You may be offered a succession arrangement from a practice owner or partner who has retirement in their sights.
The simplest transition is one where you buy 100% of the equity at the outset. However this is not a succession arrangement. It is an acquisition. A succession arrangement is where you gradually acquire equity over time. For most of the succession period both parties hold equity.
Sometimes a buyer prefers a succession arrangement to an upfront acquisition as a way of securing a mentor or because of nervousness about transition issues. Sometimes a vendor sees it as a more gradual way to deal with change. Whatever its motivation, there is no doubt that it is more complex than an outright acquisition.
Here are three traps to avoid as an incoming buyer:
1. No fixed stages
A succession plan should be like a conveyor belt. It carries you from beginning to end. Upon starting the succession arrangement, the stages to get to the end are predetermined in the plan. There is no discretion for either party to change the plan unilaterally.
A succession plan that does not automatically move the parties to the end stage is otherwise known as a partnership agreement. When a ‘succession plan’ looks more like a partnership agreement, the incoming buyer should question whether the incumbent owner is really committed to a full transition.
2. No formula for salaries
As the equity shifts from seller to buyer, the distribution of profits shift accordingly. That is how it should be. However, professional services is a labour intensive business in which the split between wages and profit or labour and profit, is a grey and murky area.
To remove the murkiness and potential conflict of never-ending salary negotiations, there should be a formula for salaries. The formula for salaries is no less important than the formula for share/equity transfers.
3. No emergency stop button
After a period of time, one or both parties may not wish to continue with the succession. While a succession plan should be like a conveyor belt, there should still be a way for either party to press the emergency stop button. This should generally not be an easy or painless choice for whoever presses the button. However, it is better to bring the arrangement to a premature end than to prolong one or both parties’ misery.