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If you are thinking about a 'professional' business succession plan - think 'Bacon & Eggs'!

All good things come in 3's and there are only 3 types of business exit (unless you are planning on 'going bust' or giving the business away). Those 3 types of exit are - GOING PUBLIC (possible but unlikely) - BUSINESS SALE (easy to plan to maximize business value) and BUSINESS SUCCESSION.

BUSINESS SUCCESSION is going to be our focus today - and of the 3 types of business exit it is easily the most 'idiosyncratic' (and hardest to plan for). That is partly because there are (very broadly) 3 different types of business succession:

- Planning for a family business succession.

- Planning for a mix of family & management business succession.

- Planning for a 'professional' business ('partnership type') succession.

Of the above - its the latter - the 'professional' business ('partnership type') succession where I am going to concentrate my blog today. This is more 'standard' in approach - and it can be structured like a series of 'mini internal sales' - and therefore becomes easy to plan for. I usually call this a 'rolling partnership succession plan'.

I would normally start by taking the senior partners through a thought process, and asking them some key questions - like:

- 'Have the (senior) partners ever given any thought to their ultimate destination' (and do they all want the same thing)?

- 'What is their current and ultimate target business value' (and is everybody in agreement)? 

- 'What is their target timeline' (and will it be different timing for different partners)? 

Often the above questions will not have been discussed openly within the partnership. Also, another key question is 'how do the partners get rewarded today'? Do they just participate in a general profit sharing arrangement - or do they run it more like a 'proper business' and separate out different elements of remuneration ('proper businesses' normally use different words like 'salary', 'bonus', 'dividend', 'interest', 'rent' - rather than just 'profit share'). Where professional partnerships only recognize 'profit shares' then I always think they must enjoy 'playing golf with only 1 club in the bag'!

Having worked through the above questions, the next step is often a conceptually difficult one for 'older' partners to come to terms with. They need to change their perspective from 'whats in it for me' towards how can we make this a 'win-win' for all of us (both 'older partners' and the 'younger partners' of the future).The 'older partners'  need to start to think about 'balancing the scales' if a 'rolling succession plan' is going to work effectively.

For example, one of the problems with partnerships generally is that they are usually just an 'income-producing asset' rather than truly being a 'capital-generating asset'. Therefore, it’s usually in the older partner’s best interests to keep hanging on for ‘one more year’ of income- and to focus (short term) on saving costs and maximizing revenue so that there’s a larger profit share this year. It is often in the older partner’s best interests to ignore building for the longer term because they may not be around to benefit from those longer-term gains.

As a rule, the older more senior partners/owners should be focused on CERTAINTY. They usually want to be certain that they will realize the financial value that they have built up (and have currently invested) in their business. The younger partners should focus on OPPORTUNITY. They want the opportunity to help shape the business and create future value for themselves. To create a successful 'rolling succession plan', both sides should be as near as possible in perfect balance: there must be certainty for older partners and opportunity for new partners.

Often the starting point is to ‘draw a line in the sand’ between past business performance and the future business performance. It’s important to separate past (or existing) profit performance owned by the existing partners from future growth that can be shared more widely. The idea is to allow younger/ more junior people the opportunity to participate in the future growth but not in the past (or existing) business profits (other than via their existing financial arrangements).

Under a typical 'rolling succession plan', older partners need to understand that future profit growth will most likely not happen to any significant extent if they don’t allow other (younger) partners the opportunity to participate in that growth and help push the business forward. Where it comes full circle is, by pushing the business forward, the younger partners are actually creating more certainty for the older partners to realize the existing value.

The way that the older partners realize that certainty ('get their money out') is by periodically selling (perhaps notional) partnership 'shares' at a future (largely fixed) value and where the junior partners are contractually committed to buy them over fixed periods of time. 

The plan separates the rewards for everybody doing a job (salary) from the rewards of 'partnership share' ownership (dividends) until the 'shares' are sold. This means that older partners can potentially retire from their salaried job – but continue to receive 'partnership dividends' until such time as their 'shares' have been fully purchased.

The 'rolling succession plan' typically involves a legal contract that spells out what is expected to happen and when. It will also spell out the consequences for under-performance (risks for buyers of shares) and the rewards for over-performance against the anticipated ‘norm’ (opportunities for buyers). The idea is to improve the certainty for selling/retiring partners but at the same time incentivizing success for the younger partners.

This strategy provides a ‘win-win’ scenario for all parties. However, it still doesn’t rule out or get in the way of a future third-party sale that might benefit all of the respective parties.

So finally - what's all this about 'Bacon & Eggs'?

This is a trap that many professional partnerships fall into (accountants, lawyers, architects etc). The people that are called 'partners' in the business have often got into that partnership (owner) position by being 'technically very good at their profession' rather than because they really wanted to own and run a business. In my experience 'professional partners' can (and must) be divided into 2 types:

- 'Pigs' are committed to the process of making bacon and eggs. They give their lives to 'make bacon'. They are analogous to the type of partner who really wants to own and run a business (with all the inherent risks and rewards that involves).

- 'Chickens' are just involved in the process of making bacon and eggs. They don't give their lives to 'make eggs'. They are analogous to the type of partner who is great at dealing with technical professional issues - but who really does not want to take the financial risks inherent in buying/owning a business.

A successful 'rolling succession plans' recognizes that both 'pigs' and 'chickens' are important in a professional partnership - but that they need to be motivated and rewarded in very different ways. Its never a good idea to base your professional partnership succession plan around the idea that a 'chicken' will magically turn into a 'pig' one day!

So if you are planning for a professional business succession - aside from everything else that you need to think about - remember the importance of 'Bacon & Eggs'!

 



 

 

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