Seven Stewardship Strategies for Ensuring Firm Sustainability

The market has moved – and fast – and firms that are slow to respond risk being forced to merge in order to monetize. The funny thing is, the main thing that keeps firm leaders from taking the strategic steps needed to remain independent – an unwillingness to change and to submit to authority – are the very things your partners will experience if you sell your firm. We like to say: “you can change now in small ways that you choose and prioritize, or you can change ALL AT ONCE in ways that your acquirer will dictate.” Which is your choice?

If your leadership team has committed to pass your firm on to the next generation – to leave a legacy and remain independent – then you’ll need to actively implement a series of change initiatives to drive long-term sustainability. In this article, we’ll identify what we believe are the most important stewardship strategies to prioritize and make happen. Then, in Practice Perspectives, we’ll explore the various elements of practice transition to plan for as you prepare for partners to leave your practice in the coming years.

To ensure that your firm is sustainable long-term:

  • Develop and communicate a compelling mission and vision. Your team members, but most especially your Millennials (those born from 1982-2000), want to know that the work they do makes a difference. They want to understand the context of their work in relation to the greater whole. In addition, most want to know where their organization is headed and what objectives their leadership are striving toward.
    • Be sure you have developed and communicated a compelling mission – or reason for being –and that you have a five-year vision for where you’re headed with the firm. If you have not developed, updated or communicated these strategic planning elements for a while, it is definitely time to update them. And, when you do, please include members of the next generation – seniors and managers – in the planning process to garner their input and give them a sense of ownership and engagement in the future of the firm. For more information on developing your firm’s vision, see “Does Your Firm Have a Vision for Its Future?“.

  • Involve your closest up-and-comers in leadership NOW. Look hard at the composition of your firm’s governance structures and be sure future leaders are leading now, not later. Add them to your firm’s Executive Committee, Compensation Committee and/or as Service Line and Industry Leaders, now, while there are mature partners around to provide coaching and counsel. Engage the next generation by giving them the reigns and allowing them to guide the firm to the place they most want to be – because the more mature leaders in the firm won’t necessarily be there to reap the benefits from, or pay the consequences of, the decisions made today. When there are disputes about strategic direction or major changes you should make, defer to the younger leaders whenever possible. For many mature leaders, it’s simply time to begin letting go.
  • Honestly assess your deferred compensation (or buy/sell). Many firms in this country have a buy/sell or payout strategy for retirees that is too rich for the next generation to sustain. Your future leaders have to believe that when they buy into your firm as partners, they will see a meaningful return on their buy-in investment. For many firms, several partners will be leaving within a similar “band” of time, say 7-10 years, and the cost of their buy-outs or deferred compensation payments, together with accelerating space and salary costs, may cause future owners to take a big step backward in net income per partner as compared to current partner earnings. Be sure you have honestly modeled your firm’s buy-in and buy-out dollars over the next 15 years and make sure your estimated growth percentages for top line revenue growth remain conservative (no double-digit growth estimates over ten years, which isn’t accounting for inevitable economic fluctuation nor projected staffing shortages). Invite younger leaders to review the model, ask questions and give honest feedback about any changes they would like to see to address the objections and needs of these important buyers.
  • Update your partnership agreement. Many firms are operating under an outdated partnership agreement. As you bring new “buyers” (partners) into the firm, the more-literal, ROI-focused next generation expect the firm’s governance and buy-sell agreements to reflect actual practice (and they’re going to want to be certain that those practices are leading-edge, not “old school”). This means updating your operating documents which can take one to two years to research, draft, come to agreement around and then finally get signed. Start today and be sure you’ve considered these frequently outdated sustainability elements:
    • Buy/sell or deferred compensation methods – see our prior discussion of this to determine whether your current methods for calculating buyouts will work or not. And, because so many firms tie their buyout or deferred compensation payouts to a multiple of compensation (the 2014 Rosenberg Benchmark Survey says that this method is the industry standard for all size firms), be sure that your buyout method does not cause retirees to delay transition! If compensation is calculated based on collections, book of business or other production-based methods, and your deferred compensation or buyout is based on a multiple of the average of the last 3 or last 5 year’s compensation, you can bet that partners will not begin transition in earnest until they have clinched their needed retirement income. Instead, consider “freezing” the buyout calculation two to three years from the expected or mandatory retirement age (whichever is applicable) and then begin compensating the retiree on transition-related measures not production related measures thereafter.
    • Mandatory retirement – be sure you have a mandatory retirement age in place for retirees, so that you can open up seats at the partner table for the next generation and help those for whom it is time to go plan an orderly transition. Consider adding a clause that allows for the potential for the retiree to sell services back to the firm at the Executive Committee’s discretion (annually reviewed and renewed). Ensure that the retiree’s capital transition is complete at the agreed upon retirement age (the current “gold standard” for mandatory retirement per the 2014 Inside Public Accounting National Benchmark Report is age 65).
    • Put boundaries around early retirement. Most firms find it important to have a minimum retirement age, too, to avoid key partners going too soon or all at once. These firms put a financial penalty in place in their deferred compensation or buy-sell for those that retire before a certain age (and perhaps years of service).
    • Notice periods – some firms have no formal notice period for partners and this can leave the firm in a lurch if a partner suddenly chooses to retire or terminate their employment without enough notice to assure successful transition. Be sure you have at least one-year’s notice, ideally two so you have two seasons to transition, for partners and that there are financial penalties for those who do not supply the proper notice.
    • Client retention clawback – many firms do not have a provision to incent a retiree to cause client transition and retention, so partners hold on to their clients far too long and they don’t position their successor as “better than they are” in the minds of clients. Avoid this by tying the buyout or deferred compensation payout to client retention and instituting a penalty for more than a certain percentage of clients lost.

  • Prune the tree. Maximize the health of your firm as you transition it and commit to resolve long-time partner performance and personnel matters. Most firm leaders have put off handling thorny people issues but this simply isn’t fair to the next generation and it may be THE reason your best future leaders don’t want to take over the firm. Insist on changed behavior and performance or help those people leave the firm. In addition, review low-realization service lines and clients and begin moving them to better financial performance (or out of the business altogether). While these decisions are always tough, they will put the firm and its future leaders in a better position for long-term health and enable your next generation to meet the forthcoming buyout obligations.
  • Develop your future leaders. Develop leadership and management skills at all levels of your firm – so that your future partners have a strong base of leaders from which to leverage. Teach practice economics early and often to be sure that your people understand the levers that will cause success. Take your people along on shadowing opportunities so they can see you and other experienced partners in action. Identify future technical and industry leaders and begin active knowledge transfer today. Invest in “compressed” development programs like our Transformational Leadership Program to drive growth quickly and prepare your people to lead the firm to its future success. For more people development ideas, see our newsletters, “Focus On Your Rising Stars” and “Experiential Learning in the Succession and Development Process.”
  • Plan for transitions NOW. Transitioning clients, referral sources, and internal mentoring, operations and leadership responsibilities takes time and thoughtful strategy, too. It takes time to identify the right people to transition to and to consider the “ripple” effect that transition will have on all levels within your firm. For more information on transition best practices, read the Practice Perspectives article in this newsletter.

The market will drive you to make these changes – whether you lead them, or you comply with them when they are thrust upon you in an upward merger. Choose one area and begin working on it first. While the list may feel a bit overwhelming, remember: you don’t have to address all of these things at once when it is still your firm.

Choose your priorities. Involve your future leaders. And, in the end, be a faithful steward of your firm’s future sustainability.

For additional information on preparing your firm for future transition, contact Jennifer Wilson at or (402) 933-2900.