May 27, 2024
Succession planning is one of the biggest headaches for every business owner, but a vital aspect of any long-term strategy to enable owners to exit on their own terms. Understanding the nuances of different succession options—from promoting internal talent and recruiting external candidates to merging or transferring ownership—can be the difference between a smooth transition and a turbulent one.
Understanding Succession Planning
Succession planning involves identifying and developing new owners who can step in to continue a business. It not only addresses the inevitable changes in leadership but also prepares the company for unexpected & untimely departures.
Options for succession are below.
Promoting Internal Talent
Developing internal candidates for future take over is the holy grail for law firm & accountancy practice sales. These are by far the most recommended solution for most smaller sized law firms and accountants in the UK, but also the hardest to achieve. How many 20-40 year olds have sufficient capital to acquire a business, or the willingness to acquire sufficient finance to go through with it? From our experience its very few indeed.
Identify Early: identify as early as possible any future owners and gently nudge them towards management.
Provide Training and Development: consider offering leadership training programs, mentoring and exposure to all aspects of the company.
Create a Development Plan: consider putting together a plan in conjunction with your identified employees for future leadership roles. After all, if they don’t know about your plan, how do they know to stick around in the business and not move on?
Recruitment for Succession
If you go down the external recruitment route, consider the following:
Don’t oversell: candidates can be spooked by too much talk of future ownership too soon! Don’t appear desperate.
Define your role: talk about management and responsbility during the interview. Candidates fall generally into two categories – those who just want to work, and those who want a bit more.
Don’t go too soon: give the candidates time to get involved in the business before starting to push them towards ownership.
Employee Ownership Trusts (EOTs)
EOTs are coming up quite often now. Basically it allows employees to have a significant stake in the business, ‘promoting long-term stability and employee commitment’.
We don’t think this is an easy option, but a few steps below:
An EOT is designed to hold a controlling interest (at least 51%) in a company on behalf of its employees. The trust acquires shares from existing shareholders and holds them for the benefit of current and future employees. This model aims to provide employees with indirect ownership without them needing to invest their own money. Before you even get to setting up, you need to decide whether your employees are likely to embrace an ownership culture. This is a very difficult conversation to have, because the moment you bring it up, the status quo in your business changes.
EOTs are not cheap – we have heard quotes from law firms of around £15-25k to get one in place. Please tell us if you have come across other fee structures – many thanks!
Usually the EOT will buy the shares from the current owners either with cash reserves from the business, if available, or more commonly, through a loan. The business then repays this loan over time out of future profits.
Merging with Another Business
Merging can be an effective succession strategy, particularly for business owners looking to retire or reduce their involvement.
For full advice on mergers please get in touch – always happy to assist.
Few pointers:
Mergers are virtually never mergers – for example the SRA usually define a merger as a new entity set up by two existing entities on equal footing. In reality mergers are usually one firm being swallowed up by another firm. This is an acquisition.
Mergers that do not involve successor practice status are usually to be avoided – this is more of an asset stripping exercise! Lots of info around this – contact us for guidance.
Find the Right Partner: Look for a company with complementary strengths and a compatible business culture.
Due Diligence: Conduct thorough due diligence to avoid financial pitfalls and legal complications. You can do a lot of background checking very early on and save a lot of time if you dig up a load of issues prior to discussions commencing.
Plan the Integration: Develop a detailed plan for integrating the two companies, focusing on systems, employees, and company cultures.
Transferring to Family Members
Handing over a business to a family member requires careful planning to avoid conflict and ensure readiness. Pointers:
Just because your current employees are loyal to you, they may not be as loyal to your son or daughter.
Don’t assume that the family member is interested and capable of running the business!
Emotion should be avoided at all costs (much easier said than done)
Formal Training: Ensure your family member gets training in business management.
Gradual Transition: Implement a phased handover process where responsibilities are gradually shifted.
Closing Down the Business
If no suitable succession options are available, closing down might be the best solution.
This should be your last resort option – there is usually very little reason to close down a law firm in the UK without achieving a deal. Contact us for a confidential discussion (www.jonathanfagan.co.uk).
Conclusion
Effective succession planning secures a business’s legacy and ensures its continued success. The earlier you start to plan, the more chance you have of achieving an acceptable succession. Whether through recruitment, promoting from within, establishing an employee ownership trust, merging, transferring to family, or closing down, each strategy requires careful consideration and planning.
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