Newsletter - September 2007
Breaking Up Is Hard To Do - Succession Planning For Professional Services Firms
September 13, 2007 - David Henderson
It's one of those management issues that rarely gets attention until a partner announces plans to leave or retire or, worse, is suddenly removed by illness or death. Whatever the circumstances, the situation often throws a firm into crisis mode.
What makes succession planning for professional services firms so difficult?
Many professionals believe they will practice until the day they die. Age may slow them a little but they'll just reduce their workload and carry on as usual. Thinking about succession isn't on their radar at all.
For others, particularly in occupations based around having developed a personal relationship with their clients, there is a natural reluctance to let go of their book of business because of its importance in terms of status, compensation and leverage. Succession planning can be seen as a threat to their security and their reputation.
In such circumstances even broaching the subject of succession can raise barriers and harm relationships among partners - just how do you, sensitively, go about telling a friend and colleague that it may be time to start thinking about retiring? It's little wonder that professional services firms have such a tough time confronting the issue of succession.
A management succession plan that operates as part of the regular management practice of the firm, which is recognized as applicable to each partner in their turn, is the most politic approach and the one that offers the best chance of a smooth and good-for-the-business way of dealing with succession in these circumstances. The two key elements to achieving this are:
- having the necessary agreements relating to succession issues in place, and
- working to a succession plan that rolls out over a long term period.
Passing on ownership
The essentials of a managed succession process are documented agreements covering partnership arrangements, a buy/sell agreement and a valuation method. The key issue to be clarified in a partnership agreement is the arrangement for buying out the withdrawing shareholder's or partner's interest. Without this the transition event can put the business in an extremely vulnerable position.
A necessary corollary to a partnership agreement for most entities is a buy/sell agreement. The specific firm's circumstances will determine the nature of the most advantageous type of agreement - cross purchase agreement, repurchase agreement, open market sale, employee buy out or whatever.
For a sole practitioner a practice continuation agreement plays a similar role. This contractual arrangement with another practitioner or firm provides that in the event of death or disability, that party agrees to immediately take over the practice under a predetermined compensation formula and payment schedule. This can provide security and certainty for the practitioner's dependents.
The buy/sell agreement includes the valuation method of a retiring partner's share, and this needs to be reviewed as the business develops. An inappropriate valuation formula can bankrupt a firm in some circumstances, such as a partner's sudden death.
Maintaining the firm's viability
The second element involves developing a phase-out program that can be translated into procedures for dealing with continuity of critical business processes. For example, using a planning horizon of 5 to 10 years, the plan should include provision for:
• retaining the partner's clients
• maintaining professional expertise and a range of functional management skills (marketing etc.)
• continuing strong firm management and leadership
• generating new business
The plan agreed to can be a process that runs over 3 to 5 years and set to kick in at a predetermined age (established in the partnership agreement). Having a mandatory transition period does not necessarily mean also having a mandated retirement date - but it does mean that the business will be in the best possible position to deal with the transition when it does occur.
For many firms, most business value resides in their client list. When there is no plan for an orderly transition, clients can become lost in the shuffle. An orderly approach would build in a client transition process to the overall succession process such as by the retiring partner beginning to introduce other team to their clients and involving them in client affairs. The clients, in turn, should be assured that while this is the start of a transition period for the person they have been dealing with, the retiring partner will still be around for a number of years.
The knowledge and experience that resides in a partner forms a substantial proportion of the firm's intellectual property and capital. That knowledge and experience needs, as far as is possible, to be passed on to potential successors. Where the partner also carries a special function, such as CFO, the opportunity exists to consider alternative strategies to fill the gap, for example appointing a CFO instead of training the proposed successor in finance.
Where a partner has been a major rainmaker for the firm, provision must be made to continue the active recruitment of clients. Rainmaking talent should be one of the characteristics to look for in a potential successor and it pays to provide time to identify those associates who seem to have the ability and to create a training program to foster their development.
Planning for Succession Planning
A smart professional services firm will plan for the broad spectrum of issues associated with partner departure well before the event occurs. Many of these issues are long-term in nature and can take years to phase in.
They are best managed in the context of a long-term succession planning program geared to achieving the firm's strategy for identifying and addressing the gaps in capability that will inevitably occur from the phase-down and retirement of a partner.
This approach provides both the best strategy for ensuring the firm's continuing success as well as the most politic manner of managing the personal issues raised by succession.
ROCG is an international consulting firm of skilled business transition specialists with offices throughout North America, Europe and the Asia Pacific region. We are the only international firm specializing in the areas of strategy, finance and operations for privately owned and emerging growth enterprises.
For more information about ROCG's Business Consulting services, please visit our website at: http://www.rocg.com
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