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Succession planning by attracting junior partners to buy in.

By Andrew Roberts Andrew Roberts

 

I was speaking at the Local Law Societies conference last week and a theme that kept on cropping up was that junior partners are no longer keen to buy in to small firms. I was asked what firms could do about this and I think there are some clear steps that partners can take to secure their succession internally.

The biggest hurdle I have found is a culture of them and us. We are equity partners and they are not, so what we do with our business is none of their business. This is true, but the market is full of head-hunters ready to poach good staff and if your stars don't know what at the future holds for them with your firm, and they get a call from a rival firm with a clear path and goals, it will be very attractive.

If you have some future stars you are lucky. So, tell them they are the future. Kind words over a glass of wine letting them know that you have their best interests at heart is worth far more than an annual review and a small pay rise. Bring them into your confidence, tell them they are the future and that your aim is to leave the firm in a better place than it was when you found it.

As part of this process, if they are the future let them be part of shaping it. Discuss the firm’s strategy and ask their opinions. Explain that you are the owners and so the final decision rests with you, but get their ideas. I suggest giving them basic accounts and help them understand how to run the business. We always hear that " I love the law, but I didn't go to law school to spend all my time running the firm”. But if they know how to do it properly, running the firm properly is just as important as the doing law and probably minute for minute is more profitable, drawing profit from efficiencies rather than selling another hour.

Also, it is important to discuss your plans. If you are late 50’s or early 60’s telling your stars that you plan to retire at 65 is not a sign of weakness. Telling them you want to carry on forever or even worse not telling them anything is true weakness and will eventually leave a husk of a firm when they have left for better opportunities.

From a practical perspective, a sensible first step is to incorporate. There are tax benefits which make a limited company the best vehicle but that aside, asking a future star to buy shares in the business they work in is, philosophically, a different conversation than asking them to take your equity. The later hints at taking over liabilities and is often an all or nothing kind of deal. So why not sell your 50% equity to your star at 10% a year for 5 years. This makes it affordable for everyone. Or just sell 40% and keep 10% of non-voting shares so that you can enjoy their success and remain as an ambassador.

We advise that it is sensible to prepare a sales brochure just like a normal commercial business would do if it was looking for investment. This should contain 3 years accounts and PII records, leases (see below), staff numbers and salaries, current business plan and a brief SWOT (Strength, Weakness, Opportunity, Threat) analysis. They can then study this, discuss it at home or with a friend who is in business and it shows you in a positive light. It demonstrates that you are running a proper business which is investable.

We are currently working with a firm with 3 equity partners, all mid 60's who have been talking to us for 5 years about their plans and how the 5 salaried partners are the future. Unfortunately, they did not say this to those 5 salarieds. Now the equities have decided to retire over the next 2 years but not one of the salaried partners is interested in taking over. They are not going to leave, but nor are they going to take ownership due to timescales and frankly, because the equities have milked the firm and it needs investment, let alone paying the equities out. The only alternative is merger which we will help with, but internal succession is much less stressful and difficult and this situation was so avoidable.Ampersand legal

Property is always a major issue if the partnership owns it. Very often the current equity partners inherited an old building on a High Street which in the 1970s was not worth much. Now it could be worth well over £1m if it was developed and it is unlikely the equity partners will want to walk away from this. The logical thing to do as part of the succession would be to look five years out, find new leasehold premises for the firm to move to and develop the old office. The more understanding equity partners might even give a slice of this to the future stars which would really lock them in.

So, if you have future stars in the firm they need to be looked after, trusted and told they are the future or else your succession plan might very quickly become someone else's.

 



 
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