How Your Firm Should be Planning for Internal Successionby
Now that roughly 10,000 Baby Boomers are reaching retirement age every day, the time to sell or pass on control of accounting firms may come sooner than you realize.
Most firms are unprepared when it comes to this matter. According to one survey, 50 percent of accounting firms have no succession plan whatsoever, while another 30 percent don't have a detailed one. Thankfully, these ill-prepared firms have examples they can look to for inspiration.
Our firm recently underwent an internal succession and while it wasn’t the only option, with careful planning and execution, this way can be the most beneficial. Here's a closer look at the advantages of filling positions internally.
How Internal Succession Benefits the Seller
When considering succession options, it's easy to focus on one key advantage of going external: it's more profitable. Selling a firm on the open market often means you can ask for more and get it. While internal succession typically involves less money, it holds other benefits for the seller.
For our firm, the seller (a founding member) wanted to maintain some level of involvement. Since the firm's been in business for more than 30 years, it's understandable why a founding member wouldn't want to sever all ties with the firm. If he had gone to the open market, he may not have been able to retain involvement.
Internal succession enables the seller to hold on to parts of their job if they want to. Employees know the seller and they understand why they may want to stay involved in some capacity.
External buyers on the open market may not be as willing to allow for these freedoms. An internal succession makes it easier for the seller to stay involved and mentor the new owners.
How Internal Succession Benefits the Company
Internal succession has even more advantages for employees than it does for the seller as it enables the seller to assist the new owners, which can help avoid disruptions. This mentorship is crucial for a smooth transition, which employees need to stay productive.
Internal succession, when done right, has the highest potential success rate of client and employee retention. In an external sale, staff will have to get used to new bosses and likely new workflows. These changes could cause confusion and lower morale, leading to lower productivity and even employee turnover.
Internal succession, on the other hand, causes relatively fewer changes in day-to-day operations. Employees will work for people they already know and the new owners will already be familiar with how the company works. Less disruption also means more consistent service for the firm's clientele.
When employees have to adjust to changes, customer service can suffer. Workers won't be able to offer the best service possible when they're still figuring out how everything works. Long time clients who have expectations about how the firm operates could also turn away in the face of these changes.
The intangible and sometimes hidden benefits are the biggest reason to consider an internal succession. External buyers won't have as firm a grasp on the unique company culture that helps a business operate. That advantage only comes with experience, which internal buyers already have.
The Path to Successful Succession
Internal succession can present both buyers and sellers with a variety of benefits. None of them are guaranteed, though. If firms hope to get all they can get out of the succession, they need to plan and proceed carefully.
Internal succession is only going to be successful when both the former owners and new owners want to make the deal work. Both sides need to aim for a successful deal, which often involves some amount of sacrifice.
Buyers and sellers need to meet in the middle, especially on price, and ensure that it's fair for everyone involved. This is why a qualified third party is crucial in making sure the deal works for all sides.
Our firm turned to a group that specializes in transitions when starting the deal-making process. Without this outside help, the succession could have dragged on for years or left out areas that would've caused problems later.
Even with third-party help, both sides need to make an effort to reach an understanding. For Marshall Jones, this involved holding weekly in-person meetings to discuss issues and developments. Regularly meeting face-to-face helps clear up any miscommunication and gives everyone a chance to voice their opinion.
This process has to be planned in advance. Succession, even with internal buyers, involves a lot of fine details that can take a long time to discuss. It's not unusual for these discussions to last for a year or more, so firms need to start early.
If our firm had rushed this process, it could have been disastrous. Our founding member might not have been able to retain his desired involvement and the new owners might not have figured out everything they needed to. Since they took the time and effort to account for everything, though, the deal ended with all parties satisfied.
Internal Succession Offers the Best Solution for All Parties
With proper planning and careful execution, internal succession can be the best way to transfer ownership. For sellers, it provides a greater deal of flexibility and enables them to stay involved. For the firm itself, it sends a good message to all employees that leadership values everyone's efforts.
If done right, internal succession improves morale and minimizes disruption. As one generation starts to leave the workforce and another enters, accounting firms should consider how to transfer company leadership. If you want to ensure the future success of the company, internal succession is the best way to go.