PRACTICE MANAGEMENT

Avoiding the ‘Retired’ Partner Problem

Here’s how to get CPA firm partners who are destined to hold on until the bitter end to loosen their grip and successfully hand off their firms to the next generation.

By Jeff Stimpson

The American Association for Retired People (AARP) will tell you that more than half of American workers plan to continue working in retirement. Their reasons vary, from the desire for added income to simply staying active. And then there’s the “sense of purpose” work provides. We commit much of our lives to our careers, so it’s no wonder they’re not only meaningful but also the basis for strong connections to people and purpose that we don’t want to give up. However, there’s a time when the inability to truly walk away becomes problematic — particularly for CPA firms and their partners. That time is when a partner “retires” and then hangs on at the firm in a sometimes-reduced capacity for as long as possible. When some 60% to 80% of CPA firms are firstgeneration firms, it’s no surprise this happens with high frequency. It’s also no surprise that many firms never survive beyond the first generation for this same reason. “In my 20-plus years of consulting with CPA firms, I estimate that 99% of all partners who actually retire from their firms continue working part time,” says Marc Rosenberg, CPA, founder and managing partner of Rosenberg Associates. “The problem here is that retired-but-still-active partners can create situations that range from simply uncomfortable to outright risky, and the conditions can quickly become emotionally prickly on a number of fronts,” notes Bill Reeb, CPA, CITP, CGMA, CEO of Succession Institute LLC. “No matter when asked, partners always say they’ll really retire in five years.” “But it often becomes a rolling five years,” warns Tommye E. Barie, CPA, Reeb’s colleague and executive vice president of leadership development at Succession Institute. A recently retired partner from a top 100 full-service accounting and consulting firm herself, Barie can empathize — but she also recognizes the risks: “Partners work all their lives to build successful firms. What are they going to do now? There’s often some passive-aggressive behavior that must be addressed, and every weakness a partner allowed to perpetuate is also spotlighted in succession.” For instance, it’s common to see aging partners not being able to keep up with the demands of partner-level work, there’s less urgency for them to maintain their technical skills, and their often equally aging clients tend to offer diminishing business development opportunities.

The problem here is that retiredbut-still-active partners can create situations that range from simply uncomfortable to outright risky.

– Bill Reeb, CPA, CITP, CGMA

So, how can CPA firms find renewed strength and longterm success through succession, all while avoiding the aging partner problem?

The slow roll to retirement

“Arguably, one of the hardest things to do is to sit down with an aging partner and tell them it’s time to step away,” says Bill Carlino, managing director of Whitman Transition Advisors. “When I consult on a succession plan, I never start with the ‘R’ word — retirement. I ask, ‘How many more tax seasons do you want to work full time before slowing down?’ This gives the partner a chance to consider a reduced, part-time role as opposed to stepping away completely.” This transition requires not just a role change but also a mindset change. In Reeb’s view, retiring partners must adopt new attitudes and change certain others — i.e., letting go of ego and perceived indispensability — if they want to see succession success and the long-term sustainability of the firm they built. Offering examples of what “slowing down” could look like, Reeb and Barie’s approach at the Succession Institute includes the recommendation that partners nearing retirement focus on the following: • Taking on more technical work in the background • Spending time working on their client transition plan

• Introducing others to their personal networks • Using their skills and reputation to sell new business • Training others in their area of expertise • Acting as an ambassador for the firm That last recommendation of acting as an ambassador for the firm is, in Rosenberg’s opinion, one of the best roles for a retiring or retired partner who wants to continue working and being connected in some capacity to the firm. “Utilizing their contacts and referral sources to bring in business is essentially priming the pump for the next generation,” Rosenberg offers.

Arguably, one of the hardest things to do is to sit down with an aging partner and tell them it’s time to step away.

– Bill Carlino

Of course, this requires that a next generation exists in the first place. So many first-generation firms fail to have a future because the founding partners hold on until the bitter end. “The most important part of succession planning is to develop future leaders. If senior partners never let go and never train and mentor younger people, there will be no succession,” Rosenberg stresses.

The rules of retirement

To avoid the aforementioned pitfalls, Carlino says any successful part-time involvement from “retired” partners requires clear guidelines — and an openly accepted mandatory retirement policy that all parties agree to. The purpose of mandatory retirement policies, as stated by AICPA President and CEO Barry Melancon, CPA, CGMA, “is to allow for the predictable progression of lesser-tenured, and often more diverse, individuals into the partnership, and facilitate the orderly transition of a firm’s clients from senior partners to those who will succeed them,” Rosenberg recounts. “This ‘predictable progression’ will never happen if the senior partners work forever. This progression will never succeed if the firm’s partners fail to mentor and develop potential partners many years before they retire. This progression will never occur if the potential partners see roadblocks to them actually taking over the firm — particularly in the form of partners who cling to their clients and never leave,” Rosenberg emphasizes. This is one of those instances when those “emotionally prickly” situations can really crop up. Partners receiving retirement pay have been known to actively keep certain clients for the extra cash. “This situation is most damaging,” Barie says. “It often means that the retired partner is inappropriately being paid retirement benefits for relationships they didn’t transition.” “Firms under $15 million in revenue especially — where the retiree may be a stronger, longtime personality and presence — tend to be too loosey-goosey about these matters,” Rosenberg points out. “If you [the firm] allow someone to stay on, they should have one-year contracts,” Barie suggests. “The firm needs to clearly spell out what the partner can do, the limitations they need to work within (think back to that bulleted list of useful retirement roles) and how the firm will pay for that work.” “However, there’s no substitute for a formal succession plan, and that should form at least five to seven years before a partner plans to step down,” Carlino says. To avoid succession problems, retirement needs to be on everyone’s radar as much as possible. “The managing partner should be inquiring and keeping up with when people plan to retire. Regardless of whether the firm has mandatory retirement or not, retirement shouldn’t be a surprise when the time comes,” Barie says. At the very least, Reeb and Barie think firms and soon-toretire partners can successfully squeak by if they prepare for two to three years before the changing of the guard. Starting with the biggest clients first, their Succession Institute literature outlines that a managing partner — working with the retiring partner — creates transition instructions for each client, showing specific steps the retiring partner will perform over a given timeframe and to whom the retiring partner will be transitioning the client through those steps. Periodically — at least quarterly — the managing partner meets with the retiring partner to review the status and note any issues of noncompliance. “What it all comes down to is that the retiring partner has to build up the partner who’s up and coming,” Barie says. “The ultimate goal is for the retiring partner to walk away saying ‘I’m excited they’re taking over. They’re the one I picked.’”

What it all comes down to is that the retiring partner has to build up the partner who’s up and coming.

– Tommye E. Barie, CPA

Jeff Stimpson is a New York-based writer covering tax concerns for more than 20 years for various industry publications, including Accounting Today and Financial Advisor.

Reprinted from Insight magazine with permission from the Illinois CPA Society (icpas.org).