How accounting firms should manage succession

A wave of consolidation in the accounting industry, where bigger firms are swallowing up smaller firms, is often tied to a failure to deal with succession issues.

The BRW 2012 Top 100 Accounting Firms list, due out on November 8, reveals that 21 out of the nation’s top 100 firms don’t have a succession plan for the next five years. Although 79 per cent say they do have a succession plan, many are still in their infancy and don’t deal with the issue of how to recruit good talent.

Regional firms often find it harder to recruit talent against their big-city competitors. And then there’s the added problem that the younger generation no longer wants to buy goodwill to become a firm partner.

In fact, they may not want to make partner at all, says accountant Scott Edden, who joined Maitland, NSW, accounting firm Farrow Wyatt in 2003.

“Gen Y only have a one- to two-year time horizon; they are not always looking at a partnership,” he says. “Trying to get someone into a five- or
10-year plan is quite hard.”

Edden, 36, is from Newcastle, NSW, and joined the regional firm after working with PwC’s forensic accounting team between 1998 and 2000, and later in tax and accounting roles for another local firm, Forsythes.

When Edden joined Farrow Wyatt, a firm with offices in Maitland and Singleton that has been in business for 80 years, he made it clear he wanted to make partner. The firm now has two partners in their late 30s and four in their late to mid-50s, so a succession plan was a must.

“It’s quite critical in our business because we’ve got two partners that are looking to retire in next five years,” he says. “They need to pass on clients and the firm needs to ensure there’s still enough partners working in the firm. We don’t want partners over-burdened.”

The Leadership Circle Asia Pacific’s director of commercial and governance Greg Lourey has helped many firms prepare succession strategies. He says the succession dilemma hits regional accounting firms because many wait until the last minute to produce a plan.

“Succession planning is not a 12-month-out process,” he says. “Partners need to be looking out five or more years to manage this process well.”

Owners need to be open to mvoing out of the business rather than treat it as a “once-off liquidity event”, he says.

“This may mean working fewer days a week over a period of time to affect the client relationship transition and, or, stay on in a consulting role to support the retention of loyal client,” Lourey says.

Another reason firms struggle is that they operate under goodwill models. Buying goodwill – or equity in a firm – by sinking in hundreds of thousands of dollars isn’t a model that makes it easy to find suitable young talent.

Edden says that although he was prepared to work under the goodwill model, most young people don’t want to make that sort of a financial commitment and a better option may be making people salary partners, as is done at big four firms.

“There are already non-goodwill practices where senior partners get a higher salary than the junior ones,” he says. “That could be something that could work in the future. People won’t need to pay to buy in.”

But the transition to a non-goodwill model will be hard for many firms because they are reluctant to change. “People do things the same way they’ve done for past 30 years and as a result we are not attracting as many people as other professions,” Edden says. “It needs to be more attractive. Putting in a lump sum of money doesn’t do it for everybody. I think that model needs to change. It’s the issue that’s a sticking point for next generation who are coming into leadership and partnership roles. There needs to be more flexibility.”

Edden is considering this very issue as part of his firm’s succession plan.

“My biggest concern about getting the next lot through our firm is convincing them that you have to pay,” he says. “I’ve started talking to other firms that have moved that way.”

Aside from the buy-in issues, Edden says many firms spend little time understanding what their recruits want and recruits themselves don’t understand the demands of making partner.

“Try and understand what you want out of your career,” he says. “If you’re happy being told what to do and being controlled in what to do, then partnership is not for you. If you want control over your own destiny partnership is great.”

Another regional firm in Wagga Wagga, WDF Professional, is facing similar challenges. The firm, which was founded in 1978, has four partners and a team of 32 staff. David Friedlieb, an accountant who joined the firm in 1992 and is now a partner, says they started thinking about succession issues soon after he started.

At the time the firm’s founding partner, John Whiles, became ill. “That gave rise to us having to think about a succession strategy,” Friedlieb says. “Now from the point of view of succession, we know five years out who will be coming in, who will be going out, and how that works.

“The best way to make sure you have the right people is keeping the people you already have. We find opportunities to fulfil their aspirations, so they stay with us rather than going elsewhere.”

Senior staff who want to work only three days a week are accommodated and when it comes to partnership arrangements, he says the firm offers other incentives, such as maternity leave options and transition to retirement.

In an environment where the accounting industry is undergoing rapid consolidation, Edden says flexibility is crucial. He believes firms that don’t think about their future will cease to exist. “Smaller firms facing succession planning issues will get to a point where they can’t attract people,” he says. “They will have to consolidate.”

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