Make a resolution for your firm’s future

Link: Small practice guide

It is no coincidence that the word succession includes the word success. Succession should be a measure of success in practice.

A generation ago it was easy.

Our clients were loyal and not too demanding – and our colleagues were too. Being a chartered accountant in practice gave partners status and security. Now we are exposed to the real world. This manifests itself most clearly when we turn to succession planning.

Going back a generation, we had bright young accountants eagerly awaiting invitations to become partners. They knew that for the first few years it may be a struggle financially, but then it would be 30 years on a gravy train.

In small firms, incoming partners would happily buy goodwill in the belief it would be bought from them when they retired. In the larger firms there was no goodwill, but earnings were high enough to fund substantial pensions, so there would be the same happy retirement.

Now I hear senior partners complain that young accountants don’t want the commitments, both financial and time, demanded by partnership. The traditional model of succession planning by replacement from within the firm – a rolling management buyout – is under threat. There are various alternatives and they all enable ownership and management to be separated.

Recently, we’ve seen the efforts of the consolidators, although nobody has got it right, and an exit by sale or merger is always an option.

Put yourself in the shoes of the young accountant offered a partnership. Unlike any business investment advice that we would give our clients, we expect our potential partners to accept unlimited joint and several liability without being able to carry out any due diligence.

Prospective partners may be shown some accounts, but are unlikely to know the accounting policies that have been adopted. The partnership agreement will be a ‘take it or leave it’ document and the peer pressure to sign will be enormous.

Over the last 25 years, accounting firms have changed. The large firms have evolved, merged, incorporated and it is no longer unusual for their partners to leave to take other jobs.

A substantial problem in smaller firms is that the range of earnings has narrowed. Trainees and newly qualifieds have to be paid the market rates and partners’ earnings are no longer high enough to reflect the skills and responsibilities of the profession – let alone the risks. Why become a partner?

If you are a senior partner in a small or medium-sized firm, I suggest that you make a New Year resolution to sort out succession. Lord McLaurin, under whom Tesco developed so successfully, said: ‘Succession planning is one of the most important jobs any chairman has to do.’ Senior partners must work on their firm and not just in them.

The starting point for success in succession is to achieve sustainable profitability, and that means facing reality in 2004.

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