Transitioning the firm to new leaders

How operational modes are impacting the evolution
By Bill Reeb, CPA, CITP and Dom Cingoranelli, Jr., CPA, CMC

Over the years, many CPAs have assumed that they would work in a practice, become an owner, work some more as an owner and then retire by selling their ownership interests to the other people in the practice. While that has been a reasonable assumption to make in the past, the reality of this scenario has not matched up to their vision of it. Why? Because the partners and people in the firm are not supported by a structure and processes that can easily move beyond the founding fathers (either the original founding owners of a firm or a few like-minded entrepreneurial, dominant owners that split off, took over, or bought out others to take over controlling interest in a multi-decade old firm).  In short, most entrepreneurs default to building organizations custom tailored to suit and leverage their personal skills and, therefore, selling/merging the firm is the only real option since the organization they built doesn’t work without them.

This is a critical point to understand if you are trying to build your firm to operate successfully long after you are gone. The problem is NOT finding new leaders but rather, what the existing leaders have put in place that will derail and handcuff the success of future leaders. We have tried to clarify this by identifying common modes for running a CPA firm. Although this is not an all inclusive list, these definitions will help loosely describe how your mode of operation could help or impede a successful firm transition. 

The modes of operation are:

• Survival. Initially, entrepreneurs are driven by the instinct to pay for the roof over their heads and put food on the table.
  
  
• Safety Net. Once the business generates the resources to cover basic needs, the focus is on building the business to generate enough cash to fatten the savings account, pay off business notes, and create a cushion in case times get tough.
  
  
• Success. Once financial security is established, entrepreneurs start thinking about evolving the firm in a way that makes the owners, and employees, want to work there. Additionally, the firm becomes an entity that needs protecting. The firm’s success, reputation and strengths still are reflective and synonymous with those of the owners in this mode.
  
  
• Continuation. At this point, the focus shifts from success (where the owners have done well financially and are secure in their own accomplishments) to creating an organization that has its own institutional identity and that can survive without them.

We realize that our analogy is very simplified, that all CPA firms don’t go through these phases. Even the firms that do don’t necessarily go through them in a step-by-step manner.  But as you will see in a minute, we are trying to drive home what we believe to be some important points. 

When you are just starting your firm, you aren’t thinking about developing leadership. As we said, it is about paying the bills, making a living and keeping the doors open.  Once your bills are no longer an everyday threat, your focus shifts to setting aside enough money so that the anguish of living from paycheck to paycheck doesn’t happen again. We want to build our organization solid enough to generate greater financial security.  During these two modes of operation, the best and easiest way to fulfill these needs is for the owners to work hard, depend heavily on our own skills and build a support structure that leverages their time.

As our firms continue to thrive, owners start thinking about the culture they are creating and the concept that there is more to life than money (partially because they now have money). It becomes increasingly important to many entrepreneurs that they enjoy coming to work and that they are part of a well-respected and highly thought of organization.  The firm, and the owners, while separate legally, have the same identity.

During this “Success” mode, the firm continues to evolve into a kinder and gentler place to work. The choices being made every day are driven by the idea of enhancing the success and profitability of the organization while promoting the desired culture and living up to the current values and reputation of the firm. The strategy is to maximize the talents of people within the organization under the management and control of the founding fathers.

The final mode, “Continuation,” is about separating the identity of the firm from the owners and building infrastructure and governance that transcends the founding fathers. This stage is far different than the other three stages because it often requires an organization to restructure and move away from the mode of operation that has been fundamental to current success. The “Continuation” mode turns the business model up-side down from the “Success” mode because rather than building the organization around the creativeness, talents and management skills of the founding fathers, it requires the founding fathers to step back into the shadows and allow others to evolve.

Once the founding fathers see the need to step back, stay involved, but take a much less prominent and dominant role, they quickly balk at many of the systems that they built because they are not comfortable giving others the power they have taken. And that is the key point here. The systems in the “Success” mode were built efficiently and expeditiously around specific people, rather than organizational roles and responsibilities. And those systems typically fail when dominant players, or controlling interests, are removed from the system.

So, in the “Continuation” mode, your objective is to set up systems of governance, operational processes, voting rights and privileges, accountability, compensation, etc. that revolve around interchangeability. As an example, you don’t create the job description for the managing partner as if a specific person were filling that position, but rather as if anyone elected would fill that position. If the powers, limitations, expectations, responsibilities and accountability of a position are tailored to a specific individual, then you are likely operating in the “Success” mode. If they are right for whoever is elected, then you are probably much closer to operating in the “Continuation” mode. 

Taking this example a step further, often, a managing partner who is a founding father has more power built into that position than they should be entitled to have. However, if the managing partner job description was created after the founding fathers retire, then it is likely that the managing partner position has been stripped of almost all of its power (still “Success” mode, just a more dangerous deviation because the organization is still operating around specific people rather than required authority and accountability to effectively run the organization). In the “Success” mode, the firm is not thought of as an entity that is an asset which needs to be protected, nurtured and managed, but simply a conduit for financial gain. Owners treat the entity as insignificant, with all of the value being attributed to specific people and their achievements. To move from the “Success” to “Continuation” mode, the founding fathers have to be visionary enough to realize that the long-term success (beyond them) of an organization requires that the entity, its governance and processes have been established in a way that it can shed (terminate) and effectively manage around a few bad or dysfunctional future owners.

Now that we have shared this concept, in my next column, we will apply it to a case study to provide greater insight as to how these modes impact the way firms’ approach the leadership development objective.

This column is an excerpt from materials in Chapter 7 of the new PCPS Succession Resource Center, which is FREE to PCPS members and only $35 per CPA to join (with a maximum fee of $700 per firm). Visit http://pcps.aicpa.org/Resources/Succession+Planning/ for more.

Reeb is a keynote speaker, author, trainer, coach, facilitator, and management consultant with more than 20 years of business consulting experience. He has founded seven small businesses in the retail, software development and services sectors, including the CPA firm Winters & Reeb, PLLC in Austin, Texas. Reeb has also been internationally published with around 200 columns and articles to his credit.

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