think it’s too early? think again.
by august j. aquila
what makes a great partnership
it’s no surprise to anyone thinking about retiring or selling a practice today that the number one issue they face is finding someone to take over the practice. there is a definite shortage of buyers and those who are buying are becoming more and more selective. many firms will find that it has now turned into a buyers’ market.
more: firms must plan ahead for partner retirement | retiring partners are valuable assets | nine ways to handle partners with strong views | rate managing partners in six areas | five ways to keep your edge as a leader | managing partner: the toughest job in the world | why partners need written goals
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there are still a few exceptions out there. first, if you happen to be a very profitable firm in a major market you are lucky. firms will continue to seek you out. second, if you have a very strong niche market presence you can be an attractive acquisition candidate. however, if you are an average firm in a secondary or tertiary market, selling the practice will take more work and time.
here are some ideas to help you plan your succession.
what’s the primary purpose of a succession plan?
the primary purpose of every good succession plan is to provide the seller or retiring owner with options and opportunities. the best succession plan is the one that offers you the most personal and business choices. if you have few or no choices you won’t be able to get top dollar for the firm or fulfill the dream of what you want to do with the second half of your life.
creating options and opportunities
the first thing you need to do is develop your personal game plan. the sooner you can start this the better. i know some practitioners who started their succession plan while in their late 30s. you might think, “well, i don’t have time to think about it. i’ll do it later.” the longer you postpone, the less time you have to prepare for the transition, find a successor and train that individual or find an outside buyer. by waiting until you are 60 or 65 you limit your window of opportunity to five or fewer years.
the current and future value of any firm depends mainly on one thing – retaining longtime clients. the last thing you want to say is, as one practitioner proudly said to me, “this firm would be nothing without me.” i wished he would have said, “this firm is everything without me.” one of the hardest things for a practitioner to do is to give up control – control of their clients and the practice they have spent their entire lives building. but unless you are able to transition your clients, you won’t be able to have a successful succession. and the sooner you can start giving up control, the sooner you can say, “this firm is everything without me.” holding on too long is the most serious sin you can commit.
the most important thing is that clients continue using the firm after you have retired. start by introducing new and old clients to a younger partner or staff member. gradually you will want to turn over some client responsibility to the younger partner. if you don’t have any younger partners, this is an opportunity to develop a staff person over time. don’t say to yourself, “ellen isn’t ready for client relationships yet.” rather, think of how you can develop her over the course of several years.
before you get non-owners involved with your clients, make sure that they have signed non-solicitation agreements. all owners should sign both non-compete and non-solicitation agreements.
if you are the rainmaker in the firm, it will be necessary to groom someone to take over the role too. you need to take the role of a teacher by showing, telling and doing what it takes to bring in new clients. the best way to do this is to take the person by the hand. start by showing them how you work with clients and prospects to develop new business, tell them what they need to do and what organizations they should join, and bring them out with you so they can do it.
client transition and business development training won’t happen if you want to have complete control over the practice. you will need to feel confident in yourself and your skills. if you don’t trust your younger partner or up-and-coming staff member, you will continue to protect what you have. in doing so, you will lessen your chances for a successful succession.
counting on your other partners?
let’s take a typical three-partner firm. tom is the managing partner and is 52 years old, marc is 49 and linda is 45.
in tom’s mind when he is ready to retire, he will sell his ownership to the younger partners. now let’s jump forward 10 years. tom is 62, marc is 59 and linda 55. tom announces he plans to retire in three years. marc is thinking, “darn, he beat me to the punch.” marc quickly makes it known that he has no interest in buying any of tom’s practice. linda quickly realizes that while she will want to work until age 65, there is no way she can buy out both tom and marc.
this firm is in a succession planning pickle. what are their choices – promote some younger staff into the partnership, look for a white knight to buy the practice or simply work as long as possible and then close the practice when linda nears retirement age?
the firm should have started thinking about the succession planning issue when tom was 52. sure it might not have solved all the issues but time would have been on their side. now time has become the enemy and the partners don’t have the luxury of creating options. here’s what the firm could have considered during those 10 years:
- identify potential future partners and groom them.
- look for younger sole practitioners to merge into their practice.
- have marc and linda purchase some of tom’s interest each year (assuming that tom was the majority owner).
- consider the benefits of an ideal merger. should they be the buyer or the seller?
- start funding for their retirement.
there are many three- to five-partner firms out there today that are in this situation. you can wait 10 years to do something, or you can start the discussion and planning today.
determine a realistic value for the practice
firms under $300,000 often get 1 times plus if an outsider buys the practice. the larger your firm gets, the less likely you are going to get a premium price for it. if you are looking to sell your equity interest internally, realize that the staff person who just became partner has helped you build the practice over the years. what is that worth? on average, most internal buyouts range from 75 percent to 85 percent. the real question you need to answer is this, “at what price is a sale unlikely to happen?” if your formula is too rich, the younger partner or partners will just walk away. make sure the number in your mind works for all the parties involved.
have a buy/sell agreement
i can’t tell you how many firms don’t have a basic buy/sell agreement. get down on paper what you want to happen in case of disability, death and retirement. if you have no written agreements you are setting yourself up for some serious future problems.
what are you going to do?
succession planning should be an exciting time for you. if you have planned it right, you have choices and opportunities. you have successfully transitioned your practice to a new owner. now, you can do many of the things that you have been dreaming of. you can start that new business, become more involved in civic, social or charitable organizations. get involved with your college alumni association. spend more time on your hobbies. or even continue working part time.