Professional firms need a robust succession plan to continue growing, says Richard Green.
Professional firms should recruit and develop talented, young people and have an effective succession plan in place if they are to carry on growing and enable older partners to retire.
Gone are the days when partners can wait until they are ready to retire and then sell the firm to a third party for significant sums of money. This approach rarely works anyway because once clients know the plan, they have little incentive to stay with the firm, making it difficult for the business to achieve its financial goals and enact its sale plans. Moreover, and certainly in today's economic environment, larger firms might be prepared to pay a small earn-out or take over the business, but at no real value.
It's all in the planning
An effective succession plan tends to be reflected by the age profile of the partners. A spread of ages across the firm's various specialisms is usually a good sign. More often than not however – and in law firms especially – there is a 'top-heavy situation', meaning a lot of partners aged 45 to 55 are holding fairly senior positions.
In the past, set retirement ages made it easier to put a programme in place for retiring partners to scale down their workload and pass on expertise and client responsibilities. But with no default retirement age the situation is now trickier.
Some retiring partners have successfully opted to work part-time, scaling down their responsibilities and commitments. This may work for some disciplines but not others. An alternative approach is to increase holidays gradually. This will mean a reduced income, but the business gets used to managing without the outgoing partner.
Balancing a partner's income with the needs of the business can pose a significant dilemma. The retiring partner's view of what he or she is worth to the business may differ from what the managing partner or managing board think. What is crucial is that the firm has in place clear objectives for all partners, but particularly those nearing retirement so that an objective assessment of the partner's contribution can be made.
Paving the way for the future
For those coming up through the ranks there may be issues in relation to income needs and capital. Essentially, can they afford to buy into the business? And what are the capital values?
Property can be an issue. The cost of coming into the business can be high, as individuals may need to buy into the property. For this reason, it may be necessary to separate property from the normal trading business so that it doesn't impede partners from coming into the firm.
Using third parties
As the time line moves to the right, it is important to implement your succession plans. It might be worth considering outside assistance, especially when tackling more difficult concerns, as it will help depersonalise any issues between partners.
If partner succession issues aren't addressed, people joining the partnership may feel there is a block and simply move elsewhere. This could end up stifling the business and preventing growth.
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