Setting a direction for your practice involves understanding your future plans – and in some cases – of other equity owners, explains Keith Underwood.
Running a small practice as a sole practitioner can be a lonely one; that can be the case even if multi-partner. Understanding your own path, direction of travel, can be difficult to summarise and communicate in the day-to-day of work.
While it seems intuitive to think that talking through the future is easier and more prevalent in a two or three-partner practice, that’s not always the case. Plans can change from person-to-person very quickly, and a fear of misalignment often sees difficult conversations put on the backburner.
As difficult as it can be, spending time to make a plan gives you a foundation to work from, and the chance to proactively create a positive and best-value environment.
Sole practitioner options
Timing – what timeframe are you looking at to move on from your firm? A 12-month plan will be different to that of five years. The longer you have, the more likely you will optimise the best value and best fit for yourself, clients and staff.
Internal succession – while it is possible for sole practitioners to sell their stake onto an internal successor, such an option is unlikely. This is because micro firms don’t usually have the pipeline of talent coming through in comparison to larger counterparts. And grooming a successor, or successors, is fraught with risk i.e. they leave.
Merger – Bringing together two practices requires careful thought: are your ways of working and mindset similar to those of the other firm? How long will you work within the firm, and what will be your earnout? How will the ownership structure work? Which firms’ branding will be used? How will the back office operate; which tech will be used? Will all staff transfer across?
Sale – A sale can take many forms. However, the most popular include:
- Client transfer – your clients are bought by another firm. Your business ceases to operate, and you retire.
- Sale and/or earnout – your firm is subsumed into another. The consideration for which could include a purchase of your equity alongside a period as a consultant (to secure an earnout eg. across two years based on client retention), or an outright sale without staying in the business
Multi-partner options
Timing – While there is safety in numbers, understanding each partners’ career needs and life plan is vitally important in planning the future of a practice. As previously mentioned, misunderstandings, communication gaps and abrupt changes among even a small number of partners can impact a practice’s sustainability and value.
Internal succession – A multi-partner practice often has, by virtue of its larger mass, potential new equity holders within the firm. However, if they haven’t been identified and managed carefully, such plans can fall through very quickly. Gauging how equity is valued and acquired by internal candidates is crucial. Again, the longer that existing partners have to plan such a move, the more chance of it occurring. It is also likely to involve several years of prep, though there have been instances of partners joining a firm on the basis of acquiring further equity within a shorter timeframe.
Merger – There are key benefits in bringing together multi-partner firms, particularly around increasing the pipeline of junior talent, value creation from a broader client base; and operational efficiencies. Such deals are often run in parallel with a partner (or partners) retiring. But making sure the two firms have a cultural fit, and that value can be created, becomes more complicated the more people are involved in both making the decision and working together post-deal. It is also likely that one firm will be ‘more equal’ than the other post-integration i.e. branding and decision-making.
Sale – As with a sole practitioner sale, there are options available to multi-partner firms:
- Sale and/or earnout – A multi-partner practice may be acquired by another, however, there are multiple valuation and consideration models that exist. Once again, timely planning will enable the equity holders to maximise the value of the sale and enable each partner to achieve their goal; whether it is to leave upon sale; serve during an earnout period; or become a partner (or employee) within the new organisation. Deals can fall through because of divergent wants and needs among a partnership – even among a two- or three-partner firm. Again, the model, ambitions and working culture of the new owner may sway partners as to whether they ‘want in’, or not.
- Employee Ownership Trust – Selling your firm to a trust can have a number of tax benefits, and certainly fits a model where the firm exists on its own, with employees ‘invested’ in its future. The original equity holders may even remain in situ post-deal.
Keith Underwood FCA is founder and MD of Foulger Underwood
Keith and the Foulger Underwood team would like to help you plan your future. Get in touch by clicking here.
