Growing pains

There comes a time in every firm's development when the existing management need to make an important decision about their business's future. Do they merge or do they remain independent? My experience of working in and around the city is that most young professional firms go through the same development process.

They are founded by a generally small number of dynamic individuals, who work hard and grow the business successfully. These people often find succession an issue and tend to eventually promote internally. Following retirement, they are then replaced by people who may not have the same the work
ethic or ambition or, to put it bluntly, required abilities.

Decision time

This is where the business reaches a fork in the road. The first route leads the partners to carry on exactly as they are, continue to run their portfolios down, make no efforts at business development, be happy on (say) £100K a year and, remain secure in the knowledge they will be on the 5:30pm out of Liverpool Street every evening.

In this scenario, they will eventually bequeath the business to a group of young partners who'll quickly realise that they are presiding over an aging and steadily reducing client portfolio. At that point, they will be forced to enter into
a merger and the firm will disappear.
As we all know, there is no such thing as a merger in professional practices. It is always one firm taking over another.

The second route is one where,
if the internal candidates for promotion are not good enough, the existing partners recruit from outside. This may disappoint some long standing staff with partnership ambitions, however in any business, the quality of the senior staff is of paramount importance.

A structure is then put in place in which the partnership is populated by a mixture of business men and work getters. Firms will, of course, always need technically gifted people and those people can take 'director roles', but they would not be involved in the running of the business.

They may be so important that they are paid more than some of the partners, but it's unlikely that they will contribute to the executive decision making.
The days of portfolio managers drawing partnership profit shares will end.

Where does the work come from?

Key to any firm's success is the ability to bring in new work. A partnership cannot survive for long if it is dependent on the work winning skills of a relatively small number or partners. Business development is a requirement for all partners, not just a few. Therefore all partners need to be given new work targets and if they are not fulfilling those targets, their status in the firm needs to be reviewed.

Everyone will have good and bad years, so any decision needs to be taken over a number of years. However partners need to be under no illusion that cruising or winding down is an option, so regular transparent reviews should take place.

It should also be emphasised that bringing in clients is not just the job of partners; everyone in the firm is responsible for this. I would therefore make it part of the appraisal process for everyone at manager level and above.

The fateful merger

The growth plans of most firms require mergers to take place and it is these that are the most problematic. It is not just the importance of getting a cultural fit, it is also a question of treating everyone fairly, equally and ensuring everyone feels part of the team. Both the legal and accountancy industries are littered with examples of how not to effect a merger.

Mergers are usually met with distrust by staff on both sides of the fence. Staff usually anticipate promotion opportunities evaporating into the ether, or job security reducing as duplicate staff appear.

Certainly anyone who is a receptionist, office manager, IT or a secretary would rightly fear a merger. I would generally avoid significant mergers. By all means, make strategic hires or bring in teams to fill gaps in your firm's skill set, however beware large mergers.

They create disruption and you are often not getting what you thought you were. At BKL we ask ourselves, will this merger be 'gene pool enhancing'. If not, we walk away.

Firms always need to develop and progress however, and growing for the sake of growing is pointless. As the old saying goes, turnover is vanity and profit is sanity. 

Geraint Jones is a tax partner at BKL Tax

He writes the regular in-practice article on doing business for Private Client Adviser