A top attorney offers his list of what not to do.
Where the ownership of the firm is in more than one person, there is no buy/sell agreement dealing with death or disability. In such events, ownership will pass to the estate of the owner. As a result, the estate has lost leverage to negotiate a sale.
Key employees are not allowed to become owners until they are in their forties. As a result, talent may not be bonded to the firm and may leave for firms where they can obtain an ownership position.
Ownership interests are distributed as compensation perks rather than to encourage key players to participate in management.
Planning occurs too close to the retirement of the principals who manage the firm. As a result, there is not enough time to train successors.
Tax advantaged retirement plans (such as pension and profit sharing plans) are not considered as a funding source for an eventual buy-out under a buy/sell agreement.
Firms create obligations to retiring partners without providing adequate funding. As a result, retirements of one or more owners may create a financial crisis for the firm.
Firms fail to recognize the potential of existing employees to transition into management and business development. As a result, the firm eventually is dissolved or sold for a fraction of value during its prime.
Ownership doesn’t change except for the death, disability or retirement of existing owners. There is no plan for gradual admission of new owners prior to that date. As a result, new owners may not have the management skills to continue the firm.
Owners make the first step in ownership transition planning the determination of firm value by outside appraisers. As a result the owners find that they have no buyers at those values.
Firms fail to consider the value of covenants not to compete to prevent the loss of existing clients upon departure of employee-owners.
Firms fail to consider the option of recapitalization with a limited liability company as a method to make a transition plan more affordable.
Future owners are kept out of the planning for ownership transition. As a result owners are disappointed when employees choose not to purchase ownership interests.
Firms fail to fund buy/sell agreements to purchase stock upon disability with disability buy-out insurance.
There is a failure to consider ownership transition as merely a part of a strategic planning process.
Firms fail to understand that clients like to see younger generations of management being prepared in order to give them interrupted service. Older owners need to understand that the cemetery is filled with indispensable people.
Firms use attorneys and consultants who are primarily involved in serving asset based companies. These advisors may not understand the special needs of professional service firms.
Firms that look to outside purchasers to remedy the lack of an ownership transition plan, don’t understand the problems that can be created by claims made professional liability. As a result, former owners may have to buy “tail” insurance or be responsible for deductibles for claims caused by the merged firm.
First owners often believe that their “sweat equity” should be reflected in the value of the firm. Usually there is no basis for such an assertion.
Ownership interests are given to employees without requiring payment. This usually causes unexpected taxable income to the employee based on the value of the interest.
Ownership transition planning is delayed because owners don’t want to allow employees to be able to look at financial records.
What practice looks like on the other side of the Atlantic Read full »
How Gensler maintains quality, culture while expanding globally Read full »
The client perspective on design and what makes firms successful Read full »
DI.net RSS Feeds
DI.net on Twitter
- World’s Tallest Twin Towers Planned for Dubai | ArchDaily ow.ly/DAtF01 day ago by @dinet
- Google’s BIM-busting App for Design and Construction | BIM + Integrated Design ow.ly/DAgry1 day ago by @dinet
- Michael Graves School of Architecture to Open in 2015 | ArchDaily ow.ly/DAeUn2 days ago by @dinet