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UK: The Succession Planning Guide for Professional Service Firms

Perhaps the single most challenging long-term issue for any small or mid-sized professional services firm, whether an accounting practice, law firm or other consultancy, is defining its future

(PresseBox) (Munich, ) Succession planning brings a host of tricky issues as partners age, veer towards the finishing line and consider, often for the first time, their financial worth to the business. As founders or long-term shareholders, are they not entitled to some sort of compensation for the blood, sweat and toil that they invested in the practice? From the flip side of the coin, others may see the productivity of those same individuals wane and, ironically, their financial contribution to the business may begin to be questioned. Likewise, retaining top talent as junior professionals develop and transition towards senior roles and ownership offers a related set of issues to navigate. By ignoring the views of the ‘next generation’, business owners are by definition putting their own plans at risk.

This guide has been produced from years of experience of counselling a significant number of clients through such issues. We felt it would be useful to articulate the issues and key questions surrounding business succession planning for the modern practice.

1. Does it make sense to plan for more than a single generation in your firm?

The first question for any professional services firm when it comes to business and succession planning is: do the current business owners want to leave a legacy or do they not care if their practice does not last more than a “single generation”? Most small and mid-sized practices are developed by the passion and commitment of a few inspirational individuals who are in it for the challenge and satisfaction of growing a successful practice. It is usually “not about the money” or the potential capital gains of a future share sale.

Business succession for professional service firms (“PSFs”) is inherently difficult. The reality is that most thriving practices depend on a handful of dynamic professionals who generate the clients that make them succeed. The very thing that makes these groups successful – charismatic leadership – does not naturally lead into a next generation. Indeed, if there is not enough headroom in the practice, the danger is that tomorrow’s dynamic leaders may jump out of the organisation and start their own practice – a very familiar occurrence in many London based PSFs in the past 20 or so years. Sometimes the original firm is left with the ‘next generation’ being made up of talented individuals but with a ‘follower’ rather than ‘leader’ approach to commercial issues. The relationships with clients that drive the practice’s success are often highly personal and do not transfer naturally or easily. In many cases, the first generation took risks that those who joined later did not have to take, and the difference in style around risk is a constraint on business growth. In other cases, second-generation leaders struggle with internal tensions that the first-generation founders did not have to deal with (such as lack of support for their leadership) for the simple reason that the original leadership was a condition to which everyone signed on when they joined. For these and other reasons, it is little surprise that many PSFs are around for one generation only.

With this mind, for some firms it may be smarter to acknowledge upfront that the business is being built for a single-generation lifespan. It helps to clarify strategic priorities and the decisions about where to invest resources. If being around for a second generation is not a shared goal which the business owners are united on and committed to, then the group may be better off preparing for a point when collective existence no longer makes the most sense based on the circumstances of its owners. At that point, the group simply disbands. Its founders retire when they are done and selling up to a competitor might be the preferred strategic option. Other professionals create new firms or move on to other ones.

However, for the majority of firms, the preference is that second generation leaders will emerge internally. Unfortunately, many firms do not actively plan for this to happen; they passively assume that talented staff will come through one day and grasp the opportunity when (at last) it is thrust upon them. In such cases, only time will tell whether that strategy will eventually pay off and in the timescales that are desirable.
Another changing dynamic is that we now live in an era when professionals are likely to switch business organisations multiple times over the course of their careers. There is now an abundance of compelling research on the preferences of Generations Y and Z to suggest that firms should now plan for a more mobile work-force and, consequently, the need for more lateral hires at senior manager/senior associate level and above.
In addition, there is a more practical reason for building for a second generation: the cost of losing professionals after the significant investment that goes into their training. This is particularly true in specialised firms where the pool of potential replacements in the marketplace is, by definition, shallower.

In summary, are the two different strategic options (legacy firm against a one-generational firm) in conflict? In many areas, the same things that keep everyone invested in the firm for purposes of a second generation existence (including healthy profits, a strong culture, a compelling vision for the future, and an effective compensation system) also translate into effective retention in the interim which benefits the one generation firm.

2. The Need to Talk about the Future

The hardest part of business succession planning is not how to integrate junior people or develop them into next generation leaders, but how to treat ageing senior professionals. The departure of a senior partner, whether through termination, death, disability, or retirement, is a major event not only for the person affected, but for the organisation itself. When a partner with significant productivity is lost, the organisation may face a significant challenge to its ability to replace the clients and billings and to survive.

Unsurprisingly, few first-generation organisations face planning around ageing partners “head-on”. Most small and medium-sized firms wait as long as possible to tackle the challenge of a senior partner who is no longer performing at his or her historic level. The strategy of avoidance is understandable, given that the topic is awkward and can feel scary for the ageing partner who has to contemplate relinquishing control. On the other hand, the failure to address declining performance can pose a threat to the firm.
The single biggest mistake that business owners make is not talking about succession planning and the future, either among themselves or with their junior professionals. No matter how old we are or at what stage of our career, each of us thinks about what is ahead. We cannot help it. At 50 years of age, we think differently about our career than we did at 42 or 29. For example, at 29, ambitious recently-qualifieds worry about whether their current firm has the right market reputation and can fulfil career ambitions. At 42, experienced professionals with home financial pressures obsess more about rewards and what the end game (financially) might look like. At 50, I find myself increasingly thinking about investing and saving more, in order to support the family and to be able to make choices ahead, in particular the ability to generate income from passive sources.

While it is easy to have these conversations with ourselves or with our spouses, it is much harder to have them with our business partners. It is hard to acknowledge to more junior accountants or lawyers that we want to slow down or shift roles as we age. It is even harder for junior colleagues to talk about what they see or how they experience senior colleagues ageing. The topics are hard, and it is too easy for the conversations to go off the rails.

The problem is that not having these conversations does not make the issues go away. It just means the conversation continues in silos, with the key players not talking to each other. We each tell ourselves stories about what we are entitled to, with increasing risk that our perceptions do not align with those of colleagues. Fellow partners and junior colleagues continue to think and wonder about what ageing partners want. It gets particularly awkward when colleagues and clients are aware of inevitable changes in ageing professionals, but are afraid to talk about them. Even worse than the lack of communication is the anger and frustration that builds up from not expressing ourselves.

I have encountered some terrific mediators and conflict resolution facilitators who deal with these issues and can facilitate conversations in a way that feels safe for all involved, but I believe outside experts will not be enough if the foundation has not been laid in how the firm communicates. In other words, unless PSGs are able to have open and frank conversations across a broad range of topics, they stand little chance of taking on this most difficult of all topics productively.
On the other hand, by developing a culture of trust, transparency and respect over time by having the dialogue necessary to tackle tough issues, firms can set the stage for healthy conversations about succession planning and about what both junior and ageing partners want and need. Ideally, these issues are not addressed on an ad hoc basis, but rather in a unified and strategic manner that enables planning by the current owners, improves the chances for retention for the most promising junior attorneys, and establishes a stable foundation for the firm to endure.

I am curious what you think about when it comes to your own organisation or your clients where you service PSFs. Are you planning for a next generation? What are you/they doing to develop and retain talent? How are you planning for succession? I would love to hear from you.

David Miles, accountant, ECOVIS Wingrave Yeats, London, UK

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About ECOVIS AG Steuerberatungsgesellschaft

Ecovis is a leading global consulting firm with its origins in Continental Europe. It has over 4,500 people operating in over 60 countries. Its consulting focus and core competencies lie in the areas of tax consultation, accounting, auditing and legal advice. The particular strength of Ecovis is the combination of personal advice at a local level with the general expertise of an international and interdisciplinary network of professionals. Every Ecovis office can rely on qualified specialists in the back offices as well as on the specific industrial or national know-how of all the Ecovis experts worldwide. This diversified expertise provides clients with effective support, especially in the fields of international transactions and investments - from preparation in the client's home country to support in the target country. In its consulting work Ecovis concentrates mainly on mid-sized firms.

Both nationally and internationally, its one-stop-shop concept ensures all-round support in legal, fiscal, managerial and administrative issues.

The name Ecovis, a combination of the terms economy and vision, expresses both its international character and its focus on the future and growth.

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