Five Partner Firm With Succession Challenge

The Challenge

The current partners had identified two potential partners to replace the senior partner and another senior partner who as a couple wished to retire in 5 years’ time whilst not causing disruption a business to which they had given almost 50 plus years of service combined. The departing partners dominated day to day management and financial interests over the other three partners.

A move from partnership to limited company helped offer reassurance to lenders to back the business in a revised structure with key personnel stepping up their own financial exposure and interests (meaning the risk came with enhanced profits if a success).

The two departing partners were key figureheads in terms of winning new client work and managing staff across 6 offices over a wide geographical area. These two individuals were seen as central to the success of the practice and lenders were reluctant to lend if they departed within the first 3 years.

The departing partners wished to sell their interest for a sum of just over a £1 million pounds. In reality this was overpriced but the 3 existing partners were prepared to pay a premium to increase their own interest and to encourage others to join them.

What we did

We developed and implemented a strategy to allow the retirement over a number of years in stages to facilitate the payment on a realistic basis given the fee income and available capital.

The solution had three elements:

1. 3 to 5 year term loans for the other existing partners to enable them to increase their interest in a very profitable firm;
2. A practice loan being identified with the incoming partners which allowed them to buy;
3. A Consultancy Agreement to ensure the departing partners departed immediately as partners/directors but would be obliged contribute to smooth transition to the new regime and financially their interests were aligned.

The loans were each secured through our work with the lenders to explain the structure of the deal and the safeguards in place including a “Golden Share” which allowed the departing parties to return to make limited decisions if certain financial targets were not achieved i.e. in the event of financial problems due to the change of management.

The Outcome

Lenders backed the project due to the structural safeguards, the partners already in place increased their holding and the incoming new partners acquired a decent interest in a cost effective manner. The firm is thriving and continues to grow turnover and profits. The firm is looking to grow further.