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    June 20th, 2010

    ♫ I know his journey ends never.
    His Star Trek will go on forever…♫

    Music by: Alexander Courage, lyrics by: Gene Roddenberry.

    Starship

    Sooner or later, every firm must deal with the issue of succession planning. Given that the ‘boomers’ are all nearing retirement age, this is a looming – and lurking – issue for most firms.

    This issue can arise in several ways. One major way this issue comes to the forefront is the lease for the office is coming up for renewal. At that time the partners who really don’t wish to keep practising for another 5 years refuse to sign onto the lease. This throws the partnership into a crises and most likely leads to the firm going ‘supernova’ – the firm explodes and a group of partners leave (usually the ones with the biggest book of business) and the remaining ones are left to try to pick up the pieces (or most often, simply close the doors and turn off the lights on their way out).

    More subtle ways of this occurring happens as major keystone partners start to leave – one by one – until what is left is a shell of the former firm. This is death by a thousand cuts as the major income earning assets of the firm depart leaving only the liabilities of the old firm in the hands of those remaining.

    A third way is when the founding partners realize that every one of the up-and-coming associates who could have been partners have left after staying with the firm for a certain time. These partners-who-could-have-been have each come to the conclusion that the ‘old guard’ were not willing to give up control of the firm and their were better prospects for them elsewhere. As a result, there simply isn’t anyone left to buy-out the founding partners and again, the only option is to close out the firm one day.

    Other partners have woken up one day to find that the ‘old guard’ have agreements with the firm to fund their retirement plans that were entered into early in the history of the firm. These ‘unfunded liabilities’ typically don’t show up on any financial statement that lands on the desks of the partners.

    As a last resort, other firms end up trying to frame themselves as merger candidates to younger firms that may be willing to pay for the book of business of the firm. Here the firm doesn’t continue but is simply assimilated by the other firm as a way to retire the older partners of the practice.

    Of course, there are other firms who do successfully transition the firm to the next generation that respects the needs of the ‘old guard’ for some payment for their building up the firm that doesn’t place horrendous payment obligations on the shoulders of the incoming guard. The question is, how can a firm follow this path rather than one of the more tumultuous ones?

    The ‘gentler’ path is most often initiated by the younger generation courageously starting the conversation with the older guard along the lines of: “So – how much longer are you planning on being here?” This is not an easy conversation to start – but once started, you are now on the path to have a dialogue on the entire issue of succession, transfer of clients, payments, timelines, expectations and the like. Without this conversation being started, the firm continues to lurch along, steadfastly ignoring the elephant standing in the room that only gets bigger – and older – by the day.

    Successful transition from one generation to another is difficult to initiate most often due to the sense that in raising the issue, someone in the firm is operating from a position of self-interest. This is why a consultant is most often brought in to start the process and to guide and frame the dialogue. Someone who does not have a financial stake in the outcome of the decision can be seen as being objective and fair in a way no one in the firm can be. Furthermore, they often have experience in guiding the conversation around the minefields and pitfalls that can derail – or destroy – the process.

    Furthermore, a transfer from one generation to another involves many issues, not the least of which is the question of control. The old guard may hold all the cards and might (rightfully) fear that once they have transferred over enough voting rights, they may find themselves outside of the firm sitting on the curb following a palace revolt. This is particularly apt where there is an overwhelming percentage of the firm held by one or only a few partners. It may be trite to say that there is an issue of trust at play here.

    Intimately connected with trust and control issues is the question of money. Of course the retiring partners understandably want a payout for their efforts in creating the firm, by valuing “goodwill”. Unfortunately, in many cases, these same partners do not look at this issue from the perspective of the younger generation, who are asking themselves, quite rightly, what can the firm reasonably afford by way of payments for an intangible asset such as goodwill? Often these two numbers may be worlds apart. Again, someone neutral can help with this dialogue which is fraught with difficulties whenever someone who has a stake in the outcome raises it.

    The process of retiring the older guard oftentimes requires the rewriting of the partnership agreement, typically by placing ‘earn-out’ provisions on the old guard. These earn-outs require the older generation to actively mentor the younger generation and ensure the successful transfer of major clients of the firm to the younger partners in order to continue their partnership buy-out payments based on the collective billings from these key clients.

    Along with the transfer of money and ownership is the question of transfer of management. If the old guard want to see their firm continue into the future, they need to successfully groom the younger set for – and transfer over – the running of the firm to the up- and-comers. Unfortunately, many firms have looked at their second string and not seen the skill sets that they believe should be present to make this a reality. There are many ways to deal with this, but ignoring it isn’t one of them.

    In the longer term, the younger generation should be doing something that is not typical – start planning their retirement – now. Bring in a financial planner to meet with the younger partners as the time of their elevation to partner to assist them with setting out a financial plan for their future – and thereby leave the entire firm in a better position overall.

    Most firms would prefer to see their ‘Starship Enterprise” journey to never end. In order to do so, Captain Kirk and his crew have to ease out of the control deck and watch the younger generation take over the helm. Sometimes that transfer is best aided by someone who is beamed on-board who is neutral, objective and respectful of the needs, views and goals of all those concerned – and who does not form part of either group. After all, no one wants to face the possibility that their only option is to be assimilated by the Borgs.

    (Hat Tip to my friends at LawPact for providing the inspiration for this post).

    This entry was posted on Sunday, June 20th, 2010 at 3:56 pm and is filed under Change Management, Firm Governance, Issues facing Law Firms, Law Firm Strategy, Leadership and Strategic Planning, Trends. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
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