When family business owners prepare for the next generation to enter into the business, most families initiate discussion of the succession process.
However, for unrelated business partners, this can be an entirely different situation, says Ricci M. Victorio, CSP®, managing partner at Mosaic Family Business Center.
“You need to talk, before it’s time to retire, about how the business is going to continue with or without your presence,” says Victorio. “No matter how young, healthy or determined you are to stay at the helm, if your sudden departure would be devastating to the business, you need a contingency succession plan. And ‘devastating’ is not a word you want as part of your strategic plan.”
Smart Business spoke with Victorio about how to ensure that your business will continue to thrive and grow.
How does succession in professional firms differ from that in family-owned businesses?
In a family business, parents will introduce their children into the business at a fairly early stage in their professional careers. Throughout their maturation, if all is going well, employees, clients and vendors become familiar with the next generation, understanding that at some point in time, there will be a transfer of control and eventually ownership. A parent can start transferring stock to a child or a family trust over many years. It can be purchased out of bonuses, gifted or inherited.
In a professional firm, however, the succession challenge is in buying out retiring partners who are still earning full salaries and stock payouts. Gifting or inheriting is certainly never an option in nonrelated stock transfers.
How do you create a profitable environment to allow younger partners to be able to buy the stock in a shorter period of time when all of the cash is going out to the senior partners?
Founding partners tend to have the most significant clients, and passing them on to junior partners is a complicated process in retaining client confidence and to the firm as it relates to who receives the lion’s share of the billing credit and income.
How can you begin to create a pathway to develop future partners and help them learn to market the firm?
Though the younger associates may have been working under the lead professional handling the task management of serving clients, they probably haven’t learned to market and perform business development. Partners are concerned that new clients may not emerge if they retire, thus creating a potential revenue impact on the firm and in their buyout price. A typical question asked is, ‘If we stop working, who will bring in new clients?’
Business succession is not unlike family succession. Here are some helpful tips to consider:
? As a senior partner, you need to groom younger people by creating opportunities for clients to work with you and your protégé.
? Mentor the younger person by giving him or her more responsibility and allow the client to interact with that person.
? Tell clients that you work in teams because you want to always have someone who understands the project, even if you are unavailable. This is a key point and one that is often overlooked.
? Appoint a young, talented potential successor as the client’s primary contact but continue to work as a team.
? Succession is occurring on multiple levels, including in your clients’ business, so it is important to match younger people with like-minded clients. This will aid professional firms in keeping long-term clients as the business goes through succession.
How can a senior leader transition to a new role before retirement?
This is a delicate conversation because you’re talking about affecting the financial stability of high-powered professionals who wish to maintain their income. You want to increase productivity and profit by using the founders’ expertise and connections to bring in new clients. Founders can explain to clients they are still involved from a strategic or global viewpoint and introduce highly capable, qualified younger associates to handle the actual casework, which will build confidence and new relationships.
As a result, profits and stock value improve, and salaries can be increased for new and existing staff. It is critical that new staff understand that they are progressing and have potential for growth, or they will move on to another firm where those opportunities are present.
You also need to redefine the roles and responsibilities of the senior members. This discussion can be more easily accomplished (and without the drama) through the facilitation of an experienced succession coach. Salaries can be realigned for fewer hours, providing revenue to pay the next tier of partners. You retain the skills of senior members while creating a circle that continues to build success.
Succession planning must be a fundamental element in every business’s strategic plan, even if you’re not looking to transition in the near future. It is always important to be prepared for a change within your business and provide a smooth transition for the clients; because, leadership change can occur without warning.
Ricci M. Victorio, CSP, is managing partner at Mosaic Family Business Center. Reach her at (415) 788-1952.
Insights Wealth Management & Family Business Consulting is brought to you by Mosaic Financial Partners