Succession planning key to sudden firm exits

This article was current at the time of publication.

Although no one wants to imagine the worst-case scenario, there are many reasons a principal may need to suddenly leave an accounting practice.

It could be because of illness, a divorce, or other personal problems. The unexpected can impact any of us and health issues or accidents do not discriminate.

More than 50 per cent of small to medium business owners exit due to ill health, divorce, disputes, financial distress, death, insolvency and various unforeseen events, says Stephen Jones FCPA, an adviser with Succession Plus. 

Every practitioner also reaches a point where they simply want to retire.

No matter the reason, issues around handing over clients, records and responsibilities should be addressed and then planned.

“Under APES 325 Risk Management for Firms, it is necessary to have a succession plan in place,” Jones says.

“One of the reasons is to protect clients, staff and stakeholders, as well as practitioners.”

In a review for CPA Australia, Jones has been looking at the extent to which practitioners are prepared for changing circumstances.

Previous reviews found that only around 42 per cent of [CPA Australia] members have a succession plan, he notes.

“Even in this case, practitioners tend to reflect the general population and many of these plans are not adequate or workable.”

When you’re a sole practitioner

While inadequate succession planning can disrupt firms with multiple practitioners, it is even more difficult for those with no support staff.

“In a larger firm, someone could step up,” Jones says. “In smaller practices, the issue is that there may only be one principal.”.

There are currently around 9000 public practices in Australia and of these, 83 per cent are represented by sole practitioners and firms with just two partners. 

For sole operators, having an arrangement with another practitioner who can step in and manage the practice in the event of a sudden exit is crucial.

Jones says it is important to find a practitioner whose values and service offering aligns with your own. Involving him or her in writing your succession plan may also be helpful. 

“It is one thing to have an arrangement in place, but another to ensure it can be implemented if necessary.”

Forming a succession plan 

Whether you’re a sole trader or running a larger firm, a solid succession plan should include the specific actions your firm will take to maintain its professional obligations for clients.

“It’s important to take a broad and detailed view of the issues involved in servicing accounts,” Jones says.

This includes access to the database and physical files – especially anything protected by a password only you know.

“Accessing this information may be time-critical if your clients have urgent accounting needs,” Jones warns. 

Guarding retirement income

With the average age of public practitioners now well over 50 years, more are contemplating succession for their practice.

Many focus on its capital value and how it can be used in their retirement planning. 

However, waiting until retirement – or, for example, being forced to leave because of illness – before considering business value can diminish its potential.

“You need to present your firm as an attractive investment opportunity,” Jones says.

“Being investor-ready and having an exit strategy means you can respond quickly to an unexpected acquisition [offer].

“The best outcomes are a result of good planning and involve both ownership and management transfer.”

Things to consider include, but are not limited to:

• A will with clear terms about what should happen to the practice in the event of your death or permanent incapacity.
• Power of attorney so that if you are incapacitated, someone is authorised to make decisions on behalf of the practice.
• Instructions on how client and staff needs will be managed based on the type of service you provide, as well as how they will be notified of a change to the practice. 
• Insurance details. This may include death or key person cover, trauma insurance, critical event cover and sickness and disability cover. Professional indemnity insurance should extend to any claims against the firm for work actioned before your exit for up to seven years.
• Successors you have nominated within your firm if you have partners or staff. Also consider any gaps in skills, education, or experience and how they can be filled through training before an unplanned event. You can download a practice review here.
• For partnerships, buy and sell agreement provisions in your shareholders’ agreement or a separate buy and sell agreement. 
• For sole practitioners, details of an arrangement with another practitioner who can step in and manage the practice.
• A practice overview document designed to assist someone in a caretaker role. It should include every detail from business assets and client base to billing practices and the name of the real estate agent leasing commercial premises to your firm.

Watch CPA Australia’s latest webinar on succession planning.