The larger the firm, the more rational succession planning is. Partners in large firms know from the beginning what the process is like, when it takes place and who makes the decisions. They are trained from day one on what to expect and when.
In smaller firms (three to 10 partners), just the opposite happens. Usually, no one talks about succession until it becomes an issue. Partners are not sure of the process. And, the major offenders are usually the founding partners or those with large books of business.
What Should Small Firms Do?
There are several things that small firms should do in order to safe guard the continuation of the firm. Many firms fear competitors, technology or not being able to retain qualified staff, but the major threat to smaller firms is the lack of succession planning.
1. Realize that succession is an emotional event. Partners, especially founding partners, spend their entire professional life acquiring clients, training staff, being part of the community. Succession asks them to step away from all of that.
2. What will I do now? Whether a partner retires at 66 or 70, they still have a long life ahead of them. If they have not developed outside interest or a plan on how they intend to live the next 20 years, they will feel a lot of fear and even loss. They need to begin to separate themselves from the firm.
3. What might the firm do? You may not want to throw out a useful asset. If the partner has valuable connections in the community, can still bring in business or mentor younger associates, then you should find a way to keep him or her.
4. Start the process early. The biggest mistake that a firm can make is to wait until the year the partner is going to retire. At a minimum lay out a five-year plan which outlines year-by-year what you want the partner to start doing. For example, clients will need to be transferred to others in the firm. This is a multiyear process.
5. Make sure you have a partner retirement agreement. This should outline when a partner retires, the required notice (at least two years), what happens if the partner does not transition clients, and so on. Each partner should be responsible for developing his or her successor.
6. It’s the firm and not the partner that makes the decisions. Small firms run into problems when they don’t have a written plan or when they let individual partners decide when or if they will retire. What happens is that each partner negotiates his or her retirement. It’s not that unusual to find partners well into his 70s still working at firms, whether they are productive or not.
7. Make sure you take into consideration your buyouts. Succession planning is just about the individual, it also affects the entire firm. Review your current buyout agreement and make sure that it still makes sense for the firm. If not, don’t be afraid to modify it now.
8. Be sure compensation system isn’t a hindrance. It’s critical to have your compensation plan aligned with the partner’s succession plan. If you ask the partner to transfer clients and your compensation plan is based on billable hours, there is misalignment.
9. Develop a culture of accountability. If your firm lacks a culture of accountability, then partners know that whatever they do or don’t do, nothing will happen to them. Hence the same will happen when it comes time to start their succession. They think, “Nothing will happen to me if I postpone it for another year or so.”
Don’t Let This Happen at Your Firm
Here is an example of what commonly happens when you don’t take the time to address succession and develop a process. Sam is the managing partner of a five-partner firm. The firm has grown over the years and it is now $4.5 million in revenue. Sam was one of the two founders. The other founder had to retire because of medical reasons. Sam owns 30% of the firm and according to the current buyout; he will receive $1.35 million. Sam is also the highest paid partner. By the way, Sam is 66 years old and has no intention to retire anytime soon.
The other partners realize that they cannot afford to pay Sam 100% of his buyout. The firm has no written succession document. The partners ask Sam if he would consider renegotiating his buyout. He says, “Absolutely not!” The partners find themselves in a no-win situation and the war begins. The other partners start a process of forcing Sam out and refusing to pay his retirement unless he reconsiders. Sam’s feelings are hurt. Didn’t he provide these partners their current positions? You probably know how this ends. Sam is forced out of the firm he helped found. There are a lot of bad feelings and it’s a terrible way for someone to end their career.
All of this can be avoided with proper communication. This is an emotional topic for partners to discuss, but it is one that needs to come up at partner meetings. Your succession planning efforts need to be communicated positively; otherwise it will be subject to negativity, fear, and possible sabotage. Using an independent advisor can keep emotions in check and help get everyone’s ideas and concerns expressed.