Sourcing Succession Can Be Hard

Sourcing and attracting new partners to a firm can be challenging at times with our many years within the professions highlighting that many firms experience one of two trends. The first is a pattern that we’re often asked to advise on where a firm is unable to source internal successors and therefore feels they need to go to market to realise some value for the current equity holders as they retire. The conversation tends to go along the lines of ‘do you have anyone internally that would be able to step up to partner?’ The reply is typically ‘no’. Upon delving a little deeper we are most often told that ‘no-one internally is partnership material’ or ‘no-one internally can afford or wants to buy equity’.

Now the comment about being partnership material could in fact be correct, and we will touch on this shortly, however it is also worthwhile considering whether potential internal successors can be developed. Is it possible to mentor and develop those in their late twenties through to their early forties; the key period during which admission to partnership is most ideal; to help them grow into someone who would be a suitable future partner? Or are current partners being short sighted in their lack of willingness to put in such time to grow their future leaders? Of course, it can be very frustrating for practitioners to develop key personnel towards this end goal only to find them leave, thus perhaps their reluctance to put in this time and effort.

The other reason for the supposed lack of internal succession, being a lack of affordability or desire, is often assumed as the question hasn’t been posed. There is certainly the general view that young people are likely to find it difficult to fund their entry into partnership, which yes has the potential to be true. However, if the internal successor is able to source their initial buy in funds and the deal is negotiated on a fair basis, then there is really little stopping that party from being able to proceed. Often the deal can be destroyed by an unrealistic view of the firm’s value.

When it comes to a lack of desire, I can certainly attest to this being far from the situation, with virtually every goodwill valuation our firm has been performing of late due to the potential introduction of senior employees to the position of partner / equity holder, and there have been many. Thus, those firms are obviously doing something conducive and attractive for would-be new partners. Certainly, in the mid to late 2000’s, it seemed very difficult to source internal succession, however now that the cloud seems to be lifting and the world reignites post COVID, both current and future equity holders seem to be embracing such opportunities with gusto. So, I would certainly suggest not to discount a potential successor simply due to a perceived lack of interest because this may be far from the case.

However, the flip side of the lack of internal succession, is inviting the wrong parties into partnership, and we are involved with these discussions too. Once someone fills the role of partner, it is very difficult to undo this without one or more parties feeling dissatisfied or humiliated. It often intrigues us how this happens. We’ll be in a consultation and a proportion of the partners will be recounting their dissatisfaction with the performance of one or two of their colleagues. When we probe a little further, it becomes apparent that the undesirable traits were present prior to the offer of partnership which was still forthcoming. It’s almost as though a solution or this admission comes about because it feels right at time, or it’s the logic next step even though the party doesn’t match expectations, or there was no-one else interested in acquiring the equity. It’s unclear exactly why.

But remember, it is okay for some not to become partners and equity holders. As previously mentioned, not everyone is necessarily suited to be in a partnership, or perhaps more accurately, in a partnership with you! Our general view of partnerships is the benefits from the sum of the parts needs to outweigh those benefits as individuals. However, it’s also really important to have honest and frank discussions around expectations, values, morals, desired outcomes, practice management, staffing, just to name a few. It’s important to ensure everyone is on the same page or is willing to accept to proposed approach. Whilst it’s difficult to document performance criteria and hold everyone to account down the very last minute or dollar, it’s imperative to reach agreement on what will and won’t be considered acceptable within the partnership. If some don’t agree with the direction of the firm and its desired outcomes, then it’s best not to join up in the first instance.

Another factor to also consider is how one party’s choice of successor might impact on the remaining and future partners of the firm. Are your current colleagues in agreeance on your choice of replacement for you? Would you willing to be in partnership with who a departing partner has earmarked as their successor? How do your colleagues’ successors feel about being in partnership with the party you plan to offer equity? This is perhaps an even tricker situation than entering and remaining in partnership with your current partners.

Thus, the clear take aways for us include clear, open, honest communication, sharing and delivering on expectations through the longevity of the partnership, being willing to mentor a firm’s future leaders, but also being realistic where someone is unlikely to fit your partnership mould well.