Succession Planning - Be prepared

With the consolidation of the market and a more competitive environment, small firms need to have a sound succession strategy in place.
Richard Linsell

Not even two years ago, the accountancy market was a very different place - partners were quite likely to be worrying about succession. Had they got the right calibre of people in place to succeed them? The prospect of selling their firms was not a real one. That was before the intensive consolidation began. In April, Tenon Group announced the acquisition of another five practices: Lathams, Scott Oswald, Godfrey Allan and Jennings Johnson, together with the corporate recovery arm of Horwath Clark Whitehill. And £59.3m (with £28.3m of that in cash) has found its way into the pockets of the partners in these businesses.

Now, Tenon seems assured of reaching its stated goal of 'growing the annual turnover of the company to more than £100m within two to three years'. And other 'consolidators' are active. Recently Levy Gee announced that it is to become the catalyst for Numerica Group, a consolidator that will concentrate on acquiring firms outside the top 50. This focus on 'smaller firms' will generate a lot of interest - firms are emerging as willing vendors.

Select few

But it is only a few firms with the right strategic mix in their practices and the right location that are going to attract Tenon or the other consolidators. I believe we are seeing a readjustment of the markets for all major professional services. Globalisation will be the achievement of a few, and national coverage the achievement of a few others. In the accountancy market those firms can already be identified, and there are only a few that might compete with the second tier of national practices, all of which are likely to need £100m in annual fees to support their infrastructure and generate the profits their partners seek.

For others there is going to have to be some serious readjustment. Some mid-sized firms are going to be pressured by niche practices that are going to be focused on particular market sectors and specific towns. With smaller fixed costs and a more entrepreneurial culture, these firms will be formidable competition. The pressure will encourage some of the most successful partners in these mid-sized firms to set up alone, thus stripping their firm of their client base and skills, but improving the partners' take-home pay considerably. They will be their own masters, reducing decision-making time and bringing them closer to their clients.

Take action

So what should the smaller practice be doing to ensure that the business carries on once the existing partners retire? First, they should look at their partnership to see if it is successful or capable of becoming successful. A successful partnership is a business where people share a common vision, get on with each other, and each make effective contributions to a profitable practice. Where this is not the case there is likely to be the need for a change of leadership and culture, a demerger or even an enforced retirement.

If your partnership has a good business and team culture, the objective must still be to pass the baton down through generations of partners, without in most cases requiring a goodwill payment. Only those who nurture the talent to succeed them are likely to avoid a more radical 'solution' to succession in their firm.

Research has regularly shown that money is not the only reward professional people seek, despite changing values and media focus on earnings. Higher in most surveys are attaining the client's respect and trust, and achieving recognition from their peers in a convivial partnership. However, the pressures on salaries and profits are very real. Graduates are being swept up by a range of employers and tempted by some very favourable salaries and fringe benefits, with the leading firms also offering training that some of the largest businesses in the UK are hardly able to match. Many graduates are going to join the top accountancy firms, not because they see themselves as long-term partners, but because they will within three years have received in-depth training almost equivalent to a business-school course; and they will have been well paid at the same time.

So, the smaller firm has either got to look to family succession (something that works effectively in very few businesses, and professional firms are no exception here) or find ways of recruiting and retaining people of sufficient quality and commitment that traditional succession can continue. Here, firms are going to need some good fortune. The next generation of partners is unlikely to be easy to find through traditional recruitment markets. Thus they are likely to seek new talent from the contacts they make, through finding the right person on the opposite side of a transaction, by introduction through trusted clients and other intermediaries, and simply by 'networking' in their market and being alert to opportunities.

Regular review

Once you have the right team of partners in place, with a cohesive strategy and the right blend of skills and ages, the challenge is to keep that team together. To do that, you have to generate perceived success that will be measured in terms of the bottom line. You will need to address the perennial issues of partnership governance. Some firms can act collectively and dynamically; others have to move, sometimes with pain, to a more corporate model empowering leaders and communicators to deliver the agreed strategy. The limited liability partnership, with its more corporate form and public disclosure, may help things to change in this area.

Any well-managed corporate business undertakes a succession review regularly. Yet many partnerships shun the process or confuse it with other issues. The consolidators have elevated the debate and focused some thinking on succession issues. Now is the time for all firms to have clear plans. If structural issues arise from that planning, they are better addressed now than being allowed to fester.

Richard Linsell is head of Rowe & Maw's Professions Group

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