How to Plan for Succession Planning
Sunday, February 1, 2009
How to plan for succession planning
Joel Sinkin, a principal at New York-based Accounting Transition Advisors, and a specialist in mergers, acquisitions and succession planning, offers 10 tips on how to implement a firm succession plan:
Make sure the operating agreement covers all types of succession needs
You should have language that details how you will handle voluntary buy-outs, disability, retirement, involuntary terminations and penalty buy-outs. I get calls from people monthly that say: "We're a 10-partner firm and we have two partners looking to reduce their time commitment and we have to value their equity." And I say: "How does your operating agreement handle this?" And they say: "It doesn't really specifically discuss that." Meaning, they don't really have an effective agreement. The first thing you should do is have an agreement that addresses all the types of terminations and all the necessary issues.
Review the operating agreement as often as twice a year
A lot of people who do have a complete agreement put it in a drawer and never look at it again. For instance, the trend is for firms that have their buy-outs based on equity applied to a market-based valuation to move to a compensation-based formula. Make sure your agreement works for your situation and is current with market trends.
Plan ahead
You should, if possible, plan five years in advance of a partner retiring or substantially reducing their time commitment to the firm. When a partner is five years or less from a substantial reduction in time, there should be a plan in effect that will transition the relationships, the workload and all their roles gradually so their clients are retained and the firm isn’t overwhelmed by having to do this at the eleventh hour.
Be realistic
A lot of people try to replace the leading individual with technicians.
Value the equity or the ownership that is being sold appropriately
Many firms use valuation methods that are what is currently top dollar in the market for a third-party transaction but will result in an unrealistic financial burden for the partners that are left in an internal succession. That often results in disaster for both the remaining partners and the retired ones.
For external successions, choose the right successor on four levels
Professionally, make sure they have the skill set needed to serve your clients. Secondly, that the successor has the financial resources to complete the transition and succession. On a cultural level, test your fit with the successor with this simple benchmark: if you don't want to eat lunch with someone, you shouldn't enter into an affiliation with them. Lastly, structural issues: if your practice is very geographically sensitive, don’t affiliate with someone who is going to move the practice 40 miles away.
Have a proper transition plan
It's good to say: "I'm five years from getting out and you’re going to be my replacement." That's not a transition plan, that's a fact. A transition plan for clients is, for instance: "This year you (the transitioning practitioner) will mention that they are using me (the successor) in the back office to help review issues; the second year, you're going to bring me with you to meet the client; the third year, I'm going to meet the client alone and you are going to call the client and remind them I'm meeting with them; the fourth year we're going to go together; the fifth year I'm going to go alone again; and in year six, we shouldn’t even have to make an announcement, by then the client should be transitioned."
Document your deal thoroughly
Never agree to agree later. I have worked with firms that have reached a verbal agreement on important issues and then when push comes to shove, suddenly they realise they didn't have a complete written agreement. You can never have a trial period that mirrors what a merger would be like. Firms will have a glorified trial period, it ends successfully and then they can't agree on the final document. Document all of the financial and legal issues completely in the beginning.
Leave room for the unexpected
One of my favourite sayings is if there are 50 things you have to know about doing a deal, the smartest of us are going to think of 30 to 35. If you are involved in a merger or acquisition, there can be a lot of unexpected time commitments and expenses.
Get help
Unless you've done a lot of deals already, you haven't gotten beaten up enough to learn the lessons. When you are in the middle of the fire often all you see are flames, not the safe way out. You may need to consider outside help.
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