Accounting for the next generation

The handing down of a limited liability partnership (LLP) from one generation of partners to the next is often rife with conflicts and pitfalls.
Many founding partners postpone such a transition until it is too late, only then discovering that an effective succession plan was not in place.
Other small businesses are torn apart by the conflicting interests of founding partners who want to preserve the equity they have built into establishing a company and younger partners who want to try new concepts or enact possibly risky growth strategies.
The partners at Winter, Kloman, Moter & Repp, S.C., an Elm Grove-based certified public accounting firm, have found a way around this problem. It is a solution they don’t just use themselves, but they also advise many of their clients to adopt as well.
The key, WKM&R partners say, is developing a corps of middle managers who are gradually taught the intricacies of the firm’s day-to-day business operations over several years. If that is done, one or more of those managers will be ready to step into a top leadership role when an owner or partner wants to step back.
"Basically, you have to evaluate the key management people you have," said Paul Sehmer, a shareholder and member of WKM&R’s executive committee. "If you don’t have management people, you should start looking at who you want to be in middle management. And you have to start mentoring them into the day-to-day business operations."
Sehmer and others in WKM&R say many small and medium-sized businesses have no middle management at all. Instead, many companies often have senior partners or owners handling all day-to-day operations, with a cast of employees just doing their jobs.
That situation creates difficulty when an owner or partner wants to step aside, because no one has been trained to take the reigns.
To solve the problem, WKM&R has created what it calls an "inverted pyramid" business model, in which the firm has 10 partners, instead of the usual two or three at most comparably sized companies.
While major decisions are made by the 10 partners, day-to-day decisions and operational insight are handled by an executive committee.
The makeup of the partners and the executive committee is important, according to Sehmer and James Repp, one of the four partners who bought the firm in 1979 from Jerry Huss. It is essential to have a balance of younger and older partners and executive committee members, they said.
Starting in 1982, when the four partners asked their first new partner to buy into the company, WKM&R has generally asked younger employees who show promise to be new partners, Repp said.
Because the company now has 10 equal partners, buy-ins are not as expensive as they might be in other firms with fewer partners.
"When a partner is admitted, they take a portion of the assets and a portion of the revenue as goodwill," Repp said. "It can be a large number for a young person, when you’re trying to encourage them to come on board. We’ve tailored ours. It’s still a good size number, but it’s in the five figures, rather than the six or seven figure range, and it can be paid by taking out a home equity loan."
Having a balance between senior partners with significant experience in accounting and younger partners with new ideas and drive has helped the company make wise decisions, both for the short-term and long-term future of the firm, Sehmer and Repp said.
WKM&R’s executive committee currently includes Sehmer, 43, John Senger, 38, and Dan Gotter, 49, who has been with the company for more than 25 years and was the first employee offered to be a new partner aside from the four who bought the firm in 1979.
The committee was formed in 2001, Repp said, when Jack Winter, another of the original partners who had bought the firm in 1979, was acting as WKM&R’s managing partner and expressed a desire to step down.
Instead of just naming one of the partners to be the next managing partner, Repp said the firm’s partners decided to create the executive committee.
At the time, Winter, Gotter and Sehmer made up the executive committee. Winter continued on the committee for about one year before stepping down. Senger was then named in his place.
Repp was offered Winter’s spot on the executive committee, but declined it, saying it was more important to have a younger partner in that place. Having more young partners in place as decision-makers is a large part of WKM&R’s plan to avoid abrain-drain when one of the firm’s high-level partners steps down.
Creating the executive committee of three members, which creates an odd number of votes, not only enables decisions to be made by both senior and younger partners, but also promotes mentoring between those on the committee.
"It gets them into the process of talking to each other, communicating with each other," Repp said. "It works much better with human relations, and they’re also teaching each other in that aspect."
Of particular importance, Repp said, are decisions being made by senior members. The younger shareholders can learn from that wisdom, he said.
Sehmer, who has taken on many of the responsibilities that Winter did when he moved into semi-retirement, said being able to learn some of the day-to-day strategies from a more senior member of the team was invaluable.
Because Winter is still working most days of the week, Sehmer is still able to ask him questions when issues arise.
"Without him to go to, my job would have been very difficult, very ineffective," Sehmer said. "He was able to point out ways to be more efficient and things to look for. That training came about through Jack initially and us working as a team."
Having three members on the executive committee is also important because one partner never becomes too occupied with the day-to-day operations that he does not see the long-term picture.
Sehmer said the company’s philosophy requires a high degree of client interaction by the partners, and having one partner handling all of its management would get too much in the way of that goal.
"Dan Gotter is our elder member (of the executive committee)," Sehmer said. "And as such, he is the most qualified to be managing partner. But he is also instrumental in one of our growing models, of business valuation and litigation support."
While having a team of 10 shareholders who make major decisions about the firm’s future may seem excessive, both Repp and Sehmer say it is part of the way WKM&R reaches its clients’ needs.
"Our purpose is to have a lot of partner involvement and have a second tier of employees who know what they’re talking about and have years of experience," Repp said. "With that, we feel we can better serve the small to medium size business climate."
When Repp and his three partners purchased the firm in 1979, it had 10 employees. Now, it has more than 50, many of whom have been there for the majority of their careers.
"We take good care of our employees, so we have very little turnover," Repp said. "As a result, that’s been our forte. Some of (our staff) have been here 23 or 24 years, and they have excellent capabilities to answer 85 or 90 percent of our customers’ questions off the top of their heads, rather than having to wait a week for a response from one of the larger firms."
Sehmer said WKM&R’s strategy of mentoring its shareholders and the members of its executive committee has carried over to employees who are leading departments, but are not partners.
"We think of succession in the service areas also in terms of managing the firm, making sure we have people under us who will grow into future managers of the service departments, as well as managers of the firm," he said.
Through financial consultation with clients, WKM&R often talks with owners of small and medium-sized companies about their succession plans. Repp said those conversations often center on why a company may have grown to a certain level and it hasn’t moved past it.
"We find that when you get to a level of between $3 million to $5 million, you need middle management to help you run the business," Repp said. "You can’t do it by yourself anymore. There are lots of businesses out there that have reached that level and do not grow any more."
Winter, Kloman, Moter & Repp, S.C.
Address: 12700 W. Bluemound Road, Elm Grove and 155 W. Wisconsin Ave.,
Oconomowoc
Web site: www.wkmr.com
Employees: 50
Thom Cody, a partner with Pathmakers Inc., a Green Bay-based consulting firm that helps leaders of family-owned businesses identify and resolve core personnel issues, says every business, large or small, needs to keep the following things in mind when creating a succession plan.
* Devise a plan for what comes next when they leave the business, along with a financial strategy to allow them to accomplish that plan.
* Create clear goals and targets for succession and transition.
* Identify a timeline – how long a leader will stay and what his or her role will be during the transition.
* Clearly define the role of the successor, based upon the future needs of the organization, addressing the decision-making parameters, personal characteristics, experience and educational requirements needed to be successful.
* Engage an objective method to identify potential successors, based on identified role definition.
* Include specific objectives and a plan that identifies the technical and leadership development needs of the successor.
* Assign a coach or mentor who will coach from that plan.
* Include checkpoints to communicate and discuss progress and any issues or concerns during the transition.
* Clearly define specific decision-making parameters during the transition.
* Develop a contingency plan if things don’t go as expected.
* Ensure that the person who is being succeeded is willing to let go.
– Eric Decker
Plan or die
Unresolved issues can divide families, partners
By Eric Decker, of SBT
Failing to enact a long-term succession plan for a business can tear apart families and leave former congenial partners in bitter feuds, according to Sally Merrell, an attorney with Quarles & Brady LLP.
"With families, the issues are more complicated for two reasons," said Merrell, who handles estate planning, probate and charitable gift giving and has helped many small businesses create succession plans. "First, there may or may not be all members of a family in the business, and there is the issue of how to be fair. It’s harder to talk about, and there are often a lot of unspoken assumptions."
Conflicts often arise when one or more founders of a company want to step back from running the firm.
Family-owned businesses and partnerships face separate challenges with succession, she said.
When she is approached by family members talking about legal and tax requirements, she often uncovers underlying issues.
"Sometimes when lawyers get asked a legal or tax question, it’s really a bigger question, and we can help them see and focus on some of the bigger issues," Merrell said. "The 60-year-old says he’s ready to retire, but he needs the income (from the business). They would need to start increasing the responsibility of others and look at whether the business can afford that. That’s another discussion."
Family businesses that haven’t planned for succession often encounter challenges simply because the parties involved are related and many things are left unsaid, Merrell said.
"Sometimes the answers are hard," Merrell said. "IDing the issues is easy – the devil’s in the detail. And someone who has to be part of the solution may have a whole different view of the situation as someone else. We just have to keep working at them, to make them see that they need to communicate."
Companies formed by partners who are not related often adopt succession plans, but many of those plans are not revisited and updated to accommodate changes in the business, Merrell said.
"Sometimes they say that they thought about it in 1990, but life is different now, and they need to get that agreement out there. The price may be different, and other things may be different," Merrell said. "It’s not a fun discussion, and it’s easy to understand why they would not want to revisit it."
Families can run into trouble, from both legal and tax standpoints, when there are intentions to sell the company to one family member for a lower price than fair market value.
"In the family context, there are some very strenuous rules about what can and cannot be done," Merrell said. "When they want to pass (the company) on to a family member, there could be tax implications if they give it to someone for a price break. Those things need to be explained to the family. There are ways to make it cheaper for who is buying it for a break."
Because of the potential for litigation between attorneys on different sides, both family-run and partner-based businesses need to have frank discussions about succession, Merrell said. When those talks don’t happen, she said, the situation can divide families and end up hurting the businesses, as well.
"It’s a distraction from what people want to be doing," she said. "If (the employees) don’t know who’s in charge, it’s hard to focus."
Small businesses can lose some of their most talented employees when the partners or family members are feuding, because those employees might not feel secure in their futures, she said.
"If it is not clear what is happening, outsiders or non-family members often start thinking why they are staying," Merrell said. "They can lose some talented people."
Having an adequate succession plan in place often determines whether a small business survives into the next generation, she said.
"Often a successful business person is a very powerful person, and if they are gone, there’s a big hole where they used to be," she said. "Having a plan gives them a road map. If there is none, there will be a fight. And that will be hard on a business."
November 26, 2004, Small Business Times, Milwaukee, WI