A tale of two practices …
In 2011 the first Baby Boomers reach 65 – the traditional retirement age for western males.
The Boomer generation’s enormous energy, fed by aspirational consumerism and decades of relative peace and prosperity, spawned an explosion of entrepreneurial businesses and professional practices. Many of the owners and leaders of these businesses are now thinking about “retirement” and succession and the cannier ones are already well advanced.
As a generation the Boomers have very differently ideas about retirement to their forebears. Demographers tell us that: (a) they’re going to live for a hell of a long time after ceasing full-time work and (b) they’re going to be extremely active for as long as their health holds up (read: “they’re going to have expensive lifestyles”). So this group will not be donning fluffy slippers to sit in front of the fire, stroke the cat and wait for a slow decline.
For Boomers to fund an active lifestyle throughout what could be a very lengthy retirement ‘next phase’ of their lives, most need to obtain maximum value from the businesses they have built. But here’s the problem: while Gen X’ers and Y’ers are their natural business successors, they have very different expectations, lifestyles and work ethics. They often don’t see high value in the goodwill proposition, believing they could get a better return on investment, and have more fun, by doing their own thing instead.
Apart from the money issue, many Boomers are passionately connected to the practices they’ve nurtured, and the loyal staff and clients that have shared their values, visions and goals, over many years.
So while some Boomers think only of cashing out when it comes to succession, others think more widely. Ironically, these guys often get more by not being focussed on extracting top dollar. The difference seems to lie in their desire to pass on a unique legacy, not just a business; and happily, their buyers see extra value in this approach. These owners work hard to prepare their successors to stand on their shoulders, not just fill their shoes, and set them up to be successful by leveraging two sets of knowledge and experience – both outgoing and incoming.
Here is a comparative tale of two fictitious practices, almost based on real facts:
Milo and Stinkweed (“M&S”) was a five partner suburban practice, established by John Milo and Larry Stinkweed, in 1970. Over the next 40 years the practice had grown strongly and profitably by focusing on the needs of local business people, and developing staff and systems to enable them to service their needs with great efficiency. They drove their staff and their clients hard, and invariably produced good results at a good price. The two founding partners enjoyed high levels of client loyalty, having serviced many of their clients for over 30 years. They were also active and well regarded in their local community.
The major criticism of the practice was that it was seen by many as a comfortable, but rather soulless, sweatshop that had commoditised the delivery of professional services. It therefore suffered uncomfortably high staff turnover rates, including at partner level, and was always struggling to satisfy client demands with an under experienced workforce that required a lot of supervision.
Trustworthy Accountants (“TA”) was a four partner practice, established in 1975 in Melbourne’s eastern suburbs. In 2010, two of the founding partners were still actively involved in practice affairs. A third partner died of cancer in 2000 and the fourth departed in 2005 to take over the helm of his family’s substantial business interests. To this day, his family remains one of the practice’s best clients.
Internal replacements were appointed upon each partner’s departures, and those partners remain.
TA has always nurtured and operated a trusted adviser culture, which it applies to all internal and external dealings and relationships. Consequently, it enjoys great loyalty from both staff and clients. Although the working atmosphere is relaxed and friendly, and most work is charged by agreed value billing, rather than on a timesheet basis, the practice enjoys comparable levels of profitability to M&S, by handling lower volumes of higher quality, value-adding work that attracts good margins.
Succession Processes Compared
Practice #1: Milo and Stinkweed
In 2007 John and Larry came face-to-face with their own mortality when Guy, a close friend to both of them since their university days, dropped dead at his desk at a major law firm where he had been a senior partner for many years. Guy had been professionally and materially successful, but his highly stressful career had taken its toll on both his health and his home life, and he had two broken marriages behind him. Guy had shared his plans to retire and sail around the world on his yacht with both John and Larry. Isn’t it sad?
As a result, John and Larry revised their antiquated partnership agreement to require, amongst other things, compulsory partner retirement at age 65 (it would have been 62, but they’d left it too late for that) with a goodwill payout formula that the other three partners considered to be nothing short of exploitative. As John and Larry held 70% of the equity and voting rights, their wishes had carried the day at a partnership meeting that came very close to destroying the practice.
2011 approached, and John and Larry planned to retire on June 30th. They spent a lot of time cleaning up the partnership books, debtors and commercial affairs in general, believing this would enable them to exit on the appointed day with clear consciences and stacks of cash.
Meanwhile, the three junior partners were struggling amongst themselves, with their spouses, and with their bank managers to get comfortable with the idea of producing the amount of money their partners had mandated as the price of their exits. There was only one senior manager they all wanted to invite into the partnership, and she turned them down flat when they discussed the price of equity. We suspect she was looking for alternative employment from the day that conversation took place.
The junior partners talked to contacts outside the practice in an attempt to find other punters, but they couldn’t find many acceptable candidates and invariably their interest evaporated when they heard about the cost.
To cut a long and painful story short, there were no willing buyers for our very willing sellers and the practice was forced to place itself on the market. The GFC had suppressed any potential interest from similar practices looking for acquisitions as part of their growth strategy. The only taker was a consolidator, whose purchase price was lower than they’d hoped for, and it contained significant performance requirements that were ultimately not met as both clients and staff drifted away from the practice after John and Larry’s departure.
Eventually, the remaining fees and staff were rolled into another consolidated practice – and Milo & Stinkweed disappeared forever.
Practice #2: Trusted Accountants
Almost from day one of establishing their practice, TA’s partners had focused on quality of life, both in and out of work: for themselves, their staff and their clients. They viewed their business as an extension of their personal lives, and they shared their values freely between both planes of existence.
As the partners raised their families, so they developed their practice: with a continuing focus on personal and professional growth, learning and improvement. They saw business succession as an inescapable, and indeed as a desirable component of a healthy life cycle that requires constant refreshing to remain relevant, competitive and valuable.
Their partnership agreement reflected these values, which were constantly being reinforced by the way the partners led, and conducted themselves within, the practice.
TA had always had a 20 year strategic plan, although it didn’t contain much detail more than 5 years out. What it did show clearly were the dates when various partners expected to either exit the practice, or progressively reduce their levels of involvement in its activities. With this in mind, the practice had long worked towards devolving authority and responsibility amongst its staff.
In this environment, and unbeknownst to the older partners, several managers had been talking to the younger partners about acquiring equity. Because the buyers were much more willing in this case, the perceived value and attractiveness of the practice was much greater and, although they needed to find a substantial amount of goodwill, it was relatively easy to negotiate terms that worked for everybody.
For over 10 years, succession planning advisers have been predicting a tsunami of baby boomer retirements and the transitioning of ownership and control of businesses, of all types, from one generation to the next. Yet it’s only since the start of 2011 that we’ve noticed a significant increase in demand for assistance. The bad new is that many businesses have left their run awfully late, and are destined to compete in markets with many more willing sellers than buyers; the good news is that the ones that get their offering right will still be able to differentiate themselves from their competitors, and thereby obtain a good price AND pass on their legacy.
If succession is on your radar, think long and hard about how to maximise the value of your business. Of one thing you can be certain: you won’t achieve a great outcome by doing the same as everyone else.