Readers question – Why start succession planning when you start up your practice?

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HandWe have just received an important question from a reader, regarding succession planning.

Practice manager ‘Ali’ asked; when do you start to think about succession planning… in particular about issues such as timelines, how long it takes on average to sell a practice, and whether staff are retained versus replaced? 

When should you start planning? 

The answer is simple – from the time you first start up your practice. From the outset, you should have an end point in mind. You won’t live forever, nor will you want to own the practice indefinitely. Having a succession plan in place will greatly benefit recruitment and staff retention. More importantly, if you are suddenly struck down with poor health, it can become a financial life-saver to have somebody to be ready to take over. 

How long does the process take?

 matchsticks

The process of transferring the practice may take up to 2 to 5 years, depending on how well the succession planning process has been implemented. You must; 

  • plan for a carefully thought out process and an orderly transition (so you avoid doing it in a sudden panic);
  • identify and prepare a capable successor;
  • build, protect and transfer your net worth.

Identify your successors 

green

What if you decide to retain ownership or transfer the business rather than sell outright –  who should run the practice after you are gone? It may be;

  • family member(s),
  • partners and/or shareholders,
  • professional managers or key employees or staff,
  • external investors or practitioners,
  • some combination of the above. 

Usually a successor is chosen according to two criteria; who you want the practice to go to, and who you believe is best qualified to run it after you leave or sell down. Often, these two are not one and the same person. In fact, identifying a suitable successor can prove to be the most difficult step in the entire process.

fail

In my experience, the three common succession planning mistakes in order of importance, are;  

  • failure to plan,
  • choosing a weak successor,
  • having a succession plan in place but then failing to implement it successfully.

Having no succession plan at all means you will find it harder to recruit, retain and groom the next like- minded owner.

clear vision

To find a suitable like-minded owner, the process should start immediately. Bear in mind that it is a process and not an event. Most importantly, to sell for a fair price, the buyer’s accountant and the bank’s approval require the following:

 

  1. A clear and enticing vision including a succession planning strategy; for example, something like this: “We want to have five high-quality separate practice locations in five years’ time, managed by junior associates who are leveraging off our knowledge and experience.” Such a strategy can be set out simply in a concise statement, for example on a single page, using bullet points.
  2. A clear business model i.e. how profitability and sustainability will be achieved,  including the percentage of a provider’s gross fees.
  3. Clear legal and tax structures with adequate supporting practice documentation, including the service trust, service agreements, fair work-friendly employment agreements, and an owner’s agreement on management, share profits and retirement (avoiding any expensive legal disputes so that all parties remain on good terms).
  4. The annual financial statements needed to demonstrate the financial success of the practice so it can be correctly valued.

If annual financial statements are prepared correctly, buyers and sellers can easily and fairly deal with each other with minimal external legal and financial advice required. However, this is not the case when the documentation and structure is opaque.

Where there is a lack of preparation, owners are often disappointed both in the sale price and in subsequent interactions with the new owners following the sale. This is because their expectations were not appropriately set out and discussed in the first place. It’s a situation that occurs frequently, unfortunately.

Getting it wrong may have expensive consequences for both parties, consequences that are avoidable. In a sense, it is no different to planning for a marriage or a divorce.

uncertainty

The more opaque and unclear your arrangements are, the less the practice will sell for, since people do not know exactly what it is they are buying. No matter how great you the seller think your practice is, the prospective buyer can only ‘lowball’ the price due to the inherent uncertainty and risk involved. It can also have the effect of delaying the sale, which may prove to be a significant setback. 

Outstanding practice liabilities may also be an issue. If prior to the sale, the owner still has debts or they incur a new debt, for example a significant five-year loan, then this may inevitably lead to poor cost-cutting decisions, declining practice infrastructure, support and profitability. Any of which can significantly reduce the overall value of the practice. 

In this situation, it will be harder to recruit and retain new and quality practitioners and staff.  After all, nobody wants to buy tickets to the Titanic! The practice suffers from decision-making paralysis and sinks to the bottom. 

More is at stake than just the satisfaction of a good sale price. Proceeds from the sale of the practice may well be your last opportunity to generate the retirement savings needed to live in a comfortable retirement. As a rule of thumb, a typical person needs at least $2 to $3m, in addition to the family home, given the lower interest rates forecast for the foreseeable future. 

The message is, plan ahead.

key

For more information see

Succession Planning Part I – How Not to Screw it Up! (from the archives)

Succession Planning Part! II – How Not to Screw it Up! (from the archives)

Directors Pathway Program – this helps train the next person to buy your practice.

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