Why Your Clients Deserve a Discussion About Succession Planning

Julie Shenkman
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It's easy to take a successful business for granted, in spite of statistics that reveal success is an infrequent, and often short-lived, occurrence. For example, the average life expectancy of a family business is only 24 years. Only three in 10 family businesses survive to the second generation - and only one in 10 makes it to the third generation. When you consider that 75 percent of all businesses in the United States are closely held entities (accounting for more than half of the Gross National Product), it quickly becomes evident that there is significant need - if not opportunity - for succession planning.

As trustees of our clients' personal financial data, our strongest professional asset may be our status as most trusted advisor. Because our clients (hopefully) respect and appreciate the advice we provide, we hold a responsibility to discuss with our business clients an orderly process by which ownership and management can be transferred in a tax-effective manner.

Consider another important fact: your client's business is likely to be his or her single greatest asset and source of retirement income. Whether business owners like it or not, succession - or at least some exit strategy - must be developed to maximize their most valuable asset.

Why Should the CPA Be Involved?

Beyond the obvious - protection and preservation of a long-term client relationship - the reasons why CPAs should be involved in the succession process are as diverse as a public accounting firm's client list.

First and foremost, consider the value of additional consulting income to your practice. Our hair has thinned over client "negotiations" regarding the value of preparing tax returns or other compliance engagements. Yet these same clients may be quite willing to pay 10 times that for services they feel will protect them and their wealth. Perceived value is the key. Since succession planning is a very personal, very customized consultative service, it is far less likely to be viewed as a commodity. Of course, that does not mean that the cost of such engagements will make for a fast and easy sell. However, if successful, the CPA has an opportunity to create real value that translates to higher dollar returns on your time.

With all the editorial ink spilled in the last few years regarding why CPAs should morph into consultants/saviors, the role of succession advisor is certainly an important and attractive one. The reason is simple: the succession advisor is the gatekeeper to fertile ground in terms of potential consulting engagements. Even if you do not wish to be in the consulting business, taking a leadership role in the process means at the very least new referral sources, and most likely fee revenue from service referrals from attorneys, bankers, insurance professionals, investment advisors and perhaps even other CPA firms.

Assignments vary based on each individual client's needs and weaknesses. They may range from estate planning issues (wills, life insurance, gifting, the creation of trusts, etc.) designed to move assets and minimize tax exposure, to specific transition issues such as developing compensation plans for siblings and parents as the transition moves ahead. From creating a business plan, to establishing a family council, to mediating ongoing issues, the list of potential engagements available to the CPA as a succession advisor is long and crosses over many areas of expertise. Other examples include locating buy-sell insurance (to help survivors fund transition ownership/payout issues), establishing investment savings programs and employment contracts, developing job descriptions, business planning, valuation services, life insurance, establishing family limited partnerships, tax planning and more. Much more.

From the client's perspective, planning for succession is a healthy step that brings tough questions to the table before they are forced out in a moment of crisis. The very process of planning forces certain questions about the business to be answered. What happens if we do nothing? Who will be the boss and who will be on the new leader's team? Will we need to bring in an outsider to bring the business to the next level? What is the business worth today? Are there issues regarding the long-term value of the business that need to be addressed, such as technology shifts or market changes, that will make the business obsolete in the near or mid-term? If no leader can be agreed upon by the family and we cannot agree to an outside manager to run the operations, do we sell or liquidate? How will we plan for that inevitable event, and what will be the compensation or disposition for those who have been active in the business verses those who have been on the sidelines? Of course, the parent/owner will want to bring out his or her anticipation for compensation and roles after retirement. Many businesses find unexpected turmoil after transition due largely to the inability of the retired owner to step aside and let the next generation "make their own mistakes."

From the CPA's perspective, taking an active role in the client's future will, if successful, strengthen the relationship for the long term. Of course, there is always the danger that the succession process may reveal that the company is best dissolved or sold upon the current owner's demise or retirement. Even in this scenario, however, such a realization will let everyone plan a softer landing, and may provide you with additional engagements along the way in preparation for the sale or dissolution of the business.

Even if your role is only that of a resource guidance counselor, having an active role clearly distinguishes you from your compliance-driven peers. One of the more significant benefits to this exercise is having the opportunity to work- perhaps for the first time - with the owner's family, including siblings who may be, in the very near future, the new bosses. In this instance, succession also is important for you, as you will certainly risk losing a client upon the generational switch if the new blood sees your firm as the old guard.

As with any consulting assignment - indeed any transaction involving a person or a business - there are challenges. Our biggest challenge is managing the process without becoming a victim of the process. It is, unfortunately, not difficult to lose a client by raising these delicate concerns. When families are involved in a business, emotions rule over logic, and turmoil, or at least an impasse, is always a possible outcome. There are two primary psychological issues at stake. First, succession requires dealing squarely with the mortality issue. No one wants to face or discuss the potential end of a career, a life or the life of his or her life's work. Approaching the subject requires sensitivity and genuine concern.

Beyond mere mortality, the idea of succession can quickly unleash greed and a lust for power within a family structure that may have been dormant or undetected. Like in divorce, succession discussions can quickly turn ugly when the participants take a myopic view of the future and fail to respect the fact that they may ruin the value for all by their actions. In many situations, the issue is not money but an unresolved (or irresolvable) family dispute among parents or siblings. As consultants, we bear the stressful burden of listening carefully (and often without comment) and sometimes making potentially career-limiting suggestions on behalf of our clients.

Tips and Guidelines for Promoting Succession Planning

Every business will benefit from some level of succession planning; however, partnerships and family businesses are in the greatest need for succession counseling, as their businesses risk the most from their leader's retirement or sudden absence.

It is difficult to offer tips about succession planning, other than to say you should begin, perhaps, to look at your clients in a new way. Rather than viewing them as a tax client, or an audit client, or a client that only calls when there is a problem, you may want to take stock in who they are and where they are going. Certainly, we are taught to be good analysts. We are perhaps somewhat weaker at being good investigative reporters. Begin to ask them questions about their exit strategies. Have they developed a written plan? Does someone have a durable power of attorney in the event the owner becomes incapacitated? Is there a will, living trust or estate-planning document that directs how, who and what should be done in the event of the owner's demise or disability? Is there a successor chosen? Is the successor aware of the potential responsibilities? Has any thought been given to the tax implications of the estate, including the business, in the event of the owner's death? Many businesses have had to be sold by the family in order to pay estate taxes. There are many, many questions on the checklist; these, however, certainly make for a solid start.

For those who are uncomfortable in the consulting role, assistance is available from your peers and through your alliances. While larger firms such as ours have asked individual partners to step up to the plate to become credentialed, smaller firms often pass along referrals to their attorney, banking and insurance contacts, who in turn promise someday to return the favor.

It is tough, however, to locate a professional to assist with the softer, side issues regarding the family, such as compensation plans, succession strategies and job descriptions.

One solution available to sole practitioners and smaller practices is to join an association that will allow them to share resources they may not have in house. One of the largest organizations in the country for small firms is the CPA Connect program created by the Florida-based CPA association, CPAmerica International. Membership in CPA Connect allows smaller firms to share with peers through a non-competitive network. Originated about six years ago, CPA Connect members share a free flow of ideas and services from small CPA firms to mid-sized firms throughout the country. Members pay a small monthly membership fee and in return have access to marketing and services resources, including assistance with succession planning consultations, in a non-competitive manner. Sponsor firms (including RD Hunter & Company in New Jersey) provide expertise either directly to the client or at a reduced rate as an outsourced service. In all cases, small practitioners keep control of their clients and hopefully protect their revenue stream into the future.


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