Transferring the Professional Service Business to the Next Generation
As an expert in family business succession planning, I’m frequently asked about the challenging dilemma of how to seamlessly transition a business operation from the current generation to the next. The solution is rarely cut-and-dry, and each business is faced with unique challenges and opportunities in introducing the next generation. Yet the process of transition can be even more complex with a professional service firm, where trust, relationships and expertise are key to the business’ success.
Professional service firms generally do not sell tangible goods or hard assets. Instead, they sell a service or a personality. Professional service firms include operations like those of dentists, attorneys, doctors, financial advisors, public relations firms, lobbyists, and architects, to name but a few. Unlike retail, distribution or manufacturing businesses, professional service firms do not maintain physical inventory. Rather, the business is built around the owners’ knowledge, relationships and expertise within their industry.
Regarding family business succession, professional service firms face many of the same challenging issues that all other family businesses face. Specifically, they face challenges with governance, “letting go” of control by the senior generation, professional and leadership development of the next generation, communication, and struggles to create and maintain professionalism within the business. However, the lack of inventory and the focus on selling intangible items in a professional service firm creates a number of additional challenges that the business owner must think through. Owners must analyze the impacts of their decision to transfer the business to the next generation, determine the viability of maintaining their existing customer base, evaluate the fit of the succeeding business owner and assess the overall impact of their decisions on the business’s potential for future success.
The owner of a professional services firm would be well-advised to consider each of the following factors before making a final decision regarding succession:
Many professional services firms, like medical or law practices, require highly specialized education and credentials that are not easily attained. An individual cannot become a practicing doctor without a medical degree, and an attorney cannot legally represent others without having completed law school and passed the bar exam. The rigorous education is a significant barrier to entry for these businesses, so transferring these professional service businesses to the next generation presents specific challenges. Members of the next generation must be interested in the specific field, must enter the appropriate education program and must successfully earn the degree to even have the option of being a successor in the family business. Then, of course, they must be interested in taking over the family practice.
The value of relationships is key to the success of many professional service firms. For example, a veterinary clinic may have been treating numerous animals owned by a single family for many years, developing strong relationships with members of that family over time. Personal trust with doctors, dentists and other medical care providers is a key factor for many patients, and the level of trust and the strength of the personal relationship strongly influence individuals’ decision to continue using the services of a particular professional. Another example of a professional firm that is built on trust is financial advisory services. Clients need to feel comfortable with, and confident in, the skills of the professional overseeing their financial health. In all these cases, where trusted relationships are the core foundation of the business, the transfer of the business to a new generation can readily put the entire enterprise at jeopardy. Owners must not assume that clients will place the same trust in a son or daughter as they did in the parent or another senior family member who had been operating the business previously.
Age & Experience
Business owners must ask themselves at what age it is appropriate for members of the next generation to take over the responsibilities and duties of their business. In any business, the new leader must be able to manage the existing operations, employees and contracts. In a professional service firm, the individual must also have the expertise and experience to be viewed credibly within the field and in that particular occupation. Young doctors or lobbyists who do not have sufficient prior experience will encounter extreme difficulty running the business until they are able to gain wider credibility within their chosen field. In general, expertise is perceived as a function of the individual’s age, and many people will not be considered capable of leadership until they are in their late thirties or even older. In addition, more specialized functions may require additional education or additional years of experience to reach a level where the individual is viewed as being ready to acquire and operate the professional service business. Certainly a business where clients put their financial security or personal health in your hands, experience and professional “gravitas” are critical competitive advantages. It is not surprising to learn clients feel more confident when their wealth is being managed by a person with 35 years of experience than a person of maybe 10 years of experience.
The owners of professional service businesses have become successful over time through the introduction and implementation of high-quality ideas and through the relationships they have built with clients. With this type of personally developed success, we almost always observe the deserved presence of a strong ego, and one tied largely to the business. As these businesses are in part an extension of the professionals who have built them—the business owner’s identity is wrapped up in their company. This can make it particularly challenging for a business owner to walk away from the professional service business that he or she has built, as well as the success that he or she has created, and turn it all over to the next generation. “Letting go” is challenging for all business owners, but in professional service firms, the challenge is even greater. Veterinarians or doctors physically need to remove their nameplate from their office door and replace it with another. Relinquishing this position and protecting the ego causes emotional strain and often complicates the relationships among the family members directly involved in the business transition.
The distinction in roles between family member and business owner become very blurred in family business, as do the assets that are associated with the business. With the lack of clarity in defining positions and roles, clear plans and procedures should be developed and well-documented to handle future decision-making and crises. For instance, which family members are technically and officially on payroll for the business? Some family members may offer assistance, but are not technically employees, so their role must be defined clearly. Also, who owns the real estate that the firm is operating from? Is the owner the business itself or the family? In the case of a medical office for example, if the doctor suddenly becomes unable to practice medicine at that location, will the vacant office space belong to the family or to the business? Identifying the specific roles of family members and the legal ownership of specific assets up front will eliminate—or at least mitigate—confusion and the potential for conflict when these or similar issues arise in the future.
Prior to implementing a succession plan, a professional services firm should also consider and document the logistics of transferring the business. How can the business be valued, and how will the new owner purchase or inherit the business? If the previous owner is dependent on the assets of the business for retirement income, how can the business be valued once these same assets are pulled away from it?
Introduction of the New Owner(s)
As discussed above, strong client relationships are the core asset that underlies the success of a professional services firm, yet the relationships with vendors, suppliers and other business partners should not be discounted or overlooked, either. The business successor should not only be made intimately familiar with the decision-making process of the business, but also be given the opportunity to develop close relationships with the partners, vendors and other professionals who have helped to make the professional service firm successful.
Experience has proven that professional service firms can be transitioned to the next generation, but the process requires time and great care, as well as consideration of all of the factors described in this article. If the members of the next generation do not have interest in the industry or the requisite education and experience, then business succession within the family may not be an option. A professional services firm has a limited number of exit strategies, and if the next generation does not have the needed credentials, then transition may not be possible. Still, if the desire, skills and prerequisites are in place, a well-thought-out succession plan can be implemented successfully. By focusing on the key areas covered in this article, success is possible for virtually any family-owned professional service business.