Who’s Next?

Being a partner in a good firm can be rewarding financially, creatively and socially. It can leave any architect with a real sense of accomplishment. Yet, in otherwise successful firms, succession planning issues can divert the attention of firm members from the work at hand, destroy friendships and professional relationships, and ruin members’ retirement plans.

Succession planning refers to how a firm plans to transfer management and ownership from senior to junior partners upon retirement, a partner leaving the firm, or a new partner joining the firm. Firms need to have clear agreements, watertight from a legal perspective, so that the transition happens smoothly and all concerned feel that they have been treated fairly.

Most partnerships use the concept of units, similar to the shares in a corporation, to determine the ownership structure and how net revenues are divided among the firm’s partners. How these units are transferred is important, because they represent the shared capital of the firm.

Promoting a junior to partnership

Juniors represent the future of a firm and holding out to them the prospect of partnership is an important employee retention tool. This means that succession plans need to set out clearly the kinds of performance–such as management skills, the ability to bring in work and creative strength–that will lead to partnership.

You must also indicate the financial stake prospective partners must put forward, whether the firm will finance this for incoming partners and whether, in some other way, the amount may be paid off over time.

Incoming partners

Architecture firms that want to bring in new expertise from outside, possibly to enter a new market niche, are increasingly recruiting external senior professionals directly into partnership. As with juniors, you need to set in place policies on how such new partners are selected and how they pay off their share of the partnership capital. Even if a firm has no immediate plans to recruit from outside, establishing policies for such an eventuality will allow the firm to move quickly if a good prospect becomes available–and the best will not stay “between firms” for long.

When a partner retires or moves on

Do you have policies to deal with retirement of partners, or, as is happening increasingly often, a partner moving on to other opportunities? You can create a policy that requires a partner wanting to do this to provide a suitable amount of notice so that the firm can pull together the capital needed to pay out the departing partner. The policy should also indicate the financial penalties to be imposed on a partner wanting to do this earlier than the stated time frame.

This policy should cover contingencies such as a sudden debilitating illness or death of a partner. If a partner dies, her or his estate will likely receive the shares, and heirs (such as the spouse) may want to force a quick payout. Properly structured insurance coverage may help deal with this issue.

Business continuity

Much of an architecture firm’s value consists of work in progress, relationships with clients and prospects, and the creative ability of the firm’s members. This is quite different from a manufacturer, where the value of the business is primarily found in hard assets. For an architecture firm, a policy requiring partners to exit gradually allows for a departing partner’s relationships with clients to be maintained by the firm.

For their part, departing partners may want to ensure that they are compensated in the years after their departure for their work in developing and maintaining a client base which will be passed on to others at the firm. This can amount to a substantial residual income for a departing partner.

Business continuity is particularly important for a small firm, where the departure of just one partner, particularly if it is the firm’s main business generator or marquee professional, may spell severe hardship for the rest of the firm.

Tax consequences

To get a clear idea of the tax implications of succession plans, the firm (and its individual partners) should consult a tax professional. This is particularly important as many partners will want to set up family trusts to hold their share of the partnership.

A lawyer with experience in succession planning issues can be a tremendous asset to a firm wanting to make its succession planning process smooth. Having legally binding agreements in place ahead of time can help prevent a firm’s partners from having to decide on policy matters at what may be a particularly stressful time in the life of an office.

Pamela Winchie is a lawyer with the Toronto firm of Fogler, Rubinoff LLP. She can be reached at (416) 365-3711 or at pwinchie@foglerubinoff.com