Failure to plan for succession threatens the stability and value of small practices
The chances are many of us will have to work much longer than we expected, as retirement is delayed and finances get tighter. But when we do eventually get the chance to retire the process is likely to be fairly straightforward. The same is not so for those accountants running their own practice in the twilight of their careers. They will have to work out what will happen to their employees and clients, and to themselves, when they step back from the business or sell up.
When to start planning your successor
You should think about the sort of person you want to take over
Succession planning is something you should start thinking about almost as soon as you set up the business, experts say. If a practice has several partners it should be relatively easy to maintain continuity as older partners leave. But if the business is wholly owned the accountant must decide whether to try to sell the business and retire on the proceeds, or develop a succession plan for passing the business on to someone else, possibly a relative. And although many accountants will have helped clients go through this process, everything will feel quite different when it’s your business and your future under discussion.
If you want to sell, the more time you put into planning and settling on your objectives the better your chances of achieving them. One big problem is that potential buyers, particularly if they are existing employees or family members, may not be able to finance the deal.
“Generally speaking, as firms get larger the scope for selling up for a capital sum is diminished,” says Patrick Harrison, tax partner at accountant and business adviser PKF. “Most people don’t want to pay cash for companies. They’ll do a deal on a merger or to buy a stake in the business.”
This could be done using some form of vendor finance, such as a loan note-based deferred payment agreement, possibly in the form of deferred loans or shares from the vendor. This type of arrangement can take several years to complete so probably isn’t the ideal option for someone who wants to sell up and go relatively quickly.
The best thing you can do to maximise the value of the business before a sale is to run it well, says Harrison. “A lot of what determines the price will be the state of the business. There won’t be much you can do cosmetically to make it more attractive,” he says.
“You need to be running a tight ship. You also don’t want more capital invested in the business than you really need because it will be harder to refinance.” It may be that you have someone in mind to take over the business. They may already work for you and you may want to arrange a management buyout. Or they may work for someone else, who you would like to conduct a buy-in to the business.
Other than trying to keep the business healthy, trying to work out who might be best suited to run the business is the next most useful thing you can do in preparation for a sale, says Harrison.
Angela Baron, adviser at the Chartered Institute of Personnel and Development (CIPD), says she’s seen numerous cases of businesses being sold to the wrong person and suffering as a result. “You should think about the sort of person you want to take over,” she says. “Maybe the thing to do is to bring them in now and then you can gradually fade into the background.”
If you want to retain some involvement in the company another set of questions arise. How much influence would you like to have? Are you ready to stop working completely or would you like to stay on in some sort of consultancy role?
It’s also worth considering what the new management at your company will want you to do. On the one hand, says Harrison, “people may want you to hang around for a bit if you’ve got the client relationships”. On the other hand, he says, “they may not want you to be too involved for too long”.
He continues, “They may want goodwill to be transferred and not want this person lurking in the background, who the client really wants to deal with. You need to draw the line somewhere.”
Nick Carter-Pegg, partner and head of professional services at BDO, agrees. “Clients value long-term, strong, stable relationships with their advisers, so planning to hand that relationship over to somebody else does take time,” he says. “There can be a mismatch between what the consultant thinks they’re going to do and what the firm thinks they’re doing. I’ve seen some situations where the firm expects the consultant to be bringing in new work and the consultant doesn’t. Objectives need to be clarified.” In other words: get it all in writing in unambiguous terms.
The most important consideration is to keep clients happy and well informed. “You’ve got to make sure the clients get used to dealing with new faces,” says Harrison. “Again, you’ve got to do it gradually, over time.”
Keeping it in the family
If you want to pass the business on to a member of your family there are other questions to consider. Passing the reins to more than one family member will entail careful examination of the tax implications. But perhaps most important is how different members of the family will feel about any proposed changes.
It’s best to discuss possible options in an open way to make sure there aren’t any unwelcome surprises. When this process goes wrong it can cause damaging disputes within a family, as well as harming the business.
Baron acknowledges that a frank and open discussion can be an excellent solution for all parties but stresses that the same core principles apply: the outgoing business owner thinks deeply about what the business is going to look like after they have gone, what skills a new owner should have and how best they can ensure the sustainability of the business.
I've seen people who have left it too late and are clinging on
“To some extent the succession planning [in a family business] can be easier because the basis of the gift or sale may be dealt with without advice,” says John O’Donnell, a chartered accountant and practice consultant with Practice Support Services, an ICAEW member services offering. “And frankly it is a wonderful thing to be able to hand down a business without being concerned that the son or daughter has to build it up.”
But there can also be problems to overcome. “You don’t want to lose other potential good partners or senior staff members because they perceive that, however good they might be, the next partner is inevitably going to be the son or daughter,” says O’Donnell.
“You could say you might see the same situation at any firm where there was only one partnership going, but I think the situation is slightly different if the perception is that the other person will get the partnership because they’re a son or daughter of the boss. So there needs to be some expectation management. You’ve got to make sure [those employees] are kept on board and incentivised because the loss of a good staff member can lead to quite significant issues, particularly if you’re having a change of ownership.”
Even if you have advised clients on succession planning it is often worth taking external advice from an independent observer. “You may find you need some help from someone outside the business to make sure you don’t end up drifting into the sort of deal you didn’t want or end up spending another five years in the business that you hadn’t wanted to work,” says Harrison.
O’Donnell outlines how ICAEW can help. “Often we have identified value in the client portfolio that the accountant hasn’t realised may be particularly attractive to potential purchasers,” he says. “It may be that you have developed a specialism in a particular area and not realised there could be a commercial premium for that. So there are some very good reasons to take a few hours of advice.”
One guiding principle is to try to avoid any nasty surprises for clients or staff. “You need to keep clients informed,” says O’Donnell. “If you tell them nothing they may get to the point where they think you are retiring and start thinking about moving to another firm. Conversations with key clients and key staff could keep those important people on side and make the practice more attractive to sell.”
“I’ve certainly seen people who have left it too late and are clinging on, and clients are starting to think they may be served better by somebody else,” says Carter-Pegg. “This situation can arise for a number of reasons: either the person hasn’t given enough attention to retirement planning or they may have inflated views of what the practice may be worth so are clinging on in the hope of achieving a sale.
"But actually all they’re doing is potentially losing clients and damaging the business.”
Case study: Ian Hursley
Ian Hursley, 67, set up as a sole practitioner in the mid-1980s, then formed a company. When he sold the business in 2006 it had 15 staff and more than 600 clients. He had started planning for his retirement and succession after two accountants he knew died before doing so, leaving their staff and clients distraught and directionless. “I thought to myself: I can’t leave my practice in such a state.”
Hursley sold the business to a member of staff, having lent the purchaser three quarters of the money required. Six years on the purchaser has paid it all back. Hursley remains a sole practitioner with a handful of clients and he and his former company do some work for each other. His old firm still rents its office from him.
What will he do next? “I would still like to be involved with clients,” he says. “Meeting clients is one of the joys of being a practitioner. I shall deal with these clients until I’m 70 and then I’ll stop. Some will join what was my original firm, others may want to go elsewhere.”
And then where will his income come from? “We’ve been prudent. I could probably live for 10 years or more on the capital, but my income will come partly from the state, partly from the capital and partly from a pension pot that will probably provide an annuity of about £20,000 a year. And we’ll have income from one rental property, which is the office. I think I’m going to be all right.”
How did he feel when the business was sold? “Initially it felt fantastic to be able to walk away and not have to sit at the phone and computer until nine at night.” He and his wife immediately left for a fortnight’s holiday in the sun. But Hursley says he loved running the business. “It could be exhausting and emotionally draining but I couldn’t have chosen a better job.”
So was it a wrench to relinquish control? “No, because I did it for the right reasons. I don’t regret it – but I regret it not being there to occupy me (I don’t play golf). It’s a funny feeling.”
What sole practitioners should do
“Sole practitioners have to have some arrangement for passing things on in case they die in harness, to make sure clients continue to get a service,” says PKF’s Patrick Harrison. “There may be some contact with other firms, but you’ve got to have a proper service for your business.”
There will be some scope for selling on your fees. Again, the best solution would be to think carefully about this several years in advance in order to make sure you sell through, or to, someone you trust. “It may be that the only terms being offered are not especially attractive,” Harrison warns. “You’ve got to look at generating some kind of succession planning in the business so you can rely on people you trust to do a deal.”