Succession is about more than finding the right people

by Ladislav Hornan

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27 Nov 2012

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The right choice

WHEN EQUITY PARTNERS discuss the future of accountancy firms, the recurring theme is succession planning. They talk about how difficult it is to attract new equity partners, with the younger generation not being ready to take on the responsibility, or rejecting partnership in favour of a better work/life balance.

But in my opinion, there is more to succession than just lining up the next generation.

Firstly, it's not that it is difficult to attract people into partnership, but rather that the people to whom partnership appeals may not be the right people for the job of running and growing a business.

There are people coming through the ranks who are ambitious, professional, technically highly skilled and good in client-facing situations. But these people may be insufficiently attuned to developing new business, without which there is no future for the firm.

Within the Big Four, there is a culture of building a pipeline of work, which may be easier because of their greater access to the market. But some mid-tier firms are struggling because not enough importance has been placed on commerciality and nurturing business development skills.

The other issue is the need to properly structure the partnership to allow potential leaders to be developed. There is much that is good about the partnership structure – it is a democratic, transparent vehicle and an excellent way of securing good senior people. But when it comes to structuring the leadership of the firm, partners would do well to embrace a more corporate ethos.

Here the democratic nature backfires – in the vast majority of partnerships, there are too many decision makers with differing views. Within this structure, it's difficult for the existing leadership to pick out a small number of future leaders and groom them for senior positions, because the right to a vote means there is always uncertainty over the final outcome. Some firms have tried to resolve this issue by having their elected body appoint a CEO, but this still falls some way short of the true corporate model.

The classic partnership ethos is, however, difficult to change. Some firms have tried, for example, by publicly listing. And, while in those cases the corporate business structure might be more appropriate, it doesn't address the other important issue which is how to repay the value a person has brought to a firm during their time as a partner. Furthermore, being a shareholder in a firm does not engender the same sense of ownership as being a partner.

The creation of capital value does a good job of tying a person into the business, but the need to build capital value is in itself a barrier to entry into equity partnership. And yet valuing and paying in or out on goodwill at the point of entering or departing a firm is not the answer either.

Once defined, all of these matters should be encased in a properly crafted partnership agreement to help ensure a smooth transition from the older to the younger generation over time. It can also be useful for setting out ways to incentivise partners to bring in new business and develop existing clients. There are too many mid-tier firms still using old partnership agreements which cannot adequately cope with modern situations.

What all of these issues come down to is the need for long-term strategic planning, which is properly documented so as to make it very clear what will be expected in the future of the incoming younger generation and to avoid knee-jerk reactions to fundamental business issues.

Ladislav Hornan is managing partner at UHY Hacker Young LLP

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