Start at the end: planning your exit

It might seem a strange point to start a conversation about moulding a practice into one that is profitable and built for future success, but the exit plan(s) of its equity holders is crucial in determining the firm’s future direction.

A firm that is performing well, has good staff and a pipeline of internal successors to leadership, will be in a much better position to operate from a platform of strength – with control of its own destiny, in which succession is attained with as little disruption as possible.

Ultimately, many smaller practices develop in an unplanned way, and this creates challenges that need solutions. Longer-term strategic planning does take management time and effort, and the unwinding of structural issues that may inhibit growth in the future.

Providing for succession

Case study:

• £5m firm – second generation MBO development.

Issues:

• investment of management time
• investment in second tier remuneration
• capital funding solutions.

This was an already-successful firm, but one that wanted advice around developing a third generation of potential owners internally.

Exit values and formulas were already in place, and a second generation ready to step up. Two partners had moved on and three were next in line. Support was required to help the existing and the next stage of management to invest time in building a forward-looking strategy. Remuneration plans were restructured and a communication plan was put in place for the third generation coming through, to let them be aware of what they might receive if they step up.

This was a successful piece of work, and we have assignments addressing similar challenges, creating plans to gain buy-in from younger and aspiring team members.

Attracting like-minded younger talent

Case study:

• £1.4m practice with three partners looking for the next owners.

Issues:

• early-stage recruitment
• building clear career and remuneration paths
• potential need for lateral hires.

Recruitment is now as much about marketing and communicating a vision as it is about the role itself. This firm worked on building messages externally but also communicating to existing staff and managers about their career opportunities within the practice.

The firm’s leaders were looking at two potential internal partners and so we supported them in the process of assessing over the coming months whether they were suitable. In tandem, we supported them in understanding how to bring on board a lateral hire for potential partnership – that person needs to know the potential opportunity and what they need to grasp it.

Burnout and exit of founding partners

Case study:

• straight proposal for sale to larger firm as a bolt-on.

Issues:

• unresolved merger of practices
• aged 40-something looking for new challenge.

There are always situations where practice founders have had enough and decide to exit – but with a lack of planning from the outset.

In this case, the firm was initially grown organically. The owner bought another practice but ran them separately. They weren’t particularly compatible; two separate offices and different client bases.

The benefits/synergies of two practices don’t exist. He is now looking to sell both practices; sadly, no second tier exists in either business. Therefore, based on the situation, the firms’ value will be discounted and an external sale process created. It is possible two separate sales will be required.

Growth pains

Case study:

• £1.6m practice with four partners operating ‘as individuals’.

Issues:

• One partner considering leaving.

Firms can, and do, operate where the equity partners work as if separate from each other. Each partner develops a team to support them. If undeveloped, then each partner does the grunt work and will reach a capacity ceiling.

This also means that if one partner operates more productively than the others, or finds the arrangement unattractive, then it makes them more likely to leave – as in this case.

However, we’ve worked with all four to agree to grow fees up to £2.25m by operating more as a team. This will require a change in processes and operations, with an investment in second-tier staff.

If undertaken well, then the partners will free up time to do more valuable and rewarding work. This, in turn, will make the firm more attractive to the second tier from an aspirational perspective.

Scaling through M&A

Case study:

• £3m practice looking to merge with similar sized, or larger, firm and remain independent.

Issues:

• taking on talent
• building scale
• optimising partner time and service lines.

Even £3m firms can have difficulty in stepping up to the next level – often struggling to find the quality or quantity of people required.

We dealt with sub-optimal performance in the last example – now, even at £3m level, this firm has difficulty in growing; instead turning work away because they can’t find the people to take them up the next level. In this scenario they looked to merge with a similar-sized business.

The plan was to create a larger mass of skillsets and drive synergies – in this instance a 15% uplift will put £1m on the bottom line.

One firm, in this scenario, does ultimately ‘subsume’ the other … but the closer everything is culturally and strategically then the easier that process becomes – staff and clients and ongoing partners will see the positives of that. It doesn’t have to be a ‘disappearing’ situation that people fear with private equity.

Keith Underwood is MD of Foulger Underwood. Please get in touch if you’d like to watch a recording of the ‘Practical Problem-Solving for Independent Practices’ webinar.