Adviser: Smoothing the path to succession

Link: Small practice guide

When you ask a group of practitioners about their main concerns, practice succession is a recurring worry. One of their concerns is where to find good young partners who will continue the business.

But sometimes the underlying problem is as much about the retiring partner as it is about the incoming one. In a perfect world, a partner’s retirement is simple – the partners agree on the terms, and clients are transferred to others with the minimum of effort and disruption.

Unfortunately, we don’t live in a perfect world. Often the partnership deed specifies theoretical retirement dates, which need to be varied for practical reasons. Ageing partners have different objectives to younger ones – the financial incentives are not the same, for example, or they may want to spend more time helping local charities, rather than focusing on chargeable hours.

The instinctive response of many younger partners is to leave matters as they are. The outgoing partner is allowed to drift in and out during the last year or so until retirement. After that date, the remaining partners scrabble around to recover the clients, who by that stage are left uncertain about the level of attention they have been getting and whether there is anyone there who really understands their needs.

A painless transition is possible with proper planning. One continuing partner needs to be in control of the process, and there need to be clear, written policies that all partners understand. The process should start early, in an ideal world, probably four years before, with emphasis on the interaction with clients in the last 18 months.

Bonus arrangements need to be carefully structured to remove financial disincentives in the last year to the outgoing partner handing over knowledge and responsibility to the new engagement partner. For example, the last two years’ profit share could be based on an average of the last five years prior to that. Another possibility is to have an internal sale mechanism under which the outgoing partner transfers fees and has a financial reward for this.

Often the retiring partner’s real concern is the quality of the client care after they have left.

It is sensible to get the retiring partner to list his least desirable clients, and transfer them first, gradually weaning him off clients so that a trust is built up before the cherished clients are relinquished.

The real value of a process that works is that a retiring senior partner can use the time freed up by trans-ferring responsibility for day-to-day management of clients to concentrate on business development. They can find it personally rewarding, and, sometimes, the result can be a mutually beneficial consultancy arrangement in retirement.

It is important that all concerned never lose sight of the psychology of the retirement process. Matching financial incentives is crucial, but so too are the personal relationships, and it is essential to work hard at these to manage retirement successfully for all.

  • Mark Spofforth is an ICAEW council member and partner at Spofforths

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