Retirement: succession solution

So many partners now in practice are reaching an age where they are considering retirement, or at the least reducing commitment to everyday work. There are many options that a practice can look at, but the reality is that if you are a multi-partner firm with say, four or six partners, then you probably have between four and six opinions and requirements. Younger partners wishing to continue in practice. The older ones wishing to retire and receive payment for their lifetime’s work. Those in the middle looking both ways, and wondering where the practice is going to end up.

This is going to be a regular feature for the next five to ten years. Succession is not only something to worry about in clients, it is endemic throughout accountancy practices.

Traditionally the simple route to take was that the younger partners would buy out the older ones. However, there is a difficulty with raising this type of finance from the banks.

Not only that, younger partners are often unwilling to borrow the substantial amount of money required to assist a retiring partner. The route therefore was simply to look at selling the practice onto a larger player in the market place. The new owners would buy out the interest of the retiring partners and keep the younger ones on to look after the clients. Fairly straight forward, but not always, of course, acceptable.

There are alternatives. Given the scenario of older and younger partners in the same practice, it is possible to look at a salary sacrifice buyout scheme and this may be worth considering with one or two practices. Essentially the younger partners will not have to raise substantial funds and be committed to heavy borrowing. Older partners can receive their goodwill and capital accounts. The disadvantage is that they might have to wait an awfully long time to receive it all. However, in view of the current non-value of cash in the market place, long-term income may be more acceptable.

An alternative would be for the retiring partner to take his fees and sell them elsewhere. This can be extremely difficult, as it can cause severe disruption to the existing practice in terms of general turnover and value of the practice, taking into consideration fixed and variable overheads. Not a happy option and rarely seen. We really only see this occur when the practice is in dispute and the retiring partner removes his fees and walks away because there appears to be no alternative for him or her.

The various consolidators within the profession may provide an alternative. There are a number of models available that look at acquiring practices away from their core business in separate geographic locations. The older partners are brought out by the consolidator/integrator. The younger ones continue with a shareholding in that practice and achieve at least some areas of autonomy. Again, a solution that may just be the preferred option by some practices.

Back in the 80s, it was very common for younger practitioners to buy out the interest of senior partners. This option almost disappeared in the 90s, and certainly has done so in the new millennium. We can see this being resurrected, and activity in that direction is recommencing. The surprising issue is that it is possible to find partners or partners designate to come into a practice and buy out the interest of a retiring partner. More so than getting the existing partners to buy out that interest. The incoming partners may be arriving from a larger practice where they have little or no influence. There may be a two partner firm going down to one, and the younger one does not want to be left on their own. It may be a sole practitioner (they are much rarer) who does not want to be on their own with all the attendant commitments.

Incoming partners may be with or without fees therefore. We are aware of many high street practices that would prefer those partners to come in with existing fees so they effectively pay for themselves on day one. It does not, however, solve the problem that the retiring partner still has fees that need to be passed on, and the incoming partner or partner designate already has fees.

It may be that someone is coming in from another practice seeking a better opportunity, perhaps in a smaller firm. We have seen good accountants coming out of national practices where they feel they have little or no influence or are going to be waiting a long time to be made partners. They may therefore be suitable to bring into a high street firm. They may even bring additional services, resources, ideas and even the odd client with them. They may, however, just as importantly, have cash available to buy out a retiring partner. This route, which did tend to die the death for twenty years, appears to be now back with us again.

I believe the expression is what goes around, comes around.

Ron Goldsmith is director of Goldsmiths Practice Services LLP