This is interesting. It applies to any professional firm but probably most applicable to accountants and lawyers.

shakinghandsGary Adamson, president of Adamson Advisory, specialising in practice management consulting for CPA firms in the USA, has written on the issues of succession and retirement of senior partners in accounting firms. He also addresses the review and updating of firm’s internal documents and agreements. He says that a key part of the update should be focused around how new partners are brought into the firm to replace the retirees.  There have been changes in valuations and process that should be noted.

Mr Adamson sets out some of the best practices on the following:

  • How Many Partners Do You Really Need?
  • Non-Equity or Low-Equity Partners
  • Buying In
  • How Much Capital?
  • Financing the Buy-in

“Regardless of whether you change anything or not, the Baby Boomer succession wave presents an opportunity to review and challenge how we bring new partners into our firms”, says the author.

You can read Gary Adamson’s full article here. He previously contributed another article on accountingWEB last year, here. He said accountants everywhere are wrestling their way through partner retirements and the accompanying succession issues in numbers that the profession has never seen before. He called it “the baby boomer bubble, up close and personal”. Important points he makes are:

  • Succession planning should focus on replacing that retiring partner’s contribution on several fronts. Depending on the role of the retiring partner in the firm, partners will experience varying levels of pain surrounding things like replacing significant knowledge or technical expertise, backfilling a block of hours to get the work done, and shoring up voids left in firm leadership. These are all significant issues and deserve a plan of their own. But the big issue is the transition of client relationships.
  • The underlying issue is that most firms have an unfunded partner buyout or “retirement” plan. That means that retirement payments over an extended period of time will (hopefully) come from the continued operations and profits of the firm. The currency the firm will use to pay out that retiring partner is really the annuity revenue stream from the clients they used to serve. A successful handoff and the retention of those clients is the only way the unfunded plan has a chance to survive.
  • Make sure that there is a mandatory retirement date for partners. There is a target date (for instance age sixty-five) that we all know is coming that is controlled by the firm. There is no way to create an effective transition plan without everyone knowing when it is.
  • The trend by more and more firms is to build the client transition expectations into their partner agreements; for example, a two-year notice and the completion of a written transition plan with the managing partner. If the retiring or departing partner fulfils the expectations, then a successful transition of the clients is a lot more likely and there should be no penalty for any subsequent losses. However, if the partner does not meet the firm’s transition expectations and clients depart within a relatively short period of time (say two years), then the partner suffers a deduction in retirement payments. This is not where the majority of firms are today, but it is where they are going.

Practical Law for Companies (PLC) provide a checklist of matters to be considered when admitting a new partner to an existing partnership. It is available here but you need to be a subscriber to access it.

Martin Pollins
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