A quiet contemplation of succession

One such issue is practice succession. All too often practitioners file the issue in the “too hard” basket. Many don’t want to contemplate retirement or acknowledge that they may be approaching their “use by date”. Young partners and managers can often be reluctant to raise the issue with the senior partners who have often been their guiding light as they have grown in the profession.

A few years ago I assisted a firm address this issue. There was a senior partner and major equity owner who had reached his “use by date”. The younger partners, who were brought into partnership by the senior partner knew the issue needed to be addressed but were reluctant to raise the issue and offend the senior partner. I was asked to help find a solution. 

The key was to have individual discussions with all involved and to propose potential solutions - a mediation role. It was quite revealing. The senior partner didn’t know how to approach the issue. As we moved towards a solution he was in tears of relief that a solution was being found. He retired with no angst. A new managing partner was installed. New partners were brought in. The firm has gone from strength to strength. Putting succession on the table and dealing with it was transforming. 

For multi-partner firms succession should be on the partnership agenda at least annually. Each partner needs to give their partners an honest assessment of their position in the firm and their retirement plans so that there are no surprises.

Some firms insert mandatory retirement age clauses in their partnership agreement to force the issue to be addressed. Of course partners can vote to not apply the clause in a particular situation but it does put the issue on the table. More recently, these mandatory retirement age clauses are being challenged in the courts as being age discriminatory. It will be interesting to see how the courts rule. 

For many, particularly solo practitioners, there’s the challenge of finding a likely successor. Fortunately, the market for practices remains buoyant aided by low interest rates. However, it’s not quite that simple. Buyers will not buy just any firm. To maximise the price the firm needs to have a strong track record of profits and growth. It needs to be efficient and be getting the most from technology. It needs to have a strong team and be well managed. Unfortunately, there is no silver bullet to be fired that will transform the business. Generally, it’s doing a whole lot of things better which together will deliver significant performance improvement. Whether or not the buyer is internal or external they will be looking to buy into a strong business.

Changes take time to implement. It’s no good thinking that you need to deal with succession and that a few quick tweaks to the business will achieve the desired outcome. Many changes require planning, pilot programs, new technologies and lots of training. It’s not easy to do, particularly in an environment where the senior people in the firm are generally quite time poor.

A key issue to be addressed is the reliance on the present owners. What happens when the key owners are no longer in the business? So much knowledge has walked out the door. So perhaps one of the most important issues is to focus on systems and processes. Firstly, are  key systems and processes documented to ensure the business can continue to operate effectively. Not only does this enable smoother business transition it is also key to enabling delegation.

A buyer is looking for a firm with a future. They will not be attracted to a firm whose clients are approaching retirement age. They will be looking for a firm with an effective marketing/business development program to drive future growth and attract new young star performers.
Transitioning client relationships is also a critical component. There needs to be a transition plan to move the clients to younger partners or the new owner. Client disrupted needs to be minimised. Older partners need to let go. A plan needs to be agreed and all involved need to be accountable to ensure it is followed. 

If there firm has more than one equity owner or is introducing new equity owners it is critical that the right agreements are in place. Are partnership/shareholders agreements in place? Have they been regularly reviewed? Are the provisions still appropriate? Without a solid agreement it can become very difficult should relationships between the owners sour. It is critical that there are mechanisms to enable the firm to terminate a non performing owner and force a sale of their equity to the other owners. 

Buy-Sell arrangements also need to be established alongside appropriate insurances so that funding is available to buy out an owner should they die or become permanently disabled. 

The thorny issue of valuation also needs to be addressed. For internal sales to the other owners or a rising star, valuation formulas are often specified in partnership/shareholders agreements. There is no standard approach. Some firms will use market valuations while others will discount the valuation to encourage team members to buy-in. The key here is consistency. There have been many cases of angst arising from partners trying to change the valuation model from that model they bought in on to the model they wish to sell for. Balance Sheet management is also important as a high level of net assets might result in a purchase price beyond what a new owner may be able to afford or willing to pay. 

For buyers, they need to do their own due diligence regarding financial performance, quality of clients, systems and processes and technical competency just to name a few issues. No-one wants unhappy surprises after they’ve bought into the business. 

So instead of your overseas trip, when you’re sitting on the local beach perhaps you should be turning your mind to succession. It’s never too early to start planning. I’ve heard so often from older practitioners who worked hard on improving their firm to deal with succession that they all wished they had done the work earlier and reaped the rewards.