The keyword on the issue of succession is planning. A major player, such as a partner, leaving a practice is bound to be a significant event. Careful planning – involving all partners, staff, clients and the bank – should ensure that the disruption, and therefore the potential loss of profits, is kept to a minimum.
The partnership agreement is a vital ingredient in the planning process. It involves setting out, in full, arrangements that will minimise the potential for disputes.
The peace of mind these arrangements bring is of great benefit to the firm. It ensures that everyone knows where they stand, so that they can devote their energies to developing the practice rather than being distracted by concerns about potential insecurity or unfair treatment.
Succession planning may be tackled within the business plan or as a separate issue. Preparing a successful business plan is complex and time-consuming. But the forward-thinking managing partner will put succession planning on the management agenda.
Potential conflict
Long-term financial planning for the retirement of partners yields dividends. The retirement of a major stakeholder produces a number of financial conflicts, which will be difficult to resolve if a sound structure is not already agreed and in place.
The objective of the departing partner is naturally to maximise the financial return on his or her years of commitment and investment in the firm – and thereby ensure financial security for the future.
The objective of the firm’s remaining partners will be to ensure the firm’s on-going stability and profitability. Since the departing partner will probably be paid out over a period of time, it is also in their interest to ensure that the two parties come to an arrangement that does not place undue pressure on the continuing financial health of the business.
Depending on their personal circumstances, the retiring partner may be more or less impatient as to how soon they receive repayment from their current and capital accounts. These typically comprise four parts: cash or assets introduced; retained profits; surplus on the revaluation of assets – including work in progress (WIP) – and goodwill.
