Transitioning from Founder-Led to Perpetual Governance Models: The Most Difficult Challenge that Many Professional Service Firms ever face

The transition that any firm must undergo if it is to survive and thrive after its founders retire affects every aspect of the organisation. It is at the same time both strategic and intensely personal. For founding partners, it involves giving up control of an organisation that in many cases defines who they are and trusting the next generation to lead and manage it into a successful future. For that next generation, it means stepping up to a whole new level of responsibilities. It almost always involves difficult discussions, including about money, power and influence. For the firm’s employees, the outcome determines no less than their future livelihoods. For clients, such transitions can significantly impact the quality of service that they receive in both the long term and while the transition is underway.
This issue is deeply relevant in 2021; the (then) young entrepreneurs who founded a disproportionately large number of professional service firms in the early 1990s are fast approaching retirement. Many have been immensely successful, building firms that stand proudly pre-eminent in their markets. The role that those founders will play in their twilight professional years, and indeed whether or not these firms will even survive without their founders, depends on how well the transition is planned and executed.

In this panel discussion recording, you can hear Session Chair, Rob Millard (Founder, Cambridge Strategy Group – Law Firm Management Consultant) and esteemed panellists, Fernando Peláez-Pier (Founding Partner, Hoet Peláez Castillo & Duque- a former president of the International Bar Association and the Lex Mundi network), David Shufflebotham (Founder, PEP Up Consulting – Partner Remuneration Specialist), Claire Watkins (Partner, Buzzacott LLP – Head of Professional Practices Group) and  Zulon Begum (Partner, CM Murray LLP – Partnership and M&A Law specialist),  discuss and provide expert insights on the major challenges and considerations for such transitioning firms, including:

The relative merits of potential exit models to balance founders’ and next generation partners’ interests, including a straight return of capital and profit share (or “naked in, naked out”); post-retirement annuities; consultancy arrangements; sale on exit based on agreed value (and typical valuation approaches and expectations); and returns based on a future capital event.
Developing a governance transition strategy and adequate succession planning, including understanding the firm’s current position and future requirements as well as managing timing and communications.
Issues involved in transitioning family-owned firms, including challenges caused by not having clear, institutionalised governance, processes and opportunities for all partners, the need to have open early conversations about the exiting partners’ interests and to build consensus on the firm’s future.
The legal and operational issues and how to approach key provisions in the firm’s constitutional documents, including weighting of founder and next generation voter rights, profit sharing arrangements, anti-embarrassment clauses, annuity provisions, post termination restrictive covenants, admission of new partners, partner “lock-in” provisions, mandatory retirement age and change to firm name clauses (amongst others).

Transitioning from Founder-Led to Perpetual Governance Models

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CM Murray LLP is a leading partnership, employment and regulatory law firm based in London. 

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