that came into effect 1 April 2018, public practice firms are required to document their succession plans as part of their risk management framework.

However, according to the 2018 Good Bad Ugly succession poll, 75 per cent of those surveyed did not have a documented succession plan. For practitioners looking to retire or move on from the business, the options are wide but limited, the main being:

  • Sale of a fee parcel
  • Outright sale of the firm
  • Merger
  • Sale to existing partners
  • Internal succession
  • Introduction of new partners
  • Orderly winding up.

Having a succession plan demonstrates business stability to existing and potential clients, as well as employees. Unfortunately, while an equity owner may have worked a lifetime to facilitate the financial security of clients, many do not take the time to properly map the long-term course of their own firm.

Internal succession model: a case story

David Livingstone FCPA has not fallen into the trap. Livingstone established an accounting practice from his home in Somerville on the outskirts of Melbourne in late 1987.

In 1999, his business having outgrown his house, he joined with Peter Beckett CA and formed Livingstone Beckett & Associates (LBA). In April 2018, LBA welcomed Luke Wade on board as a third partner, changing its name to LBW Advisory. It currently services over 2500 clients from all over Australia.

Although Livingstone says he is not going anywhere for at least the next four years, he is an advocate of the internal succession model. 

“The opportunity presented itself, having employed a graduate with two years’ experience at Grant Thornton but who lived locally and from day one really wanted to become a partner,” Livingstone says. 

“Five years later, we decided to take him on board.”

As a younger person, Wade has cultivated a younger clientele. In contrast, as many sole practitioners age, so does their client base. 

“Natural attrition without getting any new clients in at the bottom end is a worry if you want to sell at some stage,” Livingstone says. 

While specialising in a niche may make your firm more attractive to some buyers, recruiting new, forward-thinking talent in outlying or regional areas against big-city competitors can be difficult. 

At one stage Livingstone considered acquiring another firm in nearby Mornington, which was still run by a practitioner in his 70s. 

“One of his major clients was in his 60s, and some in their 80s. There were super funds that would have been good for us, but we thought the A$400,000-$500,000 fees in five years’ time might become A$250,000 or even A$100,000.”

The firm had also failed to leverage technology

“He had three people doing one ‘I’ return and storage rooms filled with 26 filing cabinets. If you are going to buy into a practice you need to consider the backend work involved and staff retraining. If you do it right, you should be able to maintain about 80 per cent of fees, but in this instance, location was also an issue, because if we shifted that office from Mornington to Somerville, even the 10-to-15-minute drive could have been a deterrent to the older client base.”

Due diligence is imperative and extends to cultural fit. 

“I think a lot of practitioners would favour the internal succession route, but you have to get the right person – someone who isn’t going to cut a swathe through the place,” Livingstone says. “I have a 30-plus year [legacy] of work and I would like to see it continue.”

In stark contrast, someone Livingstone encountered at a recent industry conference “just sent out an email saying he had closed shop, any queries contact this guy and see you later".

"That’s not looking after people and it spoils your name. You are trusted by people and have a responsibility to return that trust.”

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A better way to do accounting practice succession

Kayleen Redman CPA, principal Berwick Taxation Services (BTR) in Berwick, Victoria, agrees, adding that it is important to implement an appropriate succession timeline. 

“The best way to succession is to have someone come up from inside the practice who knows the clients and how everything works, because it makes for a smoother transition,” she says.

“Originally, I was thinking about getting someone to buy in or to combine forces with because the practice was getting too big for me, but it seemed I was going to lose out if I went into a partnership, even if I sold fees.”

An up-and-coming, one-time junior accounting team member has been designated Redman’s successor. 

“She’s not there yet and she knows it, but the intention is that in the next five years or so this will be her practice.”

After 17 years at BTR, Redman may yet sell her successor fees and stay on to service a few key clients but will cross that bridge in time. The important thing, she says, is that the firm is abreast of the latest technology, has a sound reputation and despite a team of just five, is positioning to attract a new generation of clients. 

“The biggest bonus is that clients know [my successor] is coming up from the inside, so they don’t leave, unlike if you sell to an outsider. I bought this practice off my old boss and I lost only one client. He made sure that when I was about two years out from buying I was at every client interview and did all the contracting. Without that [induction], you run the risk of a mass exodus.”

Redman’s successor is almost 40, but she had previously tried grooming a Millennial. It didn’t work. 

“He wanted everything now and I do find that Millennials would rather start up on their own and do it all their way.”

Anecdotally, perhaps this is a contributing factor to PJ Camm & Associates managing director Patrick Camm’s observation: “Ninety-two per cent of firms in the country are sole practitioners or two-partner firms, so internal succession accounts for less than 10 per cent of transactions.

“Best practice internal succession really relates to larger firms and this is a small percentage of transactions.”

That being the case, if you don’t already have a succession plan, the time to get one is now. Succession planning is not an overnight process and as Livingstone and Redman testify, could well take five or more years. 

To be succession ready, you must be both investor-ready and have an exit strategy so that you are able to respond quickly if an unexpected opportunity arises.

Related resources:

CPA Australia’s succession planning toolkit 

Succession planning pathways for CPA Australia public practitioners (PDF)

Read next: Accounting practice succession: planning sows the seeds for a successful transition

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