With businesses maturing at the same rate the business owner’s experience grows, succession planning becomes an area of focus for business owners. Many consider the issue of succession when they lay awake at night thinking about their retirement and exit strategy. However, here at Accru we believe in raising the issue of succession before a business owner approaches retirement. Leaving succession as an afterthought for retirement may have significant consequences. For example, business owners may lose out on maximising the value of the business prior to exiting, they may pass the business to a less than suitable candidate, or they may lose out on gaining from the business altogether upon exiting.
A professional services firm, with more than half the partners expected to retire in the next decade, approached us to assist with the exit of a particular partner. The exiting Partner’s share was to be replaced with the entry of a new Partner. However, in handling the swap of ownership, the partners were faced with a scenario that they had not realised would arise. For in finding out that a new partner amongst the pool of employees was to be appointed, other motivated employees started approaching the partners – they wanted to understand their own possible pathway to potentially becoming a partner. Employees began engaging with partners with an interest in understanding their future in the firm. And partners started to realise that without a pathway for employees to achieve partnership, as they become demotivated through not seeing a future in the firm, they might leave. On the other hand, partners also realised that with a pathway for employees to achieve partnership, not only will the firm retain current high-performing employees, it would also motivate others to step-up and aim towards partnership – all for the good of the firm.
There were also partners who expressed concern over potentially having a reduction in their ‘share of the pie’ – their profits – when their equity is expanded to include more equity holders. However the following information was shared with the Partners to allay their concerns:
The Pie Grows Larger
Instead of diminishing the pie, extending equity to the correct candidates has the opposite effect of growing the pie. By incorporating appropriate milestones or key performance indicators (KPIs) when offering equity to potential candidates, the business’ revenue base will grow, which in turn leads to increased net profits. As a result, many hands make light work. Leverage from new partners can be expected, which in turn increases the existing partners’ share of profits.
A Performance-Based Staged Approach
In developing a succession plan, equity can be offered to potential candidates in a staged manner, with performance-based milestones or KPIs set up to be achieved in order to progress from stage to stage. This provides candidates with clarity, certainty and removes a potential sense of inappropriate entitlement. With an appropriate plan in place, the business will be able to avoid senior employees being promoted (or even expecting a promotion) based on seniority, and instead reward high-performing employees who demonstrate leadership and initiative.
As Tim Lane of our firm likes to say, “You can never over-communicate, but will most certainly always under-communicate.” It is important to ensure employees understand and are on the same page as the partners in the implementation of the succession plan. Misunderstandings can spread like wildfire across the office and can potentially backfire with a mass exodus of valued employees. Having all partners understand the succession plan in detail, and communicating the same consistent message to employees, is essential. Implementation of the succession plan has to similarly be consistent and in conjunction with the message given to employees – partners have to be invested in the plan long-term in order for the plan to produce a long-term and sustained result.
Succession planning is not an easy task. Ensuring that every one of the owners within the business is ‘on the same page’ makes the process somewhat more challenging. However, a well thought-out and agreed upon succession plan can lead to a fruitful result. Starting the process early with trusted professional advisors and investing into the new equity holders can mean that owners can grow their share of the pie while in the business, and when they do decide to exit the business they will gain much in return.
Accru is able to step through the stages of succession with you. From planning to communication, to implementation, we have the expertise to make the process a whole lot easier. Contact your local Accru office today if you would like to further discuss.