BD’s career doctor advises a practice that failed to keep a trusted lieutenant motivated
Q: Our practice, a limited company with three working directors, has done well and we are thinking through the next stage of our practice. But our plans have been undermined as the associate who we were most hoping to bring in has left to set up his own practice. I feel like we have lost a great opportunity for succession. I, for one, know I may want to have a change of direction in a few years.
A: Succession in small practices is a complex and difficult thing to manage, and the stakes can get increasingly high the longer the practice has been established and the larger the assets. As you have learnt to your detriment, without planning in advance, you can waste opportunities, and lose valuable staff. Yet it is possible to make succession plans that work for everyone.
The first lesson from this situation is that you were not perhaps explicit with this associate that there was chance for progressing to a directorship, so he probably did not even consider staying in the firm. Another barrier can be that, due to the increased value of capital assets that original directors may have built up, for example from owning the premises, buying in is just not possible.
Some get round this by making the financial burden less onerous: for example, by allowing the new director to spread the acquisition of their stake over a period of years.
Another way to avoid a reoccurrence of what has happened to you is to restructure the terms of your association in a way that allows directors to change and the company to continue long term.
As we all know, a service industry such as architecture is essentially worth little more than the value of the people it is made up of.
Some might choose this way to structure their company, to allow directors to come and go more easily. All shares in the existing “goodwill” of the firm are valued at zero at the moment a new director joins, ensuring that new entrants are not prohibited from entering into the partnership.
This might require original directors to realise their stake prior to this point (some do this by, for example, selling the premises they may own, then renting it back).
The reason this approach to “good will” makes sense is that it can also work well for leavers, making it easier for a director to leave at a future date. At this point essentially the same thing happens: another valuation is made, all directors receive their share of the value of the assets at the time of departure, with the years of profit and income to that date as reward, for each to manage as they choose (including reinvesting back in the company).
At this point, a new director can then buy in, the company’s value is reset to zero, and then the process starts again.
Of course, this might be wrong for the legal structure of your company, the issues are more complex than described here, including ongoing liabilities, indemnity insurance, and so on. But the main point remains to plan, with an (albeit potentially robust) discussion among directors well in advance, and paying attention to articles of association that make it clear how parties can leave and join. With this in place, the process of succession and generational change can at least be clarified before a situation arises.
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